Vuzix's (VUZI) CEO Paul Travers on Q1 2016 Results - Earnings Call Transcript

| About: Vuzix Corp (VUZI)

Vuzix Corp (NASDAQ:VUZI)

Q1 2016 Earnings Conference Call

May 13, 2016 8:30 AM ET

Executives

Andrew Haag – Managing Partner-IRTH Communications

Paul Travers – Chief Executive Officer and President

Grant Russell – Chief Financial Officer, Executive Vice President, Treasurer and Director

Analysts

Jim McIlree – Chardan Capital

Matt Margolis – Wall Street Forensics

Amit Dayal – Rodman & Renshaw

Ross Silver – Vista Partners

Abish Patel – Private Investor

Operator

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

Andrew Haag

Thank you very much. I would like to welcome all of you to Vuzix’s first quarter 2016 financial results conference call. With us today 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 that 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 any forward-looking statements, as a result of certain factors not limited to, general economic and business conditions, competitive factors, changes in business strategy or development plans, the ability to attract and retain qualified personnel, and 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, May 13, 2016. Vuzix assumes no obligation to update these projections in the future as market conditions change.

Last evening, 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 we provide a summary of the results we discuss 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 on sec.gov or at the company's website vuzix.com.

I would like to now turn the call over to Paul Travers, who will give a brief overview of the company’s business activities and developments during the first quarter of 2016. Paul will then turn the call over to Grant Russell, Vuzix's CFO who will provide an overview of the company’s first quarter results, Paul will then talk about the company's outlook and programs as we move through 2016.

We will then open up the call for Q&A after management's update. Paul?

Paul Travers

Thank you, Andrew. Hello, everyone, and thank you all for joining our call today to discuss the company’s first quarter 2016 financial results and outlook for the remainder of 2016. And thanks to everyone else for joining the call. As everyone knows, the Intel investment of last year, Vuzix has been working hard to bring to market a series of next generation VIRTTU products and starting in this current quarter, the results of those efforts will concretely start to show. In the quarter we are currently in, revenues for our video headphones will start to accelerate as we have resolved the production issues and are beginning again to build and ship high order customers. Even more exciting in Q2, Vuzix will launch its highly anticipated M300 smart glasses.

This is the first major upgrade to our smart glasses on the first major product developed since we received the investment from Intel and began that relationship. We are happy to report that the M300 smart glasses has tool parts already completed with production of the electronics due in next week. As many of you know, the M100 smart glasses is one of the top selling enterprise smart glasses in the world. We have developed the M100 at a time when Vuzix was not as well capitalized and still have sold thousands of M100s. We feel this has helped to create a high level of pent-up demand for a new solution that would solve the many problems current smart glasses have and we are confident the M300 does just that. As a result, we expect the M300 will far outpace the M100 sales, both in units and speed of sales ramp. Over the coming months, the initial demand should be robust.

I’ll share more on this later in the call, but first I’d like to turn the call over to Grant to review the financial results for the first quarter. Grant?

Grant Russell

Thanks, Paul. Good morning, everybody. Before jumping in, I would like to point out that I’ll be rounding many of the discussed numbers to thousands even though we currently in dollars. Further, I encourage interested listeners to review our 10-Q for a more detailed explanation of some of the quarter’s year-over-year differences since I’ll be highlighting just the major items. For the three months ending March 31, 2016, Vuzix reported $364,000 in revenues as compared to $809,000 for the same period in 2015. Binocular smart glass product sales or M100s were 86% of revenues for the three months ended March 31, 2016 versus 72% in the prior 2015 period. And total consumer focused video iWear product sales were 12% of revenues for Q1 2016 versus 13% of prior year’s quarter. The decrease in sales was primarily the result of lower M100 smart glass revenues caused primarily by existing and new customers choosing to defer purchases and so, the new M300 smart glasses began shipping in the second half of 2016.

Sales of our M100 to M300 migration packages and M300 preorder deposits are continuing to accelerate, but of course, most of these customer preorders and deposits for the M300 smart glasses are not recognized as revenue in the last quarter and won’t be until these units ship to customers. The revenues from our video iWear product line categories were less than due to the impact of our ongoing production difficulties with our iWear video headphones. This limited available shipments despite demand. Contributing to the comparable revenue reduction in this category is the fact that during the quarter 2015, we were still selling our prior luxury products which we will discontinue to invest early spring of 2015.

Sales from our – the company’s engineering programs for the three months ended March 31, 2016 were nil as compared to a $114,000 or 14% of total revenues in the same period in 2015 when we completed the last of our defense related engineering programs. As you know, when we sold our defense division, we are no longer allowed to compete in the defense markets. The decreased net gross profits for the three months ended March 31, 2016 as compared to the prior 2016 period was primarily the result of revenues not being high enough to absorb many of our relatively fixed manufacture and overheads and amortization costs.

As a result, cost of goods items like manufacture and overheads were 40% of Q1 2016 revenues and they are just $147,000 as compared to that same number effectively being 18% of revenues in Q1 2015. Other relatively fixed costs and cost of goods include non-cash expense to the amortization of software development costs which due to lower sales and 20% of revenues in Q1 2016 as compared to just 10% of revenues in Q1 2015, even though the dollars spent to non of $71,600 was exactly the same in each period. Clearly, the company needs to achieve higher revenues to absorb these and overhead costs to have a positive gross profit.

