Karen Howard - Investor Relations Jim McCarley - Chief Executive Officer Brian Smith - Chief Financial Officer and Treasurer

Chris Van Horn - FBR Bobby Burleson - Canaccord Rob Stone - Cowen and Company

Thank you, Kevin, and good morning, everyone. We appreciate your time today for our First Quarter 2017 Financial Results Conference Call.

On the line with me today are Jim McCarley, our Chief Executive Officer; and Brian Smith, our Chief Financial Officer and Treasurer. Jim and Brian will be reviewing the results that were published in the press release distributed after yesterday's market close.

If you don't have that release, it's available on our website at www.ExOne.com. The slides that will accompany our discussion today are also posted on the website.

Referring to the slide deck, on Slide 2 is our Safe Harbor statement. As you may be aware, we will make some forward-looking statements during this presentation and may also during the Q&A.

These statements apply to future events that are subject to risks and uncertainties, as well as other factors that could cause actual results to differ from where we are today. These risks and uncertainties and other factors are provided in the earnings release, as well as in other documents filed by the Company with the Securities and Exchange Commission.

These documents can be found on our website or at www.sec.gov. I also want to point out that during today's call, we may discuss some non-GAAP financial measures, which we believe are useful in evaluating our performance.

You should not consider the presentation of this additional information and isolation or as a substitute for results prepared in accordance with GAAP. We have provided reconciliations of comparable GAAP to non-GAAP measure in the tables accompanying today's earnings release.

Jim will get started and summarize the first quarter’s results and business progress. Brian will go through the detailed review of the financial results and then we'll turn it back to Jim to offer perspective on our outlook before we open up the line for questions-and-answers.

And with that, it's my pleasure to turn the call over to you to begin, Jim.

Thank you, Karen, and good morning, everybody. Let’s start with Slide 5 and begin with a high-level overview of our first quarter results.

I’m pleased to report that the first quarter revenue was $10.9 million, up 29% over 2016’s first quarter. As we indicated on our last call, we are continuing to gain traction in the marketplace especially with our market-leading S-Max platform.

We believe our market share position in indirect printing equipment is validated in Q1 with us shipping five S-Max machines in this quarter and an improved sales cycle occurring with our recording revenue on four S-Maxs. A particular note is that two of the five machines shipped were to the same customer and were replacement units for early generation ExOne machines.

Furthermore, the replaced units were essentially a pilot program we launched to test the markets willingness to upgrade from legacy indirect printing technology to state-of-the-art S-Max systems. Although the machines replaced in this pilot program were truly one-of-a-kind vintage machines, we are now looking to expand this program to other customer who own existing technology and are willing to exchange it for new machines.

I’m also pleased to say we continue to see building adoption rates within the markets we serve. During this quarter, we shipped machines into three different continents, North America, Europe, and Asia, with two binder and machines configurations.

We believe this diversity of region, product types and materials represents real validation of both the ExOne indirect technology and an overall growing adoption rate. I’m also pleased to report that our cash provided by operating activities was positive in the first quarter.

Despite a lack of profitability, there was very disciplined working capital management performance coupled with strong inflows across customer orders resulting in ExOne maintaining a stable cash balance during the period. Brian will get into that in more detail during his report, but we are certainly pleased to see stability in cash flow.

Third, the directional changes we discussed with you last quarter are progressing as planned. We have realigned the management organization and established clear accountabilities along the products of direct printing, indirect printing, applications and aftermarket within our machine and non-machine product lines.

This has allowed us to both flatten the organization and set clear management objectives. It also allows us to better set new product development priorities for both the direct and indirect equipment design teams.

We have also inserted new talent into our engineering teams in North America and Europe. These teams are helping to accelerate organizational and process improvements, make enhancements to our core machine technology and take an active role in expanding our product application opportunities using existing ExOne technology.

Finally, and from a financial performance standpoint, although we can never call a period that suffers an operating loss a success, as we stated during our call last quarter, the operational progress ExOne is making is clouded by some significant charges incurred during this quarter that Brian will describe in more detail later. It also consisted of some unfavorable sales mix that was attributable to a select number of programs targeted at increasing adoption rate worldwide replacing vintage printing equipment with S-Max technology and absorbing costs associated with supporting some of our more recent product configurations shipped into the marketplace.

