Vuzix Corp - Quarter Report: 2010 March (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
|
þ
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the Quarterly Period Ended March 31, 2010
OR
|
o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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Commission
file number 000-53846
(Exact
name of registrant as specified in its charter)
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Delaware
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04-3392453
|
|
State
or other jurisdiction of
incorporation
or organization
|
(I.R.S.
Employer
Identification
No.)
|
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75
Town Centre Drive
Rochester,
New York
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14623
|
|
(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code: (585) 359-5900
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to filing
requirements for the past 90 days. Yes þ No
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes o No
o
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company þ
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|||
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(Do not check if a smaller
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||||||
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reporting company)
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Indicate
by check mark whether the registrant is a shell company (as defined in rule
12b-2 of the Exchange Act). Yes o No þ
As of May
14, 2010, there were [263,600,274] shares of the registrant’s common stock
outstanding.
INDEX
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Page
No.
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||||
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Part
I – Financial Information
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||||
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Item 1.
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Consolidated
Financial Statements (Unaudited):
|
|||
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Consolidated
Balance Sheets — March 31, 2010 and December 31, 2009 (Unaudited)
12/31/09
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3
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|||
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Consolidated
Statements of Operations — For the Three Months Ended March 31, 2009
and 2010 (Unaudited)
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4
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|||
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Consolidated
Statement of Cash Flows — For the Three Months Ended March 31, 2009
and 2010 (Unaudited)
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5
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|||
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Notes
to Unaudited Condensed Consolidated Financial Statements
|
6
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|||
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Item 2.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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10
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||
| Item 3. |
Quantitative
and Qualitative Disclosures About Market Risk
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18
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||
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Item 4.
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Controls
and Procedures
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18
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||
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Part
II – Other Information
|
||||
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Item 1.
|
Legal
Proceedings
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18
|
||
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Item 1A.
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Risk
Factors
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18
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||
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Item 2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
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18
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||
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Item 3.
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Defaults
Upon Senior Securities
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19
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||
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Item 4.
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Reserved
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19
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||
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Item 5.
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Other
Information
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19
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||
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Item 6.
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Exhibits
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19
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||
|
Signatures
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20
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|||
2
Part
1: FINANCIAL INFORMATION
|
Item
1:
|
Condensed
Consolidated Financial
Statements
|
VUZIX
CORPORATION
CONSOLIDATED
BALANCE SHEETS
|
March 31,
|
December 31,
|
|||||||
|
2010
|
2009
|
|||||||
|
Current
Assets
|
||||||||
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Cash
and Cash Equivalents
|
$ | 202,700 | $ | 2,500,523 | ||||
|
Accounts
Receivable, Net
|
797,057 | 1,446,750 | ||||||
|
Inventories
|
3,068,424 | 2,959,636 | ||||||
|
Prepaid
Expenses and Other Assets
|
36,358 | 41,192 | ||||||
|
Total
Current Assets
|
4,104,539 | 6,948,101 | ||||||
|
Tooling
and Equipment, Net
|
636,871 | 701,368 | ||||||
|
Patents
and Trademarks, Net
|
777,871 | 759,356 | ||||||
|
Total
Assets
|
$ | 5,519,281 | $ | 8,408,825 | ||||
|
Current
Liabilities
|
||||||||
|
Accounts
Payable
|
$ | 3,181,492 | $ | 3,936,914 | ||||
|
Lines
of Credit
|
166,062 | 178,107 | ||||||
|
Current
Portion of Long-term Debt
