Introduction
Vuzix (NASDAQ:VUZI) is a US manufacturer, vendor, and retailer of augmented reality ("AR") products (smart glasses and heads-up displays). With its small size and big promises, it is a remnant of a by-gone era. Companies like Vuzix don't understand how the game has changed, and neither do Vuzix investors.
Long before Google (GOOG) (GOOGL) and Amazon (AMZN), AT&T (T) was the largest and most powerful company in the US due to its ability to monetize and monopolize the most important technologies of the times (telegram, telephone, television, and an oligopoly in data networks). The curbing and ultimate break-up of the Bell System led to waves of young newly formed companies developing a dazzling array of products and services.
CES 1994 (image source: The Verge)
At the same time, a tech-boom catapulted the consumer electronics industry. Sony (SNE) and Nintendo (OTCPK:NTDOY) became household names. The breakup of AT&T ultimately led to ubiquity of the internet and personal computers. At the intersection of telecom deregulation and consumer electronics were companies and products experiencing explosive growth. As Vuzix founder and CEO Paul Travers said at CES 2008:
"this is the consumer electronics industry man, it gets bigger, better, faster".
It is a very different world today. The companies built on the deregulation and infrastructure of the telecom industry have themselves become the world's largest and most influential companies - with high budget R&D capabilities to match. Their sights are set on consumer electronics. Google launched a phone and brought the concept of AR into mainstream recognition with Google Glass. Apple (AAPL) has slowly expanded into a consumer electronics ecosystem that includes watches, headphones, and Apple TV. Microsoft (MSFT) makes a gaming device that is a complete home-entertainment system. Developers spend hundreds of millions of dollars to develop blockbuster titles for it. Amazon has Kindle, Fire, Alexa, and is working on the commercialization of delivery robots and drones.
Long gone is the era when a small company like Vuzix could have a big impact on a big opportunity. Yet Vuzix claims that its Blade smart glasses will be revolutionary, what's going on?
The History of Vuzix
Forte Technologies VFX-1 (image source: PC Mag)
The early groundwork for Vuzix was laid when former Kodak R&D engineer Paul Travers founded a company called Forte Technologies in 1993, partnering with Advanced Gravis, a Canadian company specializing in video game accessories, to develop a consumer VR headset in 1994. Forte Technologies also worked closely with Gravis on sound chips.
Shortly after Advanced Gravis burned shareholders in a spectacle that will be detailed when we discuss Vuzix's corporate governance, Paul Travers created VR Acquisition Corp (later named Kaotech), which acquired the assets of Forte Technologies. In 1998, the name was changed to Interactive Imagine Systems, which launched a VR product called the VFX-3D. In 1999, one website wondered if it would ever be available. At this point, the 1990s dream of VR had mostly become vaporware.
The Interactive Imaging Systems PIB (image source: Google Images)
With the failure of VR technology as a whole to take off, Interactive Imaging Systems set its sights on an early precursor to the smartphone: the
iCOM Personal Internet Browser (PIB). Under the leadership of Travers, the PIB foolishly entered the market as alternative to the popular PDA, which was soon to become the smartphone.
Most "Internet ready" cellular phones and PDAs are either text based (WAP) or have low-resolution displays offering limited web protocol support, thereby blocking access to over 99% of the Internet's content. As a result, consumers and business users are frustrated and disappointed with WAP based products, but are still clamoring for wireless solutions. Foreseeable improvements in cellular phone and PDA displays simply cannot provide usable direct view VGA quality while remaining small in size!
(source)
Paul Travers was unfazed, and by 2003, Interactive Imaging Systems was working a new personal display product called Second Sight. Paul Travers said at the time that he expected the head-mounted display to be used by engineers to work on aircraft or other heavy machinery. If you are an investor in Vuzix, it's a very familiar pitch.
