Business context and reporting period
Vuzix Corporation designs, manufactures and sells wearable displays and smart glasses, including products for consumer, industrial and augmented/virtual reality applications. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2015, compared with the corresponding 2014 periods.
Financial performance and liquidity
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | $970,379; up 46% year over year | $2,207,346; up 1% |
| Gross profit and margin | $326,133; 34%, versus $204,352 and 31% | $539,730; 24%, versus $813,540 and 37% |
| Operating loss | $2,297,003, versus $1,268,851 | $8,129,749, versus $3,187,301 |
| Net loss | $2,424,971, versus $3,301,321 | $9,918,150, versus $1,550,305 |
| Loss attributable to common stockholders | $2,811,348, or $0.17 per share | $11,040,010, or $0.73 per share |
| Operating cash flow | Not presented for the quarter | Used $8,874,705, versus $3,350,336 |
At September 30, cash and cash equivalents were $16.07 million, compared with $84,967 at year-end 2014. Current assets of $20.15 million exceeded current liabilities of $1.29 million, producing working capital of $18.86 million, versus a $1.43 million deficit at year-end. Nine-month investing activities used $719,753; financing provided $25.58 million. Total liabilities were $2.75 million. Long-term debt, net of discount, was $1.27 million, including $73,985 current; the convertible senior notes have $1.90 million principal outstanding and mature in 2017.
Material changes versus prior periods
- Third-quarter product sales rose 43%, and engineering-services revenue nearly doubled from a lower base. Nine-month total sales were nearly flat: product sales rose 7%, while engineering-services revenue fell 36%.
- Revenue mix shifted toward M100 Smart Glasses and waveguide display engines as legacy Video Eyewear, AR and VR products were phased out. M100 sales rose 38% in the quarter and 29% for the nine months; waveguide engines contributed 24% of quarterly revenue and 12% of nine-month revenue.
- Quarterly gross margin improved to 34%, mainly due to product mix; the nine-month margin fell to 24% from 37%. Management cited newly incurred software-cost amortization and higher software royalties as key factors in the nine-month decline.
- Operating expenses increased materially. Nine-month G&A rose $3.47 million, including approximately $2.68 million of non-cash share and warrant compensation; R&D increased 86%. The nine-month operating loss widened.
- The 2015 nine-month net loss includes a $968,467 derivative-valuation expense, compared with a $2.12 million gain in 2014. In the quarter, derivative valuation was a $58,239 gain versus a $1.70 million loss in 2014, helping reduce the reported quarterly net loss despite a higher operating loss.
Outlook, risks and unusual items
Management said cash on hand and expected future operating cash flow should meet working-capital and capital-expenditure needs for the foreseeable future, even if losses continue at levels similar to recent periods. It also said positive operating cash flow depends on increasing product sales and cautioned that future positive cash flow is not assured. Planned product introductions include iWear Video Headphones, successor M100 models and waveguide-based smart glasses; no quantified revenue or earnings guidance was provided.
Intel invested $24.813 million in Series A preferred stock in January 2015. The preferred shares carry a 6% annual cumulative dividend, conversion rights and governance, participation and consent rights; accrued unpaid dividends were $1.12 million at September 30. Common shares outstanding increased to 16.06 million from 11.30 million at year-end 2014. The company also disclosed 6.39 million potentially issuable common-share equivalents.
Vuzix relocated to a facility approximately four times the size of its prior premises in October 2015. The new lease carries annual base rent of $335,248 and five-year obligations of $1.68 million; planned leasehold improvements and equipment were estimated at approximately $987,000, expected mainly in the fourth quarter of 2015. The filing reports no pending litigation and no material changes to the risk factors in the 2014 Form 10-K.
Management concluded disclosure controls were ineffective at September 30, 2015 because previously reported material weaknesses had not been fully remediated. An external review was completed and remediation plans were being prepared. Risks identified include rapid technological change and competition, dependence on key customers and suppliers, manufacturing capacity, order variability, liquidity, and potential weaknesses in financial reporting controls. A major stockholder accounted for $325,625 of nine-month revenue and $290,625 of period-end receivables.
Key facts investors should verify
- Whether product growth, particularly M100 and waveguide sales, can improve gross margins and offset declining legacy-product and engineering-services revenue.
- Cash runway relative to the nine-month operating cash use of $8.87 million, planned expansion spending and continuing losses.
- Customer concentration and collectability of the $290,625 receivable from the major stockholder-related customer.
- Potential dilution and preferred-stock obligations, including conversion, accrued dividends, participation rights and governance protections.
- Progress remediating the material weaknesses in internal control and the effect of stock-based and warrant compensation on reported expenses.