|
215,500 | 715,500 | ||||||
|
Notes
Payable
|
— | 246,417 | ||||||
|
Current
Portion of Capital Leases
|
94,458 | 100,661 | ||||||
|
Current
Portion of Deferred Trade Payable
|
1,746,500 | — | ||||||
|
Customer
Deposits
|
194,928 | 170,671 | ||||||
|
Accrued
Interest
|
195,537 | 154,016 | ||||||
|
Accrued
Expenses
|
371,274 | 399,966 | ||||||
|
Income
Taxes Payable
|
875 | 3,592 | ||||||
|
Total
Current Liabilities
|
6,166,626 | 5,905,844 | ||||||
|
Long-Term
Liabilities
|
||||||||
|
Accrued
Compensation
|
495,096 | 445,096 | ||||||
|
Long
Term Portion of Long-Term Debt
|
209,208 | 209,208 | ||||||
|
Long
Term Portion of Trade Payables
|
— | 1,746,500 | ||||||
|
Long
Term Portion of Capital Leases
|
73,237 | 94,176 | ||||||
|
Accrued
Interest
|
351,491 | 338,226 | ||||||
|
Total
Long-Term Liabilities
|
1,129,032 | 2,833,206 | ||||||
|
Total
Liabilities
|
7,295,658 | 8,739,050 | ||||||
|
Stockholders’
Equity
|
||||||||
|
Preferred
Stock — $.001 Par Value, 500,000 Shares Authorized;
none issued
|
— | — | ||||||
|
Common
Stock — $.001 Par Value,
700,000,000 Shares Authorized; 263,600,274 Shares Issued
and Outstanding March 31 and December 31
|
263,600 | 263,600 | ||||||
|
Additional
Paid-in Capital
|
17,727,963 | 17,665,941 | ||||||
|
Accumulated
(Deficit)
|
(19,540,604 | ) | (18,032,430 | ) | ||||
|
Subscriptions
Receivable
|
(227,336 | ) | (227,336 | ) | ||||
|
Total
Stockholders’ Equity
|
(1,776,377 | ) | (330,225 | ) | ||||
|
Total
Liabilities and Stockholders’ Equity
|
$ | 5,519,281 | $ | 8,408,825 | ||||
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
3
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
|
Three Months Ended
|
||||||||
|
March 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Sales
of Products
|
$ | 1,968,824 | $ | 2,595,504 | ||||
|
Sales
of Engineering Services
|
93,135 | 448,490 | ||||||
|
Total
Sales
|
2,061,959 | 3,043,994 | ||||||
|
Cost
of Sales — Products
|
1,444,536 | 1,617,174 | ||||||
|
Cost
of Sales — Engineering Services
|
57,539 | 239,509 | ||||||
|
Total
Cost of Sales
|
1,502,075 | 1,856,683 | ||||||
|
Gross
Profit
|
559,884 | 1,187,311 | ||||||
|
Operating
Expenses:
|
||||||||
|
Research
and Development
|
494,000 | 502,011 | ||||||
|
Selling
and Marketing
|
617,186 | 449,266 | ||||||
|
General
and Administrative
|
749,664 | 478,253 | ||||||
|
Depreciation
and Amortization
|
110,266 | 138,834 | ||||||
|
Total
Operating Expenses
|
1,971,116 | 1,568,364 | ||||||
|
Loss
from Operations
|
(1,411,232 | ) | (381,053 | ) | ||||
|
Other
Income (Expense)
|
||||||||
|
Interest
and Other (Expense) Income
|
414 | — | ||||||
|
Foreign
Exchange Gain (Loss)
|
(5,174 | ) | (1,272 | ) | ||||
|
Interest
Expenses
|
(91,307 | ) | (65,376 | ) | ||||
|
Total
Other Income (Expense)
|
(96,067 | ) | (66,648 | ) | ||||
|
Loss
Before Provision for Income Taxes
|
(1,507,299 | ) | (447,701 | ) | ||||
|
Provision
for Income Taxes
|
875 | 888 | ||||||
|
Net
Loss
|
$ | (1,508,174 | ) | $ | (448,589 | ) | ||
|
Basic
and Diluted Loss per Share
|
$ | (0.0057 | ) | $ | (0.022 | ) | ||
|
Weighted-average
Shares Outstanding — Basic and Diluted
|
263,600,274 | 218,647,009 | ||||||
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
4
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
|
Three Months Ended
|
||||||||
|
March 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Cash
Flows from Operating Activities
|
||||||||
|
Net
Loss
|
$
|
(1,508,174
|
)
|
$
|
(448,589
|
)
|
||
|
Non-Cash
Adjustments
|
||||||||
|
Depreciation
and Amortization
|
110,266
|
138,834
|
||||||
|
Stock-Based
Compensation Expense
|
62,022
|
40,689
|
||||||
|
Non-Cash
Compensation
|
—
|
—
|
||||||
|
(Increase)
Decrease in Operating Assets
|
||||||||
|
Accounts
Receivable
|
649,693
|
451,092
|
||||||
|
Inventories
|
(108,788
|
)
|
(118,977
|
)
|
||||
|
Prepaid
Expenses and Other Assets
|
4,834
|
(26,060
|
)
|
|||||
|
Increase
(Decrease) in Operating Liabilities
|
||||||||
|
Accounts
Payable
|
(755,422
|
)
|
(414,504
|
)
|
||||
|
Accrued
Expenses
|
(28,692
|
)
|
34,284
|
|||||
|
Customer
Deposits
|
24,257
|
(400,836
|
)
|
|||||
|
Income
Taxes Payable
|
(2,717
|
)
|
(35,524
|
)
|
||||
|
Accrued
Compensation
|
50,000
|
—
|
||||||
|
Accrued
Interest
|
54,787
|
17,672
|
||||||
|
Net
Cash Flows Used in Operating Activities
|
(1,447,934
|
)
|
(761,919
|
)
|
||||
|
Cash
Flows from Investing Activities
|
||||||||
|
Purchases
of Tooling and Equipment
|
(29,549
|
)
|
(19,369
|
)
|
||||
|
Investments
in Patents and Trademarks
|
(34,736
|
)
|
(40,839
|
)
|
||||
|
Net
Cash Used in Investing Activities
|
(64,285
|
)
|
(60,208
|
)
|
||||
|
Cash
Flows from Financing Activities
|
||||||||
|
Net
Change in Lines of Credit
|
(12,045
|
)
|
(2,523
|
)
|
||||
|
Issuance
of Common Stock
|
—
|
300,000
|
||||||
|
Repayment
of Capital Leases
|
(27,142
|
)
|
(34,916
|
)
|
||||
|
Prepayment
of Notes Payable
|
(746,417
|
)
|
—
|
|||||
|
Repurchase
of Fractional Shares
|
—
|
(2
|
)
|
|||||
|
Net
Cash Flows Provided by Financing Activities
|
(785,604
|
)
|
262,559
|
|||||
|
Net
Increase (Decrease) in Cash and Cash Equivalents
|
(2,297,823
|
)
|
(559,568
|
)
|
||||
|
Cash
and Cash Equivalents — Beginning of Year
|
2,500,523
|
818,719
|
||||||
|
Cash
and Cash Equivalents — End of Year
|
$
|
202,700
|
$
|
259,151
|
||||
|
Supplemental
Disclosures
|
||||||||
|
Interest
Paid
|
36,521
|
45,747
|
||||||
|
Income
Taxes Paid
|
3,592
|
36,412
|
||||||
|
Non-Cash
Investing Transactions
|
||||||||
|
Equipment
Acquired Under Capital Lease
|
—
|
—
|
||||||
|
Dividends
Declared but Not Paid
|
—
|
25,275
|
||||||
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
5
Note 1 —
Basis of Presentation
The
unaudited Consolidated Financial Statements of Vuzix Corporation and Subsidiary
(“the Company") have been prepared in accordance with generally accepted
accounting principles in the United States of America for interim financial
information (“GAAP”) and with the instructions to Form 10-Q and Article 8 of
Regulation S-X of the Securities and Exchange Commission. Accordingly, the
Consolidated Financial Statements do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. The accompanying
Consolidated Financial Statements should be read in conjunction with the audited
Consolidated Financial Statements of the Company as of December 31, 2009, as
reported in its Annual Report on Form 10-K filed with the Securities and
Exchange Commission.