Actual product gross profit before overheads and amortization costs was 28% in the first quarter, and that’s excluding the impact of $90,000 related to scrapping some component materials related to the iWear video headphones. Those amounts scrapped represent components which cannot be reworked and usable with our new iWear production processes. As a final note on the scrap side, I would like to mention that M100 product margins are still greater than 50% on average currently, but the iWear gross margins are around 20% due to its current higher production costs. We still expect gross profit levels will be closer to 40% and will be realized when revenues pick up to probably levels in excess of $1 million per quarter.

R&D cost for Q1 2016 $1,275000 which represents a $760,000 or 148% increase over the same period in 2015. This increase represents our continued investment in our new upcoming M300 and M3000 smart glasses as well as waveguide research and increased R&D staff resources. The two largest cost changes were increases in 2016 salaries and benefit expense of $441,000, primarily the result of additional staff additions and an increase in product development and research costs of $210,000 related to the new product development, for the M300 smart glasses and expanded waveguide development works.

Selling and marketing costs increased overall for the three months ended March 31, 2016 over the 2015 period by $769,000 or 215%. This increase was primarily the result of higher wage costs due to staff additions of about $140,000 and increased trade show costs $276000 which represents our larger and more complex biz [ph] we had in CS this January 2016, as well as the attendance of additional trade shows including Mobile World Congress in Barcelona in February as well as increased public relation for us of a $123000 related to the hiring of two new PR firms which we didn’t have on retailer for the 2015 period, $48,000 for the production cost of our iWear video – headphone video unleashed at the CS and a new website cost of $ 122,000 which we feel was a worthy investment and will outpace for many more quarters to come.

G&A costs decreased to $886,000 for the three months ended March 31, as compared $2,935,000 in same period of 2015. This 70% increase was primarily due to lower non-cash compensation expenses and IR costs, hopefully if you remember them in the 2015 period, we’ve had made share-based awards of $1,475000 to our officers, directors and legal firm, that was a one-shot deal in 2015 numbers. Total other expenses for the quarter $80,000 as compared to an overall expense of $1,402,000 in the same period in 2015.

The reduction in these expenses is primarily a result of two items; company reported a gain of $102,000 on its derivatives liability valuation mark-to-market versus a loss of $1,003,000 in the prior 2015 quarter. Second, we had a reduction of $208,000 in the amortization of senior term debt and amortization in the 2016 versus 2015 period. Overall, the company reported a net loss of $3,776,000 or $0.26 per share for the Q1, 2016 versus a loss of $5,091,000, or $0.40 per share for the same period in 2015.

Moving to the balance sheet, as of March 31, 2016, we had cash and short term marketable securities totaling $8.2 million. This represents a decrease of $3.6 million from the December 31, 2016 balances and reflects of course not just our operating losses, but also our investment in new products, R&D, tooling and plant. With our new facilities now completed, we expect the remainder of capital additions for the remainder of 2016 with the new product tooling and production equipment focus, and we currently forecast that to be well less than a $1 million.

Inventories were basically flat as of March 31, 2016 versus our December 31 numbers being down slightly by $57,000. Our iWear component inventories represent about two-thirds of this investment and the balance being M100s, we expect inventory levels not to increase significantly over the next two quarters and even with the iM300 entered production as the iWear backlog –supply chain backlog will be coming down with production moving slowly.

Overall, we believe that our existing cash and cash equivalent balances and cash flow from operations will if that since the operating plan is met, be sufficient to meet our working capital and capital spending needs for the foreseeable future even with expected operating losses for the next two quarters. With that, I would like to turn the call back to Paul.

Paul Travers

Thank you, Grant. I would like to begin my update and outlook by first talking about our iWear. During our year-end conference call, we reported on the production quality issues we are having with the iWear and that we finally have them in hand. The last 30 days we have rolled these fixes into the production line and are now producing one of the best HMVs Vuzix has ever brought to market. The quality improvements not only have improved yields, but we are seeing significant improvements in color and contrast and other optical futures. With this effectively brand-new version of the iWear, Vuzix is starting a proactive marketing campaign to share them with the world.

For example, and this is just one example, as most of you know, the home industry is growing like wildfire and as it happens, our iWear is perfectly positioned to be the hands-on choice for FPV growing use, that’s first person view, find a remote controlled drone through a twisted race cars at speeds in excess of 80 miles an hour is all done with a video feed coming off the drone that allows the racers to see as if he was sitting in the drone. To this V, the racers use head-mounted displays, much like our iWear. You could imagine that if there was delay in the video link, you would end up hitting the tree before you saw it, this is where the iWear shines. The iWear was designed to be a low latency device for VR gaming and with less than one millisecond video delay, it is 30 times faster than any other HMV out there. Again, this is a big deal. When you are flying that fast at 30X increase in what you see versus where you really are is important. The iWear are also much more comfortable to wear than the competitors and they have a clear image right to the corners of the virtual display with a much larger field of view. This allows the racer to easily see the entire field of view without having to constantly adjust their headset like they do with competitors to see critical portions of the video.