Although these actions generated significant losses in Q1 and will continue to have impact into the second quarter, we see a path to profitability in the back half of the year driven by actions started and well underway beginning this – early as January of this year and continuing throughout the year. Similarly, better sales mix is also anticipated as we see a positive shift in overall margins delivered by the business.

Bearing major change in our sales pipeline trends, delays in customer-driven adoption cycle steps and other unforeseen delays, deferrals or project cancellations by our prospective customers, we expect to enjoy sales leverage in the second half of the year. Now let's turn to Slide 6 and let's talk about our path to adjust EBITDA profitability and our progress there.

Although, we are not happy about the absolute number and the fact that ExOne is not profitable in Q1, there are good things happening inside the details of our business. First, our teams had moved through the redeployment of two production centers absorbing one in two locations without any appreciable loss of sand printing service revenues.

And two, transforming the second from a P&L operation subject to cash burn and cash creation cycles into a consistent cast flow stream. And finally, we experienced very good execution in our non-core asset liquidation, with that activity being completed well ahead of schedule and at a better realized value than originally expected.

In each of these activities, we believe we have both improved cash flow and adoption rate support freeing up funds to allow investments in technological and organizational improvements. Second, when considered in combination with improved commercial operations, increased sales bookings and cash payments and coupled with hardwired sales and operations planning, we are very pleased that the team is enabling the redeployment of approximately $3.8 million cash.

Third, our team remains very focused on driving improvements throughout our technical teams and inside our technology. The first quarter has helped underwrite some of the longer term investments we were making in the machine design and machine capability area as well as investments in people and processes.

Although, these investments are far from over and will continue throughout the year, their impact in the beginning of the year is expected to be greater than in the balance of the year. Finally, we believe the product margins will begin to make improvements starting in the second quarter and continuing throughout the balance of the year.

We also expect benefits from our up front investments to begin maturing in Q3 and Q4 as well. Now, let's switch gears and move to Slide 7 and I'd like to take us up a few levels, maybe to 20,000 feet and talk about the 3D printing industry.

As you may know, this week RAPID, the benchmark 3D printing convention, is underway in Pittsburgh and by early estimates the total attendance expected this week will be over four times greater than four years ago. Likewise, according to a recent publication, there have been positive attendance trends at other 3D printing industry conferences, such as AMUG and Formnext.

Linked to this presentation is an article that highlights these trends in attendance and user interest as additional data and validation that suggest the 3D market growth could be as high as 55% CAGR through 2020. Other substantiation in this article to underwrite this potential growth right rate are things like overall industry demand and readiness to adopt 3D pretty technologies.

3D printing process is becoming more robust and repeatable, and finally, the formation of strategic partnerships between suppliers and customers. Similarly, large industrial companies such as GE and Siemens have been at the forefront in research and adoption of 3D printing processes from its various operations.

A second article published by Bloomberg a few weeks ago and referenced below points to GE’s further expansion into 3D printing. Companies like GE recognize that various 3D printing technologies are ideally suited for different types of applications.

The quotes we are showing are from the CEO of GE Aviation, who is also GE’s Vice Chair in charge 3D Printing. Clearly, GE sees the opportunity for 3D printing in manufacturing and we are ExOne are seeing this translate into positive momentum in the industry.

Now let's move to Slide 8 and let's talk about some third-party perspectives about the advantages of Binder Jetting. I've often been asked how our technology compares to our competitors and I think the next couple of slides help make that point.

Oak Ridge National Laboratory or ORNL, a well-known science and technology think tank within the 3D printing world, made a presentation at the 2017 Additive Manufacturing Users Conference. This conference was held in Chicago this past March, of notice that ORNL cited six benefits of Binder Jet technology compared with other 3D pretty technologies.

These are the same advantages ExOne has used to describe our technology to potential customers. I will spend time discussing these in detail on this call, but based on information provided by ORNL, we created a graphic shown here.

Basically it says that ExOne’s technology when fully realized hold strong potential advantages to other competing technology particularly in the areas of build speed and lower cost. Simply put, when compared to other technology, Binder Jetting can provide significantly faster build speeds at lower cost to produce.

