Vuzix Corporation — Q1 2014 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2014, compared with Q1 2013. Vuzix designs, manufactures and sells wearable display devices, including Video Eyewear and smart glasses, and provides engineering services.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Revenue | $798,418 | $739,184; up 8% |
| Product sales | $649,418 | $608,661; up 7% |
| Engineering services sales | $149,000 | $130,523 |
| Gross profit / margin | $348,169 / 44% | $401,797 / 54% |
| Operating loss | $(993,150) | $(705,675) |
| Net income (loss) | $1,511,906; diluted EPS $0.13 | $(936,298); diluted EPS $(0.26) |
| Cash from operating activities | $(1,073,311) | $(259,003) |
| Cash from investing activities | $(348,899) | $(27,172) |
| Cash from financing activities | $1,383,882 | $752,047 |
Q1 net income primarily reflected a $2,575,262 noncash gain from revaluing warrant derivative liabilities; it did not indicate profitable operations. Operating expenses rose to $1,341,319 from $1,107,472, including higher R&D, selling and marketing, and general and administrative costs. Management attributed lower gross margin mainly to sales mix and weaker margins on engineering services.
Cash was $271,812 at March 31, down $38,328 from year-end. Current assets of $1,560,186 were below current liabilities of $3,396,505, leaving a $1,836,319 working-capital deficit. Accounts payable were $2,273,853; management said past-due payables were impairing operations and slowing product development. Q1 warrant exercises generated approximately $1.45 million. Notes payable were $231,444; term debt was $267,662 before its unamortized discount, with $99,320 due within one year. The company also reported capital lease obligations.
Total liabilities were $11,954,689, including an $8,363,751 long-term derivative liability. The company had an accumulated deficit of $34,780,626. It reported no outstanding balance on its line of credit.
Material changes, outlook and risks
- Sales increased, supported by new products—particularly M100 smart glasses—and a new Navy waveguide engineering program. M100 shipments began in December 2013 and sales were said to be increasing month over month, although the launch was slower than anticipated.
- Management planned to focus on higher-margin augmented-reality and smart-glasses products, continue waveguide and HD display development, control costs and capital spending, optimize inventory, and explore financing and IP licensing. It expected the V720 Video Headphones to launch in late 2014 and anticipated completing the Navy development work before year-end; these were forward-looking expectations, not guarantees.
- Management said the business needed to grow and become cash-flow self-sustaining in 2014 or obtain additional capital. It warned that financing may not be available on acceptable terms and could dilute shareholders; failure to raise funds could force product-development delays, cost reductions or other curtailments. The filing reiterates substantial doubt about the company’s ability to continue as a going concern.
- Key risks include limited liquidity, reliance on supplier credit and customer deposits, product-market acceptance, competition and rapid technological change. Inventory included a $699,495 obsolescence reserve. The company reported no pending litigation and $33,510 in remaining operating-lease payments as of March 31.
- Disclosure controls were ineffective at March 31, 2014. Material weaknesses remained in financial close and reporting, segregation of duties, subsidiary monitoring, inventory controls, and documented control and risk-assessment procedures. Management said remediation was incomplete.
Important facts for investors to verify
- Whether M100 sales growth and other new-product launches can improve gross margins and reduce operating cash burn.
- Available financing, near-term debt and payable obligations, and the company’s ability to continue as a going concern.
- The size and timing of cash needs for product development, tooling, and commercialization, including the expected Navy program work.
- Progress in remediating internal-control material weaknesses and improving inventory valuation and financial reporting.
- The filing reports warrant-exercise proceeds of $1,447,425 in the cash-flow statement and notes, but $1,447,525 in MD&A; verify the correct amount.