Vuzix Corporation — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Vuzix designs, manufactures, markets, and sells wearable displays, including enterprise smart glasses and consumer video eyewear.
Financial performance
- Q2 revenue: $1.325 million, up 136% from $561,000 a year earlier. Product sales were $905,000 and engineering services revenue was $420,000.
- First-half revenue: $2.536 million, up 174% year over year. Smart Glasses sales increased to $1.609 million; engineering services revenue rose to $672,000.
- Gross loss: Q2 gross loss was $429,000, or 32% of sales, versus $126,000, or 22%, in Q2 2016. First-half gross loss improved to $281,000, or 11% of sales, from $365,000, or 39%.
- Operating and net loss: Q2 operating loss was $3.980 million and net loss was $4.070 million, compared with $3.830 million and $4.103 million, respectively. First-half operating loss was $8.006 million and net loss was $8.252 million, versus $7.526 million and $7.879 million. First-half loss attributable to common stockholders was $9.089 million, or $0.45 per share, versus $8.673 million, or $0.54 per share.
- Cash flow: Operating activities used $7.549 million in the first half, compared with $6.387 million in 2016. Investing activities used $856,000; financing activities used no cash. Cash declined $8.405 million to $6.129 million.
- Liquidity and debt: Current assets were $10.823 million and current liabilities $3.063 million, leaving working capital of $7.760 million, down from $13.808 million at year-end 2016. No secured debt remained at June 30; senior secured notes and accrued interest were converted into common shares during the half. The balance sheet reports a $164,000 derivative liability.
- Other metrics: Inventory was $3.407 million, up from $2.651 million at year-end. Accumulated deficit was $85.091 million. Toshiba Japan represented 26% of first-half revenue and 75% of accounts receivable and accrued revenue at June 30.
Changes and notable items
- M300 Smart Glasses volume production and commercial shipments began in the first half, driving much of the revenue growth. Management reported completion of the move to offshore assembly in June.
- Q2 product costs included $473,000 of inventory-obsolescence expense. Management attributed elevated costs to M300 production transition, quality issues, and low initial yields; written-down iWear sales also generated near-zero margins.
- Engineering-services revenue primarily reflected the Toshiba smart-glasses development program and included percentage-of-completion accrued billings. Management expected approximately $715,000 of further Toshiba-program revenue over the next two fiscal quarters.
- Common shares outstanding rose to 20.609 million from 19.569 million at December 31, 2016, including shares issued on debt conversion and for services.
Outlook, liquidity and risks
- The company has a history of losses and states that product sales must increase significantly to achieve positive operating cash flow. Management said existing cash, the announced stock offering, and future operating cash flow should cover needs for the foreseeable future if its plan is met, while anticipating continued but reduced losses for the next two quarters.
- On August 9, 2017, Vuzix agreed to sell 1.5 million shares at $5.75 each for $8.625 million gross proceeds, before fees; closing was expected August 14. These proceeds were not included in June 30 cash. Management cautioned that further capital may be needed over the next 12 months, or costs may need to be materially reduced; additional equity financing could dilute existing holders.
- Management cited cost controls, selective capital spending, reduced external development costs, and delays to certain products as liquidity measures. It said substantial doubt about continuing as a going concern had been alleviated based on cash, fundraising history, and ability to manage costs, but noted that plans and future cash flows are not assured.
- Key risks include dependence on customer orders and third-party suppliers, manufacturing capacity and product yields, rapid technological change and competition, customer acceptance, liquidity and future financing, foreign-exchange exposure, and potential weaknesses in financial reporting controls. The filing reports no pending litigation, no material changes to previously disclosed risk factors, and effective disclosure controls as of June 30.
Investor verification priorities
- Confirm whether the August offering closed as expected, its net proceeds, and the resulting share dilution.
- Track M300 manufacturing yields, quality and obsolescence charges, and progress toward improved product margins.
- Verify Toshiba program milestones, recognized revenue, collections, and customer concentration.
- Monitor quarterly cash burn, working capital, and whether additional financing or further cost reductions become necessary.