Vuzix Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013; filed November 19, 2013. Vuzix designs and sells wearable video displays and smart glasses, and develops related technologies. Results exclude its former Tactical Display Group (TDG), sold in June 2012 and presented as discontinued operations.
Financial performance
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | $338,816, down 55% from $756,495 | $1,778,195, down 29% from $2,517,222 |
| Gross profit / margin | $148,789 / 44%; prior year $198,845 / 26% | $844,160 / 47%; prior year $736,929 / 29% |
| Operating loss | $1,196,018, versus $982,262 | $3,009,564, versus $2,939,987 |
| Net income (loss) | $(1,856,700), versus $(1,181,079) | $(4,449,734), versus income of $1,738,937 |
| Basic loss per share | $(0.26), versus $(0.33) | $(0.93), versus income of $0.49 |
| Operating cash flow | Not separately reported for the quarter | $(2,854,498), versus $(2,505,632) |
Gross margin improved despite lower sales, which management attributed to a mix shift toward higher-margin Video Eyewear and augmented-reality products. Revenue weakness reflected limited working capital that constrained component purchases, as well as the loss of permitted defense-related engineering work after the TDG transaction. Research and development expense rose 76% in the quarter and 64% year to date, primarily to prepare the M100 smart glasses for launch.
Financial position and financing
- Cash was $2,569,135 at September 30, up from $66,554 at December 31, 2012. The increase was mainly funded by the August public offering.
- Current assets were $3,461,399 and current liabilities $3,697,174, a working-capital deficit of $235,775, improved from $3,940,974 at year-end 2012.
- Total liabilities were $12,526,647; stockholders’ deficit was $7,995,882. The balance sheet included an $8,576,160 long-term derivative liability related to warrants.
- Long-term debt, net of discount, was $319,797, of which $100,064 was current. Notes payable were $406,626; the bank line of credit had been repaid and had no balance at quarter-end.
- The August 5 offering raised $8,050,000 gross through the sale of 4,025,000 shares and warrants; offering costs were $1,633,641. The company also converted approximately $3.96 million of debt, accrued interest, and officer compensation into shares and warrants, and used offering proceeds to repay debt and fund operations and product development.
- Common shares outstanding rose to 9,541,153 from 3,536,865 at year-end 2012. Warrants outstanding totaled 7,207,075 at quarter-end.
Material changes and unusual items
- Year-to-date 2012 net income included a $5,837,607 gain on the TDG asset sale, partly offset by discontinued-operation losses. The 2013 comparison is therefore not solely a measure of underlying operating change.
- 2013 results included substantial noncash debt-discount and issuance-cost amortization/write-offs associated with early debt repayment: $592,970 in the third quarter and $639,989 year to date for senior debt discount amortization. These costs contributed to the increase in other expense.
- The $8,576,160 warrant derivative liability was measured using Level 3 valuation inputs. Its remeasurement produced a $259,426 gain in the quarter and a $35,122 loss year to date.
- The offering and related repayments cured prior debt defaults, according to management. However, the company continued to report operating losses and negative operating cash flow.
Outlook, risks, and controls
Management said the offering provided resources to pursue commercialization of M100 smart glasses, VFX720 video headphones, and waveguide and HD-display technologies. It said the company needed to grow significantly to become profitable and cash-flow self-sustaining within six months; this is a management objective, not a quantified revenue or earnings forecast. Management warned that if new products do not succeed, further financing may be needed and may not be available on acceptable terms, potentially requiring reduced development or commercialization efforts.
The filing states that substantial doubt about the company’s ability to continue as a going concern remained, citing recurring losses, cash needs, and reliance on external financing. Risks also include changing technology and competition, supplier and manufacturing constraints, customer order variability, dependence on new products to replace TDG-related business, possible shareholder dilution, and reliance on supplier credit and customer deposits. No pending legal proceedings were reported. Management concluded disclosure controls were ineffective at September 30, 2013; material weaknesses included financial close and reporting processes, segregation of duties, subsidiary monitoring, inventory controls, and risk assessment.
Important facts for investors to verify
- Whether M100, VFX720, and waveguide products achieve timely commercial acceptance and sufficient sales and margins to reduce cash burn.
- Cash runway and financing needs, given $2.85 million of operating cash use over nine months and management’s stated six-month path to self-sustaining cash flow.
- The terms, valuation assumptions, and potential dilution associated with the 7.2 million warrants and $8.6 million derivative liability.
- Debt maturity and repayment obligations, including officer/shareholder notes, and whether replacement operating credit is available.
- Progress in remediating the disclosed material weaknesses in internal control over financial reporting.