Vuzix Corporation — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Vuzix designs, manufactures, markets, and sells wearable computing and augmented-reality display products, including smart glasses and display components. Financial statements are unaudited.
Financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $2.19 million | $2.65 million | $3.56 million | $4.19 million |
| Gross profit (loss) | $152,039 | $670,173 | $191,928 | $847,298 |
| Gross margin | 7% | 25% | 5% | 20% |
| Operating loss | $5.07 million | $6.05 million | $11.42 million | $11.41 million |
| Net loss | $5.06 million | $6.15 million | $11.42 million | $11.51 million |
| Loss attributable to common stockholders | $5.53 million | $6.60 million | $12.36 million | $12.40 million |
| Basic and diluted loss per share | $0.20 | $0.24 | $0.45 | $0.46 |
Six-month operating cash use was $11.68 million, compared with $12.75 million in 2018. Investing activities used $2.22 million, mainly for manufacturing equipment, tooling, licenses, and intangible assets. No financing cash was raised during the first half of 2019; cash fell by $13.90 million to $3.36 million.
At June 30, 2019, current assets were $14.42 million and current liabilities $3.05 million, producing working capital of $11.37 million. Total liabilities were $3.22 million, principally accounts payable, accrued expenses, and operating lease liabilities; the filing reports no borrowing debt on the balance sheet. Lease liabilities totaled $697,510. Total assets were $23.01 million and stockholders’ equity $19.79 million.
Changes versus prior period
- Q2 revenue declined 17%; first-half revenue declined 15%. Smart-glasses sales fell 55% in Q2 and 28% for the first half. Management cited a large 2018 customer shipment that did not recur, price reductions on M300/M300XL products, and customers deferring orders while awaiting M400.
- OEM product sales increased 46% in Q2 and 24% for the first half, supported by follow-on orders under a three-year supply agreement. Engineering-services revenue rose to $350,946 in the first half, including two waveguide development projects.
- Product sales generated a gross loss of $106,435 in Q2 and $66,546 in the first half, versus product gross profits of $670,173 and $851,378 in the respective 2018 periods. Management attributed lower product margins to product mix and price reductions, and higher manufacturing overhead to expanded production capacity.
- Operating expenses declined overall in the first half, including lower selling and marketing costs, while depreciation and amortization rose to $1.17 million from $569,000. Despite the lower expenses, the six-month operating loss was broadly unchanged.
- Inventories increased to $8.43 million from $7.28 million at year-end; the obsolescence reserve rose to $564,000 from $364,000.
Outlook, liquidity, and risks
- Management expected to launch the M400 enterprise smart glasses in Q3 2019, with production and delivery anticipated in September, and to begin volume manufacturing and sales of M100 Smart Swim in Q3. These are expectations, not reported results.
- Management cited continued sales of M300XL and Blade inventory, new product and engineering-service sales, and cost controls as liquidity measures. It also planned to limit discretionary spending, reduce external contractor spending, and adjust staffing and operations.
- The company reported cumulative losses, an accumulated deficit of $129.68 million, and substantial operating cash use. It stated that growth or further capital would be needed to reach profitability and self-sustaining cash flow. Management said substantial doubt about continuing as a going concern had been alleviated based on cash, capital-raising history, and the ability to manage costs.
- After quarter-end, a registered direct offering closed July 2, 2019: 5,479,454 common shares plus warrants for up to the same number of shares, for $20.0 million gross and $18.8 million net proceeds. Warrants are exercisable for two years beginning six months after issuance at $4.10 per share. The financing increases liquidity but is dilutive.
- Customer concentration is notable: Foxconn represented 30% of first-half product revenue and 27% of total revenue; at June 30, Foxconn accounted for 92% of accounts receivable.
- Risks include product acceptance and launch timing, customer order deferrals, margins and inventory management, reliance on key customers and third-party suppliers, competition and rapid technology changes, future financing needs and dilution, and foreign-exchange exposure. The company does not hedge foreign-currency risk.
- Legal matters include Vuzix’s defamation suit seeking damages exceeding $80 million, with a motion to dismiss pending, and shareholder derivative suits against current and former directors and officers, which the company intends to defend. The filing does not quantify any potential liability.
Important facts for investors to verify
- Whether M400 and M100 Smart Swim launches, production, deliveries, and customer demand occurred on the expected timetable.
- Post-offering cash, operating cash burn, and the resulting runway; first-half cash was only $3.36 million before the $18.8 million net offering proceeds.
- Whether product gross margins recover, particularly given first-half product gross losses and increased overhead.
- Inventory sell-through, reserve adequacy, and customer concentration, including Foxconn’s share of receivables.
- The terms and potential dilution from the July offering warrants, and any additional financing needs.
- Developments in the disclosed litigation and any resulting financial exposure.