And these guys that rarely find the drone, they got to reach up, one handed, find the drone and grab the current competing products and move them around on their head in order to see in the corners. It’s not a great option for them. Some of the racers and top racing league companies have high marks to the iWear for all these traits. This is a big market, and although we’re just getting started, we’re already cutting deals and preparing to be front in center some of the large coming events. You’d be getting much more about these efforts shortly. That’s just one example.

Our gaming support activities are also continuing to bear fruit as our title support grows. Shortly, we will also be announcing mode Unity 3D support. Unity is one of the number one gaming engines in the world today. Finally, like the drone activity above which is very recent, we have been delaying our general marketing efforts until we were ready. It’s really challenging to market a product and generate demand and have your customers screaming because you can’t deliver. That problem is behind us now. iWear really performed well. We are getting comparisons even against the Oculus that is better for various reasons.

So, in any event, now that we are there, we’ve got inventory, we are building product, you will see a growing users at present starting June 1, to both end users, the viewers and the press. Its goal time for the iWear and we are really excited about it and I think everybody will be thrilled when they start to see some of the news reports and review the reports on the iWear, they really are fantastic there. The M100 update, as we’ve been saying, sales were weaker than planned as many customers are waiting to move to M300 or are waiting for an eventual price reduction that typically follows the launch of a new more powerful, successful product.

That said, we have opted to not yet reduce the price of the M100. At the right time, this will happen as we do have customers that want lower price or lower price solution and we will also bundling self-contain user applications that a lower cost product market would support. Until the M300 gets a bit closer, we are not prepared to do that, but that will be coming soon. As part of our last 3000 units, we have improved the cameras and software features and we will focus on markets with price sensitivity as more important once the M300 is rolling.

M300 update, the M300 is getting very close to its official launch and unlike the iWear, we believe the risk of delay is almost non-existent. It is always exciting when a new product comes to life, and for the M300 it is not only Vuzix that can wait, our customers are also eager to get them so they can finally capitalize on all their efforts over the last couple of years and I’ll explain more about that in a few minutes. So, with that, it’s great to report that T1 tooling of the plastic parts is completed now. It’s done two weeks ahead of schedule. It’s nice to be working with folks, who know what they’re doing that our current guys don’t, but these guys really have it together. First shops are already off the tools and they look great also.

The first engineering unit build is in process and should be ready by early June. These first units will go to key the IP accounts and are paid for at a premium to production units. They are also being used for software refinement, regulatory testing, performance and quality testing, et cetera. By mid-July, we’ll be performing a second pre-production build called DVT, development verification, that reflects all the fixtures and refinements from the prior build, this build will also include more units for fee accounts and may have a small production run in the mix on the performance of the first run units.

In parallel with DVT, we will begin the commencement of volume production, now currently scheduled to be no later than the first week of September, but they are pushing to pull this schedule and pence the reason for some of the DVT units being in production based, et cetera.

And for the M3000 final design and engineering work is well underway with a release to tuning by mid-July. It is important to note that most of the components are the same as the M300 other than optics and display engines. There is a lot of commonality in here. The electronics, the processors, practically everything in this thing looks like an M300 with the exception of display engine, which is really helpful in sharing the cost of development.

The new rate guides are finalized and replication plates are in process, the Cobra display engine, which is one of the differences here also is being released for tooling design next week and first chart will be available in July. In fact, I will be in Korea next week reviewing the tools for release and doing with some other key partners. Production is expected to commence in late fall.

Let me now give you a feel for the sales opportunities around the M300. With the initial M300 getting ready to roll, we have been working with our key accounts to determine who will participate in the initial DVT engineering verification units, these are the ones that should be coming here very shortly even though at a higher price than production, we have direct interests from 134 companies asking for these early units. Of that we have earmarked 50 companies for these first units, mostly VIP partners, those with mature.

M100 software platforms with an idling pipeline, these are guys that are like ready to go just awaiting the M300 release. We also have a handful of end-users to cover the major current used case industries like oil and gas, logistics, manufacturing, aerospace and automotive. From a pipeline perspective, for M300 even conservatively, it outpaces our initial M300 supply. There are lots of one to ones, buy it and try it. But more importantly, we have 194 known opportunities of pilots and initial rollouts scheduled for 2016. This could translate to thousands of units. For example, Bechtle will upgrade their warehouse operations from M100 to M300. Today, they’re only in one facility and that will be expanding, that’s an example you guys have all heard in the past.

DHL U.S. and Euro pilots will be using the M300’s a new Q3 pilots that we expect will be more than just a pilot, they will be operational. And you heard remaining more over the last few years. These folks have invested a lot of money, energy, time and they’re waiting for just the right product and the M300 we believe is up. Then there are several large scale opportunities waiting for M300 that are expected to launch in 2016. For example, a major retailer wants process consistency via smart glasses to rollout over 1,000 stores nationwide. There is work to be done here, but it clearly is a fantastic opportunity.

Another major electronics manufacturer wants to bundle M300 with their hardware and it partners off with a resell as an out-of-the-box solution in 10s of 1000s. Also a North American facilities management consortium is planning to outfit their 1000s of technicians with M300s for competitive advantage. I wish that we get more details about who and what these guys are, but we should be sharing more as the year unfolds. The key thing to note here is that most of this pipeline represents known smart glasses users, who have been through the proof-of-concept or pilot phase. They’re not testing anymore. They have addressed the internal and external issues to adoption and have the ROI to move forward. They are just waiting for the ergonomic and feature set from the M300 to start.

