Vuzix Corporation — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing was signed March 16, 2020. Quarterly figures below are unaudited; the filing is an annual report, not a standalone Q4 filing.
Business context
Vuzix designs, manufactures, markets and sells augmented-reality wearable displays, Smart Glasses and related optics, display engines and engineering services. Its focus is enterprise, industrial and commercial customers, with additional prosumer, OEM and defense/security opportunities. In 2019, it began M400 Smart Glasses production and shifted final product assembly primarily to its Rochester, New York facility.
Financial results and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $6.67 million | $8.09 million |
| Gross profit (loss) | $(4.41) million; (66)% margin | $1.77 million; 22% margin |
| Operating loss | $(26.57) million | $(21.86) million |
| Net loss | $(26.48) million | $(21.88) million |
| Net loss per share | $(0.94) | $(0.87) |
| Operating cash flow | $(22.36) million | $(22.54) million |
- Product sales fell 22% to $6.00 million; engineering-services revenue rose 67% to $673,151. Total revenue declined 18%.
- FY2019 gross loss included a $4.57 million inventory obsolescence charge for M300/M300XL components and legacy finished goods. Before that reserve, product gross loss was $336,880, versus $1.62 million product gross profit in 2018.
- Research and development expense was $8.90 million, down 14%; selling and marketing was $4.22 million, down 13%; general and administrative expense was $6.60 million, down 5%. Depreciation and amortization increased 66% to $2.44 million.
- Cash and cash equivalents were $10.61 million at year-end, down $6.66 million. Working capital was $16.44 million; total current liabilities were $2.63 million. The company reported no current or long-term debt obligations.
- Investing activities used $3.16 million; financing provided $18.86 million net, principally from a July 2019 equity offering. The offering issued 5.48 million common shares and warrants for up to 5.48 million additional shares.
- Accumulated deficit was $144.74 million. Series A preferred stock carries a 6% annual compounded dividend; FY2019 preferred dividends were $1.93 million. No common-stock dividends are anticipated in the foreseeable future.
Q4 and changes versus prior periods
In Q4 2019, revenue was $1.953 million, gross loss $4.369 million, net loss $9.583 million and basic and diluted loss per share $0.31. Q4 2018 revenue was $1.979 million, gross profit $300,000, net loss $5.564 million and loss per share $0.22. The filing reports the large FY2019 inventory reserve but does not clearly allocate its amount by quarter.
Annual revenue and product sales declined from 2018, while net loss widened. Management attributed lower Smart Glasses sales to the absence of large 2018 customer shipments, price reductions, M400 early-adopter pricing and customer deferrals ahead of M400 availability. New Blade sales partly offset those declines. Toshiba/Foxconn commercial orders had slowed, and management reported no near-term expectation of further orders.
Outlook, risks and unusual items
- Management identified continued losses and cash use as a funding risk. It said the company would need significant business growth to become cash-flow self-sustaining or would need additional equity or debt capital; no additional committed external funding was in place. Management stated that its plans and available resources alleviated substantial doubt about continuing as a going concern, while warning that financing may not be available on acceptable terms.
- Plans included M400 adoption, Smart Swim volume manufacturing and sales targeted for Q2 2020, and the M4000 waveguide-based enterprise glasses, with introduction targeted around late Q2 and mass production expected in the second half of 2020. A binocular AR product was under development for expected introduction in 2021. These are forward-looking plans, not guarantees.
- Management also planned cost controls, possible workforce and spending reductions, lower discretionary capital spending, reduced external contractor use, and efforts to monetize engineering services and waveguide licensing/OEM opportunities. It provided no numeric revenue or earnings guidance.
- Key risks include uncertain market adoption and intense competition; short-notice order cancellations and limited backlog visibility; reliance on third-party and limited-source component suppliers; manufacturing capacity and equipment concentration; product quality and inventory obsolescence; potential dilution from future financing and outstanding securities; and trade, foreign-exchange, cybersecurity and regulatory risks. The filing also noted emerging public-health uncertainty, including potential effects on capital access, demand and component supply.
- A patent-infringement complaint by Throop, LLC was voluntarily dismissed without prejudice in March 2020; Vuzix denied the claims and said it would defend against any related future lawsuit. Other disclosed 2019 litigation matters were resolved. Auditors gave unqualified opinions on the financial statements and internal control over financial reporting; management also assessed controls as effective.
Important facts for investors to verify
- Whether M400 sales and customer adoption improve revenue and product-level margins, and whether the M400 launch displaces legacy product demand.
- Whether Vuzix can sell or recover value from the $4.57 million of inventory reserved, and whether further obsolescence charges arise.
- Cash burn and financing needs relative to year-end cash, operating plans and access to capital; monitor dilution from warrants, options and preferred-stock conversion rights.
- Progress and commercial terms for M4000, Smart Swim, engineering services and OEM/waveguide licensing opportunities.
- Whether customer concentration, supplier dependence, Toshiba/Foxconn order weakness, and the dismissed patent matter create further material developments.