Vuzix(VUZI) - 2019 Q4 - Annual Report

Part I Business Vuzix Corporation designs, manufactures, and sells augmented reality (AR) wearable display and computing devices, known as Smart Glasses - The company is engaged in the design, manufacture, marketing, and sale of AR wearable display and computing devices, such as Smart Glasses[21] - Vuzix's core technology includes proprietary waveguide optics and compact display engines, which it believes provide a competitive advantage in image quality, power efficiency, and form factor[23] - Key target markets are enterprise, consumer electronics, OEM, defense, and security. The company is re-engaging the defense and security markets after a non-compete agreement was amended in October 2018[24][26] - The company's intellectual property portfolio includes 71 issued patents and 79 pending patent applications, along with expertise in nano-imprinting manufacturing processes[69] Products and Applications Vuzix's main products are the M-series (M300XL, M400, M4000) for enterprise and the Vuzix Blade for prosumer markets, supported by an App Store and third-party connectors - Current products include the M-series (M300XL, M400, M4000) for enterprise and the Blade Smart Glasses for prosumers[40][43] - The M400 began commercial production in September 2019, and the M4000, featuring proprietary waveguide optics, is planned for mass production in the second half of 2020[40][42] - Vuzix offers applications through its own App Store, including Vuzix Remote Assist (VRA) on a subscription basis, and is developing connectors for third-party collaboration tools[47][49] Manufacturing and Sales Vuzix primarily performs final assembly and manufactures proprietary waveguide optics in Rochester, New York, sourcing key components from third parties and selling directly or through VARs - Final assembly of products was moved from China to the Rochester, New York facility in the summer of 2019. All waveguide optics are manufactured in Rochester[96] - The company relies on third-party suppliers for key components, including micro-displays from Sony, Texas Instruments, and Kopin, without long-term supply contracts[97] - Sales channels include direct sales, a network of Value-Added Resellers (VARs)/Vuzix Integration Partners (VIPs), and online web stores[84][85] Risk Factors The company faces significant risks including a history of net losses, intense competition, reliance on limited suppliers, and potential impacts from technological change and IP disputes Net Loss and Accumulated Deficit | Metric | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Net Loss | $(26,476,370) | $(21,875,713) | $(19,633,502) | | Accumulated Deficit (as of Dec 31) | $(144,742,811) | - | - | - The company has a history of net losses and may not achieve or maintain profitability. It may need to raise additional capital to continue operations[109][110][111] - Competition is intense from established companies like Google, Microsoft, Facebook, and Sony, which have greater resources and brand recognition[116][117] - Vuzix relies on third-party suppliers, some of which are sole-source (e.g., Sony, TI, Kopin for micro-displays), creating risks of supply shortages, long lead times, and price increases[186][191] - The company's intellectual property (71 issued patents, 79 pending) may not adequately protect its products, and it faces risks of infringing on the IP of others[144][145] - Intel Corporation, which holds Series A Preferred Stock representing approximately 15% of voting power, has stated it no longer desires a strategic relationship and may seek an orderly disposition of its stock, which could depress the stock price[205][206] Unresolved Staff Comments The company reports no unresolved staff comments - None[209] Properties Vuzix's main facility is a leased 39,000 square foot space in West Henrietta, New York, with smaller sales offices in England and Japan - The main facility is a 39,000 sq. ft. leased space in West Henrietta, NY, with the lease extended to October 3, 2023[210] - The company rents a 400 sq. ft. office in Oxford, England and a 577 sq. ft. office in Tokyo, Japan[211] Legal Proceedings Vuzix is defending a patent infringement lawsuit while two other legal matters, a defamation suit and a shareholder derivative suit, were resolved in 2019 - A patent infringement lawsuit was filed by Throop, LLC in December 2019. The company denies the claims and intends to defend itself vigorously[212] - A shareholder derivative suit filed in October 2018 against certain directors and officers was voluntarily discontinued by the