Vuzix Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; filed May 10, 2017. Vuzix designs, manufactures and sells wearable displays, including enterprise Smart Glasses and consumer Video Eyewear.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Total revenue | $1.211 million | $0.364 million; up 233% |
| Product revenue | $0.959 million | $0.364 million; up 164% |
| Engineering services revenue | $0.251 million | None reported |
| Gross profit (loss) | $0.149 million; 12% margin | $(0.239) million; (66)% margin |
| Operating expenses | $4.175 million | $3.457 million |
| Operating loss | $(4.026) million | $(3.696) million |
| Net loss | $(4.182) million | $(3.776) million |
| Basic and diluted loss per share | $(0.23) | $(0.26) |
| Cash used in operating activities | $(3.833) million | $(3.213) million |
| Cash used in investing activities | $(0.305) million | $(0.442) million |
- Cash and cash equivalents were $10.396 million at quarter-end, down $4.138 million from December 31, 2016. Working capital was $11.015 million, versus $13.808 million at year-end.
- Current assets were $14.200 million and current liabilities $3.185 million. Total liabilities were $3.361 million; reported current debt, net of discount, was $518,374. The convertible senior secured notes had $547,990 principal outstanding, bore 5% interest and matured June 3, 2017.
- Gross margin turned positive as higher sales absorbed fixed manufacturing costs. Product-only gross profit was just $5,480, or 1% of product revenue.
Material changes and operating developments
- Smart Glasses revenue rose 189% to $901,448, primarily from the M300 launch. Video Eyewear revenue increased 15% to $48,319. Engineering services generated $251,280, largely for a specialized Toshiba Japan smart-glasses program.
- M300 production start-up challenges limited fulfillment: the company said it could not fulfill approximately 45% of original migration-pack orders. Related preorders and migration-pack amounts were recorded as deferred revenue or customer deposits until shipment. M300 first-volume-shipment margins were approximately 30% below expectations due to production inefficiencies and yields.
- R&D rose 31% to $1.669 million, primarily due to M300 development and additional staff. General and administrative expense rose 39% to $1.235 million, including higher audit and Section 404 consulting costs. Selling and marketing expense declined 8% to $1.031 million.
- Toshiba Japan represented 20% of Q1 revenue and 75% of accounts receivable at March 31, 2017, versus none in the corresponding 2016 period.
- During the quarter, $1.044 million of note principal and $153,591 of accrued interest converted into common stock. After quarter-end, a further $225,000 of notes and $34,972 of accrued interest converted into shares.
Outlook, risks and other notable items
- Management expected full-volume M300 manufacturing to commence in spring 2017 and anticipated improved margins with higher volumes and offshore assembly. It also expected a Toshiba development program, targeted for completion by September 2017, to contribute a further $905,000 of revenue over the next two fiscal quarters.
- Management planned to control operating costs and discretionary capital spending, reduce certain R&D spending and delay some planned products. It expected continued operating losses for the next two quarters and said sales must increase significantly to achieve positive operating cash flow.
- The company reported recurring losses, a $81.021 million accumulated deficit and substantial cash burn. Management said its cash, ability to manage costs and expected financing actions alleviated substantial doubt about going concern, and believed available cash and future operating cash flow could meet needs if its plan was achieved. It cautioned that failure to meet the plan or raise capital could require material spending cuts; new financing could dilute shareholders.
- The remaining notes were due June 3, 2017. Management expected holders to convert the balance; more than half had converted after quarter-end. Conversion or repayment and available liquidity remain important near-term considerations.
- Management stated disclosure controls were effective at March 31, 2017 and that a previously reported material weakness in financial close and reporting controls had been remediated. No pending litigation was reported, and no material changes to the previously disclosed risk factors were identified.
Important facts for investors to verify
- Whether M300 manufacturing yields, fulfillment and gross margins improved, and whether deferred orders converted to recognized revenue.
- Whether the anticipated Toshiba program was completed and generated the expected revenue, and how customer concentration and receivable collection evolved.
- Cash burn, working capital and financing needs relative to management’s operating plan, including the final disposition of notes due in June 2017.
- Whether revenue growth can support positive gross margins and offset R&D and other operating expenses without additional dilutive financing.
- Whether remediation of the financial-reporting control weakness remained effective in subsequent reporting periods.