Vuzix Corporation — FY 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; filed March 15, 2021. The filing also reports unaudited fourth-quarter results. Vuzix designs, manufactures and sells augmented-reality (AR) smart glasses and wearable displays, with a focus on enterprise, industrial, commercial and consumer markets.
Financial performance and liquidity
| Metric | FY 2020 | FY 2019 |
|---|---|---|
| Revenue | $11.58 million | $6.67 million |
| Gross profit (loss) | $1.93 million (17% margin) | $(4.41) million ((66)% margin) |
| Operating loss | $(19.13) million | $(26.57) million |
| Net loss | $(17.95) million | $(26.48) million |
| Loss attributable to common stockholders | $(20.01) million | $(28.41) million |
| Basic and diluted loss per share | $(0.53) | $(0.94) |
| Cash and cash equivalents | $36.07 million | $10.61 million |
| Working capital | $41.96 million | $16.44 million |
| Cash used in operating activities | $13.96 million | $22.36 million |
- Revenue increased 74%. Smart Glasses revenue rose 107% to $9.95 million, led by M-series products; M-series unit sales increased 109%. Engineering-services revenue increased 123% to $1.50 million.
- Gross profit improved substantially, helped by higher product margins and a smaller inventory-obsolescence charge. Product gross profit before obsolescence reserves was $1.98 million; the reserve charge was $1.27 million, versus $4.57 million in 2019.
- Operating expenses totaled $21.06 million, down from $22.16 million. Research and development decreased 15% to $7.57 million; general and administrative expense increased 5% to $6.92 million.
- Financing activities provided $40.91 million, including $25.20 million net proceeds from equity offerings, $14.13 million from warrant exercises, and a $1.56 million PPP loan. PPP loan forgiveness contributed to a $1.31 million net gain on debt extinguishment after a $250,000 note-receivable write-off.
- At year-end, the company reported no current or long-term debt obligations. Total liabilities of $4.17 million included lease liabilities; these should not be confused with debt. Operating cash use remained significant.
Fourth-quarter results and notable changes
- Q4 2020 revenue was $4.23 million, gross profit was $703,000, and net loss was $3.59 million. Q4 2019 revenue was $1.95 million, gross loss was $4.37 million, and net loss was $9.58 million.
- FY 2019’s gross loss reflected a $4.57 million inventory-obsolescence reserve associated primarily with older M300/M300XL products. The FY 2020 reserve was lower, but the company recorded additional write-downs for M300XL, Blade components and Smart Swim inventory.
- Product sales included no OEM product or standalone waveguide/display-engine revenue in 2020, compared with $951,570 and $152,499, respectively, in 2019. Management said the prior OEM customer had not placed further orders and none were expected in the near term.
- Net loss improved year over year, but the company remained loss-making and reported an accumulated deficit of $162.69 million.
Outlook, management commentary and risks
- Management provided no specific revenue or earnings guidance. It said year-end cash was expected to fund working-capital and capital-expenditure needs for at least 12 months, while also anticipating increased 2021 R&D spending and investment in new-product development.
- Management’s strategy is to grow smart-glasses sales, develop software and subscription offerings, and expand OEM supply of waveguide optics and display engines. The M4000 entered mass production in September 2020; the Blade Upgraded entered mass production in the second half of 2020. A binocular next-generation product was expected late in 2021.
- Key risks include ongoing operating losses and cash burn; uncertain adoption of AR and smart glasses; competition from larger, better-funded companies; reliance on third-party platforms and suppliers, including micro-display suppliers; manufacturing capacity and equipment concentration; order cancellations and unpredictable demand; inventory obsolescence; and potential dilution from future equity financing.
- COVID-19 affected demand for Smart Swim and reduced travel and trade-show activity. The filing also highlights international trade and tariff exposure, cybersecurity and privacy requirements, product defects and warranty costs, and foreign-exchange risk.
- A patent-infringement action by Throop, LLC concerned patents that expired in January 2020. The parties had agreed to a proposed settlement for a nominal sum, expected to be finalized before March 31, 2021. The filing reported no other material pending legal proceedings.
- After year-end, the Series A preferred holder converted its shares into 4,962,600 common shares and accepted $10.0 million in cash to settle accrued dividends of approximately $10.8 million. Also after year-end, 7,196,378 warrants were exercised for $34.35 million in proceeds. The filing estimated pro forma cash of $60.42 million after the dividend payment and warrant exercises, before subsequent operating losses and investment.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management and the auditor reported internal controls effective as of December 31, 2020.
Important facts for investors to verify
- Whether M-series demand and revenue growth can continue, and whether product sales can achieve sustainable positive gross margins without large inventory charges.
- Current cash, operating cash burn, capital needs and the effect of post-year-end warrant exercises and the $10.0 million preferred-dividend settlement.
- Current share count and potential dilution from warrant exercises, preferred-stock conversion, stock awards and the equity plan’s evergreen provision.
- Progress, customer commitments and timing for the next-generation glasses and OEM waveguide/display-engine programs; the filing gives no firm revenue guidance for these initiatives.
- Inventory quality and reserve adequacy, particularly for older products, and supplier availability and pricing for critical components.
- Final disposition of the Throop settlement and any material developments in other legal, regulatory or intellectual-property matters.