Vuzix(VUZI) - 2022 Q4 - Annual Report

Part I Item 1. Business Vuzix designs, manufactures, and sells augmented reality (AR) wearable display devices, known as Smart Glasses, targeting enterprise, industrial, medical, and defense markets Company Overview and Strategy Vuzix specializes in AR wearable displays (Smart Glasses) that offer hands-free access to digital content, aiming to improve operational efficiency for its customers - Vuzix's competitive advantage lies in its thin, see-through waveguide optics and compact display engines, which allow for HMDs to resemble conventional eyeglasses[18][19] - The company's strategy involves selling finished products, licensing technology to OEMs, selling waveguide components, and developing a suite of software applications[26] - Effective June 2022, a 10-year non-compete agreement expired, allowing Vuzix to resume marketing and sales initiatives directly into the defense and homeland security markets[24] Target Markets Vuzix primarily targets the enterprise, industrial, and medical sectors, where its Smart Glasses enhance productivity, safety, and remote collaboration - Primary target markets are enterprise, industrial, and medical, with applications like remote video support, quality assurance, and warehouse pick-and-pack[32][35] - In healthcare, Smart Glasses are used in operating rooms for remote expert consultation, medical student training, and telemedicine[36] - The company is also targeting security and first responders with features like real-time facial recognition and alerts in a covert eyeglass form factor[37] - Vuzix believes the long-term consumer market will be driven by fashion-forward, lightweight smart glasses that augment reality with cloud-based information and AI[38] Products and Applications Vuzix offers a range of AR Smart Glasses, including M-Series, Blade, Shield, and Ultralite platforms, supported by an App Store and proprietary software for collaboration - Key products include the M400/M4000 (monocular enterprise), Blade 2 (upgraded monocular), Shield (binocular micro-LED), and Ultralite (lightweight OEM platform)[41][43][46][47] - The Vuzix App Store allows users to download applications, and the company fosters a third-party developer ecosystem with a revenue-sharing model[49][52] - Vuzix offers Vuzix Remote Assist (VRA) for telepresence and has developed 'connector' applications for third-party platforms like Zoom, Microsoft Teams, and Cisco WebEx[50] Technology and Intellectual Property Vuzix's competitive advantage is built on its proprietary technology in advanced optics, including see-through imaging waveguides, micro-projection display engines, and investments in micro-LED displays - Core technologies include see-through waveguides, custom micro-display engines (DLP and micro-LED), and nanoimprinting processes for manufacturing thin optics[62][68][69][71] - In 2022, Vuzix signed agreements with Atomistic SAS for an exclusive license and custom design of key micro-LED technology, involving a $30 million cash commitment and equity issuance[66] - The company's IP portfolio consists of 148 issued U.S. and foreign patents and 130 pending patent applications, with patents expiring on various dates up to January 24, 2040[75] Competition Vuzix operates in a highly competitive and rapidly evolving market, facing competition from direct view displays (smartphones, tablets) and other wearable display manufacturers - The wearable display industry is highly competitive, with key factors including image quality, power efficiency, ergonomics, and cost[77] - Competitors in binocular AR/VR include Microsoft (Hololens II), Magic Leap, Meta, and Sony[79][80] - Monocular smart glasses competitors include Google/Alphabet, Lenovo, RealWear, and Sony[81] - Competitors for waveguide optics and display engines include Lumus, WaveOptics (Snap), and Digilens[84][86] Sales, Marketing, and Manufacturing Vuzix sells its products through a multi-channel strategy including direct sales, distributors, value-added resellers (VARs), and online stores, with a focus on the US, Europe, and Japan - The sales strategy utilizes direct sales, distributors, and VARs, with international offices in Japan and Europe[87][89] - Final assembly and all waveguide optics manufacturing occur at the company's West Henrietta, NY facility; an adjacent facility was leased in October 2022 to expand waveguide production capacity[99][100] - Vuzix relies on third-party suppliers for critical components, purchasing micro-displays from Sony Corporation, Jade Bird Display, and Texas Instruments on a purchase order basis[101] - The company is engaged in the design, manufacture, marketing, and sale of augmented reality (AR) wearable display and computing devices, such as Smart Glasses[17] - Vuzix's strategy includes developing its own finished products, building