Vuzix Corporation — FY 2018 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2018; it is not a standalone quarterly filing. Vuzix designs, manufactures and sells augmented-reality (AR) smart glasses, video eyewear, waveguide optics and related services, with a focus on enterprise, industrial, commercial and medical customers and potential OEM markets.
Financial results and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Total revenue | $8.09 million | $5.54 million |
| Gross profit (loss), before separately reported depreciation | $1.77 million; 22% margin | ($0.68) million; (12)% margin |
| Operating loss | ($21.86) million | ($19.35) million |
| Net loss | ($21.88) million | ($19.63) million |
| Net loss attributable to common stockholders | ($23.70) million | ($21.35) million |
| Basic and diluted loss per share | ($0.87) | ($1.02) |
- Product revenue increased 69% to $7.69 million, led by smart glasses sales of $5.94 million, up 55%, and $0.99 million of Toshiba OEM product sales. Engineering services revenue declined 59% to $0.40 million after the Toshiba development program ended in March 2018.
- Product gross profit turned positive at $1.62 million, compared with a $0.72 million product gross loss in 2017. Improved product costs and lower inventory-related charges contributed; overall operating losses nevertheless widened as expenses increased.
- Research and development expense rose 55% to $10.38 million; selling and marketing rose 31% to $4.82 million; general and administrative rose 14% to $6.97 million.
- Cash and cash equivalents were $17.26 million at year-end, versus $14.89 million a year earlier. Working capital was $22.71 million; current assets were $27.38 million and current liabilities $4.68 million. Total liabilities were $4.68 million, with no long-term liabilities reported.
- Operating cash use was $22.54 million; investing cash use was $3.15 million; financing cash provided was $28.06 million. Financing chiefly reflected a January 2018 stock-and-warrant offering that generated $28.03 million net proceeds. Inventory increased to $7.28 million from $3.85 million.
- The company had an accumulated deficit of $118.27 million. Series A preferred stock dividends were $1.82 million for 2018; accrued and unpaid preferred dividends totaled $6.67 million at year-end. The preferred stock carries a 6% annual dividend, compounded quarterly.
Material changes versus the prior comparable period
- Revenue grew 46%, but net loss increased by $2.24 million and operating loss increased by $2.51 million, primarily as operating expenses rose faster than revenue.
- Gross margin improved from negative 12% to positive 22%. The 2017 period included a $1.15 million inventory/product discontinuance loss; 2018 recorded a $0.21 million gain as discontinuance costs and production yields compared favorably with prior estimates.
- Operating cash use increased by $6.08 million. Higher inventory and vendor prepayments, along with lower accounts payable, weighed on operating cash flow.
- Common shares outstanding increased from 24.28 million to 27.59 million, principally reflecting the 3.0 million-share January 2018 offering. The company also issued warrants to purchase up to 1.2 million shares; these warrants expired in January 2019 without exercise.
- In October 2018, Vuzix amended its agreement with the buyer of its former defense division, paying $1.5 million to regain certain market rights and permitting specified defense, security and first-responder sales, subject to conditions and commissions through June 2022.
Outlook, risks and unusual items
- Management expected available working capital and projections to cover obligations for the next 12 months, and stated that substantial doubt about continuing as a going concern had been alleviated. The filing also says continued operations depend on growth, cost controls and/or access to additional capital; no additional financing was committed.
- Management’s plans included selling existing M300 and Blade inventory, launching M400 enterprise glasses in the third quarter of 2019, beginning volume manufacturing and sales of M100 Smart Swim in the third quarter of 2019, pursuing newly permitted security and defense opportunities, and controlling costs. A binocular AR product was targeted for introduction in late 2020. These are plans, not assured outcomes.
- Key risks include sustained losses and cash burn; need for future capital and possible shareholder dilution; uncertain AR market adoption; intense competition; short-notice cancellations or delays of customer orders; dependence on third-party and potentially sole-source suppliers; production yields and inventory forecasting; product defects; international and China tariff exposure; and privacy, cybersecurity and regulatory compliance.
- Unusual items include a $196,223 impairment of discontinued M300 application software development costs and the $1.5 million reacquired-rights payment, of which $750,000 remained payable at year-end. Open purchase obligations were approximately $6.5 million.
- The 2018 shareholder securities class action was voluntarily dismissed without prejudice in December 2018. Three related shareholder derivative suits remained pending; the company said it intended to defend them. Vuzix also brought a defamation suit seeking damages exceeding $80 million. The filing reports an SEC informal inquiry begun in 2016 concerning internal financial-reporting controls, with no further document requests since a November 2017 meeting; management and the auditor concluded controls were effective at year-end 2018.
- The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Adoption of lease accounting was expected to add an estimated $1.0 million right-of-use asset and lease liability.
Important facts for investors to verify
- Whether smart glasses and Toshiba OEM demand convert into repeat, higher-volume revenue and whether the reported gross-margin improvement is sustainable.
- Actual cash burn, inventory conversion and funding needs against management’s stated 12-month liquidity outlook; also the timing and cost of planned product launches.
- Customer concentration: Toshiba, SATS Airport Services and AMA represented 17%, 10% and 10% of 2018 revenue, respectively; Toshiba and SATS represented 32% and 38% of year-end receivables.
- Potential dilution from equity compensation, preferred-stock conversion and any future financing; verify the preferred stock’s dividend, conversion and governance rights.
- Developments in the derivative litigation, defamation action and SEC inquiry, as well as execution of the defense-market agreement and its commissions.