Vuzix - Shareholders should be thrilled (VUZI)

On Wednesday January 24th 2018 Vuzix announced a share offering that raised $30 million for the company after the market had closed.  If you missed it here is a link to the news:

https://finance.yahoo.com/news/vuzix-announces-30-000-000-231500081.html

Buyers had pushed shares of VUZI markedly higher before the news came out, paying as much as $11.40 per before the PPS settled at $10.80 at the closing bell on Wednesday.  One day later the PPS traded as low as $9.45 before recovering a bit to close at $9.75 for a one day drop of almost 10%.

The perplexing question is obvious....Why?  Why did the stock sell off causing the drop?  I can only assume that a significant number of shareholders were unhappy with the dilution.  

That suggests to me that a lot of investors failed to do adequate research before buying their shares.  In my opinion those who've done their research and due diligence before investing in Vuzix were not surprised by the dilution.  In fact they should have expected it.

Obviously researching a potential long term investment involves a lot more than simply reading over recent press releases.  Due Diligence isn't just scanning a company profile put out by some IR outfit that's being paid to promote a company. 

A bullish sounding PR may bring a company to an investor's attention.  A sharp looking video presentation might spur some interest.  Experienced investors know that PRs often talk up the potential for the future, but forward looking statements are not material representations of fact and cannot be relied upon.  Companies hired to attract investors will punctuate the positives, while either glossing over or completely ignoring any of the negatives.

Real research for me involves looking at a company's SEC filings, perhaps even researching the business background of key executives like the CEO.  Knowledge of the industry or space is obviously helpful.  If a brewing company is planning a big expansion into some place like Saudi Arabia, it might help to know that the Saudi kingdom has a ban on alcohol.

One quick note before I continue.  

I am writing this blog posting from the perspective of an investor who is looking for long term success in a company.  I'm not approaching this from the point of view of traders simply looking to scalp shares at a profit.  For those who play momentum, or who like to swing back and forth between long and short positions....you should probably stop reading right now.

Frankly in depth research is likely a waste of time for those simply looking to buy the dips and sell the rips.

Those looking at Vuzix as a buy and hold long term investment should already be aware of the fundamental realities.  The last 10Q came out November 9th just passed and reported the results of the 3rd quarter up to September 30th 2017.  Here's the link:  

http://secfilings.nasdaq.com/filingFrameset.asp?FilingID=12372885&RcvdDate=11/9/2017&CoName=VUZIX%20CORP&FormType=10-Q&View=html

Simple factual data from that filing is there for anyone who takes the time to look.

• Shares totalled 22,203,911 as of Sept 30/17 up from the 20,674,742 issued as of June 30/17
• Up to Sept 30/17 the accumulated deficit was $90,592,988
• Loss attributable to common stockholders came in at ($5,937,563) for the quarter
• Cash and cash equivalents totalled $8,677,341 as of Sept 30/17

Basically this paints a pretty clear picture for me.  Vuzix is a cash poor company with insufficient revenues to cover operating expenses.   This isn't a Google or Apple with billions of dollars on the balance sheet to spend on product development.  

Those who've done their homework on Vuzix already know that as of May 15th 2013, in the first 10Q after a 1:75 share consolidation, the company reported only 3,536,586 shares outstanding.  So its clear how the company funds operations, by share offerings.  

From Sept 30th 2017 to present I haven't seen any news about actual sales.  Yes there's been lots of reports about hopes of building relationships and about deals that "may" happen.  But anything that "may" happen...its reasonable to think they also "may not".  

Given that the company burned through almost $6 million in the three months leading up to Sept 30th, I think its reasonable to assume they've burned through at least that much in the 3+ months since Sept 30th, and probably more.  That would have meant that without further dilution the cash available would have been getting very low.  

Now they've raised $30 million with this most recent offering, on top of the $12.5 million they just raised in December 2017.  I don't have a PHD in advanced mathematics, but I make that to be a total of $42.5 million raised in a little over 1 month.  

That is pretty impressive in my books.  Even if they start losing $10 million every 3 months going forward they now have enough money raised to last another 12 months.  Shareholders with a long term view who are willing to take on the obvious risks should not have been surprised.   

Disclosure

I own put contracts, which is a way of playing the short side.  Obviously that means my overall opinion is bearish.  With that being said with all the money they've been able to raise Vuzix is going to be around for a while yet, and if they actually do start realizing signficant sales they could even become profitable. 

If they don't?  Eventually I expect the pool of investors willing to risk money on forward looking promise to shrink.  

