Vuzix Corporation (NASDAQ: VUZI) — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual filing, not a standalone fourth-quarter report; unaudited Q4 figures are included below. The filing was signed March 16, 2018.
Business context
Vuzix designs, manufactures, markets and sells wearable displays, including enterprise Smart Glasses and augmented-reality optics and components, as well as consumer video eyewear. Its strategy emphasizes waveguide optics, Smart Glasses, OEM relationships and enterprise applications. The M300 entered volume production in 2017. In January 2018, the company introduced the Blade Smart Glasses. Vuzix discontinued further iWear production and expected to sell remaining inventory during 2018.
Financial performance and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Total revenue | $5.54 million | $2.13 million |
| Product revenue | $4.55 million | $1.99 million |
| Engineering services revenue | $989,064 | $139,500 |
| Gross loss and margin | $676,598; (12%) | $1.16 million; (55%) |
| Operating loss | $19.35 million | $18.54 million |
| Net loss | $19.63 million | $19.25 million |
| Loss attributable to common stockholders | $21.35 million | $20.87 million |
| Basic and diluted loss per share | $1.02 | $1.23 |
| Cash and cash equivalents at year-end | $14.89 million | $14.53 million |
| Working capital at year-end | $15.81 million | $13.81 million |
| Operating cash used | $16.47 million | $14.40 million |
Revenue increased 160%, led by Smart Glasses sales, up 168%, and engineering services revenue, up $849,564, primarily from the Toshiba development program. Waveguide component sales rose 220% from a small base. Product revenue still generated a gross loss; full-year gross loss improved from 2016, but operating loss widened by $819,000 as operating expenses increased.
Research and development expense was $6.71 million, selling and marketing expense $3.69 million, and general and administrative expense $6.13 million. Operating expenses included a $1.15 million inventory revaluation charge. Cash used in investing was $2.69 million, including $1.68 million for fixed assets and $599,444 for licenses, patents and trademarks. Financing provided $19.51 million, principally from common-stock offerings.
At December 31, 2017, current assets were $21.24 million and current liabilities $5.44 million. The $1.59 million of senior secured convertible notes outstanding at year-end 2016, plus accrued interest, was converted into common shares during 2017; no long-term debt remained at year-end 2017. Current liabilities included a $152,927 derivative liability. The company reported total liabilities of $5.45 million and stockholders’ equity of $21.38 million.
Unaudited Q4 2017 revenue was $1.597 million, gross loss $304,000 and net loss $5.879 million; net loss attributable to common stockholders was $6.321 million and loss per share was $0.29.
Material changes and notable items
- Smart Glasses revenue growth reflected the M300’s commercial production launch. M100 sales declined 24% as customers shifted to the newer model.
- Product gross loss improved year over year, but remained negative. Management cited low-margin iWear sales, M300 startup costs, inventory obsolescence, component quality issues and initially low production yields. Warranty provisions rose to 8% of product sales from 4%.
- iWear inventory was written down by $1.151 million in 2017, following a $1.124 million charge in 2016, after price reductions below cost. Management said remaining units would be sold during 2018.
- Operating cash outflow increased by $2.07 million year over year; the filing identifies inventory, receivables and accrued project revenue increases among 2017 working-capital uses.
- On January 29, 2018, Vuzix closed a $30 million gross registered offering of 3 million common shares and warrants to purchase 1.2 million shares. The company reported approximately $28 million in net proceeds, which are not included in 2017 year-end cash.
- The company reported no pending litigation. It disclosed an SEC informal inquiry, received in May 2016, concerning internal controls; Vuzix said it had provided requested documents and had received no further requests as of the filing.
Outlook, risks and contingencies
Management said year-end cash, together with expected cash flows, was believed sufficient for working-capital and capital-expenditure needs for at least 12 months. It also stated that continued losses mean Vuzix must grow sales substantially to become profitable and self-funding, or may need to raise additional capital. Management expected continued investment in R&D, intellectual property and new products. It anticipated M3000 commercial production by fall 2018 and was developing binocular AR glasses for a planned 2019 introduction; these are forward-looking expectations, not assurances.
Vuzix had a three-year Toshiba supply agreement and reported beginning volume manufacturing for Toshiba’s customized product. Toshiba represented 18% of 2017 revenue and 100% of accrued project revenue at year-end, creating customer and collection concentration. The company also reported approximately $7 million of open purchase obligations, substantially due within one year, and $1.18 million of operating lease commitments.
Principal risks include ongoing substantial losses and cash burn; uncertain adoption of AR and wearable displays; competition from larger, better-funded companies; customer purchase-order cancellation or delay; reliance on limited suppliers and third-party manufacturers; product execution, quality and inventory risks; possible future financing dilution; and protection or licensing of intellectual property. Series A preferred stock carries a 6% annual cumulative dividend, compounded quarterly; accrued and unpaid dividends were $4.85 million at year-end. The preferred holder has conversion, voting, participation and director-nomination rights. Vuzix reported effective disclosure controls and internal control over financial reporting as of year-end 2017, and stated that the previously reported inventory-control material weakness had been remediated. Its auditor issued an unqualified opinion on the financial statements and internal controls.
Important facts for investors to verify
- Reconcile the filing’s cash disclosures: the audited balance sheet and cash-flow statement report $14,889,636, while one MD&A sentence states $14,899,636.
- Track whether the M300, Blade and Toshiba program generate repeatable sales and positive product margins, and whether M300 startup, warranty and inventory issues recede.
- Assess cash burn against the January 2018 financing, the $7 million purchase commitments and the company’s stated 12-month liquidity outlook.
- Monitor the concentration and collectability of Toshiba-related revenue and accrued project revenue, as well as the timing and terms of customer orders.
- Review dilution from common offerings, warrants, options and convertible preferred stock, including the preferred dividends and rights.
- Follow the SEC informal inquiry and confirm that internal-control remediation remains effective in subsequent filings.