Vuzix Corporation — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. The filing was signed August 13, 2015. Vuzix designs, manufactures and sells wearable display devices, including smart glasses and video eyewear.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $427,812 | $723,258 | $1,236,967 | $1,521,676 |
| Gross profit / margin | $35,264 / 8% | $261,018 / 36% | $213,597 / 17% | $609,187 / 40% |
| Operating loss | $(2,144,281) | $(925,300) | $(5,832,746) | $(1,918,449) |
| Net income (loss) | $(2,402,327) | $239,110 | $(7,493,179) | $1,751,016 |
| Basic and diluted EPS | $(0.17) | $0.02 | $(0.56) | $0.17 basic; $0.15 diluted |
- At June 30, cash and cash equivalents were $15.05 million and short-term marketable securities were $5.00 million. Current assets were $22.60 million against current liabilities of $1.59 million, yielding working capital of $21.01 million, versus a $1.43 million deficit at year-end 2014.
- Six-month operating cash use was $5.29 million; investing cash use was $5.30 million, including the $5.00 million commercial-paper purchase. Financing provided $25.55 million, primarily from the preferred-stock placement.
- Long-term debt was $1.16 million net of discounts, including $1.90 million principal on senior secured convertible notes due June 2017. The notes carry 5% interest, payable at maturity; total liabilities were $2.97 million.
Changes versus the prior comparable period
- Quarterly revenue declined 41%; six-month revenue declined 19%. Product sales fell 30% in Q2 and 11% for the first half. Engineering-services revenue was nil in Q2 and down 57% for the first half.
- Management attributed weaker sales mainly to phasing out the Wrap 1200 product line ahead of higher-resolution replacements. For the first half, M100 Smart Glasses sales rose 28% and made up 83% of product revenue; Video Eyewear, AR and VR sales fell 65% and represented 15% of revenue.
- Gross margin contracted as sales fell against largely fixed manufacturing costs, while manufacturing overhead, software royalties and amortization of previously capitalized software costs increased.
- Operating expenses rose substantially, particularly G&A, which included significant stock and warrant compensation. For the first half, management identified approximately $2.39 million of non-cash share and warrant compensation within the year-over-year G&A increase.
- Other expense shifted from $3.67 million of income in the first half of 2014 to $1.66 million of expense in 2015. The change included a $1.03 million derivative revaluation loss in 2015 versus a $3.82 million gain in 2014, as well as higher debt-discount amortization.
Outlook, financing, risks and unusual items
- Intel purchased $24.813 million of Series A preferred stock in January 2015. It carries a 6% quarterly-compounding dividend and is convertible at the holder’s option into 4,962,600 common shares at the stated conversion terms. The investment also provides voting, participation, liquidation-preference and board nomination rights, subject to the agreement’s conditions. Accrued unpaid dividends were $735,483 at June 30.
- Management plans to expand and relocate its offices, R&D and manufacturing operations to a facility about four times the current size, and expected to introduce iWear Video Headphones in fall 2015, alongside successor M100 and waveguide-based smart-glasses products. It expects these initiatives, product tooling and working-capital needs to consume cash.
- Management said existing cash and expected operating cash flows should meet working-capital and capital-expenditure needs for the foreseeable future, even if losses continue at levels similar to recent periods, but cautioned that positive operating cash flow is not assured. No quantified revenue or earnings guidance was provided.
- Derivative accounting was a material source of reported volatility. Waivers of anti-dilution provisions led to reclassification of derivative liabilities into equity; the remaining warrant liability was $169,027 at June 30.
- Disclosure controls and procedures were deemed ineffective at June 30, 2015 because previously reported material weaknesses had not been remediated. Management said it used additional procedures and believed the statements fairly presented the company’s financial position and results.
- Risks highlighted include rapid technological change and competition, customer and order-flow concentration, reliance on third-party suppliers and manufacturing capacity, liquidity and continued operating losses, protection of proprietary technology, key-person dependence, and potential weaknesses in financial reporting controls. The company reported no pending litigation and no material changes to the risk factors in its 2014 Form 10-K.
Important facts for investors to verify
- Whether planned product launches and the Wrap-line transition translate into sustained revenue growth and improved gross margins.
- Cash burn, operating cash flow and the adequacy of available liquidity as expansion and product-development spending proceeds.
- The preferred stock’s dividend, conversion, governance and participation rights, including potential dilution and related-party protections.
- Progress in remediating the material weaknesses in internal controls and the timing of any demonstrated improvement.
- The remaining convertible-note principal, maturity obligations and the effects of derivative and stock-based compensation charges on reported results.