Vuzix commercial and consumer product history (image source: VUZIX)
Then, in 2004, the name of the company was changed again to Vicuity Corporation, later changed yet again to Icuiti Corporation. Icuiti launched "a revolution in personal and portable video viewing" at CES 2005. This began a long history in consumer video products that were sold in outlets such as Brookstone and SkyMall (to illustrate how much the electronics market has changed, consider that these both went bankrupt). Icuiti's products received poor reviews, calling it "expensive and uncomfortable" with shockingly lousy image quality despite one model winning the "prestigious CES Design and Engineering Award" in 2006.
As important as this history of forays into consumer electronics is to the Vuzix's investor pitch, they were historically not the driver of revenue. At this time, the majority of Vuzix/Icuiti's revenue was being earned serving the Department of Defense and as a defense subcontractor working on night vision display drives. In 2006, these two sources comprised 69% of Vuzix/Icuiti's revenue. Vuzix later sold its defense business in 2012.
Finally, the name was changed once more to Vuzix in 2007, before going public in 2009 on the TSX Venture Exchange for $0.20/unit CAD. Each unit included a share of Vuzix with a warrant for one half of a share exercisable at $0.30/share. Vuzix then moved to the OTC markets in 2010, where it later completed a 75:1 reverse split. In early 2015, Vuzix uplisted to the NASDAQ.
Meanwhile, Vuzix entered the enterprise market with the M100 smartglass in 2013. Vuzix abandoned its video eyewear/VR products to solely focus on AR in 2018. Vuzix has a partnership with Toshiba (OTCPK:TOSBF) focused on enterprise deployments, announced in late 2017.
Vuzix Products
Today, Vuzix has two flagships products, the M300 smartglass for enterprise, and the Vuzix Blade, which has been pitched as both a consumer product and an enterprise product. With the speed at which it is burning cash (-$23.7M Free Cash Flow and -87.5% ROE over the last 4 quarters), Vuzix is basically a bet on the success of these two products.
Left: Vuzix Blade Ad | Right: CEO Paul Travers with the Blades
(Image sources: Vuzix/Charbax, YouTube)
Vuzix has pitched the Blade as a game changer for the company, with CEO Paul Travers claiming that the Blade is "the beginnings of changing the world". We believe that they are highly likely to be another Vuzix flop.
For starters, they are far from fashionable. They appear quite awkward in Vuzix's own advertising. A review from Engadget called them "pretty chunky and not very fashionable" and pointed out they have a red light that is a "dead give-away" that they are "something unusual". Another give-away is that, at certain angles, the display field lights up in a way that is quite obvious.
(Image sources: YouTube)
Not very practical for consumer use. Paul Travers even gave a 30-minute presentation on AR without wearing the company's glasses.
Then, there is the question of are they even really AR or just a heads-up display? This was also raised in Engadget's review. With a small field of view in one eye, they are far from an immersive AR experience. Furthermore, the battery life could be as little as an hour in some cases.
(Image sources: YouTube)
The use-case for Vuzix is more compelling in the enterprise space. Their flagship product is the M300, which is essentially an upgraded version of the previous M100. Vuzix has latched onto the hype of AR, but is the M300 really an augmented reality product? No, a lecture at Stanford by Bernard Kress, who has worked on both Google Glass and Microsoft HoloLens, put the Vuzix M100/M300 squarely in the smart glass category.
It may be over-hyped, but this is not to say it is an illegitimate product. The Vuzix M300 does have successful deployments, most notably in logistics. Vuzix did work on a successor to the M300, the M3000, which would have had more robust AR capabilities and a see-through display. It was supposed to be released in summer of 2017. It is now nearly spring 2019, and still not available.
We believe that the market for the M300 is both limited and competitive. Some of the use-cases touted by management make no sense to us. Because it is not really AR, looking down at a phone or tablet device is a fine substitute. Management makes the argument that this is some sort of major inconvenience; we disagree. If you've ever been under the hood of your car, let alone working on an aircraft or heavy machinery, the last thing you would probably want is a screen in your face. Sounds a lot like Interactive Imaging Systems and Second Sight, which was the same pitch and did not pan out.
