Vuzix Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparative period is Q1 2014. Vuzix designs, manufactures, markets, and sells wearable display devices, including smart glasses and virtual/augmented reality products.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total sales | $809,155 | $798,418 | Up 1% |
| Gross profit / margin | $178,333 / 22% | $348,169 / 43% | Down $169,836; margin down 21 percentage points |
| Operating loss | ($3,688,466) | ($993,150) | Loss widened $2,695,316 |
| Net income (loss) | ($5,090,852) | $1,511,906 | Declined $6,602,758 |
| Operating cash flow | ($2,747,955) | ($1,073,311) | Cash use increased |
| Cash and equivalents, quarter-end | $22,884,309 | $271,812 | Up from $84,967 at Dec. 31, 2014 |
- Product sales rose 7% to $695,574, while engineering-services sales fell 24% to $113,581. Product sales benefited from a 56% increase in monocular Video Eyewear sales, including resumed M100 sales to China; sales of Wrap products declined as those models were phased out.
- Cost of sales increased 40% to $630,822. Management attributed lower gross margin to software-cost amortization, lower margins on Lenovo M100 sales in China, higher manufacturing overhead, and approximately $50,000 of component write-offs related to the Wrap 1200 production wind-down.
- Operating expenses increased to $3,866,799, principally because general and administrative expense rose to $2,934,907. The increase included $1.475 million of stock awards and $526,916 of stock and warrant compensation for consultants; management said approximately $2.1 million of the year-over-year G&A increase was noncash.
- Other expense was $1,402,386, including a $1,003,427 derivative-valuation loss and $340,960 of term-debt discount amortization. Q1 2014 included a $2,575,262 derivative-valuation gain. These items materially affected the comparison of net results.
- Net loss available to common shareholders was $5,449,791 after $358,939 of preferred dividends; basic and diluted loss per share was $0.40.
Liquidity, financing, and debt
- At March 31, 2015, current assets were $24,536,038 and current liabilities were $1,710,095, giving positive working capital of $22,825,943. At year-end 2014, working capital was negative $1,427,139.
- Financing activities provided $25,573,516, primarily from Intel’s $24,813,000 Series A preferred-stock investment, net of $221,669 in offering costs, and $1,200,751 of cash proceeds from warrant exercises. Cash used in investing was $26,219.
- The company reported $1,157,106 of long-term borrowings net of discount, including $2,037,500 principal on senior secured convertible notes due June 2017. Total scheduled principal maturities, before discounts, were $2,210,731. The line of credit and officer/shareholder notes payable shown at year-end were zero at quarter-end.
- Series A preferred stock carries a 6% annual dividend, is convertible into 4,962,600 common shares at the stated conversion terms, and has voting, board-nomination, participation, and protective rights. Common shares outstanding increased from 11,295,387 at year-end to 15,865,141 at quarter-end; 15,909,978 were reported outstanding as of May 12, 2015.
Outlook, risks, and notable matters
- No quantified revenue or earnings guidance is provided. Management said increased product sales are needed for positive operating cash flow and expected existing cash and future operating cash flow to cover working-capital and capital needs for the foreseeable future, even if losses continue at a similar scale. It cautioned that positive operating cash flow is not assured.
- Planned uses of cash include product development and tooling, working capital, hiring, and a move to a facility about four times the existing size, including cleanroom capacity for waveguide optics. The company planned several product introductions over the following year, including IWear 720, successor M100 models, and waveguide-based smart glasses.
- Management reported no open engineering-services orders after final Q1 deliveries to the Navy for the first binocular waveguide systems; the company said it was focusing on its own product and technology development.
- Disclosure controls and procedures were deemed ineffective as of March 31, 2015. Previously identified material weaknesses remained, involving the financial close and reporting process, segregation of duties, subsidiary monitoring, inventory controls, and documented controls and risk assessment. Management said remediation was incomplete and provided no assurance as to when it would be implemented.
- Management cited risks including rapid technological change and competition, reliance on key customers and suppliers, manufacturing capacity, order volatility, proprietary technology protection, liquidity, and internal-control weaknesses. The filing reported no pending litigation and no material changes to the risk factors in the 2014 Form 10-K.
Important facts for investors to verify
- Whether product demand, particularly for new smart-glasses and waveguide products, can grow enough to offset the decline in engineering services and discontinued Wrap models.
- Whether gross margins recover after the Q1 pressures, and how much future spending will be required for product launches, tooling, hiring, and the facility move.
- Cash burn and financing runway relative to management’s outlook, including the effects of continuing operating losses and working-capital needs.
- Potential dilution and governance implications of preferred-stock conversion rights, dividends, board rights, participation rights, outstanding warrants, and convertible debt.
- Progress in remediating material weaknesses in financial reporting, inventory controls, subsidiary monitoring, and segregation of duties.