There is not another smart glasses product that carries the capabilities that the M300 has. Being competitors are out there, but none of them have figured this out from what we can tell. These will not near the M100 launch. In the concepts, we’re the new, the ecosystem was non-existing. These are ready-to-go. That said the M300’s new ergonomics and features will open the doors to new used cases and applications that previous smart glasses users and others were unable to cultivate, for example, something simple.

The rotation of the M300 to be ergonomically positioned with the camera down, yet display rotated up, enables surgically used cases to have significant ROIs, but the current ergonomics prevent that from being realized. You think about it right. You’re looking down, you’re doing an operation and you get the headset with the camera pointed above your eyebrow, you practically have to break your neck to point it at the work surface. And this is a real simple thing, but the M300 solves that problem so well.

Or the advancement in the Wi-Fi and Bluetooth capabilities where our warehouse used cases to expand beyond simply picking by allowing 5 gigahertz connectivity, more powerful scanning, and autofocus and position awareness. So you know where you are in the facility. With these features, the M300 can now serve as a platform for most if not all of the various tasks within the warehouse including the receiving, put away, sorting and tacking.

The addition of Bluetooth beacon support enables geofencing and pharma manufacturing or the addition of voice modulation as user identification allows for used cases in those secured settings. What that basically means is that the M300 is going to be smart enough to recognize whose talking to it and will only allow it to work with the person who is assigned to use that device. The M300 is not a completely new device. Rather it is the migration from the M100, the combination of 2.5 years of M100 trails and learnings.

This sets up the M300 for immediate impact in production rollouts as proven by the early accessed DVT unit demand and size of the potential commercial pipeline. While it also assures in new markets and used cases to faster on expansion of the market to enterprise monoclar glasses. Finally, we have been selling M300 migration packages and taking deposits, but all revenues are deferred as Grant mentioned until units shipped. We have been marketing directly through installed base and M100 customers and we will be stepping outreach efforts in June with the availability of first engineering production units to share with customers.

Waveguide marketing activities, we continue to receive interest from potential OEMs of our products and components with an emphasis on waveguides and AR solutions. Management is in active discussions with multiple partners and have closed agreements that we hope to be able to share more around soon. Although we have been opposed by many potential players here from Tier-1 to start ups, we have been very selective with who might work with. We want synergistic relationships that will add value to the users and not cannibalize our own business for a smaller margin and smaller top-line revenue opportunity.

Plant update, the new clean room has been completed and was recently certified to the operating and inspect. We have levels of [indiscernible] operating now within manufacturing class 100,000, 10,000 and class 1,000, all areas are below these levels. New waveguide production has fixtures, and tools are nearing completion including the incorporation of robotic tooling and align equipment, target is to have first level volume manufacturing in place by the end of July. We will be relocating the last piece of waveguide manufacturing equipment from our office – from our older office to our newer plant in July after which we will be turning the building back over to the landlord. Research and development continues on our waveguide’s efforts with the focus moving from research to more sale production and commercialization.

The business outlook second quarter of 2016 will start our revenue growth and we expect improvement over our first quarter. New products will begin to have significant impact in the second half of 2016. Customer demand has been significant with early orders starting to grow as we get closer to launch. Our key customers know that production will take time to ramp and supply will be limited at first relatively speaking. And this is starting to drive the order pipeline to fill. Already customers are willing to have access to first volume productions. Once the M300 is in this field this should accelerate.

Moving forward by Q4 we should have all three new products in full production and expect a significant increase in revenues as they are released. Management is confident that as we execute over the coming quarters we will be quickly decreasing our cash burn and as we execute we do not expect to need more dollars to get us there. Finally on June 20, we are hosting our annual shareholders meeting here at our new facilities in Rochester. We would like to invite all of our share holders here for this event.

We plan to have working M300s, iWear, select waveguide demos for shareholders to see and some other surprises in stores. It is going to be a great event, we will have some key note folks there that will be talking about where we are going and how what we are doing relates to the businesses et cetera it really should be an eye-opener for every body and be exiting to help give you more insight as to where the company is going.

We will release more information regarding this as we get closer to the date so we hope to see many of you there. We look forward to updating you on our continued progress in our next call and the great progress that we are going to be having over the next three or four quarters.

We would like to now open up the call for questions.

Question-and-Answer Session

Operator

Thank you. We will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Jim McIlree of Chardan Capital. Please proceed with your question.

Jim McIlree

Thank you and good morning, Paul and Grant. Paul you talked about production issues with the iWear being resolved. And I just want to make sure I understand that statement versus your follow-on statement, that you are not going to really be producing in fall until the end of this month. What’s taking place over the next couple of weeks that, I guess why don’t you start doing it today if all the production issues have been solved?

Paul Travers

Yes, we aren’t doing it today actually, Jim. What’s happening is this – the parts and everything are starting to ramp on to the plant floor so it’s just like everything is hard to just instantly turn the pump on as it works. We are also coming up to speed on the plant floor with a team and the process on how the assemblies go by it’s just going to continue to grow and get faster and faster from here on out.

