Vuzix Corporation — Q3 2014 Form 10-Q
Business context and period. This unaudited filing covers the three and nine months ended September 30, 2014. Vuzix designs, manufactures and sells wearable video-display devices, including smart glasses and augmented-reality products. Management identified M100 Smart Glasses as a key driver of product sales growth.
Financial performance and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $664,586 | $338,816 | $2,186,262 | $1,778,195 |
| Gross profit / margin | $204,352 / 31% | $148,789 / 44% | $813,540 / 37% | $844,160 / 48% |
| Operating loss | $1,268,851 | $1,196,018 | $3,187,301 | $3,009,564 |
| Net loss | $3,301,321 | $1,856,700 | $1,550,305 | $4,449,734 |
| Loss per share | $0.31 | $0.26 | $0.15 | $0.93 |
- Q3 revenue rose 96%, driven mainly by product sales, up 107%; nine-month revenue increased 23%. Engineering-services revenue declined for the nine-month period.
- Gross margin contracted in both comparisons. Management attributed the decline to a greater share of lower-margin M100 sales versus higher-margin AR eyewear.
- Operating expenses were $1.47 million in Q3 and $4.00 million for the first nine months. Nine-month selling and marketing expense increased 26%; R&D decreased 3%, partly because some development costs were capitalized.
- Net results include significant derivative fair-value movements: a $1.70 million loss in Q3 2014 and a $2.12 million gain for the first nine months. The nine-month net loss therefore does not reflect the continuing operating loss alone.
- Cash was $564,302 at September 30, versus $310,140 at December 31, 2013. Current assets of $2.00 million were below current liabilities of $2.87 million, leaving a working-capital deficit of $878,432.
- Nine-month cash used in operating activities was $3.35 million, compared with $2.85 million a year earlier; investing used $902,232, mainly including $643,790 of capitalized software development. Financing provided $4.51 million.
- Total liabilities were $13.92 million. Long-term debt, net of discounts, was $1.17 million; accounts payable were $1.74 million. The $9.92 million derivative liability was a major balance-sheet item.
Material changes, outlook and risks
- In June 2014, Vuzix issued $3.0 million of 5% senior secured convertible notes, due June 3, 2017, secured by a first-priority interest in company assets. The initial conversion price is $2.25 per share and is subject to adjustment, including for certain lower-priced securities issuances. Notes totaling $600,000 were converted during Q3; the balance sheet reports $2.4 million principal outstanding at September 30.
- Warrant exercises generated $1.93 million in the first nine months. After quarter-end through November 14, additional exercises generated $726,300 net proceeds. Management said existing financing and warrant proceeds were expected to support its current plan and 2014 product development, but further financing may be needed.
- Management reported substantial doubt about Vuzix’s ability to continue as a going concern, citing recurring losses, a working-capital deficit, past-due vendor balances and dependence on external funding. It warned that unsuccessful products or insufficient financing could require new debt or equity, cost reductions, or delays to R&D and commercialization. Additional equity financing could dilute shareholders.
- Management’s plans include emphasizing higher-margin AR and smart-glasses products, introducing waveguide and higher-resolution products, optimizing inventory, reducing costs and capital spending, and considering financing or IP licensing. No quantified revenue, profit or cash-flow guidance was provided.
- Key risks include rapid technological change and competition, customer and supplier concentration, reliance on vendor credit and customer deposits, financing and dilution risk, and possible product-development delays. The company also disclosed that its disclosure controls were ineffective at September 30, 2014 and that identified material weaknesses remained, including in financial close, segregation of duties, subsidiary monitoring, inventory controls and risk assessment.
- Vuzix reported no pending litigation. It stated there were no material changes to the risk factors in its 2013 Form 10-K.
Important facts for investors to verify
- Cash runway, upcoming funding needs, and whether post-quarter warrant proceeds or other financing were sufficient to support operations.
- Whether M100 and other new products can grow sales while restoring gross margins.
- The convertible-note conversion and adjustment provisions, warrant dilution exposure, and the effect of derivative revaluations on reported earnings.
- Progress in remediating material weaknesses in internal controls and improving financial reporting processes.
- Vendor payment terms, past-due payables and the company’s ability to fund product development without disrupting operations.