Vuzix(VUZI) - 2022 Q2 - Quarterly Report

Part I – Financial Information Consolidated Financial Statements This section presents Vuzix Corporation's unaudited consolidated financial statements for Q2 and H1 2022, covering balance sheets, operations, equity, cash flows, and detailed notes Consolidated Balance Sheets The balance sheet as of June 30, 2022, shows decreased total assets and increased total liabilities due to new licensing fee commitments Consolidated Balance Sheet Highlights (as of June 30, 2022 vs. Dec 31, 2021) | Balance Sheet Item | June 30, 2022 ($ millions) | December 31, 2021 ($ millions) | | :--- | :--- | :--- | | Cash and Cash Equivalents | $100.6 | $120.2 | | Total Current Assets | $116.9 | $137.2 | | Total Assets | $145.9 | $148.5 | | Total Current Liabilities | $7.8 | $4.2 | | Total Liabilities | $14.4 | $4.7 | | Total Stockholders' Equity | $131.5 | $143.7 | Consolidated Statements of Operations Q2 2022 saw a slight sales increase but widened net loss, while H1 2022 experienced decreased sales and a larger net loss Statement of Operations Summary (Three Months Ended June 30) | Metric | 2022 ($ millions) | 2021 (Restated) ($ millions) | | :--- | :--- | :--- | | Total Sales | $3.0 | $2.9 | | Gross Profit | $0.4 | $0.6 | | Loss From Operations | ($10.0) | ($9.2) | | Net Loss | ($10.0) | ($9.2) | | Basic and Diluted Loss per Share ($) | ($0.16) | ($0.15) | Statement of Operations Summary (Six Months Ended June 30) | Metric | 2022 ($ millions) | 2021 (Restated) ($ millions) | | :--- | :--- | :--- | | Total Sales | $5.5 | $6.8 | | Gross Profit | $1.1 | $1.7 | | Loss From Operations | ($20.4) | ($18.3) | | Net Loss | ($20.5) | ($18.4) | | Basic and Diluted Loss per Share ($) | ($0.32) | ($0.31) | Consolidated Statements of Cash Flows H1 2022 saw significant cash usage in operating and investing activities, contrasting with substantial cash provided by financing in H1 2021 Cash Flow Summary (Six Months Ended June 30) | Cash Flow Activity | 2022 ($ millions) | 2021 (Restated) ($ millions) | | :--- | :--- | :--- | | Net Cash Used in Operating Activities | ($11.0) | ($13.1) | | Net Cash Used in Investing Activities | ($8.4) | ($1.2) | | Net Cash (Used in) Provided from Financing Activities | ($0.2) | $115.9 | | Net (Decrease) Increase in Cash | ($19.6) | $101.5 | Notes to the Unaudited Consolidated Financial Statements These notes detail key accounting policies, significant customer concentration, a major technology license agreement, and stock-based compensation expenses - In Q2 2022, one customer accounted for 45% of total product revenue, and another single customer accounted for 100% of engineering services revenue, indicating significant customer concentration[20] - On May 12, 2022, the company signed agreements with Atomistic SAS for an exclusive mLED technology license, recording a $15 million intangible asset and a corresponding liability, to be amortized over ten years[38][39] - The company recorded non-cash stock-based compensation expense of $2.7 million in Q2 2022 and $5.6 million in H1 2022 related to its Long-Term Incentive Plan (LTIP)[53] - On March 2, 2022, the Board approved a share repurchase program of up to $25 million, with 36,685 shares repurchased for $251,057 during the first six months of 2022[47][118] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance for Q2 and H1 2022, highlighting revenue trends, declining gross margins, increased operating expenses, and liquidity Results of Operations - Three Months Ended June 30, 2022 vs 2021 Q2 2022 saw a 3% sales increase but a 27% gross profit decline and 7% rise in operating expenses, resulting in an 8% higher net loss Q2 2022 vs Q2 2021 Performance | Metric | Q2 2022 ($ millions) | Q2 2021 (Restated) ($ millions) | % Change | | :--- | :--- | :--- | :--- | | Total Sales | $3.0 | $2.9 | 3% | | Gross Profit | $0.4 | $0.6 | (27)% | | Gross Margin | 14% | 20% | - | | Loss from Operations | ($10.0) | ($9.2) | 9% | | Net Loss | ($10.0) | ($9.2) | 8% | - The decrease in gross profit margin for product sales (from 18% to 13%) was primarily driven by higher sales discounts on large volume sales, negative foreign exchange impacts, and higher overhead allocations[76][77] - R&D expenses