plaintiffs in December 2019[215] - A defamation lawsuit filed by the company against Ricardo Pearson was dismissed in November 2019 due to a lack of personal jurisdiction[214] Mine Safety Disclosures This item is not applicable to the company - Not applicable[217] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Vuzix common stock trades on NASDAQ, with 45 record holders, and the company has never paid common stock dividends, though Series A Preferred Stock receives a 6% annual dividend - The company's common stock is listed on the NASDAQ Capital Market under the symbol "VUZI"[219] - As of March 16, 2020, there were 45 holders of record of the common stock[222] - The company has not paid and does not expect to pay dividends on its common stock. Series A Preferred stock has a 6% annual dividend[223][224] Selected Financial Data The company's selected financial data shows fluctuating revenues and consistent, significant net losses, with total sales decreasing and net loss widening in 2019 Selected Financial Data (In thousands) | (In thousands) | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Total Sales | $6,671 | $8,094 | $5,538 | $2,127 | $2,750 | | Gross Profit (Loss) | $(4,408) | $1,768 | $(677) | $(1,164) | $566 | | Loss from Operations | $(26,566) | $(21,861) | $(19,355) | $(18,536) | $(11,341) | | Net Loss | $(26,476) | $(21,876) | $(19,634) | $(19,250) | $(13,427) | | Total Assets | $28,446 | $35,134 | $26,833 | $22,345 | $19,563 | | Total Stockholders' Equity | $24,240 | $30,457 | $21,380 | $17,722 | $16,093 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses decreased 2019 revenue due to lower Smart Glasses sales, a significant gross loss from inventory write-downs, and plans to manage costs and raise capital to ensure going concern Results of Operations (2019 vs. 2018) For fiscal 2019, total sales decreased by 18% to $6.7 million, resulting in a $4.4 million gross loss primarily due to a $4.6 million inventory write-down, and a 22% increase in loss from operations Financial Performance (2019 vs. 2018) | Metric | 2019 | 2018 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total Sales | $6,670,604 | $8,094,368 | $(1,423,764) | (18)% | | Gross Profit (Loss) | $(4,408,121) | $1,768,282 | $(6,176,403) | (349)% | | Loss from Operations | $(26,566,242) | $(21,860,794) | $(4,705,448) | 22% | | Net Loss | $(26,476,370) | $(21,875,713) | $(4,600,657) | 21% | - Sales of Smart Glasses decreased by 19% to $4.8 million due to price reductions, the M400 launch transition, and fewer large customer orders compared to 2018[254] - Cost of sales included a $4,572,659 inventory write-down and obsolescence provision for M300 and M300XL products, which were being replaced by the new M400[258] - Research and Development (R&D) expenses decreased by 14% to $8.9 million, mainly due to lower external consulting fees for the Blade product, which was in active development in 2018[262] Liquidity and Capital Resources Vuzix's cash decreased to $10.6 million by year-end 2019, with $22.4 million used in operations, offset by $18.9 million raised from an equity offering, as management outlines plans to ensure going concern - Cash and cash equivalents decreased by $6.7 million to $10.6 million at year-end 2019[289] - Net cash used in operating activities was $22.4 million for the year ended December 31, 2019[291] - The company generated $18.9 million in net cash from financing activities through a registered direct offering of common stock and warrants in July 2019[294][296] - Management has outlined several plans to manage liquidity and continue as a going concern, including controlling operating costs, promoting new products (M400), and pursuing licensing opportunities[298][424] Quantitative and Qualitative Disclosures about Market Risk The company's market risks are primarily related to interest rates on cash investments and foreign currency exchange rates, both considered minimal or not material without hedging - The company is exposed to interest rate risk on its portfolio of marketable debt securities, but intends to hold them to maturity, minimizing the impact[303] - Foreign currency exchange rate risk exists due to business activities in Asia and the UK, but the company does not currently hedge this exposure and considers the risk not material[304] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2019, with no material changes during the fourth quarter - Management concluded that disclosure controls and procedures were effective as of December 31, 2019[308] - Management concluded that internal control over financial