Internal Signs of Trouble
Several events suggest that the Vuzix ship is sinking, as one might expect, given the contemporary dynamics of tech discussed in the introduction. The first and perhaps most concerning are the executive departures. Lance Andersen, the VP of the all-important enterprise business, departed with the company and became some sort of consultant just a few months after giving a presentation on Vuzix for enterprise. He appeared to be Paul Travers' right-hand man (example 1, example 2).
Paul Boris also exited his role as COO in 2018. Vuzix announced on its quarterly call a few weeks later that it had created a new VP of Operations with an internal promotion. It appears this was done instead of finding a new COO. This is a bad sign. If Vuzix was an industry leader, one would think that they could attract big-name talent to be COO.
But Vuzix may be very far from an industry leader. After investing $25M into a new class of preferred shares, Intel (INTC) elected not to be involved with Vuzix. They didn't even choose to exercise their right to appoint two board members, despite their investment.
Pursuant to a letter we received from the Series A Purchaser on November 10, 2016, the Series A Purchaser stated, among other things, that for the time being they would continue to refrain from designating any directors to the Vuzix board and would not exercise its board observer rights and that the Company should not provide them with any board materials or correspondence.
Things are looking bad for the 'revolutionary' Blades thus far. They not only behind schedule but are priced at $1,000, which is well above Vuzix's original plans to sell them at "less than $500... ...in 2018". Apps are critical for the Blade to succeed as a consumer product. Vuzix's own app store shows just 16 apps for the Blade despite its delayed launch, including a "request" for Amazon Alexa Beta. After pitching these as a consumer product, Vuzix is now pitching them as both consumer and an enterprise product. Maybe this is because they never actually released the M3000.
Also of note, Vuzix's partnership with Toshiba has a far from guaranteed future. In October 2018, Toshiba Client Solutions (the division that buys glasses manufactured by Vuzix) was acquired by Sharp, a subsidiary of Chinese electronics manufacturing giant, Foxconn. Foxconn worked on Google Glass, and is now working on Apple's smartglasses. Vuzix announced in Q3 that:
...even though originally expected, our reported revenue did not include any shipments to Toshiba of the Toshiba AR100 powered Vuzix Smart Glasses.
CEO Paul Travers assured investors that this was just a temporary situation and that Vuzix would be shipping to Toshiba/Sharp/Foxconn again in Q4. One analyst on the call pointed out that Toshiba's orders would fall short of the $5M purchase agreement.
Finally, Vuzix announced it would be re-entering the defense market after selling its defense business in mid-2012. The amendment of its non-compete agreement with buyer Six-15 Technologies came at a $1.5M cost to Vuzix. We read this as either Vuzix possibly needing to expand into defense with issues in the enterprise pipeline, or Six-15 possibly being desperate for cash. Either way, we read this as a bad sign, as Six-15 partnered with Vuzix to sell its M100 smart glasses.
Burn Rate
Despite its long history, Vuzix has only turned an annual profit once going back as far as 2006, where in 2015, it had a net income of just $323k. In 2016 and 2017, it failed to even make a gross profit. Since 2006, Vuzix's operations have burned a cumulative $84M, according to data provided by S&P. Operations burned cash going back every year since 2007, including through Q3 2018.
Over the same period, Vuzix had cash flows from financing of over $113M, mostly from the issuance of stock. Issuing stock has been critical to Vuzix's business. Vuzix has been able to do this and raise money from investors consistently by latching on to whatever the hot new technology is:
2009: The iPhone is inconvenient! Second Life! World of Warcraft!
