Business Context and Reporting Period
Vuzix Corporation designs, manufactures, markets and sells wearable computing and augmented-reality display products, including Smart Glasses, and provides engineering services and custom waveguide solutions. This unaudited Form 10-Q covers the three and nine months ended September 30, 2020; comparisons are with the corresponding 2019 periods unless noted.
Financial Performance and Position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $2.78 million | $1.16 million | $7.35 million | $4.72 million |
| Gross profit (loss) | $348,000 | ($231,000) | $1.22 million | ($40,000) |
| Gross margin | 13% | (20%) | 17% | (1%) |
| Operating loss | ($4.75 million) | ($5.52 million) | ($14.33 million) | ($16.94 million) |
| Net loss | ($4.76 million) | ($5.48 million) | ($14.36 million) | ($16.89 million) |
| Loss per common share | ($0.13) | ($0.18) | ($0.44) | ($0.62) |
- Q3 revenue grew 140%, primarily from Smart Glasses: product sales increased 154%, with M-Series sales up 236% in the quarter. Nine-month Smart Glasses sales increased 104%; engineering-services revenue more than doubled.
- For the nine months, operating cash flow was negative $11.26 million, compared with negative $18.05 million in 2019. Investing activities used $1.16 million. Financing activities provided $26.76 million, principally from equity offerings and a PPP loan.
- Cash and cash equivalents were $24.94 million at September 30, up from $10.61 million at December 31, 2019. Working capital was $30.96 million, versus $16.44 million at year-end 2019. Current assets were $34.22 million and current liabilities $3.26 million.
- Total debt was $1.56 million at September 30, including $945,009 current and $610,891 long-term. Lease liabilities were $1.62 million. Total liabilities were $5.05 million.
- Common shares outstanding increased to 42.72 million from 33.13 million at December 31, 2019. The company also had 10.16 million warrants outstanding; potential future dilution is significant.
Material Changes Versus the Prior Period
- Improved product economics and higher Smart Glasses sales moved reported gross profit from a loss to a profit. Management attributed improved product margins partly to the M400 and sales of older products previously reserved for obsolescence.
- Operating expenses declined 4% in the first nine months, mainly due to lower R&D consulting costs and reduced selling, travel and legal expenses. Q3 selling and marketing expense rose 21%, while R&D expense fell 20%.
- Revenue from OEM products and waveguides/display engines was nil in the first nine months of 2020, compared with $951,570 and $152,499, respectively, in 2019. Management said no further OEM orders from the prior customer were received or then contemplated.
- Inventory increased to $6.56 million from $5.71 million at year-end. The company recorded $500,600 of inventory obsolescence reserves in the first nine months, including write-downs for original Blade 1.0 and Smart Swim components.
Outlook, Commentary and Risks
- The filing provides no formal quantified revenue, earnings or cash-flow guidance. Management expected approximately $120,000 of remaining revenue on a waveguide development project to be recognized in Q4 2020.
- COVID-19 caused customer order and deployment delays, supplier shortages and delays, longer regulatory testing times in some countries, and several-month delays to launches of the M4000 and upgraded Blade. Both products were commercially available by the filing date. Management also cited growing remote-support and medical-use opportunities, while stating the pandemic’s future effects remained uncertain.
- Management stated Vuzix must grow significantly to become profitable and self-funding or raise additional equity or debt. It warned that inability to obtain sufficient capital could require substantial changes to its business and operating plans. Historical reliance on equity financing and potential shareholder dilution remain important risks.
- The company had applied for forgiveness of its $1.56 million PPP loan. Subsequent to quarter-end, on November 2, 2020, the SBA approved forgiveness of $1,564,155, including accrued interest; final discharge by the lender was still pending.
- A patent-infringement complaint by Throop, LLC was voluntarily dismissed without prejudice in March 2020 after Vuzix challenged venue. The company denied liability and said it intended to defend against any related future claims.
- Other disclosed risks include rapid technological change, competition, customer order variability, supplier and manufacturing constraints, product acceptance, inventory forecasting, foreign exchange exposure, and possible future financing needs.
Important Facts for Investors to Verify
- Whether the PPP loan was ultimately discharged and whether any related amount was recognized in subsequent-period results.
- Whether M4000 and upgraded Blade launches, customer deployments and COVID-related supply and regulatory delays affected subsequent revenue and margins.
- Whether product growth can be sustained and replace lost OEM and waveguide sales, while improving gross margins and reducing operating cash burn.
- Inventory quality and reserve adequacy, particularly for older or model-specific components.
- Future capital needs and dilution from equity issuance, warrants and other potential share equivalents.
- The filing reports different September-offering net proceeds in different sections: $14,617,027 in the financial statement notes and $14,613,380 in MD&A. Investors should verify the correct amount.