Vuzix Corporation — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; filed August 15, 2011. Unaudited consolidated results. Vuzix develops and sells video eyewear and defense products and provides engineering services.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $2.329 million | $1.915 million | $6.402 million | $3.977 million |
| Gross profit | $1.077 million | $0.393 million | $2.774 million | $0.953 million |
| Gross margin | 46.2% | 20.5% | 43.3% | 23.9% |
| Operating loss | $0.623 million | $1.286 million | $0.752 million | $2.697 million |
| Net loss | $0.928 million | $1.386 million | $1.348 million | $2.894 million |
| Loss per share | $0.0035 | $0.0053 | $0.0051 | $0.0110 |
Q2 revenue increased 21.6%; first-half revenue rose 61.0%. Higher defense-product and engineering-service sales more than offset lower consumer video-eyewear sales. Defense products generated $4.184 million, or 65.4% of first-half sales; consumer video eyewear sales fell to $1.367 million from $2.228 million. Engineering-services sales increased to $0.850 million from $0.138 million. Management attributed improved gross margins mainly to engineering work and higher-margin augmented-reality eyewear.
Operating expenses were $1.700 million in Q2, versus $1.678 million a year earlier; first-half expenses were $3.526 million versus $3.649 million. First-half other expense increased to $0.575 million from $0.192 million, mainly due to interest on senior debt and $0.125 million of debt-discount amortization.
Cash, debt and liquidity
- Cash fell to $639,376 at June 30 from $2.637 million at year-end. First-half operating cash use was $1.769 million, investing cash use $0.204 million, and financing cash use $0.024 million.
- Current assets were $5.719 million and current liabilities $6.295 million, a roughly $0.575 million working-capital deficit. Total liabilities were $11.656 million; stockholders’ equity was negative $4.621 million.
- Debt included a $4.240 million convertible senior secured term loan carrying 12% interest, plus other notes and deferred trade payables. The senior lender deferred $240,000 of June interest and added it to principal. The loan requires monthly principal payments beginning January 2012.
- The company had a $2 million accounts-receivable-based bank facility, with $450,000 drawn and $287,000 reported available. Borrowing capacity depends on eligible receivables; the facility matures March 2013.
- Both the bank and senior lender waived Q2 EBITDA covenant noncompliance. Management cautioned that further covenant breaches could require additional waivers, which are not assured.
Changes, outlook and risks
Management reported $3.8 million of open defense-product and engineering orders, most expected to be fulfilled by year-end. It expected the Wrap 1200 and an enhanced Tac-Eye product to launch in the second half of 2011. The first HD video-eyewear product was targeted for the second half of 2012, subject to working capital. Consumer orders could be pressured by delayed product introductions, weak visibility, economic conditions in Japan and the UK, and customers waiting for new models.
The filing reiterates substantial doubt about Vuzix’s ability to continue as a going concern. The company has recurring operating losses, limited cash and dependence on financing, customer deposits and supplier credit. Management said existing working capital might not fund planned operations through December 31, 2011 without achieving its operating plan, obtaining additional financing, or reducing or deferring spending. Its 2011 sales, margin and cash-flow forecasts—and the associated EBITDA covenant targets—are not assured.
Management also reported ineffective disclosure controls and a material weakness in internal control over financial reporting. Identified issues included the financial close and reporting process, segregation of duties, subsidiary monitoring, inventory controls, warranty reserves, intangible-asset impairment assessments, and formal control procedures. No material legal proceedings were reported.
Important facts for investors to verify
- Whether cash generation, sales and margins met management’s forecasts and whether liquidity was sufficient beyond 2011.
- Actual availability under the receivables-based credit line and compliance with asset-coverage and EBITDA covenants; whether lenders granted any further waivers.
- Conversion of the reported $3.8 million order backlog into timely shipments, revenue and cash receipts.
- Timing and commercial performance of the Wrap 1200, enhanced Tac-Eye and planned HD product launches, including the funding available for development and tooling.
- Progress in remediating the material weaknesses in financial reporting and inventory, warranty and subsidiary controls.