Owners of mobile display devices increasingly want to use them to view high-resolution, full color content. The displays currently used in these mobile devices do not work well for this purpose because they are either too small, which makes it extremely difficult for the human eye to view the detail of the images that they display, or they are too large, making the device heavier, larger and difficult to carry. Today, many mobile devices, like the iPhone, have employed a touch screen with software capable of magnifying or zooming in on a small portion of the image. We believe that many consumers consider this solution unsatisfactory because it is not like their desktop computer viewing experience and they find it difficult to navigate touch screens and to find information on the portion of the image being viewed.
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We expect those features to be of particular interest to users playing games using the VR920, but they also can be used in commercial 3D applications and for exploring Internet virtual worlds like Second Life. The VR920 is currently compatible with over 80 titles that work with it out of the box, including popular games such as Microsoft’s Flight Simulator X and World of Warcraft. We currently have over 1700 software developers’ kits being used in applications from college research programs to commercial developers to develop additional titles for the VR920. With the addition of a clip-on camera which we are currently tooling the VR920 can also used in AR applications.
2013: Mobile technology! Wearables! Interactive AR! Stereoscopic 3D!
Mobile products such as smartphones and pad/tablet computers are becoming the leading computing platforms with an installed base surpassing that of PCs. Mobile technology is redefining the way people interact with their world and has become an essential lifestyle management and entertainment tool personalized to users’ unique needs. We believe mobile devices and mobile internet access will have a more profound impact than the Wired Internet and that interactive AR content is expected to significantly change the way mobile products are used. As a result, we believe that there is growing demand for mobile access to high-resolution content in several major markets and that demand will grow for Smart Glasses that have smartphone capabilities in most markets in which smartphones are currently used. We believe wearable near-eye displays that can provide the equivalent of a high resolution wired internet at home or office experience will be a key component in advanced wearable wireless devices as these systems move to providing high resolution images without compromising the portability of the product.
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We believe that there is a need for high-resolution, interactive, stereoscopic 3D display devices for use with desktop computers, consoles, tablets and other gaming products. We believe that gaming on mobile devices that have graphics and processing capabilities closely equivalent to laptop computers and consoles but with small, direct view screens is not a satisfactory experience for many consumers. Our Video Eyewear products are designed to significantly enhance a consumer’s experience by providing larger-appearing, high-resolution images with stereoscopic 3D capabilities. We believe that there is also a demand for display devices that enable the user to simulate and experience movement within a three-dimensional environment when using either gaming consoles or mobile devices. We anticipate that VR and AR will become increasingly popular entertainment applications. Both VR and AR are difficult to implement using traditional desktop computer monitors and televisions but can be successfully implemented with Video Eyewear. Our technologies and products enable a user to use those applications.
2017: Alexa! Google! Apple! Waveguides! Artificial Intelligence!!!
We have developed thin optics, called waveguides, that are fully see-through and enable miniature display engines to be mounted in the temples of the HMD which allows the form factor of the Smart Glasses to be comparable to conventional eyeglasses. Our Smart Glasses and AR Glasses are designed for all day use cases and are small enough to fit in a user’s pocket or purse.
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We also believe that our waveguide optics give us a substantial advantage over other competitors’ optics, including other waveguides because it allows us to produce optics that are fully transparent when off, along with the high brightness required for AR and enterprise Smart Glasses applications.
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The Blade is ideal for mobile applications including social media, navigation, artificial intelligence (AI) and HD photography and videography as well as a AR wearable display for the enterprise sector. The Blade also is designed to integrate with AI engines and will ship out of the box with Amazon Alexa, an intelligent personal assistant featuring AI.
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We believe applications like the AR Kit and AR Core from Apple and Google are driving this new experience in the mobile space. But the Smart Phone is unnatural and difficult form factor by which to experience AR. We believe that AR Smart Glasses are needed to deliver this experience correctly;
Assisting in the capital/equity raises that Vuzix has required to survive are a number of media exposure services and promotional techniques. These were catalogued and written about at length by Richard Pearson of MOX Reports. Vuzix responded with an $80M defamation suit.