You know what it's easier though to find an expert that supports a position. So we have included a second expert opinion on Slide 9.

In this case, it's the manager of the Center of 3D Innovation at the University of Texas at El Paso, who stated and I quote Binder Jetting exhibits lower capital and operating costs when compared to similar direct metal technologies. The balance of his quote you can read yourself, but clearly this is a second validation of the potential of ExOne technology.

Now, let's move the Slide 10 and let me update you on some specific actions that we're taking at ExOne to advance our technology. With respect to our indirect printing, we continue to concentrate on making continuous improvement in our core technologies.

As noted earlier, we shipped our first machine adopted to use cold hardening phenolic binder or CHP into North America this quarter. We expect this technology to be a major contributor to further enhancements and adoption rates not just in North America, but throughout the world.

We also began installation of our second Exerial for use in the European market. The European OEMs continue to be the leaders in terms of adoption especially zero production and the installations we provide of - these installations will provide ExOne a strong working knowledge of how to meet the demands at this challenging but high potential area of manufacturing.

Finally, we are continuing with our consumable localization strategy with the goal of providing lower cost, reduced lead times and significantly simplified logistics for our customer base. In the direct printing area, we have made the first installation of a tool making direct printing platform.

This installation marks the first time ExOne equipment has been designed into a production line fixturing and tooling cell. Like the Exerial installation mentioned above, this type of day in day out production will provide ExOne with great visibility on how to build improvements into our technology and expanding our existing technologies to other applications.

We have also kicked off a process to bring rapid machine enhancements into existence. Today, this effort has been very successful in transforming ideas into prototypes and we expect to begin rolling these improvements into our existing product line as well as our next generation machine.

Last but certainly not least, we are seeing continued revenue growth in our North Huntingdon metal printing service there. With that business experiencing double digit growth in quarter one of 2017 versus quarter one of 2016.

Although this growth does not represent a significant part of our overall improvement in consolidated revenues, it is a good indicator of overall market acceptance of our existing binder jet technology. Now with that, I’ll turn it over to Brian for some of the financial results.

Thanks, Jim. Good morning, everyone.

If you could please turn to Slide 12, we'll talk about the revenue. As Jim said, revenue grew 29% to $10.9 million in 1Q 2017 over 1Q 2016.

Our non-machine revenue contributed 61% while machine was 39%. We are also really pleased to see that our 12 month TTMs grew - exceeded $50 million for the first time in ExOne history, reflecting 20% growth over the 16 TTMs.

Now if you could turn to Slide 13, you’ll see our shipments and revenue recorded in units by machine type for the first quarters of 2016 and 2017. Nine units were shipped in the first quarter 2017 which is the same number we shipped in Q4 2016 and is up substantially from five in the prior year quarter.

We recorded five machines in revenue this quarter versus one in the prior year’s quarter. Of the nine shipped, three of those were under new lease arrangements.

You can see that all categories were weighted heavily towards our indirect platforms, our S-Max and our Exerial. Our shipping activity evidences the positive momentum we are seeing in the marketplace for our machine platforms.

As I previously indicated, there continues to be variability in certain instances that will result in lags between shipment and revenue recognition for any number of reasons for instance contract terms, performance obligations or overseas shipments just to name a few. Now if you could turn to Slide 14, we finished the quarter experiencing significant backlog growth to $23.5 million, up 19% sequentially from $19.7 million at December 2016 and up 40% from March of 2016.

To remind you, backlog included firm orders received from our machine and non-machine customers that have not been shipped or goods in transit as well as machines which have been shipped to our customer sites that are in some stage of installation, commissioning and acceptance. Backlog also includes firm orders for contractual services like our Missile Defense Agency contract and operating leases that are non-cancellable.

The largest portion in fact greater than 80% of our backlog is in our machines and represents customers in a variety of industries including automotive, foundry, heavy equipment, tooling, aviation, university and the pump industry for water and other fluids. Our growing backlog gives us confidence in our 2017 revenue expectations.