The
results of the Company’s operations for any interim period are not necessarily
indicative of the results of the Company’s operations for any other interim
period or for a full fiscal year.
Note 2 —
Liquidity and Going Concern Issues
The
Company’s independent registered public accounting firm’s report issued on the
consolidated financial statements for the year ended December 31, 2009 included
an explanatory paragraph describing the existence of conditions that raise
substantial doubt about the Company’s ability to continue as a going concern,
including continued operating losses and the potential inability to pay
currently due debts. The Company incurred a net loss of $1,508,174 for the three
months ending March 31, 2010 and has an accumulated deficit of $19,540,604 as of
March 31, 2010. The Company’s losses in its first fiscal quarter of 2010 as well
as in the years 2009 and 2008 have had a significant negative impact on the
Company’s financial position and liquidity.
The
Company’s cash requirements are primarily for funding operating losses, working
capital, research, principal and interest payments on debt obligations, and
capital expenditures. Historically, these cash needs have been met by borrowings
of notes and convertible debt and the sales of securities. In this regard,
management is expecting to raise any necessary additional funds through loans
and additional sales of its common stock. There is no assurance that the Company
will be successful in raising additional capital on favorable terms, if at
all.
The
Company’s business plan for remainder of fiscal year 2010 is based on reductions
and tight control over selling, general and administrative expenses, lower total
investment dollars in research and development costs with a shorter term
development horizon, and a focus on sales of products with the higher margins
and lower working capital requirements. The business plan for fiscal
year 2010 projects an improvement in cash flow, but does not indicate a turn to
consistent profitability. Further there is no assurance that the Company will
achieve the sales, margins and further cost reductions to improve cash flow as
contemplated in its business plan to allow it to operate its business. If the
Company were to incur significant unplanned cash outlays, it would become
necessary for the Company to obtain additional sources of capital or make
further cost cuts to fund its operations.
These
factors raise substantial doubt about the ability of the Company to continue as
a going concern. The consolidated financial statements do not include any
adjustments relating to the recoverability and classification of assets carrying
amounts or the amount of and classification of liabilities that may result
should the Company be unable to continue as a going
concern.
6
Note 3 —
Inventories, Net
Inventories
are stated at the lower of cost (determined on the first-in, first-out or
specific identification method) or market and consisted of the following as at
March 31, 2010 and December 31, 2009:
|
March 31, 2010
|
December 31, 2009
|
|||||||
|
Purchased
Parts and Components
|
$
|
1,913,585
|
$
|
1,594,233
|
||||
|
Work
in Process
|
480,380
|
872,003
|
||||||
|
Finished
Goods
|
674,459
|
493,400
|
||||||
|
|
||||||||
|
Net
|
$
|
3,068,424
|
$
|
2,959,636
|
||||
Accrued
expenses consisted of the following:
|
March 31, 2010
|
December 31, 2009
|
|||||||
|
Accrued
Wages and Related Costs
|
$
|
63,400
|
$
|
64,529
|
||||
|
Accrued
Professional Services
|
24,500
|
52,000
|
||||||
|
Accrued
Warranty Obligations
|
274,182
|
258,476
|
||||||
|
Other
Accrued Expenses
|
9,192
|
24,961
|
||||||
|
|
||||||||
|
Total
|
$
|
371,274
|
$
|
399,966
|
||||
The
Company has warranty obligations in connection with the sale of certain of its
products. The warranty period for its products is generally one year except in
European countries where it is two years. The costs incurred to provide for
these warranty obligations are estimated and recorded as an accrued liability at
the time of sale. The Company estimates its future warranty costs based on
product-based historical performance rates and related costs to repair. The
changes in the Company’s accrued warranty obligations for the three months ended
March 31, 2010 and 2009 were as follows:
|
2010
|
2009
|
|||||||
|
Accrued
Warranty Obligations, January 1
|
$
|
258,476
|
$
|
106,865
|
||||
|
Actual
Warranty Experience
|
(93,463
|
)
|
(33,416
|
)
|
||||
|
Warranty
Provisions
|
109,169
|
30,107
|
||||||
|
|
||||||||
|
Accrued
Warranty Obligations, March 31
|
$
|
274,182
|
$
|
103,556
|
||||
Note
5 – Earnings (Loss) Per Share
Basic
earnings (loss) per share is computed by dividing net income or loss by the
weighted average number of common shares outstanding for the period. Due to the
net loss incurred in the first quarter 2010 and 2009, the assumed exercise of
stock options and warrants and the conversion of debt are anti-dilutive,
therefore basic and diluted loss per share are the same for both
periods.
