Vuzix Corporation — Q3 2016 Form 10-Q
Business context and reporting period. Vuzix designs, manufactures and sells wearable display and computing devices, including smart glasses, augmented- and virtual-reality products, and video headphones. This unaudited quarterly filing covers the three and nine months ended September 30, 2016; comparisons are with the corresponding 2015 periods.
Financial results and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $583,000 | $970,000 | $1.507 million | $2.207 million |
| Gross profit (loss) | $(237,000) | $326,000 | $(602,000) | $540,000 |
| Gross margin | (41)% | 34% | (40)% | 24% |
| Operating loss | $(4.725) million | $(2.297) million | $(12.251) million | $(8.130) million |
| Net loss | $(5.036) million | $(2.425) million | $(12.915) million | $(9.918) million |
| Loss per common share, diluted | $(0.32) | $(0.18) | $(0.86) | $(0.73) |
- Nine-month operating cash use was $10.038 million, versus $8.875 million in 2015. Investing activities used $1.655 million, mainly for manufacturing equipment and product tooling.
- Cash was $5.942 million at September 30, down from $11.877 million at December 31, 2015. Working capital was $6.717 million, compared with $14.728 million at year-end.
- Total assets were $14.968 million and total liabilities $4.683 million. Net debt carrying value was $1.334 million, classified as current; the underlying secured convertible notes mature June 3, 2017, carry 5% interest and are convertible at $2.25 per share, subject to adjustments.
- The July 2016 common-stock offering raised $6.613 million gross and $5.765 million net. Nine-month accumulated deficit was $70.504 million. Series A preferred dividends accumulated to $2.718 million; preferred shares carry a 6% annual dividend, compounded quarterly.
Material changes versus prior periods
- Q3 revenue fell 40%; nine-month revenue declined 32%. Management attributed the product-sales drop chiefly to customers delaying M100 purchases while awaiting the M300. Engineering-services revenue was also lower.
- Gross margin deteriorated to a loss in both comparative periods. Management cited lower production and sales volume against fixed costs, lower-margin iWear sales, higher freight and manufacturing overhead, and $89,523 in first-quarter component scrapping associated with iWear.
- Nine-month R&D spending increased 134% to $5.122 million, largely for M300 development and staffing. Selling and marketing rose 124% to $2.628 million. G&A fell 34% to $3.350 million, primarily because 2015 included larger stock-award and investor-relations costs.
- Inventory rose to $3.973 million from $3.349 million; accounts payable increased to $1.530 million from $907,000. The current portion of debt increased as the convertible notes’ 2017 maturity approached.
Outlook, commentary and risks
- Management expected M300 commercial shipments to begin before the end of November 2016, following final engineering verification and regulatory testing. About $350,000 of M300-related preorders and migration packages was recorded as deferred revenue or deposits at September 30.
- Management targeted M3000 volume production by summer 2017 and a proposed Blade 3000 fashion smart-sunglasses release in fall 2017. These are forward-looking plans, not assured outcomes.
- iWear production remained constrained by component-tolerance and yield problems, although Vuzix reported improving production volumes and a second production line in Asia. Management cited about $1.9 million of iWear component inventory and expected sales to convert this inventory into cash.
- Management planned to limit near-term growth in sales, marketing and R&D spending, including fewer trade shows and less reliance on external engineering contractors. It stated existing cash and planned spending reductions should cover foreseeable needs if the operating plan succeeds, while anticipating continued operating losses for the next two quarters.
- The company reported recurring losses and stated it may need additional capital if new products underperform or sales ramp more slowly than expected. Further financing may dilute shareholders; management cautioned that adequate financing may not be available.
- Disclosure controls were deemed ineffective at September 30, 2016 because previously reported material weaknesses had not yet been fully assessed and tested for remediation. Management said it performed additional procedures and believed the financial statements fairly present the reported results.
- Management reported no current or pending litigation and no material changes to the risk factors in its 2015 Form 10-K. One customer accounted for approximately 14% of nine-month sales.
Important facts for investors to verify
- Whether M300 shipments commenced on schedule and whether deferred orders convert into recognized revenue and cash receipts.
- Whether iWear manufacturing yields, shipment costs and sales improve enough to reduce inventory and support positive product margins.
- Cash burn, available liquidity and financing needs relative to the 2017 secured-note maturity and continuing operating losses.
- Progress toward remediating the disclosed material weaknesses and establishing effective disclosure controls.
- Actual spending reductions, product-development timelines and commercial progress for M3000 and Blade 3000 compared with management’s plans.