Vuzix Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017. Vuzix designs, manufactures and sells wearable display products, including enterprise Smart Glasses and consumer Video Eyewear, and provides engineering services. Figures are unaudited.
Financial performance and liquidity
- Third-quarter revenue: $1.405 million, up 141% from $0.583 million. Smart Glasses sales were $1.027 million; engineering services were $0.267 million, primarily related to Toshiba.
- Third-quarter profitability: Gross loss was $92,001 (7% of sales), improving from a $237,000 gross loss (41%) a year earlier. Product sales generated $49,000 gross profit, but engineering services had a $141,000 gross loss. Operating loss was $5.522 million; net loss was $5.502 million, versus $5.036 million in Q3 2016. Loss attributable to common stockholders was $5.938 million, including $435,000 of preferred dividends. Basic and diluted loss per share was $0.28, compared with $0.32.
- Nine-month revenue and results: Revenue was $3.941 million, up 161% from $1.507 million. Gross loss was $373,000 (10% of sales), versus $602,000 (40%). Operating loss was $13.529 million and net loss was $13.754 million, compared with $12.251 million and $12.915 million, respectively, in 2016. Loss attributable to common stockholders was $15.027 million; loss per share was $0.73 versus $0.86.
- Cash flow: For the nine months, operating activities used $12.092 million and investing activities used $1.682 million; financing provided $7.917 million, principally from the August share offering. Cash decreased $5.857 million to $8.677 million.
- Liquidity and debt: Current assets were $13.619 million and current liabilities $3.291 million, yielding working capital of $10.328 million, down from $13.808 million at December 31, 2016. No secured debt remained at September 30: $1.592 million of senior notes and $270,000 of accrued interest were converted into common shares during the period. Total liabilities were $3.312 million.
- Capital and dilution: The August public offering of 1.5 million shares generated $7.978 million net proceeds on an accrual basis. A $61,000 officer subscription receivable was collected October 3; cash-flow proceeds reflect its collection timing. Common shares outstanding were 22.179 million at September 30, up from 19.569 million at year-end.
Changes versus the prior period
- Smart Glasses revenue rose 170% for the first nine months, largely with M300 commercial shipments; Q3 M300 shipments increased 462% year over year. Video Eyewear revenue fell 36% for the nine months, amid lower selling prices and competition.
- R&D expense decreased 15% for the nine months, while G&A increased 24%, chiefly from added personnel and compensation. Operating losses nevertheless widened 10% for the nine months.
- A $1.151 million inventory revaluation charge was recorded after Vuzix reduced the iWear suggested retail price below its inventory cost. Management also cites M300 startup costs, quality/yield issues and increased warranty provisions as pressures on product costs.
- Revenue and receivables became more concentrated: Toshiba Japan represented 24% of nine-month revenue and 59% of accounts receivable and accrued project revenue at September 30. It represented 0% of those measures in the comparable 2016 period.
Outlook, risks and notable items
- Management expects stronger M300 sales, new products in the first half of 2018, and potential Toshiba program volume production in early 2018. Vuzix describes a proposed supply and purchase agreement that it expects could produce at least $5 million of revenue in the 12 months after volume deliveries begin; this is an expectation, not a reported commitment in the filing.
- The Toshiba development program is expected to conclude by year-end 2017 and was expected to generate approximately $221,000 in further revenue. During Q3, Vuzix increased its estimated project completion costs by approximately $280,000, reducing expected project margin.
- Management says current cash and planned cost controls should support operations for the foreseeable future if its operating plan is achieved, with reduced losses expected over the next two quarters. It also states that failure to meet the plan could require additional capital or material reductions in operating and product-development spending. The company reported persistent losses, a $90.593 million accumulated deficit, and a need for substantial sales growth to reach positive operating cash flow. Management concluded that substantial doubt about going concern had been alleviated, while emphasizing execution and financing uncertainties.
- Production limitations at a Chinese plastics supplier affected M300 output; management said the molding and plastics-strength issues had recently been corrected. Other stated risks include dependence on a limited number of customers and suppliers, competition, changing technology, manufacturing capacity and possible future dilution.
- Subsequent to quarter-end, Vuzix acquired certain intellectual property for approximately $75,702 in patent-cost reimbursement, up to 100,000 restricted shares tied to milestones, estimated additional R&D spending of $200,000 to reach a demonstrator, and product royalties upon commercialization.
- No pending litigation was reported. Management said disclosure controls were effective and that a previously reported material weakness in subsidiary monitoring controls had been remediated. No material risk-factor changes were reported.
Important facts for investors to verify
- Whether M300 production and supplier improvements translate into sustained shipments, demand and positive product margins.
- Whether the Toshiba development program meets its cost and completion estimates, and whether the proposed volume-production agreement is finalized and delivers the anticipated revenue.
- Cash burn, working-capital needs and the timing of any need for additional financing; note the risk of dilution if new capital is raised.
- Further iWear inventory exposure and the adequacy of inventory, warranty and project-cost estimates.
- Customer concentration and collection of Toshiba-related accrued revenue and receivables.
- The share-offering proceeds presentation: the filing reports $7.978 million net proceeds on an accrual basis, while cash-flow financing reflects $7.917 million through September 30, including the timing of the $61,000 officer subscription payment.