Vuzix Corporation — Q1 2018 Form 10-Q
Business context and period: Vuzix designs, manufactures and sells augmented-reality wearable displays, smart glasses, video eyewear, waveguides and related engineering services. This unaudited report covers the three months ended March 31, 2018, compared with Q1 2017; balance-sheet figures are compared with December 31, 2017.
Key financial results
| Metric | Q1 2018 | Q1 2017 / prior balance date |
|---|---|---|
| Revenue | $1.544 million | $1.211 million; up 28% |
| Gross profit / margin | $177,125 / 11% | $148,760 / 12% |
| Operating expenses | $5.529 million | $4.175 million |
| Operating loss | $5.352 million | $4.026 million |
| Net loss | $5.366 million | $4.182 million |
| Loss attributable to common stockholders | $5.804 million; $0.22 per share | $4.595 million; $0.23 per share |
| Cash used in operating activities | $6.471 million | $3.833 million |
| Cash and cash equivalents | $36.068 million | $14.890 million at Dec. 31, 2017 |
| Working capital | $38.853 million | $15.789 million at Dec. 31, 2017 |
| Total liabilities | $3.182 million | $5.454 million at Dec. 31, 2017 |
Product sales were $1.363 million, including $1.212 million of smart glasses and video eyewear, $114,170 of OEM products and $36,438 of waveguides. Engineering services revenue was $180,516. The balance sheet reports no term debt at March 31, 2018. Accrued expenses include $235,469 of officer compensation owed for services before 2016; the amount has no fixed repayment schedule and bears 8% interest compounded monthly. Accrued Series A preferred dividends were $5.288 million.
Changes and operating performance
- Revenue increased 28%, mainly from M300 smart glasses: M300 sales were $1.137 million versus $567,000 a year earlier. M100 sales fell 88%. iWear unit sales rose 373%, but revenue increased 144% as the retail price fell from $299 to $99.
- Product gross profit improved to $181,164 from $5,480, with product direct costs falling to 46% of related sales from 51%. Overall gross margin nevertheless declined to 11% from 12%.
- Engineering services recorded a gross loss of $4,039, versus gross profit of $143,280 in Q1 2017, as the Toshiba development project was completed. Nearly all Q1 2018 engineering revenue represented final accrued billings on that agreement.
- Operating expenses rose 32% overall: R&D increased 23%, selling and marketing 49%, and general and administrative 35%. Management cited added personnel and stock compensation, Blade development consultants, trade-show spending, and app-store and website costs.
- Net loss increased by $1.184 million. Lower interest and debt-discount amortization costs following the 2017 debt conversion and maturity partly offset the higher operating loss.
Liquidity, financing and outlook
Operating activities used $6.471 million and investing activities used $415,153. Financing provided $28.064 million, principally from a January public offering of 3.0 million common shares and warrants for up to 1.2 million shares. The offering generated $30.0 million gross and $28.025 million net proceeds; 27.308 million common shares were outstanding at quarter-end. The filing reports 2.357 million warrants outstanding at March 31, 2018.
Management believes existing cash will fund working-capital and capital-expenditure needs for at least the next 12 months. The company remains loss-making and says it must grow significantly to become profitable and self-sustaining; future financing may be needed if liquidity proves insufficient. Additional equity could dilute shareholders, while debt could add service obligations and covenants. No numerical revenue or earnings guidance is provided.
Risks, contingencies and unusual items
- Customer concentration: Toshiba Japan represented 18% of total revenue and 94% of engineering revenue in Q1 2018. Management also identifies dependence on key customers, suppliers and manufacturing capacity as risks.
- Inventory obsolescence reserve increased to $1.220 million from $836,324 at year-end; inventory net of reserves was $4.276 million. Management cited ongoing plastics and cable issues and raised the provision rate for possible future smart-glasses warranty costs to 9% of sales from 4%.
- On April 5, 2018, after quarter-end, Vuzix filed a defamation lawsuit seeking damages in excess of $80 million, including punitive damages. This is a claim by the company, not an awarded or recognized recovery in the reported financial statements.
- Operating lease minimum payments totaled $1.177 million. The company expects adoption of the new lease standard to materially affect its financial statements by recognizing a right-of-use asset and lease liability, particularly for its office lease.
- Vuzix adopted ASC 606 using the modified retrospective method, recording an $81,724 reduction to opening accumulated deficit. The company estimated the standard’s effect on Q1 revenue versus prior accounting guidance would have been immaterial.
- Management reported disclosure controls and procedures were effective at March 31, 2018 and stated that risk factors had not materially changed from the 2017 Form 10-K. The company does not hedge its foreign-currency exposure.
Investor verification priorities
- Track whether M300 growth, new product sales and waveguide/OEM revenue can lift gross margins and offset ongoing operating losses.
- Assess cash burn against management’s 12-month liquidity assertion, and monitor the need for additional financing and resulting dilution.
- Review Toshiba-related concentration and the transition after completion of the development agreement, including the disclosed $944,000 of remaining OEM purchase-agreement performance obligations expected to be recognized during 2018.
- Monitor inventory reserves, product reliability and warranty provisions given the cited plastics and cable issues.
- Verify the outcome and potential financial effects of the post-quarter defamation litigation; the filing does not establish that any recovery is probable or collectible.
- Consider outstanding warrants, preferred dividends and officer compensation obligations when assessing potential dilution and claims on future cash.