Note 6 —
Accrued Compensation
Accrued
compensation represents amounts owed to officers of the Company for services
that remain outstanding. The principal is not subject to a fixed repayment
schedule, and interest on the outstanding balances is payable at 8% per annum,
compounding annually due to its continuing deferral post the Company’s IPO. An
additional $50,000 in accrued compensation was accrued for the three months
ending March 31, 2010.
7
Note 7 —
Current Portion of Deferred Trade Payable
Long-term
trade payable represent amounts owed to two suppliers of the Company for
component purchases in 2009 that have been deferred and remain outstanding. The
principal amount of $1,746,500 is due and payable on January 15, 2011. The
deferred trade payables are secured by all of the assets of the Company and
interest on the outstanding balances is payable at 10% per annum. In the event
the Company consummates an equity financing subsequent to its recent IPO that
results in gross proceeds of at least US$2,000,000 then the Company must,
subject to regulatory approvals apply not less than 50% of the proceeds from
such equity financings to the prompt payment of the deferred trade
payable.
Note 8 —
Long-Term Debt
Long-term
debt consisted of the following:
|
March 31,
|
December 31,
|
|||||||
|
December
31,
|
2010
|
2009
|
||||||
|
Note
payable to an officer of the Company. The principal is not subject to a
fixed repayment schedule, bears interest at 8% per annum and is secured by
all of the assets of the Company
|
$
|
209,208
|
$
|
209,208
|
||||
|
During
October 2008, entered into an agreement with an officer of the Company,
whereby the officer agrees to make loans from time to time to the Company
through December 31, 2010, accruing interest on the outstanding
balance at 12%, secured by all of the assets of the
Company
|
215,500
|
215,500
|
||||||
|
—
|
500,000
|
|||||||
|
$
|
424,708
|
$
|
924,708
|
|||||
|
Less:
Amount Due Within One Year
|
215,500
|
715,500
|
||||||
|
Amount
Due After One Year
|
$
|
209,208
|
$
|
209,208
|
||||
Note 9 —
Income Taxes
The
Company’s effective income tax rate is a combination of federal, state and
foreign tax rates and differs from the U.S. statutory rate due to taxes on
foreign income, permanent differences including tax-exempt interest, and the
resolution of tax uncertainties, offset by a valuation allowance against U.S.
deferred income tax assets.
At
December 31, 2009, the Company had unrecognized tax benefits totaling
$3,659,000, of which would have a favorable impact on our tax provision
(benefit), if recognized.
In the
three month period ending March 31, 2010 and 2009, the Company generated federal
and state net operating losses for income tax purposes. These federal and state
net operating loss carryforwards, which total approximately $15,300,000 at
March 31, 2010 and begin to expire in 2018, if not utilized. Of the
Company’s tax credit carryforwards, $1,209,000 expire between 2017 and 2018, if
not utilized.
The
Company’s income tax returns have not been examined by the Internal Revenue
Service and are subject to examination for all years since 1997. State income
tax returns are generally subject to examination for a period of 3 to 5 years
after filing of the respective return. The state impact of any federal changes
remains subject to examination by various states for a period of up to one year
after formal notification to the states.
8
Note 10 —
Stock Warrants and Agent Options
A summary
of the various changes in warrants as of March 31, 2010 and changes during the
three month period is as follows.
|
Number of
Shares
|
||||
|
Warrants
Outstanding at December 31, 2009
|
19,067,194 | |||
|
Exercised
During the Period
|
— | |||
|
Issued
During the Period
|
— | |||
|
Expired
During the Period
|
— | |||
|
Warrants
Outstanding, End of Year
|
19,067,194 | |||
The
outstanding warrants as of March 31, 2010 expire from December 31, 2010 to
December 31, 2015. The weighted average remaining contract term on the warrants
is 2.9 years. The weighted average exercise price is $0.2537 per
share.
As
consideration for their services, the agents involved in the Company’s recent
IPO received special agent options to purchase 3,897,519 common shares along
with 1,948,760 whole warrants. The options expire on December 31, 2010 and the
common shares must be purchased to receive any corresponding half warrants,
which would expire on December 23, 2012. The purchase prices are set in Canadian
dollars. The common share purchase price is Canadian $0.20 or US $0.197 per
share and the warrant exercise price is Canadian $0.30 of US$0.295 per share
(the US$ amounts based on exchange rates at March 31, 2010).
Note 11 —
Stock Option Plans
A summary
of award activity under the stock option plans as of March 31, 2010 and changes
during the three month period is as follows.
|
Weighted
|
||||||||||||
|
Average
|
||||||||||||
|
Number of
|
Exercise
|
Exercise Price
|
||||||||||
|
Shares
|
Price
|
Range
|
||||||||||
|
Outstanding
at December 31, 2009
|
15,885,578
|
$
|
0.1195
|
$
|
0.0061
– $ 0.2334
|
|||||||
|
Granted
|
—
|
$
|
—
|
$
|
—
|
|||||||
|
Exercised
|
—
|
$
|
—
|
$
|
—
|
|||||||
|
Expired
or Forfeited
|
(29,896
|
)
|
$
|
0.1739
|
$
|
0.1500 –
$ 0.2334
|
||||||
|
|
||||||||||||
|
Outstanding
at March 31, 2010
|
15,855,682
|
$
|
0.1194
|
$
|
0.0061
– $ 0.2334
|
|||||||
As of
March 31, 2010, there were 12,353,572 options that were fully vested and
exercisable at weighted average exercise price of $0.1041 per share. The
weighted average remaining contractual term on the vested options is
4.9 years.
