Vuzix Corporation — Q3 2019 Form 10-Q
Business context and period: Vuzix designs, manufactures and sells wearable computing and augmented-reality display products, including Smart Glasses, and provides engineering services. This unaudited report covers the quarter and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods.
Financial performance and liquidity
- Revenue: Q3 revenue was $1.16 million, down 40% year over year; nine-month revenue was $4.72 million, down 23%. Q3 product sales fell 43%, while engineering-services revenue rose 23%. For the nine months, product sales fell 27% and engineering-services revenue increased 72%.
- Profitability: Q3 gross loss was $231,000, compared with gross profit of $621,000 a year earlier; reported gross margin was negative 20%, versus 32%. Nine-month gross loss was $40,000, compared with gross profit of $1.47 million; reported gross margin was negative 1%, versus 24%. Operating loss was $5.52 million in Q3 and $16.94 million for the nine months. Net loss was $5.48 million and $16.89 million, respectively, compared with $4.80 million and $16.31 million in 2018. Loss attributable to common stockholders was $0.18 per share in Q3 and $0.62 per share for the nine months.
- Cash flow: Operating activities used $18.05 million in the first nine months, compared with $17.93 million in 2018; investing activities used $2.43 million. Financing provided $18.86 million net, primarily from a July common-stock-and-warrant offering. Cash declined $1.62 million from year-end to $15.64 million.
- Liquidity and debt: Current assets were $28.05 million and current liabilities $2.72 million, yielding working capital of $25.32 million. The company reported no current or long-term debt, though it had operating lease liabilities. Total liabilities were $2.76 million.
- Balance-sheet items: Inventory rose to $8.81 million from $7.28 million at December 31, 2018; manufacturing vendor prepayments increased to $1.50 million from $755,000. Accumulated deficit was $135.16 million.
Material changes versus prior period
- Management attributed lower Smart Glasses sales to large customer shipments in 2018 that did not recur, price reductions, and customer deferrals while awaiting the M400. Blade sales partly offset the decline. Video Eyewear had been discontinued in September 2018.
- Product gross margins deteriorated amid discounting and lower-margin M400 early-adopter sales, alongside higher manufacturing overhead as Vuzix expanded production capacity and began bringing more assembly and production in-house in New York.
- Operating expenses declined overall for the nine months, including lower selling and marketing and general and administrative costs, but depreciation and amortization increased by $849,000, principally from manufacturing equipment, facility improvements and amortization of the TDG-related intangible asset.
- In July, Vuzix issued 5.48 million common shares and warrants for an aggregate of up to 5.48 million additional shares. Gross proceeds were $20.0 million and net proceeds were $18.86 million. Common shares outstanding increased to 33.13 million from 27.59 million at year-end.
Outlook, risks and unusual items
- Vuzix launched its M400 enterprise Smart Glasses near the end of Q3 2019. Management expected volume manufacturing and sales of the M100 Smart Swim product to begin in Q1 2020. It also expected to recognize $215,000 of remaining engineering-services revenue from waveguide development projects in Q4 2019; these are company expectations, not formal financial guidance.
- Management said the company must grow substantially to become profitable and self-funding or may need additional equity or debt financing. It stated that substantial doubt about continuing as a going concern had been alleviated based on cash on hand, past capital-raising ability and planned cost management, while warning that future capital may not be available or sufficient. Additional equity could dilute shareholders.
- Management’s stated liquidity measures included selling existing M300XL and Blade inventory, controlling costs, limiting discretionary spending, and adjusting staffing and R&D spending. Execution, product acceptance, pricing, margins, inventory management and manufacturing capacity remain important uncertainties.
- Customer concentration is notable: Foxconn represented 23% of nine-month product revenue and 21% of total revenue, and 76% of accounts receivable at September 30. One customer accounted for all engineering-services revenue in both the quarter and nine-month period.
- Vuzix disclosed a defamation lawsuit seeking more than $80 million, with a motion to dismiss pending, and consolidated shareholder derivative litigation; the company said it believes the claims are without merit and intends to defend them. No material legal proceeding is otherwise reported.
- The company adopted lease accounting under ASC 842 during 2019. Management reported disclosure controls were effective at September 30, 2019 and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether M400 production and customer demand improve revenue and product gross margins after the launch-related discounting and order deferrals.
- Whether the elevated inventory and vendor prepayments convert into sales without further obsolescence or cash pressure.
- Cash burn, available financing options, and the extent of potential dilution from outstanding warrants and future capital raises.
- Customer concentration and collection exposure, particularly Foxconn’s share of receivables and the single-customer dependence in engineering services.
- Progress and potential outcomes of the disclosed lawsuits, and the timing and realization of expected Q4 engineering-services revenue and M100 Smart Swim manufacturing.