Jim McIlree

Good, so the issue right now isn’t more of parts or how to put it together it is not just more of the pre-production staging everything. Getting everything is set and the processes correctly staged.

Paul Travers

So we have processes in place and they are actually functional, we are improving them so that we can do things faster. We have a certain number of people available to run the lines and as we are expanding we need a few more of those to go faster and so yes, that is correct. It’s not…

Jim McIlree

Okay.

Paul Travers

There is no issues with parts availability and those kinds of things it’s just kind of turning the engine on as it were.

Jim McIlree

Got it, got it, great. And the confidence you are expressing in the M300 production issues. I know it’s a different product, we have different components and all that. But can you just talk a little bit about why you are so confident that you are not going to have production issues with the 300?

Paul Travers

So this is not just fair thing, current partners and all. The folks that we’re working with our – they are really very good one. The product it’s complex with the M300, don’t get me wrong, but the products that we’re having a hard time with today, it’s much, much simpler for the M300. We’re seeing the stuff being done. It’s much easier to build the M300 than it is iWear just all of those things add up, so we’re right on track with the product and we’re not seeing the kinds of issues frankly that we saw with the iWear.

Jim McIlree

You are talking about different…

Paul Travers

I’m sorry. I was just going to say we’re ahead of schedule on things like tuning in the lights…

Jim McIlree

Yes.

Paul Travers

It’s great. And it hasn’t been the case for the iWear.

Jim McIlree

Right. I got that. Thank you. You talked about different stages of the rollout for the 300. I’m wondering if there is also different pricing associated with those rollout stages. Are you giving introductory pricing to the customers who are getting the initial engineering units and then pricing similar more or less for that next stage? And then when you go to full scale production again what happens to the pricing on those units similar just more or less though that’s been earlier than first two stages.

Paul Travers

So these first units that come off the line and the partners that we’re working with some of them are getting different levels of support. And so the prices range from $4,500 to $10,000 a piece for the unit. So but it also comes with a little bit of support on the – and at the same time. So yes, these first units are much more expensive, but we’re getting the advantage of being able to be an upfront and for some of these companies, they’ve invested an awful a lot over the years and that’s a very small price to pay to get your hands on these first units. The second round, the DVT will be less expensive than the production units are what they are.

Jim McIlree

Okay.

Operator

Our next question comes from the line of Matt Margolis of Wall Street Forensics. Please proceed with your question.

Matt Margolis

Hi, how are you guys doing?

Paul Travers

Good, Matt.

Matt Margolis

So you guys are reiterating that the cash balance on hand is sufficient to get through the next 12 months. Can you kind of I mean you are not going to exactly share your plan, but there is a lot of this is going to be conversion of existing iWear inventory and the M100 inventory into cash and then growing the rest of the base of product revenue. And can you just kind of walk through why you are confident in that projection.

Grant Russell

Matt, that’s an important part of the assumptions in our plan. I mean it falls, stage of the iWear production issues are behind us. I’ve told you we have two-thirds of our $3.3 million mostly we want inventory balance is iWear products.

So effectively any sales with that are almost pure cash, I mean yes, there is the container – our current batch filled out so be a little more investment, but those generate a lot more cash and normally they’ve read because we have all these to start, similarly with the M100, we have those an inventory and stock and converting and selling that through its cash.

Of course Paul alluded there could be some optimal price, good carrying adjustments, but we’re still very confident that, the next average selling prices will be – all be profitable in that basis. Clearly the rest of the plan requires us to achieve our product milestones and introduction.

And to see some reasonable level of customer take up based on the forecasts, sales pipeline that we’ve been provided by our sales team. And that’s effectively that the plan got going – we don’t have any large capital expenditures plan, as I mentioned. I mean we have the, one the 300, the 3000 products. We know what we’re going to doing for the next three years. From that standpoint but I mean these, the 300 and the 3000 of these should be the only two new products we see from Vuzix this year.

And we feel that working with them, those assumptions, we had to continue following. Ultimately if the business exploded because its finally running up the hockey stick that we’re all hoping for. There may be a need for some additional working capital. But when you have a pipeline that’s backed by purchase orders and financing that is much easier and there are sources to do types the dumbness require further dilution to our existing shareholders.

Matt Margolis

Okay. So the racing here you mentioned for drone’s form this seems like a kind of a new area. I know there’s some excitement that I’ve seen on this in our ESPN they signed a deal with them to kind of get this, bring this product to light. Can you kind of extrapolate how big this opportunity is potentially for the iWear like how many racers are – how far this industry expands kind of into the market as potential opportunity to – for your sell through initiative of the iWear?

Paul Travers

I don’t have all of the statistics on the size of the market broken down by high-end versus low-end, versus lasers, versus the enterprise market, because there’s opportunity in all of that, it’s not just about drone racing. The cool thing about drone racing bit though is you are right, it’s ESPN sponsor is trying to stop, it gets the iWear a lot of attention in the world. And as I said we’ll be hearing – you guys will be hearing more about those kinds of things here shortly.