The first quarter of 2017 backlog shown here still includes the four Exerial machines shipped in May of 2015 for which we have been fully paid. I discussed this last quarter and I refer you to note into our financial statements that our March 2017 Form 10-Q for an update.

On Slide 15 you can see that our first quarter machine sales were up 96% to $4.3 million. Referring to the TTM revenue chart on the right, you can see that machine revenue is up 39% to $23.1 million over the prior year first quarter TTMs emphasizing our growing momentum with machine sales.

Let’s turn to Slide 16, you can see non-machine revenue is up 6% to $6.6 million in the first quarter of 2017 and 7% in the TTMs. Non-machine revenue continues to demonstrate steady growth.

Our first quarter growth was driven by increased consumable materials and service as our installed base of machines continues to grow. As we disclosed you last year, our 2016 second quarter included a sale of our laser system inventory amounting to about $0.5 million, the cost of which was fully reserved in prior periods.

In addition, we will not be machine parts for customers going forward after our sale of that operation a couple of weeks ago in April and that business generated approximately $1.4 million in annual revenue. While we expect to continue to have steady growth in our core operations, we anticipate the growth in non-machine revenue will be challenged by these two items in Q2 and the remainder of 2017, and the second quarter 2017 will not have the recurrence of that high margin item.

Turning to Slide 17 we’ll talk about gross profit and margin. Despite strong revenue, our first quarter 2017 gross profit and margin were lower than the prior year.

Also, as we previously told you in our March call, we incurred some significant restructuring charges this quarter related to exiting our specialty machining operation and combining our Las Vegas facility with our Houston and Troy EACs. The 2017 quarter includes $0.7 million of employee termination cost and asset impairments of which $0.6 million in non-cash.

While not quantifiable, these costs do not include any amounts for the disruption and inefficiencies associated with these changes which we know inevitably occur. As Jim mentioned earlier, two of the five machines sold this quarter were to the same customer and were replacement units for two very early generation ExOne machines.

The replacement units were essentially a pilot program we launched to test the markets willingness to upgrade from legacy and direct printing technology to state-of-the-art S-Max systems. This program had an unfavorable impact on margins on our quarter of roughly $800,000.

Additionally, 2017 gross profit was unfavorably impacted by $200,000 charge to record certain indirect printing machine platforms at that realizable value. So as we predicted when we reported our March 2016 results, with regards to margin, Q1 was a bit of a messy quarter and some of these charges would also impact the second quarter but to a lesser extent.

However, if we execute as planned, they should largely be behind us after Q2. Having said that, we know we’re on the right track.

You can see in the TTMs for first quarter 2017 with both gross profit and margin outperforming the prior year TTMs. Now, if you can turn to Slide 18, we’ll discuss SG&A.

We’ve made a change from the presentation we used in prior quarters for operating expenses to a current quarter and TTM presentation and as a percentage of sales as we think this presentation is more informative at this point in our life cycle. Comparing the 2017 first quarter to 2016, our SG&A expenses were up about $1 million.

The 2017 first quarter includes approximately $300,000 for non-cash intangible asset write offs associated with exiting our non-core specialty machining operations. Also, the 2017 quarter included $0.3 million of higher selling expenses associated with higher sales and $0.3 million of incremental non-cash stock compensation related principally to some of our new hires.

These increases were partially offset by lower consulting and professional fees. Note that on a TTM basis, our SG&A expenses are quite comparable but the 2017 TTM period is more favorable as a percentage of sales indicating the leverage opportunity as we continue to grow.

On Slide 19 R&D continues to be largely FX cost for us which is our people cost. The first quarter is presented here are relatively comparable.

On a TTM basis, the 2017 period is up modestly primarily due to materials used in machine development and other organizational development activities although the costs are lower as a percentage of sales. We expect this trend to continue for the next few quarters as we reinvest into improvements for our binder jetting technology and printing machines and grow our revenues.

Now if you can turn to Slide 20, we talk about CapEx. As you can see, our first quarter spending was very modest about $0.2 million of cash.

The non-cash portion, just to remind you, pertains to transfers of machines from inventory into PPNE for our own use or for customer leases. As previously indicated, 2017 cash CapEx will remain low between $1 million and $2 million.

