Vuzix Corporation — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Vuzix designs, manufactures and sells smart glasses and augmented-reality display products, and provides engineering services, primarily for enterprise and other commercial markets. The financial statements are unaudited.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $3.04 million | $2.19 million | $4.57 million | $3.56 million |
| Gross profit, before separately reported depreciation | $0.80 million | $0.15 million | $0.88 million | $0.19 million |
| Gross margin, as reported | 26% | 7% | 19% | 5% |
| Operating loss | $(4.24) million | $(5.07) million | $(9.58) million | $(11.42) million |
| Net loss | $(4.24) million | $(5.06) million | $(9.60) million | $(11.42) million |
| Loss per share, basic and diluted | $(0.13) | $(0.20) | $(0.31) | $(0.45) |
- For the six months, operating cash outflow was $8.87 million, investing cash outflow was $0.64 million, and financing cash inflow was $12.14 million. Cash increased $2.62 million to $13.23 million.
- At June 30, current assets were $22.92 million and current liabilities were $2.81 million, yielding working capital of $20.11 million. Total liabilities were $4.97 million.
- Debt was $1.56 million under a two-year, unsecured PPP note bearing 1% interest; principal and interest payments were deferred for six months. The company intends to apply for forgiveness. Operating lease liabilities totaled approximately $1.73 million.
- In May, Vuzix issued 5.0 million common shares at $2.25 per share, receiving $10.58 million net proceeds. Common shares outstanding increased to 39.0 million at June 30 from 33.1 million at year-end 2019.
Material changes versus the prior period
- Q2 revenue rose 39%; first-half revenue rose 28%. Smart-glasses sales grew substantially, principally from the M400, while engineering-services revenue also increased.
- Q2 M-Series smart-glasses unit sales increased 164% year over year; the M400 represented 50% of Q2 revenue. Blade sales declined 40% in Q2. For the first half, M-Series unit sales increased 91%, while Blade revenue declined 49%.
- No OEM product revenue was recorded in the first half of 2020, compared with $0.95 million in the first half of 2019; the customer had placed no new orders since spring 2019, and none were then anticipated. Waveguide and display-engine sales were also nil in the first half, compared with $0.14 million.
- Losses narrowed year over year, supported by higher revenue and lower operating expenses. First-half R&D, selling and marketing, and G&A expenses fell 15%, 13%, and 10%, respectively.
- Product gross profit improved, but included a $307,600 write-down of original Blade components. The company attributed improved product economics in part to higher M400 margins and sales of inventory provisioned in prior periods.
Outlook, commentary and risks
- Management identified M400 adoption, planned introduction of the M4000 in fall 2020, upgraded Blade products, engineering programs, and waveguide licensing opportunities as business and liquidity priorities. COVID-related supply-chain delays had pushed expected launch timing for the M4000 and upgraded Blade back several months; customer deliveries were also affected by supplier constraints and regulatory-testing delays.
- COVID-19 had delayed customer orders and deployments and reduced manufacturing output. Management also cited emerging opportunities in remote support, training and medical applications. The extent of the pandemic’s future effects remained uncertain.
- Management stated that the company must grow significantly to become profitable and self-funding or may need additional equity or debt financing. It said cash on hand, its historical ability to raise capital, and cost-management options alleviated substantial doubt about going concern; this remains dependent on execution and access to capital.
- Cost and cash measures included voluntary payroll reductions in exchange for stock, expected to save about $888,000 in cash through December 2020, lower discretionary spending, headcount controls, and delayed or curtailed nonessential capital spending. These measures and the equity offering involve dilution or reduced spending flexibility.
- Key risks include continuing losses and cash burn, dependence on external financing, potential shareholder dilution, COVID-related supply and customer delays, reliance on third-party suppliers, product acceptance and competition, and customer/order concentration. Two defense customers accounted for all Q2 engineering-services revenue; three customers represented 68% of accounts receivable at quarter-end.
- A patent suit filed by Throop, LLC was voluntarily dismissed without prejudice in March 2020. Vuzix denied the allegations and said it would defend against any related future lawsuit. The patents at issue expired in January 2020.
- No numerical revenue, earnings, or cash-flow guidance was provided in the filing. Management’s product timing statements are forward-looking expectations, not firm guidance.
Investor verification priorities
- Track cash use against the $13.23 million quarter-end cash balance, and assess whether operating improvements reduce the need for future financing.
- Verify actual M400, M4000 and upgraded Blade sales, launch timing, margins and customer adoption, especially against pandemic-related delays.
- Monitor whether engineering-service and waveguide opportunities convert into recurring revenue, and whether the former OEM customer places new orders.
- Confirm the outcome and terms of the PPP forgiveness application and the note’s repayment schedule.
- Assess dilution from the May offering, payroll-related stock awards, outstanding options and warrants, and the preferred stock’s accumulated unpaid dividends.
- Evaluate the inventory obsolescence reserve, particularly the remaining value and saleability of older Blade inventory and components.