Will Vuzix hold its gains this time? (VUZI)

I first wrote about Vuzix back in September of 2016 when it first popped onto my radar thanks to a lot of chatter on stock social media site Stock Twits where I participate with the name "growacet".

Vuzix - Time machine back to the tech bubble?

Back in September of 2016 shares were trading in and around the $9 area.  Now?  It looks like VUZI will be trading somewhere around $10 today (Wednesday Jan. 24th 2018). In between its been quite the roller coaster as evidenced by the chart below covering that period.

That's quite the roller coaster.  From up around $9 in September of 2016, then like a yo-yo on a downward escalator all the way below $5 by early November of 2017.  However while it took over a year for the PPS to fall so steadily, its only taken a couple of months to erase those losses, with VUZI now making new highs.

The big question though....Will it hold this time?

More importantly, especially for those who might be considering paying $10 or so per share at current levels.....Could the PPS climb even higher?  In fairness I have to allow that VUZI could very well not just maintain its current valuation, but that it could climb substantially higher.  

Do I think it will?  I do not know for certain, my time machine still isn't working, but I do consider it a very risky proposition.  Why risky?  Because of Vuzix's long history of wild price moves and poor bottom line performance.  

I know that some will look at the PPS more than doubling in less than 3 months as "PROOF" that the future must be bright, because for them, the PPS confirms it.  That was the same attitude that led many to buy, hold and to keep buying all manner of dot com disasters and money losing tech stocks in the late 1990's.  People saw their shares going up, Up, UP and thought the party would never end.  

The saddest cases rode companies like Pets.com, Digiscents and hundreds of others all the way to nothing.

Pumpers and promoters love to point to the Amazons, the Googles and Netflixes while conveniently leaving out the Gameflixes, Virtual Keyboards, Nortels, Worldcoms and countless others.  I would submit that for every Amazon and Microsoft that were huge winners, that there were hundreds of others that crashed and burned.  

I think it might be instructive to take a look at what has perhaps caused this sudden and rapid increase in Vuzix's valuation.  It doesn't seem to me it has anything to do with their last reported quarterly performance when they badly missed both revenue and earnings targets.  In that 10Q the compay reported losses of about $5.9 million for the three months ending September 30th 2017.

http://secfilings.nasdaq.com/filingFrameset.asp?FilingID=12372885&RcvdDate=11/9/2017&CoName=VUZIX%20CORP&FormType=10-Q&View=html

That is of course old information, over 3 months old now.  

As I've written many times on this blog before, with speculative stocks fundamentals often don't matter.  What does matter is the expectations of investors going forward.  If stocks were valued strictly on bottom line performance then Tesla's stock wouldn't be trading around $350 per share.  Tesla shareholders are betting that the electronic car maker will be an automotive giant.  If they're wrong, and Elon Musk's great adventure crashes and burns, oh well.  

So what's happened to cause investors to be bullish about Vuzix's future?  While I haven't seen any news with hard numbers attached there's been no shortage of Press Releases eminating from the company.   Since reporting the 3rd quarter numbers I count 24 releases on the company's website.

That's 24 PRs in less than 3 months, which comes to 2 or 3 per week.  Shareholderss who want or need constant communication are obviously happy.  That's far too many to disect each and every one, so I'll try to hit the highlights.

A day after reporting their 3rd quarter numbers Vuzix announced that they'd won CES 4 awards for their newest Blade product.  That might seem impressive, however its the same number of awards that the company won in 2017 and still their revenues were insufficient to forestall further dilution.

https://ir.vuzix.com/press-releases/detail/1524/vuzix-awarded-four-ces-2017-innovation-awards-for-its

After a number of releases about vairious shows, new hires and development deals news came out that seems to have had a big impact, a 3 year supply agreement with Toshiba.  

https://ir.vuzix.com/press-releases/detail/1597/vuzix-signs-3-year-supply-agreement-with-toshiba-for-custom

I find this PR to be very "cloudy" and replete with language that is....at best fuzzy.  Here's an example:

Any such sales will be made pursuant to purchase orders which Toshiba may submit in its discretion. (* denotes my emphasis)

What the PR lacks is what I consider definitive language.  After reading it, its hard to determine if this agreement will result in any meaningful revenue for Vuzix at all.  If Toshiba "may" submit purchase orders, then it stands to reason that they also "may not".  Later it says this:

Pursuant to the supply agreement, the Company agreed to sell such product exclusively to Toshiba for a period of up to 12 months, *subject to Toshiba's submitting a minimum of $5,000,000 of purchase orders. (* denotes my emphasis)

So does that mean Toshiba will be submitting orders for at least $5 million?  Not to me it doesn't.  To these eyes it suggests that this deal is contingent upon Toshiba submitting a minimum of $5 million in purchase orders.  If they fail to order $5 million in product over the ensuing 12 months, what then?