The assets associated with the restructuring of the Las Vegas and specialty machining operation facilities have been redeployed to our Houston and Troy EACs or they have been liquidated as of today. Those completed transaction provided us around $3.85 million of cash in the second quarter.

I would like to add that we are very proud of our team for the execution on all of our ongoing efforts and call out in particularly for the quick execution related to these new projects. If we turn to Slide 21, you can see the waterfall of our first quarter 2017 cash flows.

I mentioned cash CapEx already of about $0.2 million, our ongoing working capital initiatives provided us about $4 million of cash in the quarter mainly due to AR collections and customer deposits on new machine orders. Our net loss, net of non-cash and other items, was about $3.5 million of cash.

We ended the quarter with $28.3 million cash, cash equivalents and restricted cash relatively stable as compared with the beginning of the quarter. We expect that the majority of the $2.7 million of restricted cash at March 31 will become available for general use between the second quarter and fourth quarters of this year.

Not shown on this slide is the fact that we have positive cash flows from operations in Q1 driven by these favorable working capital efforts. If you turn to Slide 22, you will see the $28.3 million of cash then you’ll continue to see that we have virtually no debt on our balance sheet.

With that, I’ll turn it back to Jim.

All right, Brian. Thanks.

Let’s move now to Slide 24, everyone may recognize this slide as its essentially identical to the outlook we provided and reported last quarter, that’s because our outlook is actually unchanged. As I mentioned on the call last time, although we do show good year-over-year improvement this quarter, we still see revenues continuing to be lumpy and different to compare quarter-by-quarter.

However, if measured over longer duration say year-over-year and by active product lines that we have in place, we continue to expect at least 25% sales growth for this year. So as I say sometimes we are still on the plan and moving forward and the expected direction.

So with that, let’s open it up to questions.

Good morning guys. Thanks for taking my call.

Hi, Chris.

Hi, Chris.

Could you categorize the printer wins during the quarter possibly by end market? Just give us a general sense of where you’re seeing some of the demand.

And if you could give a little bit of detail on that automotive win, that’s a great win, may be what kind of parts you are providing may be where on the vehicle or just a little more detail there.

I think weighted towards automotive several machines there. The tooling machine that Jim discussed that’s – those are really the end industry so that really filled the quarter principally.

There was one other machine I mentioned, that’s a generally used machine, it’s a foundry machine that’s providing services to other customers over in Asia. So that’s really where all the sales came from.

Got it, great. And then looks like positive EBITDA by year end, there is a number of levers there that you can pull.

Does anyone of those really standout as being over weighted versus other like is it volumes or there more things you can do on cost controls. And then just a little more detail on what you’re doing to invest in the core binder jet technology?

Okay, Chris, let me take that first off and just a first correction. We did mention adjusted EBITDA.

Got it, okay.

So that one clarification. So when we think about the leverage, obviously the sales side of it, the volume side is certainly where we’re going to see a lot of leverage we expect.

From a cost control standpoint, there is always room to work in that regime. We’re going to certainly have people focused on that, but as Chris frankly as much money as I can put back into and invest in the technology we’re going to continue to do that.

That’s actually a very big priority for me because I think that’s how we really going to continue to drive the top line, just putting more and more capability into our equipment especially and its ability to perform new features or take on new material type, those are all going to be very essential in terms of growing that external market. So if we want to draw down to something very specific, we really want to continue to focus on what is at the core of what our binder jet printing technology uses and that’s really about how it creates the layers of material and how that all works together.

So that’s where we’re going to spend our time and our efforts.

Okay, great. And then just last one from me, congrats on the CHP machine.

Could you just give us a little more detail on the sales process there? How that came about and do you see additional opportunities moving forward based on how this process went?

Yes, I – so I’ll tell you this, the sales process was about a 12 month process. Maybe it might have been 12 months to 14 months.

It’s a customer that’s looking at rolling these things out worldwide. The features of CHP offer some productivity improvements relative to how the parts clean, how certain things work relative to the as printed part, the surface finishes and things like that.

So they were actually a company that was very invested in learning about the technology. They were, if you go back to my adoption cycle, they were very far progressed in the adoption cycle process.