But just in the enterprise space even they use drones for inspection purposes significantly. And having this low latency links important there’s some partners that Vuzix is working with that are all about low licensee HDMI video transmission. Most of the systems that are out there today are these old style analog radios 2.4 gigahertz and 5 gigahertz that are noisy they don’t have good range. And our digital system that’s really fast as it’s really the next step in the marketplace.

If you have followed the marketplace of ours it’s really exploding, it’s being – drones are being used all over the place. I don’t have a direct correlation of how much marketplace that represents for Vuzix yet. I can tell you it’s just one of many new markets that iWear will started to be introduced into. Sorry, I can’t get more granular than that just yet, Matt but we’ll learn more here over the next couple of months to gain on some share where we can.

Matt Margolis

Okay. So just getting a little bit more into the iWear, so you guys originally were thinking you can sell 10,000 units which is roughly a pace of 200 units a week. With production ramping up, when would we expect kind of a more mature sell through for the iWear? Is this going to be the end of Q2, or are we thinking more of a Q3 event, just from a timing and looking at the cash and when we are anticipating some more receipts?

Paul Travers

So without doubt iWear in Q2 is going to be significantly bigger than it is in Q1. But Q3 and Q4 I’m confident that all of them will be sold.

Grant Russell

I mean we believe we’re taking you through the consumer side that products like the iWear tend to have a fall seasonal push, when we get into the gift buying season for both. So we expect Q4 to like Q3 to be the strongest sales period. As far as the 10,000 units go, yes that’s our first batch we haven’t – the company is not committed to a second batch at this stage. And we haven’t made decisions on what future generations would be iWear might look like. If and not they go ahead at this, because they have other products in the pipeline that potentially could be a replacement to the iWear, that we feel might be more compelling to competitors.

Matt Margolis

Okay. So just moving on to the M300 you mentioned a 194 known opportunities in the pipeline, and as far as, I think, you did mention this purchase orders that you’ve already received. I mean how far – if you think of a big company you’ve mentioned the DHL, like how far order are they looking at this opportunity? Is this something they are staging for the next year, next two years, like how far is the visibility to a customer like the DHL or anybody else, how far is the visibility towards deployment and putting these products into use?

Grant Russell

194 mentioned accounts are accounts we expect to start doing stuff in 2016. So those are not – there’s may more accounts that we sell thousands of these things and you can go down the list and I’ll reach to the bunch of them and you never know where we’re going to be or when, but those 194 are accounts that we talk with frequently that are planning for them between now and at the end of the year.

Paul Travers

But not in a company like DHL would be thinking about a little over 200,000 employees I mean they said they can see ultimately down the road may be half their employees using products like wearables, wear glasses. Clearly there’s how much Vuzix might ultimately get about and the timing and deployment to do that, I mean, training and deploying all this equipment on that scale requires a lot of resources. And we can take these large enterprises one to two years to deploy in a costly network which consist of distribution hubs all around the world where a smaller places they can go quicker.

So I mean Energia Logistics [ph] the customer and their buyers, integrator, consultants, they deal with and that’s not something that Vuzix does. We provide the tools and the products. Like I said it can take at least two years to deploy [indiscernible].

Matt Margolis

Okay. And just to reiterate so you don’t the proof-of-concept so the M300 has gone through that process with these folks so it’s really not – they don’t have to sell some new device, and integrate it, and test it, and kind of trying to make sure it meets the specifications for their network and security at this point. It looks like this is really just going to be the next generation so there won’t be a delay from that standpoint, is that a good way to look at it?

Paul Travers

That’s a beautiful thing about the VIP program that Vuzix has put in place. We’re not waiting until we have production products to help enable and get over this one last look at the M300 for these guys. They are ready to go, they want the product, it solves running the latest version of Android, it’s got all the security stuff they need in it, they just need and get it install the software on it, do tests, enroll with production. And your – that’s why I mentioned that the demand we believe is going to outpace our production capacity because many of these guys are ready to go.

Some of them are smaller companies and their life is depending on the fact that it’s ready to go because they need the revenues to be in business even. So its a lot of motivated people, folks out that have invested a lot that are just waiting to get the product to roll.

Matt Margolis

Okay. I still have a few more follow-ups and I’ll let some others to join in here. So looking at your M100s in the field are those units approaching replacement timeframe now that they’ve been in the – some of them been in the field for a couple of years?

Paul Travers

I think the way to look at replacement there is those folks are looking at the same, I need to get the next one because it will help me with what didn’t work well on the M100. So yes, and then they all want the newest version of the OS, et cetera. So, we have a pilot guides that we look at that are more than 1D, 2D et cetera that are M100 sort of upgrade folks.

Matt Margolis

Okay. And then looking at your – I’m sorry.

Paul Travers

We don’t – in the pipeline that we build here, we don’t have a large number of units that haven’t might fit into that bucket, what we try to do here was go with our known accounts that we believe for sure are rolling. As opposed to maybe if we do a lot of marketing, we could get some of these upgrades kind of a thing.

Matt Margolis

Okay. And then on the waveguide side, you’re talking some multiple partners, you think are going to be ramping up some volume in July, I mean is this looking at your mix for Q4 between the three products potentially four if you include waveguide between the M300, the M3000 the iWear and waveguide. What type of long-term mix do you guys anticipate for revenue? I mean, do we look at the Waveguide as a significant opportunity long-term or kind of how does hold that kind of looked and come together?