The latest news, and what is likely the catalyst for the current price surge over $10 came out yesterday, January 23rd.  It concerns an apparently successful pilot program with H-E-B.  

https://ir.vuzix.com/press-releases/detail/1524/vuzix-awarded-four-ces-2017-innovation-awards-for-its

Why do I say "apparently successful"?  Different people will obviously have differing views on what constitutes success.  Sometimes a professional sports team will lose a game, but the coach will declare the game a success regardless because he percieves some important objectives as having being met.  

For me success in business is about sales, and this PR says nothing about any orders.  The PR does end with Vuzix's COO saying he's looking forward to expanding the relationship between Vuzix and H-E-B.  But that is of course forward looking and safe harbor protected.  That's not to say there won't be large orders coming from this company, but if there aren't....oh well.  

So What's the Bottom Line - Full Disclosure

Okay, so I've just gone over a lot of old news, but investing is about the future as everyone knows.  Will shares of VUZI hold their current valuation?  Will they climb even higher?  Will it be a repeat of September 2016 all over again with the PPS crashing downward?  

It could be any of the above quite frankly.  I have a position on the short side, but I'm doing my best to not let that cloud my judgement and turn a blind eye to the potential for the PPS to climb.  

My ultimate opinion hasn't changed.  It is my view that Vuzix's buisness is not sustainable for the long term.  But in the short to medium term, anything is possible because the company has been very successful at attracting investors in spite of an ever increasing accumulated deficit and regular dilution to raise much needed cash.  

With the next filing I expect that bottom line performance will continue to show the company struggling with the bottom line, with more losses and an increase to that accumulated deficit.  But that may not matter.  Investors in the company may shrug it off as they did when the company reported losing almost $6 million for the 3 months ending September 30th.  

Vuzix employs a lot of IR promotional firms and they've been very successful at building a following for this company.  And if investors don't care about bottom line performance, then things can go nuts.  Many Nortel investors made a killing by selling when buyers were falling over each other, paying over $100 per share for that networking giant.  Those who held on right to the bitter end though watched big paper gains turn into large capital losses.

A final note on my playing the short side.  I'm not actually short any shares, I do not engage in borrowing shares and dumping them back into the market in hopes of buying them back cheaper for a profit.  I use the less risky form of playing the short side by buying put options.  Puts are a futures contract, and if the PPS for a stock falls before the contracts expire, then a buyer of Puts can make profits.  

Right now I am underwater, and that's okay....I only risked money that I could afford to lose.  They expire in April, and while I'm obviously hopeful that the PPS erodes before then, I know that there's every possibility the PPS could hold where it is or climb. 

I'll say one thing for Vuzix, its never dull.  Comments of course are welcome, just no profanity.  My ultimate wish is for retail investors to make money, whether long or short or with puts or calls.  But its a zero sum game, you can't have shares and the gains they've made too...the buyer gets shares, the seller gets cold hard cash.  I hope readers make bank, and remember....nobody ever went broke from taking profits.

Cheers. 

Want to understand Bitcoin? How well do you understand money?

Like a lot of people I have been trying to wrap my head around crypto currencies like Bitcoin and terms like Blockchain.  I think the concept is perhaps more easily grasped by people who've grown up in the Internet age than for a dinosaur like me whose first introduction to a machine for doing simple arithmetic was an abacus in grade school.  

No I don't mean Biblical times, I'm not THAT OLD.  There were adding machines around when I was a kid, but they were expensive and cumbersome and they didn't run on battery power.  

In trying to understand Bitcoin, Ethereum and the rest, I think its helpful if you take into consideration the history of money.  Understanding the evolution of currency won't help with the more technical aspects, but I think it helps explain why digital currencies have caught fire.  

In broad strokes money has evolved from coins, to paper, to digital transactions and now to digitized cryptocurrencies.  And with each step in this evolution there have been dinosaurs who prefer the older and, (for them) more trusted forms.  

When paper money was widely introduced in the 15h and 16th centuries I have no doubt there were some who preferred dealing with a coin containing some precious metal like silver or gold, something with hard and tangible value.  But over time paper money came to be accepted.

Paper money for hundreds of years was backed by precious metals, at one time there were "silver certificates" in circulation, pieces of paper backed by precious metals.  Then the so called "gold standard" was abandoned in most of the developed world and was replaced with what essentially are "fiat currencies".  

