Vuzix Corporation — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual filing; it does not provide a standalone fourth-quarter income statement. Vuzix designs, manufactures and sells wearable displays, including enterprise smart glasses and consumer video/VR eyewear.
Financial results and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $2.13 million | $2.75 million |
| Gross profit (loss) | ($1.16 million) | $566,186 |
| Gross margin | (55%) | 21% |
| Operating loss | ($18.54 million) | ($11.34 million) |
| Net loss | ($19.25 million) | ($13.43 million) |
| Loss per common share | ($1.23) | ($0.97) |
| Cash used in operating activities | $14.40 million | $11.67 million |
| Cash used in investing activities | $2.19 million | $2.08 million |
| Cash provided by financing activities | $19.24 million | $25.54 million |
- Cash and equivalents were $14.53 million at year-end, up from $11.88 million. Current assets of $18.23 million exceeded current liabilities of $4.42 million; working capital was $13.81 million.
- Year-end total liabilities were $4.62 million. Convertible senior secured notes had $1.592 million principal outstanding, carried a 5% rate and were due June 3, 2017; the balance-sheet carrying amount, net of discount and issuance costs, was $1.416 million. The notes are convertible at $2.25 per share.
- Vuzix raised $19.24 million net in two 2016 common-stock offerings, issuing 3.15 million shares. These financings increased cash but diluted existing shareholders.
Material changes versus FY2015
- Revenue fell about 23% to $2.13 million. Smart Glasses sales declined 25% to $1.43 million, with customers delaying purchases ahead of the M300; engineering-services revenue fell 32% to $139,500. Video Eyewear sales rose to $395,052 from $211,257, while waveguide component sales fell 72% to $109,754.
- Gross margin swung from 21% to negative 55%. Management attributed the deterioration to lower volume against fixed manufacturing costs, lower-margin iWear sales, iWear production and rework problems, and higher freight and overhead.
- Operating expenses increased to $17.37 million from $11.91 million. R&D rose 93% to $6.95 million and selling and marketing rose 89% to $3.39 million, principally reflecting product development, staffing and marketing investment. G&A declined 16% to $5.11 million.
- Operating cash use increased by $2.73 million. Financing cash inflows were lower than in 2015, when the company received Intel’s $24.81 million preferred-stock investment.
Outlook, management commentary and risks
- Management’s 2017 plans included M300 volume production and shipments, commercial introduction of M3000 waveguide smart glasses and Blade smart sunglasses, and completion of a $1.145 million Toshiba smart-glasses development program. The filing provides plans and timing expectations, not quantified revenue or earnings guidance.
- Management said iWear production constraints eased in fall 2016, but the product missed much of the holiday selling season. It lowered the planned retail price from $499 to $299 and recorded a $1.124 million inventory write-down based on the revised pricing decision made in early 2017.
- The company reported continuing losses and a $76.84 million accumulated deficit in its financial statements. It said profitability and self-sustaining operating cash flow require substantial business growth; additional financing or substantial cost and product-development reductions may be necessary if plans are unsuccessful. Management concluded that substantial doubt about going concern had been alleviated, citing cash on hand, fundraising history and ability to adjust costs.
- Key risks include uncertain product adoption and launch execution, intense competition, short-notice customer orders, dependence on third-party component suppliers and manufacturers, and potential need for further dilutive financing. Intel notified Vuzix in November 2016 that it no longer wished to pursue a strategic relationship and was considering an orderly disposition of its investment.
- Disclosure controls and internal control over financial reporting were ineffective at December 31, 2016. Material weaknesses involved the financial close and journal-entry/reconciliation controls, subsidiary monitoring, and inventory accounting. The auditor issued an adverse opinion on internal controls but an unqualified opinion on the financial statements. The filing also disclosed an SEC informal inquiry concerning internal controls; requested documents had been provided, with no further information request reported at filing.
- No pending material litigation was reported. The company reported no off-balance-sheet arrangements. The Series A preferred stock held by Intel carries a 6% annual dividend, compounded quarterly; accrued unpaid dividends were $3.13 million at year-end.
Important facts for investors to verify
- Confirm subsequent conversion and repayment status of the June 2017 convertible notes. After year-end and through the filing date, Vuzix reported conversions of $1.044 million principal and $153,571 accrued interest; $372,730 principal remained outstanding at filing.
- Track M300 and M3000 production, Blade launch timing, Toshiba program completion, and whether anticipated shipments convert into recognized revenue and positive gross margins.
- Assess whether the iWear price reduction improves sell-through and whether remaining inventory can be sold without further discounting or write-downs.
- Monitor cash burn, financing needs and potential dilution, alongside operating performance and working-capital requirements.
- Verify progress in remediating the disclosed internal-control material weaknesses and any subsequent developments in the SEC inquiry.
- Reconcile the filing’s inconsistent accumulated-deficit references: the audited balance sheet and notes report $76.84 million, while one risk-factor passage refers to $94.54 million, a figure that corresponds to additional paid-in capital on the balance sheet.