Paul Travers

One of the talks, we didn’t talk about from a revenue perspective is the potential OEM, NRE generation with some partners that Vuzix is working with that. And that will also add to the revenue stream from that until the end of the year. The Waveguide themselves though a standalone OEM is going to be – would be something that you see earlier in 2017. The fall will be roughly representative of M300’s iWear and the start of the M3000 Vuzix as waveguide those products.

Matt Margolis

Okay, so just to reiterate on that the NRE for the Waveguides, do you expect that before Q4 some sort of contribution of cash through those relationships?

Paul Travers

Yes.

Matt Margolis

Okay. Are you able to share any sort of – significant or we’re looking at a minor contribution or is there any color you can add there?

Paul Travers

Not really at this juncture, sorry.

Matt Margolis

Okay, all right thanks again for your time and I look forward to seeing these products start to ship in earnest here.

Paul Travers

Thank you, Matt.

Operator

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

Amit Dayal

Thank you, good morning, Paul and Grant. Just I’ll be quick. So the second quarter revenues, should we expect these to come in sort of in line with what we saw in the first quarter given that the two key products as to being ramped up?

Grant Russell

Sorry, Amit, did you say similar to the Q1 revenues or…

Amit Dayal

Yes, Q1 2016 revenues. Just want to set some of the realistic expectations for investors in terms of how Q2 might play out given that you are in the process of ramping everything up still?

Grant Russell

We expect Q2 will be better than Q1, but we won’t – the M300 is might going to be a real contributor to that and it’s going to be M100 sales and iWear sales. And that’s the main revenue source of Q2 2016.

Amit Dayal

And in terms of getting sort of revenues for the remainder of the year just to kind of summarize your comments. So it looks like Q3 you could see more iWear coming through and then Q4 the M300 and the iWear. Is that the way to look at it?

Paul Travers

Yes, I mean, we will have M300 revenues in Q3, they will come as the M300 entered production in August, September, but clearly in Q4 we’ll have the M300, the iWear assuming with [indiscernible] then the M3000 coming on.

Amit Dayal

So there was a press release out a few weeks ago in a nation through the iWear production solution et cetera. It looks like there are some new features and improvements. Are you changing pricing on the iWear? Is it the same pricing? And could you remind us what this is going to be sold for?

Paul Travers

Currently, we’re not changing the price of the iWear itself. However, when you – for instance, if you entertain going into a market like the drone space there is some accessories that makes sense to bundle with the iWear that are relatively inexpensive that would allow Vuzix to yes improve – increase the price of the iWear. And we’ve had an opportunity to explore in that space now. We’ve gone to see some of the top racing guys and some of the drone lead folks. And their opinion is our lower priced product is significantly better than competing high – much higher priced products. So, you will see that – I believe in the drone space, you will see at least drone offerings that are priced a bit higher.

Grant Russell

And also, I think, we’re not necessarily going to rule it out longer-term, but right now we want to bring up some of our task that’s tied up in the iWear inventory. And I would like to point out that we aren’t priced less than a lot of less than 80C other competitors, the only products. I mean we’re not a high-end VR system, but you have a hard time telling those people, but actually price limits them we didn’t represent a lot better value for the similar pricing.

Paul Travers

We’re going to see. Well, we certainly discuss it, okay. The things starts to look pretty darn good, but let’s prove [indiscernible] get $1 million or $2 million back out of inventory then we can look at longer-term more mature pricing.

Amit Dayal

Understood. And just last question, so what happens to the M100 once the M300 is fully launched and you guys are marketing that aggressively. Is there an application for the M100 once the M300 is in the market or is this going to be phased out?

Paul Travers

We expect that the M100 will be phased out.

Grant Russell

I mean we could build more, but we don’t currently intend to do that. We do have product plans on the drawing board for a lower priced consumer – lower more price sensitive that I can just mark last product in the future. So that’s probably what will we do whereas respectively replace the M100 with a model, but that’s 2017 timeframe.

Amit Dayal

Got it. Thank you. That’s all I have.

Grant Russell

Thanks, Amit.

Operator

Our next question comes from the line of Ross Silver of Vista Partners. Please proceed with your question.

Ross Silver

Hi, Paul and Grant. And this has been the best Vuzix conference call, I think that’s even been on and I mean my head is spinning from the excitement just because of all that’s been put out there. So my question is around the M300 and how to talk about 194 potential customers are really going to shipped especially I mean how you – sort of my head falling off with excitement here I mean how do I think about the pull out of the M300 and kind of put expectation or sort of expectations you can going to put out there with the launch given there seems to be so much demand for this product. How should we on the Street thinking this?

Paul Travers

Yes, you can ask yourself, why didn’t we make more and give everybody one right. And the issue there is these first units are going to key partners and it comes with a couple of things. I mean they are giving us feedback on the one hand, on the another hand Vuzix is intimately involved with these folks with integration, et cetera, on their side, and there’s a limit to how much current stack and support doing that plus get the products rolling at the same time because the big win comes when we are in full production, right.