In a nutshell "fiat" means that the value of money is based on perception, or belief.  In turn that affects the normal market dynamics of supply and demand.  Why is the US Dollar worth more than the Canadian Dollar?  Because there is more demand for US Greenbacks than for Canadian Loonies.  And now we live in a world where physical money is used less and less, replaced by debit cards, credit cards and people using their cell phones with services like Apple Pay.   

That's a lot of preamble, but it shows money's evolution:

• From something of hard and tangible value, a coin made of gold, silver, copper.
• To a piece of paper leveraged against metals like gold and silver.
• To simply a piece of paper leveraged against nothing.  
• To a world where people transact thousands of dollars worth of monetary exchanges without ever once exchanging any physical currency.  

And now we have crypto currencies that literally do not exist in tangible form, they're digital.  

Alright alright....I can just hear my loyal readers (all three of them) saying:  "Thanks for the history lesson professor, you've told us what crypto currencies are not, now can you tell us what they are".

I can try, but understand I don't proclaim myself to be an expert, however I do think I have a decent enough handle on Bitcoin.

As I concluded at the end of that ham fisted history lesson, Bitcoin and the like are digital.  So it might help to understand them in terms of something else that is digital that pretty much everyone understand, digital pictures.  When you look at a picture on your smart phone you're looking at something that doesn't exist in physical form, its something that is written in digital code.  

Okay okay....I know what you're gonna say.  "Yeah the picture might be digital genius, but I can print it and hold the actual picture in my hand"!!  "How do I do that with Bitcoin"???

The short answer is, you can't.  Well, maybe.....but you might have to chop down a few redwoods for all the paper you're going to consume.  That's because each Bitcoin is line after line, after line after line after line, of encrypted code.  

That's what the blockchain is.  Everyone who touches the coin, every transaction and movement is included.  That's why the so called "mining" of Bitcoin is so expensive, it takes massive computing power and tons of electricity to extract these "coins".

Bitcoin miners all around the world, working as individuals or in teams are trying to unlock bitcoin by solving incredibly difficult puzzles.  I am not a computer programmer, so my explanation is going to fall short of a full and satisfactory explanation.  For those who want to understand beyond my layman's explanation, I'll direct you to investopedia's explanation here:

https://www.investopedia.com/tech/how-does-bitcoin-mining-work/

I am going to add just a bit more, about something else that is essential in the CryptoCurrency equation, something else that is intangible.  That other thing is TRUST.  

For older individuals like myself trusting digital currency is a hurdle.  I grew up getting an allowance, at the risk of dating myself I will tell you how much I got.  Once a week my father would give me a quarter, 25 cents.  He didn't use a smart phone, and there was no electronic transfer of 25 cents  into my account.  I would hold out my hand and be given a physical coin.

Things have evolved since then, I still like having actual physical money in my wallet, but I'm comfortable now paying my bills, my mortgage, and lots of other transactions without ever once touching any actual money.  Each month I transact thousands of dollars in economic activity without once having to hand over something that is physically real.  

The blockchain is what provides this trust for users of CryptoCurrencies like Bitcoin.  I do consider it a leap though for older individuals like myself.  But in another 10 or 20 years?  When debit cards were first introduced a lot of people said they wouldn't use them, and some still don't.  But the world is forever changing and evolving and I'm coming to the conclusion that things like Bitcoin are going to be adopted widely.

I'll have more to say on this later, especially about the market for stocks that are jumping on the CryptoCurrency BlockChain bandwagon. 

Glowpoint Inc - Buying the rumour (GLOW)

Glowpoint Inc is a stock that trades on the NYSE Amex.  I would never have heard of it were it not for a conversation last week with an acquaintance. Someone who travels on the periphery of some pretty deep pocketed and well known personalities, including some in the media.  

The rumour I heard is that Glowpoint may be looking to use its cloud based conferencing technology to get in on the digital currency bandwagon, specifically in the area of blockchain technology.

I don't know whether its true or not, but based on the chart and the increased trading of the past few months, I'm taking a flyer on this one.  

I haven't touched Bitcoin or any of the other digital currencies that have grabbed everyone's attention.  And if GLOW does end up moving into this sector it will be my first time investing in any stocks associated with the broader crypto-currency market.

I'm not concerned though, Riot Blockchain (RIOT) was reportedly a biotech company until a name change this past October.  This whole sector has heated up and there still aren't many publicly traded companies that have moved in. 

We shall see how it works out.