a software ecosystem, and selling components like waveguide optics and display engines to OEMs[20][25] - In November 2022, Vuzix acquired Moviynt®, a US-based SAP Certified ERP platform software provider, to enhance its software solutions for logistics, warehousing, and manufacturing applications[48] - As of March 1, 2023, the company had 105 full-time employees in North America, with 50 dedicated to research and development and engineering services[105] Item 1A. Risk Factors The company faces significant risks, including a history of net losses, intense competition, reliance on third-party technologies, and supply chain vulnerabilities - The company has a history of net losses, reporting a net loss of $40.8 million for the year ended December 31, 2022, and an accumulated deficit of $243.8 million[113] - Vuzix faces intense competition from established companies with greater financial, marketing, and R&D resources, such as Google, Microsoft, Meta, and Sony[115] - The business depends on technologies developed by other companies (e.g., micro-displays) and the broader market acceptance of near-eye display technology, which is not guaranteed[124][125] - Reliance on third-party suppliers, some of which are sole-source, for critical components creates risks of supply shortages, long lead times, and price increases that could disrupt the supply chain[209][210] Item 2. Properties Vuzix's main facility is a leased 39,000 square foot space in West Henrietta, New York, serving as its headquarters, R&D, and manufacturing center - The main facility is a 39,000 sq. ft. leased space in West Henrietta, NY, housing headquarters, R&D, and manufacturing[217] - In October 2022, an additional 12,000 sq. ft. was leased in West Henrietta to expand waveguide manufacturing, with planned completion in mid-2023[217] - The company maintains small rental offices in Oxford, England, and Tokyo, Japan, for sales and marketing[218][220] Item 3. Legal Proceedings As of the filing date, Vuzix Corporation is not involved in any material legal proceedings or litigation - The company is not currently involved in any material actual or pending legal proceedings[221] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Vuzix's common stock is listed on the NASDAQ Capital Market under 'VUZI', has not paid dividends, and initiated a $25 million share buyback program in March 2022 - The company's common stock trades on the NASDAQ Capital Market under the symbol VUZI[224] - Vuzix has never paid cash dividends on its common stock and does not expect to in the foreseeable future[228] Share Repurchase Activity (2022) | Period | Total shares purchased | Average price paid per share | | :--- | :--- | :--- | | March 30 - 31, 2022 | 36,685 | $6.84 | | Nov 29 – Dec 31, 2022 | 427,987 | $4.10 | - On March 2, 2022, the Board approved a one-year share buyback program for up to $25 million of common stock[231] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations In fiscal year 2022, Vuzix saw total sales decrease by 10% to $11.8 million, with a net loss of $40.8 million, while maintaining strong liquidity with $72.6 million in cash Results of Operations for Fiscal Year 2022 vs. 2021 For 2022, total sales decreased by 10% to $11.8 million, driven by an 18% drop in product sales, resulting in a slight increase in net loss to $40.8 million Consolidated Statements of Operations Data (2022 vs. 2021) | Metric | 2022 | 2021 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Sales | $11,835,882 | $13,164,933 | $(1,329,051) | (10)% | | Gross Profit | $1,483,126 | $1,568,490 | $(85,364) | (5)% | | Loss from Operations | $(42,232,271) | $(39,980,107) | $(2,252,164) | 6% | | Net Loss | $(40,763,573) | $(40,377,160) | $(386,413) | 1% | - Sales of products decreased by 18% in 2022 compared to 2021, primarily due to higher average sales discounts on larger volume sales and negative foreign exchange impacts[264] - Sales of engineering services increased by 250% in 2022 compared to 2021[265] - Research and development costs increased by 9% in 2022, mainly due to external development expenses for the Shield and Blade 2.0 smart glasses[271] - Selling and marketing costs rose by 32% in 2022, driven by higher salary expenses, travel, and trade show costs[273] Results of Operations for Fiscal Year 2021 vs. 2020 In 2021, total sales increased by 14% to $13.2 million, but net loss widened significantly to $40.4 million due to a 225% rise in General and Administrative expenses Consolidated Statements of Operations Data (2021 vs. 2020) | Metric | 2021 | 2020 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Sales | $13,164,933 | $11,581,496 | $1,583,437 | 14% | | Gross Profit | $1,568,490 | $597,958 | $970,532 | 162% | | Loss from Operations | $(39,980,107) | $(19,127,464) | $(20,852,643) | 109% | | Net Loss | $(40,377,160) | $(17,952,172) | $(22,424,988) | 