Vuzix Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance-sheet comparisons are against December 31, 2012. The filing is unaudited. Vuzix designs and sells wearable video-display products and related engineering services. Results are not directly comparable with 2012 because its Tactical Display Group (TDG) business was sold in June 2012 and is presented as discontinued operations.
Financial performance
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Revenue | $739,184 | $1,110,041 |
| Gross profit / margin | $401,797 / approximately 54% | $359,083 / approximately 32% |
| Operating expenses | $1,107,472 | $1,309,730 |
| Loss from continuing operations | $(936,298) | $(1,067,592) |
| Net loss | $(936,298), or $(0.26) per share | $(844,483), or $(0.24) per share |
| Cash used in operating activities | $(259,003) | Cash provided: $294,219 |
Revenue fell 33%, reflecting limited working capital that constrained component purchases and product availability, and the completion of defense-related engineering programs. Gross margin improved as sales mix shifted toward higher-margin Video Eyewear models. Research and development rose 28% to $317,695, primarily to prepare the M100 smart glasses for a planned second-half 2013 release. Selling and marketing and general and administrative expenses declined 23% and 26%, respectively. Net loss was higher than in 2012 despite a smaller continuing-operations loss, in part because the prior-year quarter included $223,109 of income from discontinued operations.
Financial position and liquidity
- Cash was $532,426, up from $66,554 at year-end. Current assets were $1.71 million and current liabilities were $6.60 million, leaving a $4.88 million working-capital deficit, worse than the $3.94 million deficit at December 31, 2012.
- Total liabilities were $10.14 million; stockholders’ deficit was $7.06 million. Accounts payable were $3.20 million. Current and long-term portions of debt were $1.28 million and $1.68 million, respectively; these figures exclude other obligations such as notes payable and accrued interest.
- Cash from financing was $752,047, primarily reflecting $800,000 of convertible-debenture proceeds and $250,304 of note proceeds, partly offset by debt repayments and issuance costs. Investing activities used $27,172.
- Management stated that existing working capital might not fund planned operations through December 31, 2013 without additional financing or substantial spending reductions. The filing identifies substantial doubt about Vuzix’s ability to continue as a going concern.
Debt, financing and material developments
- Vuzix reported default under its LC Capital senior secured loan, including failure to meet a minimum-cash covenant and missed principal and interest payments. At March 31, overdue principal was $309,562 and accrued interest was $26,862. The filing says the lender could accelerate the debt and foreclose on collateral comprising substantially all company assets; waiver or forbearance negotiations had not produced an agreement.
- In March, Vuzix issued an $800,000 senior secured convertible debenture bearing 16% interest, convertible at $4.29 per share, with warrants and periodic redemptions beginning in 2014. The filing describes the transaction date inconsistently in different sections; investors should verify the definitive transaction documents.
- Management planned a public stock offering of up to $15 million and said certain lenders had agreed, subject to the offering, to convert debt into common stock. Neither the offering nor the debt conversions were assured. Potential financing could dilute existing shareholders.
- Vuzix sold the TDG assets in 2012 for $8.35 million at closing, with up to $2.5 million of contingent additional consideration dependent on revenue targets. The sale ended direct sales of certain military products and defense engineering services, reducing a prior source of revenue and cash flow.
Outlook, risks and other matters
- Management’s plans included pursuing financing, controlling working capital and expenses, emphasizing higher-margin products, and developing smart glasses, waveguide and display technologies. It cautioned that financing might not be available and that spending cuts, operational curtailments or asset sales could be necessary.
- Key risks include the severe working-capital deficit, continuing losses, senior-lender default and enforcement risk, dependence on external financing and supplier credit, reduced revenue following the TDG sale, competition and rapid technology changes, and the ability to develop and commercialize new products.
- Disclosure controls were deemed ineffective as of March 31, 2013. Material weaknesses remained in financial close and reporting, segregation of duties, subsidiary monitoring, inventory controls, and documented internal-control and risk-assessment procedures.
- After quarter-end, Vuzix reported settling the Abarta patent complaint under a confidential license agreement. A TDG lawsuit was dismissed on May 7, 2013, though TDG could pursue claims through arbitration. The filing reported no other pending litigation.
Important facts for investors to verify
- Whether Vuzix obtained the proposed offering or other financing, and whether any conditional debt conversions occurred.
- Whether LC Capital granted a waiver or forbearance, the current amount in default, and any acceleration or collateral-enforcement developments.
- Actual cash runway, working-capital needs, and progress toward reducing operating cash burn.
- Product availability, sales and margins—particularly the M100 launch—and whether new products can replace revenue lost through the TDG sale.
- Whether the reported internal-control weaknesses were remediated, and the status of any TDG arbitration claims or contingent sale consideration.