As of
March 31, 2010 there were 3,503,110 unvested options exercisable at a weighted
average exercise price of $0.1664 per share. The weighted average remaining
contractual term on the unvested options is 8.8 years.
No cash
was received from option exercises for the three months ending March 31,
2010.
Note 12 —
Stock-based Compensation Expense
The table
below summarizes the impact of outstanding stock options on the results of
operations for the periods ended March 31, 2010 and
2009:
9
|
March 31, 2010
|
March 31, 2009
|
|||||||
|
Stock-Based
Compensation Expense:
|
||||||||
|
Stock
Options
|
$ | 62,022 | $ | 40,689 | ||||
|
Income
Tax Benefit
|
— | — | ||||||
|
|
||||||||
|
Net
Decrease in Net Income
|
$ | 62,022 | $ | 40,689 | ||||
|
|
||||||||
|
Decrease
in Earnings Per Share:
|
||||||||
|
Basic
and Diluted
|
$ | 0.0002 | $ | 0.0002 | ||||
The
weighted average fair value of option grants was estimated using the
Black-Scholes-Merton option pricing method. At March 31, 2010, the Company had
approximately $385,412 of unrecognized stock compensation expense which will be
recognized over a weighted average period of approximately 1.7
years.
Note 13 —
Litigation
The
Company is not subject to any legal proceedings or claims at the current
time.
Note 14 —
Product Revenue
The
following table represents the Company’s total sales classified by product
category for the three months ending March 31, 2010 and 2009:
|
March 31, 2010
|
March 31, 2009
|
|||||||
|
Consumer
Video Eyewear
|
$ | 1,221,392 | $ | 1,101,186 | ||||
|
Defense
Products
|
742,934 | 1,479,794 | ||||||
|
Engineering
Services
|
93,135 | 448,490 | ||||||
|
Low
Vision Products
|
4,498 | 14,523 | ||||||
|
|
||||||||
|
Total
|
$ | 2,061,959 | $ | 3,043,994 | ||||
You
should read the following discussion and analysis of financial condition and
results of operations in conjunction with the financial statements and related
notes appearing elsewhere in this annual report. In addition to historical
information, the following discussion and analysis includes forward looking
statements that involve risks, uncertainties and assumptions. Forward-looking
statements in this discussion and analysis are qualified by the cautionary
statement found on page 16.
Critical
Accounting Policies and Significant Developments and Estimates
The
discussion and analysis of our financial condition and results of operations are
based on our financial statements and related notes appearing elsewhere in this
quarterly report. The preparation of these statements in conformity with
generally accepted accounting principles requires the appropriate application of
certain accounting policies, many of which require us to make estimates and
assumptions about future events and their impact on amounts reported in our
financial statements, including the statement of operations, balance sheet, cash
flow and related notes. Since future events and their impact cannot be
determined with certainty, the actual results will inevitably differ from our
estimates. Such differences could be material to the financial
statements.
We
believe that our application of accounting policies, and the estimates
inherently required therein, are reasonable. These accounting policies and
estimates are periodically reevaluated, and adjustments are made when facts and
circumstances dictate a change. Historically, we have found our application of
accounting policies to be appropriate, and actual results have not differed
materially from those determined using necessary estimates.
Our
accounting policies are more fully described in the notes to our financial
statements included in this quarterly report and our Form 10-K for the year
ended December 31, 2009. In reading our financial statements, you should be
aware of the factors and trends that our management believes are important in
understanding our financial performance. The critical accounting policies,
judgments and estimates that we believe have the most significant effect on our
financial statements are:
10
|
·
|
valuation of
inventories;
|
|
·
|
carrying value of long-lived
assets;
|
|
·
|
valuation of intangible
assets;
|
|
·
|
revenue
recognition;
|
|
·
|
product
warranty;
|
|
·
|
research and
development
|
|
·
|
stock-based
compensation; and
|
|
·
|
income
taxes.
|
Valuation
of Inventories
Inventory
is stated at the lower of cost or market, with cost determined on a first-in,
first-out method. Inventory includes purchased parts and components, work in
process and finished goods. Provisions for excess, obsolete or slow moving
inventory are recorded after periodic evaluation of historical sales, current
economic trends, forecasted sales, estimated product lifecycles and estimated
inventory levels. Purchasing practices, electronic component obsolescence,
accuracy of sales and production forecasts, introduction of new products,
product lifecycles, product support and foreign regulations governing hazardous
materials are the factors that contribute to inventory valuation risks. Exposure
to inventory valuation risks is managed by maintaining safety stocks, minimum
purchase lots, managing product and end-of-life issues brought on by aging
components or new product introductions, and by utilizing certain inventory
minimization strategies such as vendor-managed inventories. The accounting
estimate related to valuation of inventories is considered a “critical
accounting estimate” because it is susceptible to changes from period-to-period
due to the requirement for management to make estimates relative to each of the
underlying factors, ranging from purchasing, to sales, to production, to
after-sale support. If actual demand, market conditions or product lifecycles
differ from estimates, inventory adjustments to lower market values would result
in a reduction to the carrying value of inventory, an increase in inventory
write-offs and a decrease to gross margins.
