From the Home Screen press the Menu button, then:
Privacy -> Factory data reset
Then press the "Reset Device" button.
As for firmware? I'm only aware of a firmware release for the M701. Confusing because the description I read referenced the "remote control" so I'm not certain whether it is a firmware for just the M701 (which has 2 usb ports and no HDMI or remote) or if it is for (or also for) M701-R or not. Not going to risk it until I know it's definitely for my device or I might brick the darned thing.
Mine played videos just find out of the box. You may want to double-check your Display settings - particularly "Output Device."
You may get yourself in trouble if you do that. Remember, these products are made in China, therefore the original settings was probably all in Chinese. I've heard reports of people trying this and shooting themselves in the foot because they couldn't read the language after resetting.