We also think Vuzix has aggressively promoted its stock. See this ad featuring the ticker symbol at the bottom, talking about the $150B opportunity of the wearable display market. Or this video by "Blockchain Global News", a PR service owned by Corporate Connect. CEO Paul Travers did an interview on "CEOLIVE.TV" titled Vuzix $VUZI Set to Win as Enterprise SmartGlass Market Takes Off. Vuzix was also the subject of a press release titled "Vuzix CEO discloses 9.6% stake" on the news that the CEO bought just under $20k worth of stock, as well as announcing the launch of a consumer version of the Vuzix Blade, which is already well known as a consumer product.
How about a PR announcing "market access" for the Vuzix Blade in 35 countries? Given that the product is sold online, we're surprised this wasn't announced as a partnership with the USPS. Japan is touted as some sort of addition in the headline, even though the Vuzix already has an office there. Finally, perhaps the pièce de résistance, an interview with CEO Paul Travers titled "AR Smart Glasses Will Replace Phones - Vuzix". He's already talking about 5G.
Corporate Governance
Vuzix has the history of corporate governance issues that you would expect from a company that has engaged in the sorts of investor-targeted PR practices described. For starters, Vuzix received an "informal inquiry" from the SEC requesting "certain documents relating to our internal control over financial reporting." About 6 months later, Intel sent their letter curbing their involvement with Vuzix. Vuzix later disclosed that "disclosure controls and procedures and internal controls over financial reporting" were "ineffective" in FY 2015 and FY 2016.
There are some interesting compensation policies as well. CEO Paul Travers and CFO Grant Russell are paid salaries of $500k and $425k, respectively, despite having burned well over $80M in negative operating cash flow. Furthermore, they have apparently had the ability to defer executive compensation in the past (see here & here) in exchange for an 8% interest rate on the outstanding balance. If you were around for the IPO this probably isn't a shock, as the S-1 disclosed that CFO Grant Russell was awarded an "officer loan" of $58,378 to purchase over 8 million shares at just $0.0085/share. Incredibly, this was a "non-recourse promissory note and was secured by a pledge of the shares purchased." Some of the outstanding amount was later forgiven.
More recent amenities in the compensation package include $750/month automobile allowances to both Paul Travers and Grant Russell, as well as the ability for Grant Russell to receive a portion of his salary in the form of a housing allowance, as his primary residence is in Vancouver, Canada (not in Rochester NY where the company is located). If either Paul Travers or Grant Russell were terminated for good reason, they would still receive $1M or $850k, respectively. The amounts are even higher ($2M and $1.7M) if they decide to quit due to a change in control.
What sort of board would allow this? The kind that have a tiny amount of skin in the game, with most members owning less than 1% of the shares outstanding.
Investors should also be aware of Grant Russell's background. According to Vuzix's proxy statement:
Grant Russell, age 65, has served as our Chief Financial Officer and Executive Vice President since 2000 and as a member of our board of directors since April 2009. From 1997 to 2004, Mr. Russell developed and subsequently sold a successful software firm and a new concept computer store and cyber café. In 1984, he co-founded Advanced Gravis Computer (Gravis), which, under his leadership as President, grew to become the world’s largest PC and Macintosh joystick manufacturer with sales of $44 million worldwide and 220 employees. Gravis was listed on NASDAQ and the Toronto Stock Exchange. In September 1996 it was acquired by a US-based Fortune 100 company in a successful public tender offer.
This doesn't really tell the whole story. Advanced Gravis was in fact acquired in a public tender offer, but it was in a scandal that infuriated investors in Gravis. Shareholders had their stock tendered at $0.50 CAD without option, allowing ACCO Brands (a major shareholder) to take the company private. This was well below what many shareholders had paid, and they:
- Alleged that the management of Gravis and related parties "engaged in consistent patterns of alleged fraudulent misrepresentation and concealment, undue influence, violation(s) of corporate opportunity, breach of fiduciary duty, misstatements, non-disclosure, materiality, reliance and causation and Rule 10b-5 'Controlling Shareholder' violations"
- Said that "This fraud is so blatant that it defies description."