Carrying
Value of Long-Lived Assets
If facts
and circumstances indicate that the value of a long-lived asset,
including a products’ mold tooling and equipment, may be impaired, the carrying
value is reviewed in accordance with FASB ASC Topic 360-10. If this review
indicates that the carrying value of the asset will not be recovered as
determined based on projected undiscounted cash flows related to the asset over
its remaining life, the carrying value of the asset is reduced to its estimated
fair value. To date, no impairment on long-lived assets has been booked.
Impairment losses in the future will be dependent on a number of factors such as
general economic trends and major technology advances, and thus could be
significantly different than historical results.
Valuation
of Intangible Assets
We
perform a valuation of intangible assets when events or circumstances indicate
their carrying amounts may be unrecoverable, in whole or in part. We have not
treated as impaired the value of certain intellectual property, such as patents
and trademarks, which were valued (net of accumulated amortization) at $777,871
as of March 31, 2010, because management believes that its value is
recoverable.
Revenue
Recognition
Revenue
from product sales is recognized in accordance with FASB ASC Topic 605, Revenue Recognition
Product sales represent the majority of our revenue. We recognize
revenue from these product sales when persuasive evidence of an arrangement
exists, delivery has occurred or services have been provided, the sale price is
fixed or determinable, and collectability is reasonably assured. Additionally,
we sell our products on terms which transfer title and risk of loss at a
specified location, typically shipping point. Accordingly, revenue recognition
from product sales occurs when all factors are met, including transfer of title
and risk of loss, which typically occurs upon shipment by us. If these
conditions are not met, we will defer the revenue recognition until such time as
these conditions have been satisfied. We collect and remit sales taxes in
certain jurisdictions and report revenue net of any associated sales taxes. We
also sell certain products through distributors who are granted limited rights
of return for stock balancing against purchases made within a prior 90 day
period, including price adjustments downwards on any existing inventory. The
provision for product returns and price adjustments is assessed for adequacy
both at the time of sale and at each quarter end and is based on recent
historical experience and known customer claims.
11
Revenue
from any engineering consulting and other services is recognized at the time the
services are rendered. For our longer-term development contracts, which to date
have all been firm, fixed-priced contracts, we recognize revenue on the
percentage-of-completion method. Under this method income is recognized as work
on contracts progresses, but estimated losses on contracts in progress are
charged to operations immediately. To date, all of our longer-term development
contracts have been less than one calendar year in duration. We generally submit
invoices for our work under these contracts on a monthly basis. The
percentage-of-completion is determined using the cost-to-cost
method.
The
accounting estimate related to revenue recognition is considered a “critical
accounting estimate” because terms of sale can vary, and judgment is exercised
in determining whether to defer revenue recognition. Such judgments may
materially affect net sales for any period. Judgment is exercised within the
parameters of GAAP in determining when contractual obligations are met, title
and risk of loss are transferred, sales price is fixed or determinable and
collectability is reasonable assured.
Product
Warranty
Warranty
obligations are generally incurred in connection with the sale of our products.
The warranty period for these products is generally one year, but can be
24 months in certain countries if required by law, such as in Europe.
Warranty costs are accrued, to the extent that they are not recoverable from
third party manufacturers, for the estimated cost to repair or replace products
for the balance of the warranty periods. We provide for the costs of expected
future warranty claims at the time of product shipment or over-builds to cover
replacements. The adequacy of the provision is assessed at each quarter end and
is based on historical experience of warranty claims and costs. The costs
incurred to provide for these warranty obligations are estimated and recorded as
an accrued liability at the time of sale. Future warranty costs are estimated
based on historical performance rates and related costs to repair given
products. The accounting estimate related to product warranty is considered a
“critical accounting estimate” because judgment is exercised in determining
future estimated warranty costs. Should actual performance rates or repair costs
differ from estimates, revision to the estimated warranty liability would be
required.
Research
and Development
Research
and development costs, are expensed as incurred consistent with the guidance of
FASB ASC Topic 730, “Research and Development,” and include employee
related costs, office expenses, third party design and engineering services, and
new product prototyping costs.
Stock-Based
Compensation
Our board
of directors approves grants of stock options to employees to purchase our
common stock. A stock compensation expense is recorded based upon the
estimated fair value of the stock option at the date of grant. The accounting
estimate related to stock-based compensation is considered a “critical
accounting estimate” because estimates are made in calculating compensation
expense including expected option lives, forfeiture rates and expected
volatility. The fair market value of our common stock on the date of each option
grant was determined based on the most recent cash sale of common stock in an
arm’s length transaction with an unrelated third party. We engaged in at least
one such transaction during each of our last four fiscal years. Expected option
lives are estimated using vesting terms and contractual lives. Expected
forfeiture rates and volatility are calculated using historical information.
Actual option lives and forfeiture rates may be different from estimates and may
result in potential future adjustments which would impact the amount of
stock-based compensation expense recorded in a particular period.
Income
Taxes
We have
historically incurred domestic operating losses from both a financial reporting
and tax return standpoint. Accordingly, we provide deferred income tax assets
and liabilities based on the estimated future tax effects of differences between
the financial and tax bases of assets and liabilities based on currently enacted
tax laws. A valuation allowance is established for deferred tax assets in
amounts for which realization is not considered more likely than not to occur.
