Vuzix Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Vuzix designs, manufactures, markets and sells wearable computing and augmented-reality display devices, with a focus on enterprise, industrial, commercial, first-responder and medical markets. Figures are unaudited.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / prior balance date |
|---|---|---|
| Total revenue | $1.37 million | $1.54 million; down 11% year over year |
| Gross profit and margin | $39,890; 3% | $177,125; 11% |
| Operating loss | $6.35 million | $5.35 million |
| Net loss | $6.36 million | $5.37 million |
| Loss attributable to common stockholders | $6.83 million, or $0.25 per share | $5.80 million, or $0.22 per share |
| Cash used in operating activities | $5.87 million | $6.47 million |
| Cash and cash equivalents | $10.09 million at March 31, 2019 | $17.26 million at December 31, 2018 |
| Working capital | $16.08 million | $22.71 million at December 31, 2018 |
- Product sales were $1.37 million, essentially flat against the prior-year product-sales figure. Smart Glasses sales increased 6% to $1.25 million; waveguide and display-engine sales were $95,000. There were no engineering-services sales in Q1 2019, compared with $180,516 in Q1 2018.
- Product cost of sales rose 13% to $1.33 million, leaving gross profit at just 3% of sales. Management attributed margin pressure to lower Blade margins and manufacturing overhead added ahead of anticipated production growth.
- Operating expenses increased 16% to $6.39 million. R&D rose 22% to $2.52 million, G&A rose 14% to $1.90 million, and depreciation and amortization more than doubled to $559,089. Selling and marketing fell 8% to $1.42 million.
- Cash declined by $7.18 million during the quarter. Investing activities used $1.30 million, including $724,565 for fixed assets and $537,409 for licenses and other intangible assets. There were no financing cash flows in Q1 2019; Q1 2018 included $28.06 million net financing proceeds, principally from a common-stock offering.
- Total liabilities were $3.90 million, including $860,277 of operating lease liabilities recognized under the new lease standard. The balance sheet reports no borrowings. Current assets were $19.65 million and current liabilities were $3.57 million.
Material changes and notable items
- Revenue mix shifted: Blade contributed to higher Smart Glasses sales, while video eyewear had no sales after its discontinuation in September 2018. The prior-year engineering-services revenue came from a Toshiba program completed in 2018.
- Inventory increased to $8.11 million from $7.28 million; finished goods rose to $4.78 million. The inventory obsolescence reserve increased to $510,921 from $363,845.
- Vuzix adopted ASC 842 on January 1, 2019, recognizing operating lease right-of-use assets and liabilities. The company stated adoption did not significantly affect results or cash flows.
- Series A preferred dividends are 6% annually, compounded quarterly. Accumulated unpaid dividends were $7.13 million at March 31, 2019; none were declared as payable. Preferred-stock dividends reduced the amount of loss attributable to common stockholders by $465,765 for the quarter.
- Vuzix capitalized costs related to the TDG Amendment, which permits certain defense, security and first-responder sales subject to conditions and commissions through June 2022. A $250,000 final payment was accrued at quarter-end.
Outlook, liquidity and risks
- Management expected to launch M400 Smart Glasses and begin volume manufacturing and sales of the M100 Smart Swim product in Q3 2019. These were plans, not reported outcomes.
- As of March 31, the company had $970,000 of remaining performance obligations under an OEM purchase agreement, which it expected to recognize as revenue in Q2 2019. It also reported $148,000 of deferred revenue for extended warranties, expected to be recognized beginning October 1, 2019 over 12 months.
- Management said Vuzix must grow substantially to become profitable and self-funding; otherwise it may need additional equity or debt financing or materially reduce operating and product-development spending. Potential equity financing could dilute existing holders. The filing says management concluded substantial doubt about the company’s ability to continue as a going concern had been alleviated, based on cash, historical access to capital and potential cost controls; it also warns that further capital may be needed if plans do not succeed.
- Management’s stated actions included selling existing M300, M300XL and Blade inventory; controlling costs; reducing discretionary spending and external-contractor R&D costs; and pursuing business, first-responder, defense and government customers.
- Risks cited include product-market acceptance and competition, rapid technological change, customer order timing, reliance on suppliers and manufacturing capacity, inventory management, liquidity and capital access, foreign-exchange exposure, and litigation. The company does not hedge currency exposure.
- Litigation includes Vuzix’s defamation suit seeking damages in excess of $80 million and three shareholder derivative suits alleging, among other things, fiduciary-duty breaches and misleading disclosures. Vuzix disputes the derivative allegations and said it intended to defend itself. The filing gives no clear estimate of potential loss or outcome.
- Management reported disclosure controls and procedures were effective at March 31, 2019 and no material changes in internal control over financial reporting during the quarter. It reported no material changes to the risk factors in its 2018 Form 10-K.
Important facts for investors to verify
- Whether Q3 2019 M400 and M100 launch and production plans were achieved, and whether they generated meaningful sales and margins.
- Whether the $970,000 OEM obligation was recognized in Q2 as expected, and whether the reported inventory can be sold without further reserve increases.
- Cash consumption, working-capital trends and financing needs; the filing does not provide a clear cash-runway estimate.
- Whether product gross margins improve as production scales, given Q1 gross margin of 3% and elevated manufacturing overhead.
- Developments and potential financial exposure from the TDG agreement and the disclosed litigation, for which the filing does not state a clear expected outcome.