Vuzix Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Vuzix designs, manufactures, markets and sells wearable display devices, including smart glasses and video eyewear.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change / context |
|---|---|---|---|
| Revenue | $363,839 | $809,155 | Down 55%; product revenue fell 48%, and engineering-services revenue was zero versus $113,581. |
| Gross profit (loss) and margin | ($239,138); (66%) | $178,333; 22% | Lower sales left manufacturing overhead and amortization less absorbed; $89,523 of iWear component costs were scrapped. |
| Operating expenses | $3,456,715 | $3,866,799 | R&D and selling/marketing increased; lower G&A, including less stock-award and investor-relations expense, offset much of the increase. |
| Operating loss | ($3,695,853) | ($3,688,466) | Approximately unchanged. |
| Net loss | ($3,775,739) | ($5,090,852) | Improved mainly because derivative revaluation and debt-discount amortization expense were lower. |
| Loss per share | ($0.26) | ($0.40) | Basic and diluted. |
| Operating cash flow | ($3,212,575) | ($2,747,955) | Cash used increased year over year. |
| Cash and cash equivalents | $8,213,855 | $11,877,058 at Dec. 31, 2015 | Down $3,663,203 during the quarter. |
Liquidity and debt: Current assets were $12,452,260 and current liabilities $1,442,577, giving reported working capital of $11,009,683. Long-term debt, net of discounts, was $1,388,731, including $1,335,095 classified as long term; required principal payments before discounts totaled $1,964,636, with $1,896,240 due in 2017. The senior secured convertible notes carry 5% interest and mature June 3, 2017. Total liabilities were $3,133,654. Cash used for investing was $442,149, primarily for manufacturing-facility improvements, tooling and equipment.
Material changes and operating developments
- Product sales fell as M100 smart-glasses sales declined 45% after the M300 announcement; customers delayed purchases pending new models. Video eyewear sales fell 96% as the Wrap line was phased out.
- iWear Video Headphones shipments were constrained by manufacturing yield and optical-performance problems. Management said production improvements were underway and expected production and marketing to ramp in June, with a stronger fall selling season anticipated.
- Management said it expected to ship new products in the second half of 2016, including iWear, M300 and M3000 smart glasses. M300 pre-orders were recorded as deferred revenue or deposits until shipment; management anticipated possible first M300 engineering-unit deliveries late in Q2.
- R&D expense increased 148% to $1,274,713, primarily reflecting staff and development work on M300/M3000. Selling and marketing expense increased 215% to $1,126,499, including higher trade-show, PR, website and staffing costs. G&A fell 70% to $886,315, largely due to lower 2015 stock-award and investor-relations costs.
- Net loss improved despite sharply weaker gross profit, chiefly because the derivative-liability valuation produced a $101,666 gain versus a $1,003,427 loss in Q1 2015, and debt-discount and issuance-cost amortization declined.
Outlook, risks and contingencies
- No quantified revenue or earnings guidance was provided. Management said existing cash and anticipated operating cash flow should meet working-capital and capital-expenditure needs for the foreseeable future if its plan is achieved, while anticipating continued operating losses for the next two quarters. It cautioned that the plan and future cash generation are uncertain.
- The company reported recurring losses, a $61,364,607 accumulated deficit and dependence on increased product sales to reach positive operating cash flow. If new products fail to gain market acceptance within a reasonable time, it may need additional capital or significant cost reductions. Additional financing could dilute existing shareholders; management said there is no assurance financing will be available or sufficient.
- The filing identifies going-concern uncertainty: statements are prepared on a going-concern basis and do not include adjustments that might be needed if the company cannot continue operating.
- Disclosure controls and procedures were deemed ineffective as of March 31, 2016 because previously reported material weaknesses in internal control over financial reporting had not been fully remediated and tested.
- Series A preferred stock issued to Intel in 2015 carries a 6% annual cumulative dividend, compounded quarterly. Accrued and unpaid dividends were $1,907,905 at March 31, 2016; each preferred share is convertible into 100 common shares. The filing reports 7,340,753 potentially issuable common-share equivalents at quarter-end.
- Operating lease minimum payments totaled $1,595,232 as of March 31, 2016, with the principal office/manufacturing lease expiring in October 2020. The company reported no pending litigation and no material changes to the risk factors in its 2015 Form 10-K.
Important facts for investors to verify
- Whether iWear production quality and volume improved, and whether the M300/M3000 and iWear shipments occurred on management’s expected timeline.
- Whether new-product demand converts into shipped sales and recognized revenue, rather than remaining pre-orders, deposits or deferred revenue.
- Cash burn, cash runway, financing needs and the 2017 senior-note maturity; the operating plan is a key assumption behind management’s liquidity outlook.
- Progress on gross margins, manufacturing yields and inventory obsolescence; the inventory obsolescence reserve rose to $562,797 from $487,494 at year-end.
- Remediation and testing of the material weakness in internal controls, and the potential dilution associated with preferred-stock conversion and other common-share equivalents.