The accounting estimate related to income taxes is considered a “critical
accounting estimate” because judgment is exercised in estimating future taxable
income, including prudent and feasible tax planning strategies, and in assessing
the need for any valuation allowance. To date we have determined a 100%
valuation allowance is required and accordingly no amounts have been reflected
in our consolidated financial statements. In the event that it should be
determined that all or part of a deferred tax asset in the future is in excess
of the nil amount currently recorded, an adjustment of the valuation allowance
would increase income to be recognized in the period such determination was
made.
12
In
addition, the calculation of our tax liabilities involves dealing with
uncertainties in the application of complex tax regulations. As a result we
recognize liabilities for uncertain tax positions based on the two-step process
prescribed within the interpretation. The first step is to evaluate the tax
position for recognition by determining if the weight of available evidence
indicates that it is more likely than not that the position will be sustained on
audit, including resolution of related appeals or litigation processes, if any.
The second step requires us to estimate and measure the tax benefit as the
largest amount that is more than 50% likely of being realized upon ultimate
settlement. It is inherently difficult and subjective to estimate such amounts,
as this requires us to determine the probability of various possible outcomes.
We re-evaluate these uncertain tax positions on a quarterly basis. This
evaluation is based on factors including, but not limited to, changes in facts
or circumstances, changes in tax law, effectively settled issues under audit and
new audit activity. Such a change in recognition or measurement would result in
the recognition of a tax benefit or an additional charge to the tax provision in
the period.
Finally,
any future recorded value of our deferred tax assets will be dependent upon our
ability to generate future taxable income in the jurisdictions in which we
operate. These assets consist of research credit carry-forwards, capital and net
operating loss carry-forwards and the future tax effect of temporary differences
between balances recorded for financial statement purposes and for tax return
purposes. It will require future pre-tax earnings in excess of $14,000,000 in
order to fully realize the value of our unrecorded deferred tax assets. If we
were to sustain future net losses, it may be necessary to record valuation
allowances against such deferred tax assets in order to recognize impairments in
their estimated future economic value.
Off
Balance Sheet Arrangements
We do not
have any off-balance sheet arrangements that have, or are reasonably likely to
have, an effect on our financial condition, financial statements, revenues or
expenses.
Recent
Accounting Pronouncements
In
September 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-08,
“Earnings Per Share” Amendments to Section 260-10-S99. This Codification Update
represents technical corrections to Topic 260-10-S99, Earnings per Share, based
on EITF Topic D-53, “Computation of Earnings Per Share for a Period that
Includes a Redemption or an Induced Conversion of a Portion of a Class of
Preferred Stock” and EITF Topic D-42, The Effect of the Calculation of Earnings
per Share for the Redemption or Induced Conversion of Preferred Stock goes into
effect in the period that includes a redemption or induced conversion, which was
included in our Form 10-K for the year ended December 31, 2009. Adoption of this
new guidance did not have a material impact on our consolidated financial
statements.
In
October 2009, the FASB issued ASC 605-25 “Revenue Recognition — Multiple-
Deliverable Revenue Arrangement” that will become effective beginning July 1,
2010, with earlier adoption permitted. Under the new guidance, when vendor
specific objective evidence or third party evidence for deliverables in an
arrangement cannot be determined, a best estimate of the selling price is
required to separate deliverables and allocate arrangement consideration using
the relative selling price method. The new guidance includes new disclosure
requirements on how the application of the relative selling price method affects
the timing and amount of revenue recognition. We believe adoption of this new
guidance will not have a material impact on our consolidated financial
statements.
In
January 2010, the FASB issued ASU 2010-06, “Fair Value Measurements and
Disclosures” which improves disclosures about the measurement of the fair value
of financial instruments including (1) the different classes of assets and
liabilities measured at fair value, (2) the valuation techniques and inputs
used, (3) the activity in Level 3 fair value measurements, and (4) the transfers
between Levels 1, 2, and 3 of the fair value inputs hierarchy. The guidance is
effective for fiscal years and interim periods ended after December 15, 2009.
The adoption of the guidance did not have a material impact on our consolidated
financial statements.
Key
Performance Indicators
We
believe that a key indicator for our business on an annual basis is the trend
for the volume of orders received from customers, especially those orders
related to night-vision electronic modules. Our consumer Video Eyewear products
are relatively new and historically those sales have been the greatest during
our fourth quarter (October through December). During weak economic periods,
customers’ ability to forecast their requirements deteriorates causing delays in
the placement of orders. Forward-looking visibility on customer orders is at an
all time low. Our major night-vision electronics modules customers (Kopin and
DRS Technologies, Inc.) are placing orders for product only when they have
orders in hand from their governmental customer and such orders have been
historically only received once or sometimes twice per year. Total shipments of
night vision electronics module customers in the three months ended March 31,
2010 and 2009 were $Nil, and $1,329,157, respectively.
13
Results
of Operations
Comparison
of Three Months Ended March 31, 2010 and March 31, 2009
Sales. Our sales
were $2,061,959 for the first quarter of 2010 compared to $3,043,994 for the
same period in 2009. This represents a 32.3% decrease for the three month period
2010 as compared to 2009. Our sales from defense products decreased to $742,934
or 36.0% of our total sales in the first quarter of 2010 compared to $1,479,794
or 48.6% of total sales in the same period of 2009, a decrease of $736,860 or
49.8%. The decrease resulted solely from zero shipments of night vision
electronics in the first quarter of 2010 as compared to 2009 when $1,329,157
were sold. Orders for these products typically occur only once every 6 to 12
months, and in the fourth quarter of 2009 we had just completed a prior order.
