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Vuzix S-3 filing and Atomistic update -4

08:11 07-Mar-23


Last night Vuzix filed to sell its shares to Atomistic next month as expected by their agreement.  Since VUZI shares now trade just above half the $8 floor specified there; so we should expect the maximum 15% of shares sold for the full deal, with this first transaction being just over a third of that.  Of course, Vuzix has already also spent $18.5M of the cash it obtained primarily by diluting shareholders on this technology agreement.  So far management has nothing material to say about progress, supposedly continuing to wait on patent filings.  When pressed in the Q&A on last week's report, though, management did confirm that there will be no revenue from the agreement this year.

I continue to be skeptical of the arrangement ever being positive for shareholders.  The agreement with Atomistic was apparently amended on December 16th to now include 10 milestones, plus "Foundation Materials", rather than the original 7.  Amazingly, the milestone change was not disclosed until last night's filing.  In Q&A from last week's quarterly report, management characterized changes as acting on opportunity to bring more technology on board.  Yet the overall payment terms haven't changed.  I don't think that would happen if everything was going well.

So, digging into the 10-K filing from the report, I note that $5.5M of the funds already paid were reclassified from "fixed assets construction-in-progress" to licensed technology.  That is not indicative of hard results being delivered as expected.  Vuzix is still on the hook for $11.5M more this year, but the technology license is amortized over a 10-year period, which re-emphasizes my warnings about what a long and difficult process developing new technology typically is.

I also noted the licensing of Exit Pupil Expanding optics technology from Nokia.  That alerted me to increased potential for eye strain, which has been academically documented as the products saw expanded use in logistics during the pandemic.  More recently, researchers have proposed new systems to mitigate the problem, but implementation means further cost and  delay.  In the meantime, the decline in Vuzix revenue is not reassuring.  It's easy to imagine companies that were expanding its product use during the pandemic beginning to find that what's fine for a military pilot on a limited duration flight introduces corporate liability when applied to warehouse workers doing longer shifts.

Delay for re-engineering is the last thing Vuzix needs at a juncture where it is also expanding production.  It had $72.5M on the balance sheet at the end of 2022.  That's over $1 per share, and almost a quarter of the float is shorted, which has generated a rebate rate close to 9%, making a VUZI short squeeze a real possibility.  That said, the company appears to have been burning through about $10M per quarter.  Operationally, even if management could to cut the ever-rising R&D costs to zero, that would only save about $3M per quarter; marketing accounts for another $2M. 

In summary, even though I've been negative on Vuzix for a long time, what started as a wait-what investigation of a simple S-3 filing has raised further alarm bells for me.  Even if Atomistic were to eventually hit on all cylinders, it's easy for me to imagine Vuzix not having the funds to go the distance.  Management has already shown willingness to massively dilute shareholders, even at mid-single digit prices.  However, my guess is that there is likely to be a world of difference in the market environment for doing so over the next year or two versus what management experienced in 2020 & 2021.  We'll see how things progress, but I am likely to discontinue coverage and make this note public around mid-year, along with other website changes when BGCP eventually changes to BGC.