Vuzix Corporation — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; filed April 9, 2014. This is an annual report, not a standalone fourth-quarter filing. Vuzix designs and sells wearable video displays and smart glasses for consumer, commercial, and industrial uses. It began selling its M100 Smart Glasses and M2000AR waveguide display in late 2013.
Financial performance and liquidity
| Metric | 2013 | 2012 |
|---|---|---|
| Revenue | $2.389 million | $3.228 million |
| Gross profit / margin | $807,000 / 34% | $887,000 / 28% |
| Operating expenses | $5.460 million | $5.093 million |
| Net income (loss) | $(10.146) million | $323,000 |
| Cash used in operating activities | $5.092 million | $2.823 million |
| Cash and cash equivalents at year-end | $310,000 | $67,000 |
- Revenue fell 26%. Product sales declined 31% to $1.857 million; engineering services were $532,000, approximately flat year over year. Management attributed lower product sales to limited working capital, supply-chain delays, and delays releasing new products.
- Gross margin improved to 34% from 28%, primarily due to a mix shift toward higher-margin consumer and augmented-reality products.
- Research and development rose 52% to $1.751 million, mainly for M100 development and waveguide research. Selling and marketing declined 11% to $1.092 million; general and administrative expense was $2.165 million, little changed.
- The 2013 net loss included a $3.575 million noncash loss from revaluing warrant derivative liabilities and a $1.272 million loss on early debt extinguishment. The 2012 net income included a $5.818 million after-tax gain on the sale of the Tactical Display Group assets; 2012 continuing-operations loss was $4.747 million.
- Year-end current assets were $1.680 million versus current liabilities of $3.661 million, a $1.981 million working-capital deficit. Cash was $310,000. The company used $5.092 million in operating cash and funded operations substantially through external financing.
- Conventional borrowings and capital-lease obligations totaled approximately $590,000 at year-end, before accrued interest. Total liabilities were $15.900 million, including a $12.036 million warrant derivative liability, which is distinct from conventional debt.
- The August 2013 public offering raised $8.050 million gross; the company reported approximately $4.35 million net proceeds after offering costs and specified debt repayments. Certain debt and officer compensation, together with accrued interest, were converted into shares and warrants.
Material changes, outlook, and risks
- The 2012 sale of the Tactical Display Group ended Vuzix’s direct sales of certain defense products and general defense engineering services. The remaining business is focused on consumer, commercial, and industrial wearable displays; government-related work is primarily waveguide development.
- Management said the company needed to become profitable and self-sustaining on a cash-flow basis in 2014 or raise additional capital. It planned to prioritize higher-margin smart glasses and AR products, manage inventory and costs, limit discretionary spending, and pursue financing and IP licensing. No formal revenue or earnings guidance is provided.
- Management reported M100 sales ramping during the first quarter of 2014, additional warrant-exercise proceeds of $1.436 million, a planned M2000AR relaunch, and expected V720 video-headphone launch late in 2014. These are forward-looking statements, not guaranteed outcomes.
- The auditor’s report includes an explanatory paragraph stating that continued losses and liquidity constraints raise substantial doubt about Vuzix’s ability to continue as a going concern. Management warned that insufficient financing could force reduced operations, delayed development, or bankruptcy. The 2013 financial statements were prepared on a going-concern basis.
- Disclosure controls and internal control over financial reporting were ineffective at year-end due to material weaknesses involving the financial close and reporting process, segregation of duties, subsidiary monitoring, and inventory controls. Management proposed remediation as resources allowed.
- Other key risks include dependence on the microdisplay supplier Kopin without a long-term supply commitment; unpredictable customer orders and concentrated receivables (one government customer represented 79% of year-end receivables); competition from larger technology companies; uncertain market adoption; and potential dilution. The 7.148 million warrants outstanding at year-end included full-ratchet anti-dilution provisions for certain warrants.
Important facts for investors to verify
- Whether post-year-end M100 sales, warrant exercises, and other funding were sufficient to meet working-capital needs, and whether the company achieved its stated 2014 cash-flow objective.
- The terms, valuation, and potential share dilution associated with outstanding warrants and the $12.036 million derivative liability.
- Customer collections and concentration, the status of old accounts payable, and the company’s ability to fund operations without further financing.
- Whether reported product-launch, sales-ramp, and waveguide-development plans were achieved, and whether these products can produce sustainable margins and cash flow.
- Progress in remediating internal-control material weaknesses, particularly financial reporting and inventory controls.