Vuzix Corporation — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2018. Unaudited interim results; comparisons are with the corresponding 2017 periods unless noted.
Business context and financial performance
Vuzix designs, manufactures, markets, and sells augmented-reality wearable displays, including smart glasses, OEM products, waveguides, and engineering services.
- Revenue: Q2 revenue was $2.65 million, up 100% year over year; first-half revenue was $4.19 million, up 65%. Q2 growth reflected stronger smart-glasses sales, primarily the M300, and new OEM sales to Toshiba.
- Revenue mix: Q2 product revenue was $2.65 million and engineering-services revenue was zero, versus $420,314 in Q2 2017. First-half engineering-services revenue fell 73% to $180,516 as the Toshiba development program concluded in March 2018.
- Gross profit and margin: Q2 gross profit was $670,173, a 25% margin, compared with a $429,487 gross loss and negative 32% margin. First-half gross profit was $847,298, a 20% margin, compared with a $280,727 gross loss and negative 11% margin. Improved product economics and the absence of prior-year inventory obsolescence provisions helped; lower-margin Toshiba OEM sales and higher warranty costs weighed on margins.
- Operating expenses and losses: Q2 operating expenses rose 89% to $6.72 million; operating loss widened 52% to $6.05 million. First-half operating expenses increased 59% to $12.25 million; operating loss widened 42% to $11.41 million. R&D, selling and marketing, and G&A all increased substantially.
- Net loss: Q2 net loss was $6.15 million versus $4.07 million; loss attributable to common stockholders was $6.60 million, or $0.24 per share. First-half net loss was $11.51 million versus $8.25 million; common-stockholder loss was $12.40 million, or $0.46 per share.
- Cash flow: First-half operating cash use was $12.75 million, versus $7.55 million in 2017; investing cash use was $1.05 million. Financing provided $28.06 million, principally from the January stock offering.
- Liquidity and capital: Cash was $29.15 million at June 30, 2018, versus $14.89 million at year-end 2017. Working capital was $32.97 million. Total liabilities were $4.71 million, all reported as current; no term debt was reported on the balance sheet. The company issued 3.0 million shares and warrants for up to 1.2 million shares in its January offering, receiving $28.03 million net. Common shares outstanding were 27.34 million at quarter-end.
Material changes and management commentary
- Smart-glasses sales rose 154% in Q2 and 78% in the first half, primarily reflecting M300 sales. First-half OEM product sales were $766,065, compared with none in 2017.
- Management attributed higher operating expenses to increased staffing and stock compensation, product development and consulting, marketing, and separation costs. First-half stock-based compensation was $1.18 million and included approximately $350,000 of one-time severance-related compensation.
- The company increased its warranty provision rate for smart glasses to 7% of sales from 5% in the prior-year first half, citing plastics and cabling issues.
- Management said existing cash was expected to fund working-capital and capital-expenditure needs for at least the next 12 months. It also stated that continued losses mean the company must grow substantially to become self-sustaining and may need additional financing; future financing could dilute shareholders.
- No specific revenue or earnings guidance was provided. The company expects to recognize $228,000 of remaining OEM purchase-agreement performance obligations during the remainder of 2018.
- Toshiba Japan represented 27% of first-half total revenue and 94% of engineering-services revenue. AMA SA represented 20% of first-half revenue. Customer concentration and receivables exposure are therefore notable.
Risks, contingencies, and unusual items
- Two purported securities class actions were filed after quarter-end in July 2018 relating to alleged misleading statements and the January offering. Vuzix said it intended to defend the cases and planned to seek dismissal. Separately, Vuzix filed a defamation lawsuit seeking damages in excess of $80 million; any recovery is uncertain.
- Cash use increased as the company funded operating losses and working capital, including higher inventory and accounts receivable. Management cautioned that additional capital may be needed if cash sources prove insufficient.
- Other stated risks include customer and supplier concentration, order timing, manufacturing capacity, competition and rapid technological change, product acceptance, intellectual-property protection, litigation, and foreign-exchange exposure. The company does not hedge foreign-currency risk.
- The $56,836 loss on asset disposal and the $35,687 first-half derivative-valuation loss affected reported results. The derivative liability was $172,269 at June 30 and was valued using Level 3 inputs.
- Vuzix adopted ASC 606 in January 2018, recording an $81,724 reduction to opening accumulated deficit; management said the effect on first-half revenue compared with prior guidance would have been immaterial. Management reported disclosure controls effective at June 30, 2018 and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether M300 and OEM sales growth continues, and how much revenue depends on Toshiba and other major customers.
- Whether gross margins improve despite lower-margin OEM sales, warranty issues, and the elevated 7% smart-glasses warranty provision.
- Operating cash use, inventory and receivables growth, and whether the stated cash runway remains adequate as R&D and commercial spending continue.
- Potential dilution from outstanding warrants, options, preferred-stock conversion rights, or future capital raises.
- Developments and potential financial effects of the post-quarter securities litigation; the filing does not provide a clear estimate of any exposure.