Vuzix Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2012; filed November 19, 2012. Vuzix designs, manufactures and sells Video Eyewear and provides engineering services. Following the June 2012 sale of its Tactical Display Group (TDG) assets, the company is focused primarily on consumer, commercial and entertainment markets.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $756,495 | $1,241,134 | $2,517,222 | $2,917,829 |
| Gross profit | $198,845 | $238,791 | $736,929 | $627,762 |
| Gross margin | 26% | 19% | 29% | 22% |
| Operating loss from continuing operations | $(982,262) | $(1,208,497) | $(2,939,987) | $(3,756,304) |
| Net income (loss) | $(1,181,079) | $(920,553) | $1,738,937 | $(2,268,399) |
Q3 revenue fell 39%, while nine-month revenue fell 14%. Consumer Video Eyewear sales declined 43% in Q3 and 12% for the nine-month period; management attributed the declines largely to limited working capital and inability to obtain components to meet demand. Engineering-services revenue also declined, reflecting completed programs and the wind-down of general defense work.
Gross margin improved, which management attributed to a sales mix weighted toward higher-margin consumer and augmented-reality products. Operating expenses declined year over year, including lower R&D and selling, marketing and administrative costs. Nine-month net income includes a $5.84 million gain on the TDG asset sale; continuing operations remained loss-making. Q3 included a $65,056 loss related to disposal adjustments and transaction costs.
Cash, liquidity and debt
- Cash was $171,574 at September 30, 2012, down from $417,976 at December 31, 2011.
- Current assets were $1.24 million and current liabilities $3.53 million, leaving a $2.29 million working-capital deficiency, improved from $6.05 million at year-end 2011.
- Operating cash outflow for the first nine months was $2.51 million. Investing activities provided $7.30 million, primarily from the TDG sale; financing activities used $5.04 million, mainly for debt repayment. Cash decreased $246,402 overall.
- Total liabilities were $7.33 million. Long-term debt, net of discount, was $2.82 million, of which $887,222 was classified as current; long-term accrued interest was $799,451. The company had no bank line of credit at quarter-end.
- The TDG sale generated $8,345,793 at closing, net of adjustments, with up to $2.5 million additional contingent consideration tied to revenue targets. Vuzix used sale proceeds to repay $4.45 million of senior debt and make other creditor payments; other lenders deferred certain payments until July 2013.
Material changes, outlook and risks
- Asset sale and strategy: Vuzix sold and licensed TDG assets and discontinued its direct military, defense and security product business. TDG became the exclusive reseller of Vuzix products to those markets, subject to stated exceptions. Vuzix retained a royalty-free license for non-defense uses of transferred intellectual property and may continue certain waveguide-related defense engineering and development work. The company cautioned it may not replace the revenue lost from the sold business.
- Default and going concern: Vuzix reported a senior-lender covenant default as of September 30 and said it missed a required principal payment of approximately $51,600 due October 15. It was seeking a waiver or forbearance, but none had been obtained as of the filing. The lender could accelerate amounts due or foreclose on collateral covering substantially all company assets. Management and the auditor identified substantial doubt about the company’s ability to continue as a going concern.
- Funding outlook: Management said existing working capital might not fund planned expenses, capital expenditures and working-capital needs through December 31, 2012 without additional cash or significant spending reductions. It planned to pursue financing and potential asset sales, manage inventory and costs, emphasize higher-margin products, and defer some R&D and product introductions. No assurance was given that financing or a replacement credit facility would be available.
- Controls: Management concluded disclosure controls were ineffective at September 30, 2012. Material weaknesses included financial close and reporting, segregation of duties, subsidiary monitoring, inventory controls, and internal-control policies and risk assessment. Remediation was incomplete.
- Litigation: Abarta, LLC filed a patent-infringement complaint on October 23, 2012 seeking at least a reasonable royalty. Vuzix disputed the allegations and said it intended to defend the case.
- Other unusual items: Nine-month results included a $74,072 write-off of employee subscription receivables, $48,158 in relocation expenses, and $9,268 in patent and trademark impairment charges.
Important facts for investors to verify
- Whether the senior lender granted a waiver or forbearance, and the status of the missed payment, covenant default and potential enforcement remedies.
- Whether Vuzix secured new financing or a replacement working-capital facility, and whether its cash runway and going-concern position improved.
- Whether component availability, product sales and operating cash flow recovered sufficiently to meet demand and fund operations.
- Whether TDG met the revenue milestones for contingent consideration and whether the company replaced revenue lost from the asset sale.
- The progress and financial implications of the Abarta litigation and remediation of the disclosed internal-control weaknesses.