125% | - Sales of Smart Glasses products rose by 27% in 2021, driven by growth in M-Series sales[285] - General and administrative costs increased by 225% in 2021, largely due to a $13.5 million increase in salary and benefits, of which $12.7 million was non-cash stock-based compensation from the LTIP[296] Liquidity and Capital Resources As of December 31, 2022, Vuzix had $72.6 million in cash, a $47.6 million decrease from the prior year, primarily due to operating and investing activities Key Balance Sheet and Cash Flow Data (as of Dec 31, 2022) | Metric | Amount (2022) | Amount (2021) | | :--- | :--- | :--- | | Cash and Cash Equivalents | $72,563,943 | $120,203,873 | | Working Capital | $75,963,883 | $132,994,189 | | Net Cash Used in Operating Activities | $(24,521,082) | $(26,980,411) | | Net Cash Used in Investing Activities | $(21,170,816) | $(4,852,452) | - Significant cash outflows for investing activities in 2022 included $16.5 million for technology license commitments, $2.3 million for the Moviynt acquisition, and $1.7 million for manufacturing equipment[304] - The company has a licensing fee commitment of $11.5 million related to the Atomistic Agreements, payable within one year[307][312] Item 7A. Quantitative and Qualitative Disclosures about Market Risk Vuzix is exposed to market risks from interest rate fluctuations on its cash investments and foreign currency exchange rate changes from international operations - The company's excess cash is invested in short-term, highly rated corporate debt, which is subject to interest rate risk[313] - Vuzix is exposed to foreign currency exchange rate risk through its subsidiaries in Asia and the UK and through component purchasing; the company does not currently hedge this risk[315] Item 8. Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2022, 2021, and 2020, including balance sheets, statements of operations, and cash flows Consolidated Financial Statements The consolidated financial statements present Vuzix's financial position and results of operations, reporting $132.3 million in total assets and a $40.8 million net loss for 2022 Key Financial Data (as of and for the year ended Dec 31, 2022) | Metric | Amount | | :--- | :--- | | Balance Sheet: | | | Total Assets | $132,312,550 | | Total Liabilities | $15,582,512 | | Total Stockholders' Equity | $116,730,038 | | Statement of Operations: | | | Total Sales | $11,835,882 | | Gross Profit | $1,483,126 | | Net Loss | $(40,763,573) | | Statement of Cash Flows: | | | Net Cash Used in Operating Activities | $(24,521,082) | Notes to Consolidated Financial Statements The notes detail significant accounting policies, the Moviynt acquisition, revenue recognition, and balance sheet accounts, including $11.5 million in technology license commitments - The acquisition of Moviynt in October 2022 for a total consideration of $2.47 million resulted in the recognition of $1.6 million in goodwill and $0.7 million in other intangible assets[418][420] - The company's Long-Term Incentive Plan (LTIP) resulted in non-cash stock-based compensation expense of $11.1 million in 2022 and $13.3 million in 2021[480] - As of December 31, 2022, the company had a remaining funding commitment of $11.5 million for technology licenses related to its agreements with Atomistic SAS, payable over the next twelve months[440] Geographic Revenue Breakdown (2022) | Region | Revenue (in thousands) | % of Total | | :--- | :--- | :--- | | North America | $4,738 | 40% | | Europe | $3,532 | 30% | | Asia-Pacific | $3,411 | 29% | | Others | $155 | 1% | Item 9A. Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2022 - Management concluded that as of December 31, 2022, the company's disclosure controls and procedures were effective[319] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2022, based on the COSO framework[324] - The independent auditor, Freed Maxick CPAs, P.C., issued an attestation report stating that the internal control over financial reporting was effective as of December 31, 2022[325] Part III Items 10-14 (Incorporated by Reference) Information for Items 10-14 is incorporated by reference from the company's definitive proxy statement for its 2023 annual meeting of stockholders - Information regarding directors, executive compensation, security ownership, related transactions, and accountant fees will be provided in the forthcoming definitive proxy statement and is incorporated by reference[331][332][333][334][335] Part IV Item 15. Exhibits and Financial Statement Schedules This section lists the financial statements, financial statement schedules, and exhibits filed as part of the Form 10-K report - This section contains the index to the consolidated financial statements, Schedule II (Valuation and Qualifying Accounts), and a list of all exhibits filed with the report[338][339]