Business context and reporting period
Vuzix Corporation’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2013. The company designs and sells wearable display products and provides engineering services. Results are presented after the 2012 sale of its Tactical Display Group assets; that business is classified as discontinued operations. Per-share and share figures reflect a 1-for-75 reverse stock split effective February 6, 2013.
Financial performance and position
| Metric | Three months ended June 30, 2013 | Six months ended June 30, 2013 |
|---|---|---|
| Revenue | $700,195, up 7.6% year over year | $1,439,378, down 18% year over year |
| Gross profit / margin | $293,573 / 42%, versus $179,098 / 28% | $695,371 / 48%, versus $538,181 / 30% |
| Operating loss | $1,107,871, versus $1,007,029 | $1,813,547, versus $1,957,628 |
| Net income (loss) | $(1,656,736), versus $3,764,598 income | $(2,593,034), versus $2,920,115 income |
| Basic loss per share | $(0.47) | $(0.73) |
| Operating cash flow | $(738,789) used in the six-month period |
Quarterly product sales fell 13% to $511,861, while engineering services revenue rose to $188,334 from $60,000. For the first half, product sales fell 26% to $1,120,521; engineering services revenue increased to $318,857. Management attributed constrained product sales to limited working capital and component shortages. Higher gross margins reflected a sales mix weighted toward higher-margin products.
Second-quarter R&D expense increased 90% to $421,026; first-half R&D increased 57% to $738,721, primarily to prepare the M100 smart glasses for planned fourth-quarter 2013 release. Six-month other expense rose to $762,550, including a $294,548 derivative valuation loss, greater interest expense, and debt-discount amortization.
At June 30, cash was $80,922. Current assets of $1,217,613 versus current liabilities of $7,947,988 resulted in a $6,730,375 working-capital deficit, compared with $3,940,974 at year-end 2012. Total liabilities were $11,193,825 and stockholders’ deficit was $8,697,301. Accounts payable were $3,512,203. The company reported $3,001,448 of long-term debt before its current-portion classification, in addition to notes payable and its line of credit. Cash increased by $14,368 during the first half.
Material changes and unusual items
- Prior-period net income included a $5,902,663 gain on the TDG asset sale and discontinued-operation results. The 2013 period had no such gain; comparisons of net income therefore do not represent comparable continuing-business performance.
- The company issued an $800,000 secured convertible debenture in March at 16% interest. Its warrants were recorded as a derivative liability, remeasured at $915,560 at quarter-end, producing a $294,548 six-month loss.
- At June 30, the company was in default on senior secured debt, had failed a minimum-cash covenant, and was behind $464,343 in principal and $52,815 in interest payments. Management disclosed substantial doubt about its ability to continue as a going concern.
- After quarter-end, on August 5, Vuzix completed a public offering of 4,250,000 common shares and warrants for gross proceeds of $8,050,000, before offering expenses. The warrants cover up to 4,250,000 shares, are immediately exercisable at $2.25, and expire in five years. The filing says secured debt defaults were cured through repayment or conversion and that the financing improved liquidity. As of August 14, 9,541,153 common shares were outstanding.
Outlook, risks and controls
Management said the offering was expected to fund its current operating plan, including commercialization of M100 smart glasses, VFX720 products and waveguide technologies, repayment of approximately $2,025,000 of debt, and working capital. The company still needed significant growth to become profitable and cash-flow self-sustaining. Management identified risks including product commercialization and market acceptance, competition and rapid technology change, supplier and manufacturing constraints, customer order volatility, working-capital needs, and possible future financing and dilution. It also contemplated inventory management, emphasis on higher-margin products, and possible R&D reductions or delayed launches if needed. No formal financial guidance was provided.
Management reported disclosure controls were ineffective as of June 30, 2013, with unremediated material weaknesses involving financial close and reporting, segregation of duties, subsidiary monitoring, inventory controls, and risk assessment. The filing reported no pending litigation.
Important facts for investors to verify
- Whether post-quarter financing proceeds and debt repayments/conversions provide adequate liquidity, and whether the company can meet remaining obligations.
- Execution, customer demand, production capacity, and margins for M100, VFX720, and waveguide products, including the planned M100 launch timing.
- The effect of the TDG sale on recurring revenue and the company’s ability to replace the lost business.
- The exact amounts of debt and accrued compensation converted at the offering: the filing gives differing figures in its subsequent-events note and MD&A. Reconcile these amounts against final transaction disclosures.
- The cash-flow comparison for first-half 2012 is inconsistent within the filing: the cash-flow statement reports $(1,318,367) used in operations, while MD&A cites $(1,272,451). Confirm the correct comparative figure.
- Progress in remediating the disclosed material weaknesses and any implications for future reporting reliability.