- Accused Grant Russell of being directly involved.
- Accused Grant Russell of "wallowing in Gravis shareholder blood with this obvious fraudulent and pathetic scheme."
- Wondered openly what was promised to Paul Travers in the deal, having "received 1,000,000 shares of Gravis when it was trading at $3.00"
It seems very similar to the shareholder class action suits being brought against Vuzix today, after the publication of Richard Pearson's report. Grant Russell resigned from the board of another company, Sanctuary Woods, amid the allegations against him. Keep in mind that shortly after, he joined Paul Travers at Interactive Imaging Systems and has acted as Chief Financial Officer for nearly two decades, living in Canada while Vuzix has burned well over $80M. Vuzix declined to comment on the allegations made against Grant Russell or any other matters related to Advanced Gravis or Sanctuary Woods.
External Signs of Trouble
(Image Source: Business Insider)
Vuzix's competitors are likely to put the writing on the wall for the company. Investors are pouring incredible amounts of money into developing AR, VR, and smartglasses. Take, for example, North, which has raised $130M from investors including Amazon and Intel. North makes a pair of smartglasses that appear far superior to Vuzix blades at the same price-point. Here's former Vuzix VP of Enterprise Lance Andersen reviewing them. Lance calls the Alexa-enabled glasses the "world's most fashionable."
North Focals vs. Vuzix Blade & Vuzix M300 (Image sources: YouTube)
Even though the North Focals lack some of Vuzix's capabilities as they do not seem to have an integrated camera, the form factor and technology is there, and it isn't hard to imagine them making the leap to enterprise product, especially with backing from Amazon and Intel.
Microsoft HoloLens (Image Source: Microsoft)
One product aimed directly at the commercial market is Microsoft's HoloLens. Microsoft HoloLens is advertised to be capable of the enterprise AR features that Vuzix is currently just dreaming of. As a software company, some of the hardest parts of developing AR solutions would be on the home turf of Microsoft. Microsoft's HoloLens' "Development Edition" is currently sold out. This is in addition to the fact that Microsoft is likely to unveil a second generation of the HoloLens on February 24th. Microsoft has already won a $480 million contract to supply prototypes for AR systems to the US Army.
Apple is allegedly working on both a new 3D AR camera for the iPhone and an AR headset. Sony is working on AR solutions for business, using its own waveguide technology and "hologram optics". Not to mention an enterprise focused re-release of Google Glass. Epson has already brought its Moverio AR product to market. Epson looks ready to compete directly in some of the use-cases Vuzix has suggested, see this video.
Perhaps these pale in comparison to the hype and funding of secretive Magic Leap, an AR start-up that has raised $2.3B in funding. Magic Leap has made a lot of progress, but still has a long way to go. With that kind of funding involved, that should give you an idea of the challenges in making the hype of AR a reality.
Conclusion
Whether we like it or not, we are living in an era where tech giants and their heavily bankrolled start-up investments dominate tech innovation. In this new paradigm, a company like Vuzix never stood a chance. Could the Vuzix iWear Video headphones ever compete with the Facebook-backed (FB) Oculus Rift? Of course, not... that's why Vuzix discontinued its VR business. Oculus leaped ahead, solving some of the technical challenges of VR. We are short the stock for obvious reasons. We believe the company is worth roughly $20M, or basically worth the cash on the balance sheet. This equates to about an 80% discount to the current price.
At its current burn rate, Vuzix will run out of cash in about twelve months (if it is unable to raise more capital). Given the level of competition and sophistication in the market, we do not assign value to Vuzix's patents in our analysis. This makes sense to us given what North was able to accomplish in such a short amount of time.
In the coming wave of new smartglasses and AR products, we believe Vuzix will ultimately end up like the vast majority of Forte Technologies' long-gone VR competitors from the 1990s.
(Image Source: PC Mag)