Well understood exactly how they wanted to use the equipment, what they were trying to achieve and really worked with us to identify that CHP is the best fit. So for me, that’s a perfect example of a model that we want to continue to carry forward and that’s because CHP is a relatively new material type that’s been offered into the market.

And we want to continue to bring those types of things to bear.

Great. Thanks and congrats on all the orders.

Thanks.

Thanks, Chris.

Good morning.

Good morning.

Just curious what the outlook is for the introduction of additional materials this year and what markets and applications that might open up in terms of used cases for your customers?

So on the indirect printing side, we’re pretty satisfied right now that we want to continue to build out our sodium silicate process or HHS or CHP and our traditional furan. Those product lines represent where we see that – from that particular side of our business.

Another initiative will be the localization of some of these consumables. That requires a similar development process of us.

So making that type of investment is not necessarily a new product but it makes the equipment more attractive in certain regions when you can bring localized materials in place. On the direct printing side, we’ve got a pretty aggressive material plan.

If it was perfect execution, we bring maybe six more materials into realization before the end of the year. We’re certainly looking for something higher than zero and up to at least six.

I don’t think I see a path that we’re going to necessarily bring more than that, and those are focused in the end markets that would use our direct printing technology today. So this is not something where it’s futuristic, this is applications that the material could be applied with our existing technology today.

Okay, thanks. And then curious about the competitive landscape, there is additional binder jetting competition out there getting some attention and - but just curious your thoughts on what the actual positioning is of your machine versus where this emerging competitions position and I’m just looking [ph] specifically about that Desktop Metal and whether or not, we should think about in the future other form factors for your machines that expand into more engineering type used case that they are going after as well.

Thanks.

Yes, I got you. I understand.

So let me start with, hey, I think them coming into the market and counting binder jetting is a good thing. I think it underwrites the reality which is our technologies got a place in the market and the market is not satisfied with what’s out there with some of the other technology.

It fits a piece of the puzzle but so does binder jetting and the fact that somebody is going to come in and basically start from zero, and move into that industry I think is a validation that our technology is not some arbitrage out there or something that way outside the norm. So from that standpoint I think it’s good news.

In terms of competition show up in the market, that’s like attract meat. If you’re running to get somebody else usually a little faster so it certainly keeps us on our toes to stay and pushing the technology forward.

But I’m going to be pretty straightforward here. We’ve been doing this for ten years and our equipments and peoples locations pray in parts.

I don’t know that they are – that’s bought yet and it’s my understanding it will be a while before they are at that spot. I don’t know exactly what the roll out time will be and there is nothing that replaces real experience with customers printing your product or using your product to print.

And we think that that is – that puts us in the number one chair and we are going to do our best to stay there.

Okay, great. And then just one last one with MIM, you guys have an opportunity to go after basically conventional type MIM process now with your machines you can go after those markets and that tend to be more intercut to smaller parts, I’m wondering whether or not that particular opportunity is more to kind of replace what your customers might be doing in-house with their own captive conventional capacity or if you are going after a market where there is kind of third-party MIM part suppliers?

I don't know that we are picking one or the other, it's really both. And in terms of, I think, your earlier question, I may not have said on the engineer side, the MIM industry, we're continuing to look at our equipment figure out how to be more responsive to that industry in terms of capabilities.

So, when I talk about some of these improvements in core technology, we can get better at how we could support that particular industry. That's one of many on the list of industries we’re trying to ensure we’ve got capabilities that match up with them.

So, it really not picking one – we're not preferential on which market we're going after relative to MIM, it's really both.

[Indiscernible] where is the bigger TAM, is it more what’s kind of actively made by our customers or is that third-party supplier of parts typically?

Yeah, I'm not – I don't know that I could characterize that for you as I sit here right now. Brian, you’ve got something?

The customers I've seen is a combination of both, so I don't see us focusing on one or the other Bobby. We're out there talking to as many MIMs as we can.

Great. Thanks a lot for answering my questions.

You bet.

Thanks, Bobby.

Hi, guys. I’d a couple of business model questions, obviously, gross margins weighed down this quarter by mix and some charges and you're looking for operating leverage in the back half of the year.

