Vuzix Corporation — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; filed November 8, 2018. Vuzix designs, manufactures, markets, and sells augmented-reality wearable displays, smart glasses, waveguides, and related engineering services.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $1.92 million | $1.41 million | $6.11 million | $3.94 million |
| Gross profit (loss), before separately reported depreciation | $621,000 | ($92,000) | $1.47 million | ($373,000) |
| Gross margin | 32% | (7%) | 24% | (10%) |
| Operating loss | ($4.84 million) | ($5.52 million) | ($16.25 million) | ($13.53 million) |
| Net loss | ($4.80 million) | ($5.50 million) | ($16.31 million) | ($13.75 million) |
| Loss per share, basic and diluted | ($0.19) | ($0.28) | ($0.65) | ($0.73) |
- Nine-month operating cash use was $17.93 million, versus $12.09 million in 2017; investing cash use was $1.55 million. Financing provided $28.06 million, principally from the January equity offering. Cash increased to $23.47 million from $14.89 million at year-end 2017.
- At September 30, current assets were $33.34 million and current liabilities $3.58 million, resulting in working capital of $29.76 million. Total liabilities were $3.58 million; the balance sheet reported no debt.
- Accumulated deficit was $112.70 million. Common shares outstanding were 27.56 million at quarter-end, up from 24.28 million at December 31, 2017.
Changes versus prior comparable periods
- Q3 revenue increased 37%, led by smart-glasses sales, primarily M300; smart-glasses sales were $1.72 million, up 67%. Blade represented 11% of Q3 smart-glasses revenue.
- Nine-month revenue grew 55%, principally from smart glasses and $766,000 of OEM product sales. Engineering-services revenue fell 72% to $261,000 as the Toshiba development program ended in March 2018. Toshiba represented 27% of nine-month total revenue, versus 24% a year earlier.
- Product gross profit improved to $575,000 in Q3 from $49,000, and to $1.43 million for nine months from a $439,000 loss. Management attributed the improvement to higher selling prices, better production yields, and lower product costs as a share of sales.
- Despite revenue and gross-margin improvement, nine-month net loss widened by $2.56 million. R&D rose 64% to $7.16 million, selling and marketing rose 48% to $4.05 million, and G&A rose 34% to $5.58 million.
- The company recorded a $211,000 inventory revaluation/discontinuance gain in 2018, compared with a $1.15 million loss in 2017. It also recorded a $196,000 software-development-cost impairment in 2018. iWear Video Headphones production was discontinued effective September 30, 2018, with only minimal residual sales expected.
Outlook, risks, and notable items
- No formal revenue or earnings guidance is provided. Management said existing cash was expected to meet working-capital and capital-expenditure needs for at least 12 months, while noting that continued operating losses could require additional financing. The company plans continued investment in R&D, intellectual property, and products.
- The January 2018 offering raised $30 million gross; net proceeds after commissions and expenses were $28.025 million. Continued losses and equity financing needs create potential dilution and financing risk.
- An October 2018 amendment to the TDG agreement expanded permitted defense, security, and first-responder opportunities, subject to conditions and commissions through June 2022. Vuzix agreed to pay TDG $1.5 million in installments through April 2019.
- After quarter-end, Vuzix invested $250,000 for less than 1% of AR-software company WakingApp and entered a related commercial agreement. A separate $250,000 investment in a low-vision display company had been made during Q2.
- Two purported securities class actions and three shareholder derivative suits allege misleading disclosures or related misconduct; Vuzix disputes the allegations and intends to defend itself. The company also filed a defamation action seeking damages exceeding $80 million. Outcomes and potential financial effects are not quantified in the filing.
- Other disclosed risks include customer concentration, dependence on third-party suppliers and manufacturing capacity, uncertain order timing and market acceptance, competition, technology changes, foreign-exchange exposure, and potential future capital needs. The company does not hedge foreign-currency risk. Management reported disclosure controls were effective and no material change in internal control during the quarter.
- Vuzix adopted revenue-recognition Topic 606 in 2018; the opening accumulated-deficit adjustment was $81,724 and management said the revenue impact versus prior guidance was immaterial. Adoption of the new lease standard was expected to materially affect the balance sheet.
Important facts for investors to verify
- Whether smart-glasses growth, especially M300 and Blade sales, can continue and improve gross margins sufficiently to offset rising operating expenses.
- Cash burn and the timing of financing needs: nine-month operating cash use was $17.93 million, and management’s at-least-12-month liquidity expectation is forward-looking.
- Customer and program concentration, including Toshiba’s share of revenue and the revenue outlook after its engineering program ended.
- Execution, costs, commissions, and sales potential under the TDG amendment, along with the required $1.5 million payments.
- Potential dilution from outstanding warrants, options, preferred-stock conversion rights, and future fundraising; the filing reports 8.62 million potentially issuable common-share equivalents.
- Status and possible costs of the securities and derivative litigation, and the accounting and operational impacts of lease-standard adoption.