reporting was effective as of December 31, 2019, based on the COSO framework[311] - No material changes were made to the company's internal control over financial reporting during the fourth quarter of 2019[314] Part III Directors, Executive Officers, Corporate Governance, Compensation, and Principal Accounting Fees Information for Items 10 through 14, covering directors, executive officers, corporate governance, compensation, and accounting fees, is incorporated by reference from the upcoming proxy statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the company's definitive proxy statement for its 2020 annual meeting of stockholders[318][319][320][321][322] Part IV Exhibits and Financial Statement Schedules This section lists all documents filed as part of the annual report, including consolidated financial statements, valuation schedules, and an index of exhibits - The report includes an index of financial statements and Schedule II – Valuation and Qualifying Accounts[325][326] - An exhibit index lists all filed documents, including the Certificate of Incorporation, bylaws, material contracts, and Sarbanes-Oxley certifications[327][524] Consolidated Financial Statements Consolidated Statements of Operations The company reported a net loss of $26.5 million for 2019, an increase from 2018, with total sales decreasing and a significant gross loss due to inventory obsolescence Consolidated Statements of Operations | For Year Ended Dec 31, | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Total Sales | $6,670,604 | $8,094,368 | $5,537,753 | | Gross Profit (Loss) | $(4,408,121) | $1,768,282 | $(676,598) | | Loss from Operations | $(26,566,242) | $(21,860,794) | $(19,354,546) | | Net Loss | $(26,476,370) | $(21,875,713) | $(19,633,502) | | Basic and Diluted Loss per Share | $(0.94) | $(0.87) | $(1.02) | Consolidated Balance Sheets As of December 31, 2019, total assets decreased to $28.4 million, primarily due to reduced cash, while total stockholders' equity also declined and the accumulated deficit grew to $144.7 million Consolidated Balance Sheets | As of December 31, | 2019 | 2018 | | :--- | :--- | :--- | | Cash and Cash Equivalents | $10,606,091 | $17,263,643 | | Inventories, Net | $5,707,867 | $7,281,802 | | Total Current Assets | $19,073,508 | $27,383,095 | | Total Assets | $28,446,465 | $35,133,640 | | Total Current Liabilities | $2,634,657 | $4,676,665 | | Total Liabilities | $4,206,022 | $4,676,665 | | Accumulated Deficit | $(144,742,811) | $(118,266,441) | | Total Stockholders' Equity | $24,240,443 | $30,456,975 | Consolidated Statements of Cash Flows For 2019, the company used $22.4 million in cash from operations, $3.2 million in investing, and generated $18.9 million from financing, resulting in a $6.7 million net decrease in cash Consolidated Statements of Cash Flows | For Year Ended Dec 31, 2019 | Amount | | :--- | :--- | | Net Cash Used in Operating Activities | $(22,355,020) | | Net Cash Used in Investing Activities | $(3,157,539) | | Net Cash from Financing Activities | $18,855,007 | | Net Decrease in Cash | $(6,657,552) | | Cash at End of Period | $10,606,091 | Notes to Consolidated Financial Statements The notes detail accounting policies, including the adoption of Topic 842, a $4.6 million inventory write-down, Intel's Series A Preferred Stock, $118 million in NOLs, and management's going concern assessment - Going Concern (Note 3): Despite recurring net losses and an accumulated deficit of $144.7 million, management has concluded that its plans to manage liquidity and its ability to raise capital alleviate substantial doubt about its ability to continue as a going concern[422][427] - Inventories (Note 4): The company recorded a $4,572,659 write-down and obsolescence provision for its M300 and M300XL Smart Glasses inventory due to the introduction of the newer M400 model[431] - Income Taxes (Note 11): As of December 31, 2019, the company has approximately $118 million in US federal net operating loss (NOL) carry-forwards available to offset future taxable income. A full valuation allowance has been recorded against these deferred tax assets[460] - Capital Stock (Note 12): Intel Corporation holds 49,626 shares of Series A Preferred Stock, convertible into 4,962,600 common shares, representing significant voting power and carrying a 6% annual dividend[464][468] - Leases (Note 15): The company adopted the new lease accounting standard (ASU 2016-02, Topic 842) on January 1, 2019, resulting in the recognition of a $2.1 million Operating Lease Right-of-Use Asset and a corresponding lease liability[499][500]