Vuzix Corporation — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; unaudited consolidated results. Filed November 18, 2011.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $2.84 million | $2.73 million | $9.25 million | $6.70 million |
| Gross profit / margin | $1.08 million / 38.1% | $0.78 million / 28.6% | $3.86 million / 41.7% | $1.73 million / 25.9% |
| Operating loss | $(0.62) million | $(1.06) million | $(1.37) million | $(3.76) million |
| Net loss | $(0.92) million | $(1.19) million | $(2.27) million | $(4.08) million |
| Loss per share | $(0.0035) | $(0.0045) | $(0.0086) | $(0.0155) |
Q3 revenue rose 4.3%; nine-month revenue rose 37.9%. Nine-month defense product sales grew 98.5% to $5.63 million, while consumer video eyewear sales fell to $2.36 million from $3.25 million. Engineering services revenue more than doubled for the nine-month period, to $1.26 million. Management attributed improved gross margins principally to a larger share of higher-margin defense products and augmented-reality eyewear.
Interest and other expense was $0.30 million in Q3 and $0.87 million for the first nine months, up from $0.12 million and $0.31 million, respectively. The increase reflected interest on senior debt and amortization of its debt discount.
Cash, liquidity and debt
- Cash declined to $412,617 at September 30, 2011 from $2.64 million at December 31, 2010. Nine-month operating cash use was $1.55 million; investing cash use was $0.53 million; financing cash use was $0.15 million.
- Current assets were $5.38 million and current liabilities $10.49 million, producing negative working capital of $5.11 million. Stockholders’ equity was negative $5.45 million; accumulated deficit was $24.86 million.
- The company reported $452,081 drawn on its receivables-based bank line and stated $492,505 remained available, subject to borrowing-base eligibility. The facility’s maximum commitment is $2 million.
- Senior secured term debt, net of discount, totaled $4.24 million; $5.03 million of total long-term debt was classified as current, largely because of covenant default. Senior-loan principal and accrued interest were reported at $4.37 million. The filing’s detailed debt table should be consulted for the full debt composition.
Changes, outlook and principal risks
Losses narrowed compared with 2010, while sales and gross margins improved, particularly over the nine-month period. However, cash fell sharply and working capital moved from positive $1.18 million at year-end 2010 to negative $5.11 million.
Vuzix was out of compliance with EBITDA covenants under both its senior secured loan and bank credit facility at September 30. Waivers or forbearance had been requested but not obtained as of the filing. The lenders could accelerate repayment and enforce security interests, including against company assets. The senior-loan default also triggered a default under the bank line. Management cited substantial doubt about the company’s ability to continue as a going concern and said additional financing, profitable operations, or other liquidity measures were necessary.
Management reported $2.9 million in open defense-product and engineering-service orders, most expected to be fulfilled by mid-February 2012. It expected delayed Wrap 1200 introductions and weak consumer order visibility to hurt Q4 2011 consumer sales. The company planned to emphasize higher-margin defense products, reduce costs and capital spending, seek financing, and market certain assets or product lines for sale. It did not expect to introduce its first HD video eyewear before the second half of 2012; timing depended on working capital, tooling and display availability. No quantified earnings or revenue guidance was provided.
Other notable matters: management concluded disclosure controls and internal control over financial reporting were ineffective, citing material weaknesses in the close and reporting process, segregation of duties, subsidiary monitoring, inventory, warranty reserves, intangible-asset impairment assessments, and formal control procedures. The filing reported no material pending legal proceedings.
Investor verification priorities
- Whether both lenders subsequently granted covenant waivers or forbearance, and whether any remedies or acceleration followed.
- Cash runway, eligible receivables and actual availability under the bank line; ability to meet near-term debt and operating obligations.
- Conversion of the reported $2.9 million order backlog into shipments, revenue and cash collections, and actual Q4 consumer demand.
- Progress on financing, asset-sale plans, product launches and cost reductions, including potential dilution or operational cuts.
- Remediation of the disclosed material weaknesses and the reliability of inventory, warranty and financial-reporting estimates.