increased by 10% due to external development costs for the next-generation 'Shield' Smart Glasses and higher salary expenses[81] - Selling and Marketing expenses grew 37% due to increased salary, travel, sales commissions, and trade show expenses[83] Results of Operations - Six Months Ended June 30, 2022 vs 2021 H1 2022 saw a 19% sales decrease, 36% gross profit drop, and 8% rise in operating expenses, leading to a 12% wider net loss H1 2022 vs H1 2021 Performance | Metric | H1 2022 ($ millions) | H1 2021 (Restated) ($ millions) | % Change | | :--- | :--- | :--- | :--- | | Total Sales | $5.5 | $6.8 | (19)% | | Gross Profit | $1.1 | $1.7 | (36)% | | Gross Margin | 19% | 24% | - | | Loss from Operations | ($20.4) | ($18.3) | 12% | | Net Loss | ($20.5) | ($18.4) | 12% | - Sales of Smart Glasses products decreased by 21% or $1.4 million in the first six months of 2022 compared to the same period in 2021[92] - R&D expenses increased by 24% ($1.2 million), largely due to a $608k increase in external development for the 'Shield' Smart Glasses and a $506k increase in salary expenses[99] - Selling and Marketing expenses rose by 48% ($1.3 million), driven by higher salary, advertising, travel, and trade show costs[101] Liquidity and Capital Resources Vuzix maintains strong liquidity with $100.6 million cash, but faces significant future contractual commitments totaling $21.5 million - The company's cash and cash equivalents decreased by $19.6 million during the first six months of 2022, ending the period at $100.6 million[109] - Cash used in investing activities in H1 2022 was $8.4 million, which included $4.5 million for technology license commitments and $3.5 million for manufacturing equipment and tooling[112] - The company has outstanding contractual commitments of $10.5 million for licensing fees and approximately $11.0 million for a backplane chip design, both related to the Atomistic agreements[116] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are interest rate changes and foreign currency fluctuations, with no current hedging activities - The company is exposed to market risk from changes in interest rates on its cash investments and foreign currency exchange rates related to business in Japan and Europe[127] - Vuzix does not currently use hedging instruments to mitigate its foreign currency exchange rate risk[127] Controls and Procedures Management concluded disclosure controls were ineffective due to a material weakness in LTIP stock option valuation, with remediation ongoing - Management, including the CEO and CFO, concluded that disclosure controls and procedures were not effective as of the end of the quarter[128] - The ineffectiveness is due to a material weakness related to the methodology used to calculate the fair market value of LTIP stock options issued in March 2021[129] - Remediation controls have been designed and implemented, but not enough time has passed to fully test them, with full remediation expected in 2022[130] Part II – Other Information Legal Proceedings The company is not currently involved in any material legal proceedings or litigation - As of the filing date, the company is not involved in any actual or pending legal proceedings or litigation[132] Risk Factors The company faces ongoing risks from COVID-19 and geopolitical actions, impacting supply chains and requiring earlier purchase commitments - The implications of COVID-19 and geopolitical actions on future operations remain uncertain, with potential for adverse effects on revenue and manufacturing output[134] - The company is experiencing longer component lead times, which increases supply chain risk and the need to carry more inventory[134] Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities or purchases of equity securities during the period - There were no unregistered sales of equity securities or purchases of equity securities by the company during the reporting period[135] Exhibits This section lists exhibits filed with the Form 10-Q, including CEO/CFO certifications and Inline XBRL financial data - The exhibits filed with this report include certifications from the CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002, as well as Inline XBRL documents[136]