So we chose to be very selective with the partners that we are picking in. So of those 50 you can rest assure there were folks that represent volume opportunities, the larger and the more short-term opportunities. Those guys that we are working with that – in 2017 it could be massive, but they are not getting units now because it’s a longer-term thing for them. So that’s why we picked that number and you can think of those first 50 as pretty key accounts. An exciting bit about that is in many cases there’s going to be press releases associated with some of the activities that are going on around what they are doing, there’ll be some – I think some pretty exciting news between now and before we’re in production.

Ross Silver

Okay. Okay, great. Well, thank you so much for taking my question, again a phenomenal call. Thanks guys.

Paul Travers

Ross, it’d be really phenomenal when Vuzix is actually executing against that. I agree it’s exiting right now, and over the summer I think it’s going to be even more fun.

Operator

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

Unidentified Analyst

Hello, Paul. Hello, Grant. Gladly I’m seeing your progress and I have four questions. One is, you mentioned the Korean – you’re going to Korea the next week to launch 2,000 products. I was wondering if that the waveguide?

Paul Travers

We are working – yes, you can say even like that, sure. It’s also the launch of our – the dealing for our Cobra engine associated with it.

Grant Russell

Which is why I don’t related to…

Paul Travers

Correct.

Unidentified Analyst

Okay. So it's actually do you launch the program which is designed in Korea?

Grant Russell

They are building for our design.

Unidentified Analyst

I see. The second question is about the iWear. And you mentioned about the ESPN marketing. And I was wondering how much you are planning to spend on the marketing?

Paul Travers

So we have already allocated dollars in there – in accounts and kind of prepaid things with some of these marketing efforts that we're talking about that will finally be executed against. As I said before, it's an exciting product and people like it, but these changes, I mean, people in our office that when they put their headset on and they are doing the VR stuff they are ducking even because they’re solely into that. So we haven’t had that until now. And we didn’t want to go out to the press and prematurely when the product wasn’t good enough in our mind. So it starts now and maybe Grant can talk a bit more to the dollars that might be associated with some of those activities.

Grant Russell

I mean it’s not significant from the standpoint of marketing those are around like a large [indiscernible] company like [indiscernible]. I mean its low six figures, it’s targeted social media reviewers. So I mean we are going to insure the product with our PR agency get them to the right hands. So we can hopefully obtain good views and it’s going to be a fairly or upwards network – innovator-driven program around it, it gets [indiscernible] we want to get the product selling and see that we’re not – we don’t believe in selling massive amounts of dollars to it. So we see a lot of the product stands up today.

Paul Travers

But I don’t think we’re going need to because it refers to space right now, that’s hot. Second, it’s an amazing product, it’s going to get great review. Third, with activities like these things that we're doing with drone approaching [indiscernible] point it got great visibility. So there’s a lot of gorilla stuff that we’re doing I guess what they that call the real marketing at the same time. And in fact you see a lot of it related to those kinds of things. You can do a lot with a little money if you’re creative. You guys still there? Hello?

Operator

It seems our question line disconnected. We will take the next question from Abish Patel, a Private Investor. Please proceed with your question.

Abish Patel

Hey, good morning, Paul and Grant. Thank you for taking my call. I just have a quick question regarding the M300s. I know you said the demand is out pacing the supply for the initial rollout for the M300s, how many units are you guys looking to rollout with?

Paul Travers

Grant you want to answer that one? How many units are we rolling out with on the M300? The production queue, how many are we building – planning to build?

Grant Russell

Our first production batch is 10,000.

Abish Patel

Okay. And you feel like the demand is quite a bit higher than that?

Paul Travers

The rate at which we’re going to be building those 10,000 pieces versus what we’re getting back from our customer base right now, will be behind.

Abish Patel

Okay. And those 10,000 when do you anticipate having those ready to ship out by?

Paul Travers

Well, they start in the August-September timeframe. We have the ability to pull in as demand requires it. So it could all be sold before the end of the year, but I’m not making that level of commitment just yet.

Abish Patel

Okay. And finally as far as the revenue guidance did you – how much do you guys expect, or you have not given that guidance for 2016.

Grant Russell

No, we’re not currently issuing the guidance for the balance of the year.

Abish Patel

Okay, I understand. Well, that’s all I have for now. Thank you very much and hope you guys – wish you guys all the best.

Paul Travers

Thanks, Abish. I would offer one piece of guidance it should not look like Q1.

Grant Russell

That is your part.

Operator

There are no further questions at this time during the Q&A session. I would now like to turn the conference back over to management for closing remarks.

Paul Travers

So as everybody can see it's exciting right now at Vuzix. We’re right on the cost budgeting starting to really crank up. There’s going to be lots of press announcements coming here shortly as the M300 rolls, our partners get units, I think there’s going to be a lot of exciting catalysts that will get people excited about Vuzix and where we're going. And you should see a continuous flow of that between now and the end of the year.

So Q2 is a transition point for the company and we're looking for the forward to the future and we look forward to everybody coming to our open house because as they say seeing is believing, and we've got some really amazing stuff to share with the globe, with the world now. Thank you. Andrew?

Andrew Haag

Yes, I'd like to thank all of the Vuzix shareholders for their participation on today's call and their support of the company. This concludes Vuzix’s first quarter 2016 financial call. And as Paul stated, hope to see you all at the shareholder event in Rochester on June 20. Thank you again.

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