Vuzix Corporation — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; comparisons are with FY 2013. This filing does not provide a clear standalone fourth-quarter income statement. Vuzix designs, manufactures and sells wearable video displays and smart glasses for consumer, commercial and industrial uses. It began commercial shipments of M100 Smart Glasses in late 2014.
Financial performance
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Revenue | $3.03 million | $2.39 million |
| Gross profit / margin | $0.93 million / 31% | $0.81 million / 34% |
| Operating loss | $5.03 million | $4.65 million |
| Net loss | $7.87 million | $10.15 million |
| Cash used in operating activities | $4.61 million | $5.09 million |
| Cash used in investing activities | $0.90 million | $0.46 million |
| Cash provided by financing activities | $5.29 million | $5.79 million |
- Product revenue rose 33% to $2.47 million, largely from increased M100 and M2000AR sales; engineering-services revenue increased 5% to $0.56 million. Wrap-series and other AR/VR product sales declined as those models were phased out.
- Gross margin fell three percentage points. Management cited approximately $72,000 of M100 China start-up manufacturing costs, $71,613 of software amortization and lower-margin Lenovo sales in China.
- Operating expenses increased to $5.96 million from $5.46 million, including higher general and administrative and selling costs; R&D remained approximately $1.75 million.
- The net loss narrowed year over year, but remained substantial. FY 2014 included a $2.19 million derivative revaluation loss; FY 2013 included a $1.27 million debt-extinguishment loss and a larger $3.58 million derivative valuation loss.
- Year-end cash was $84,967, versus $310,140 a year earlier. Current assets of $1.96 million were below current liabilities of $3.39 million, a $1.43 million working-capital deficit. The company reported $13.54 million of long-term derivative liabilities and $1.22 million of net long-term borrowings.
- FY 2014 financing included $3.0 million of 5% senior secured convertible notes and $2.68 million from warrant exercises. The notes had a $2.25 initial conversion price and were due in 2017; $625,000 had converted by year-end.
Changes, outlook and material items
- Post-year-end financing: On January 2, 2015, Intel purchased $24.813 million of Series A Preferred Stock. The preferred stock carries a 6% annual dividend, compounded quarterly, and is convertible into approximately 4.96 million common shares. It also has voting, board-nomination and other investor rights. Management said the financing provides resources for planned operations despite continued losses; it was not included in FY 2014 year-end cash.
- Management planned to expand facilities and staffing, including R&D and finance/control resources, and to introduce the IWear 720 video headphones, M100 successors and waveguide-based smart glasses. No quantified revenue, earnings or cash-flow guidance is provided.
- The company reported material weaknesses in financial reporting and close procedures, segregation of duties, subsidiary monitoring and inventory controls; management said it intended to remediate them during 2015. The auditor’s report on FY 2014 financial statements expressed an unqualified opinion but did not provide an opinion on internal-control effectiveness. The prior-year auditor had highlighted substantial doubt about going concern; the filing says the January 2015 financing led to removal of that going-concern note.
- Key risks include persistent losses and possible future capital needs; uncertain adoption of wearable displays; larger, better-funded competitors; dependence on Kopin for most microdisplays; limited customer purchase commitments and customer/receivable concentration; inventory obsolescence; and reliance on third-party suppliers and manufacturing.
- Vuzix reported no pending material litigation and no off-balance-sheet arrangements. It recorded a $104,716 impairment of abandoned patents and trademarks in 2014.
Investor verification checklist
- Review the audited statements and notes for the composition, valuation assumptions and potential cash or dilution effects of the $13.54 million derivative liability.
- Verify the terms and subsequent effects of Intel’s preferred investment, including dividends, conversion, voting and governance rights, and any resulting dilution.
- Track cash burn, working-capital needs, debt maturities and whether post-financing liquidity supports the planned expansion and product launches.
- Monitor remediation and testing of the disclosed control weaknesses, particularly inventory valuation, financial close and subsidiary oversight.
- Assess whether smart-glasses sales and margins can grow enough to offset declines in legacy products and continuing operating expenses.