So how should we think about a more normalized gross margin especially in the context of maybe some additional discounts on machines as you noted to spur an upgrade cycle? And then as you look at sales leverage, how much should we expect the variable part of SG&A to rise along with sales?

Hi, Rob, we're going to take this in two parts. I want to correct something you said.

We didn't do discounting on equipment. That was a bit of an exchange program that we had in place.

So I wouldn't characterize it as discounting. That's not really the intention that I meant in the presentation.

In terms of how to think about the – how to model things, I'll turn that over to Brian, but I did want to put a little marker there on that particular comment.

Yeah, Rob, I think, we were – the reason I pointed out each piece of that was because of the kind of strange margin that was thrown off, but we had foreshadowed that back in March. I think our margins will turn to a more normalized basis that we've seen in historical patterns and I think the things that we are doing relative to the restructuring activities will take out what I consider to be some of the lower margin items and some of the fixed costs and will help us to get a better leverage model going forward.

And so, again, if I’ve said, each call, volume will drive margins for us and we don't need to add much in facilities. And so, there's as much there in volume, you can't do it all on cost, but I think we have got ourselves a lot more efficient relative to our cost structure and we will drive – the volumes will drive margins up.

So, as you look at driving increased adoption, the acquisition costs of the machine is or isn’t a meaningful hurdle in your discussions with customers?

Actually, we talked about this before. The price machine on machine is one thing.

The largest piece of the equation going forward is the operating costs of the machine, it’s in consumables and keeping the machine running. And so, we know that and we've talked about – that's why we talked about this concept of localizing our consumables, I mean, that reduces transportation, it frees up supply chain for our customers and so we continue to be focused on that.

And I think, Jim, obviously touched on that in the slide, but that's the biggest cost. Will we focus on our machines and our ability to produce machines at a lower cost point?

Absolutely. And will volumes help us there?

Absolutely. But truly the highest cost to our customers is really running the machine with the consumable stream.

Do you want to follow-up?

Yeah, Rob, I'm going to add a few more comments too because I think it ties in well with what I said at the beginning. When we looked at those vintage machine replacements, we actually put in place a consumable program with them as well as a machine program and – so from a overall long-term value standpoint, that's why was I was sort of pushing back on how we would characterize that particular activity.

But we get clear messages very consistently that things that we can do in operating and driving down the cost of the consumables is going to – is a major benefit in terms of advancing the adoption.

Okay. Brian, you mentioned there is a little bit more impact of one-off charges in the second quarter, how should we think about a normalized OpEx run rate in Q2 ex one-time items?

Well, our Q1 is our highest quarter and Q2 is lower, Q3 is usually lower and Q4 moves back toward the Q1. We are going to move a little bit away from that because as you saw we had about, I think, I mentioned 30,000 roughly of higher selling costs this quarter.

Some of that’s variable related to the sales of our machines particularly in the regions by which we sell them. Our commission structure is different depending on the region.

So, we will incur some sales expenses with those higher volumes, but it's going to follow the same cycle that it did before. And I don't – we don't have efforts right now to take any large chunks out of SG&A other than the cost that we did for these couple of businesses that we took out this quarter or a couple of locations that we took out the quarter.

Great. My last question is on cash flow.

How much did customer prepayments contributed to the positive cash flow in Q1?

Yeah, I think, we were roughly $7 million at 12/31 and we're over $10 million, so in the range of $3 million, $3.5 million in customer prepayments. That is a lot of – really of being diligent with our contract process and not varying from our contract process.

We’re generally in a 30/60/10 type of arrangement, we’ve said that before too and so – 30 on order and 60 on delivery and 10 acceptance. And so, we’ve been sticking with that and that helps us a lot, you know, some of that growing backlog that you are seeing.

And then also we lowered AR by about $1 million in the quarter. Those were big drivers.

We didn’t do anything strange with AP and try to hold off AP or anything else, it was just kind of straight-forward quarter other than that.

Great. That’s all I have, thank you.

Thank you.

Thank you.

All right. Well, thank you everybody for you question.

We appreciate your time today and we look forward to being back with you and discussing our second quarter results in August. All right, thank you.

Thank you.

Have a great day.