Sales of our Tac-Eye video eyewear products that are included in this product
category increased to $742,934 for the three month period in 2010 as compared to
$150,637 for the same period in 2009, a 393% increase. Sales from our
defense-related engineering programs for the first quarter of 2010, decreased to
$93,135 or 4.5% of total sales compared to $448,490 or 14.7% of total sales in
same quarter 2009. In the first quarter of 2009 we had revenues from two active
programs whereas in the first quarter of 2010 we were completing an earlier
program that began in the fall of 2009. We did not commence work on
any new programs in the first quarter of 2010. Consumer Video Eyewear product
sales increased to $1,221,392 or 59.2% of total sales for the first quarter of
2010 compared to $1,101,186 or 36.2% of our total sales for the first quarter of
2009. This increase resulted from the continued expansion of our reseller
network and the introduction of new products. Low-vision assist sales,
consisting mainly of sales of low-vision assist products, were $4,498 or 0.2% of
total sales in the first quarter of 2010 versus $14,523 or 0.5% of our total
sales in the same period in 2009.
Cost of Sales and Gross
Margin. Gross margin decreased to $559,884 for the first
quarter of 2010 from $1,187,311 for the same period in 2009, a decrease of
$627,427 or 52.8%. As a percentage of net sales, gross margin decreased to 27.2%
for the first quarter of 2010 compared to 39.0% for the same period in 2009.
This decrease was the primarily the result of our lower margin Consumer Video
Eyewear being 59.2% of total sales versus 36.2% in the prior
period.
Research and Development.
Our research and development expenses decreased by $8,011 or 1.6% in
the first quarter of 2010, to $494,000 compared to $502,011 in the same period
of 2009. Despite this small decrease, as a percentage of sales for the period,
the spending on research and development as a percentage increased to 24.0% for
the first quarter of 2010 compared to 16.5% for the same period in 2009.
Expenses we incur under government funded engineering programs are included in
costs of goods sold.
Selling and Marketing.
Selling and marketing expenses were $617,186 for the first quarter
of 2010 compared to $449,266 for the same period in 2009, an increase of
$167,920 or 37.4%. Increases were attributable to higher tradeshow costs related
to Consumer Electronics Show in January 2010, sales commissions paid on
increased defense product sales, a new consultant pursuing augmented reality
applications and new web store development costs.
General and Administrative.
General and administrative expenses were $749,664 for the first
quarter of 2010 as compared to $478,253 for the same period in 2009, an increase
of $271,411 or 56.8%. The higher general and administrative related to increases
in personnel costs, insurance, legal and accounting expenses, and new
shareholder reporting and filing costs now that we are a public
company.
Depreciation and
Amortization. Our depreciation and amortization expense for
the first quarter of 2010 decreased by $28,568, or 20.6% to $110,266, compared
to $138,834 in the same period in 2009. The decrease was related to the fact
that several sets of tooling became fully depreciated in 2009.
Other Income (Expense).
Total other expenses, consisting primarily of interest expense, was
$(96,067) in the first quarter of 2010 compared to $(66,648) in the same period
in 2009. The increase in expenses was primarily attributable to interest costs
on our increased borrowings as compared to 2009.
Provision for Income Taxes.
The provision for income taxes for the first quarter of 2010 was
$875 compared to $888 for the same period in 2009. The balance of each quarter’s
tax provision was primarily for franchise taxes payable to the State of
Delaware, our state of incorporation.
Net (Loss) and (Loss) per
Share. Our net loss was $(1,508,174) or $(0.0057) per share
in the first quarter of 2010, a increased loss of $1,059,585, or 236.2%, from
$(448,589) or $(0.0022) per share in the same period in 2009.
Liquidity
and Capital Resources
As of
March 31, 2010, we had cash and cash equivalents of $202,700, a decrease of
$2,297,823 from $2,500,523 as of December 31, 2009.
14
Operating Activities.
Cash (used in) operating activities was $(1,447,934) in the first
quarter of 2010 and $(761,919) in the same period in 2009. Changes in non-cash
operating assets and liabilities were $(112,049) in the first quarter of 2010
and $(492,853) in the same period in 2009. Reductions in accounts payable of
$(755,422) after collections on accounts receivable were the prime net uses of
cash for the first quarter of 2010. Similar reductions in accounts payable and
accounts receivable occurred in the prior year’s period, however a
reduction of $(400,836) in customer deposits was the major use of cash for the
three months ending March 31, 2009.
Investing Activities.
Cash (used in) investing activities was $(64,285) in the first
quarter of 2010 and $(60,208) in the same period in 2009. Cash used for
investing activities in the first quarter of 2010 related primarily to the
purchase of computer equipment additions. The costs of registering our
intellectual property rights, included in the investing activities totals
described above, were $(34,736) in the first quarter of 2010 and $(40,839) in
the same period in 2009.
Financing Activities.
Cash (used in) financing activities was $(785,604) in the first
quarter of 2010, whereas in the same period in 2009, $262,559 was provided by
financing activities. During the first quarter of 2010, the primary use of cash
was $746,417 for the repayment of Notes Payable from the proceeds of our recent
IPO, whereas during the first quarter of 2009 we sold shares of our common stock
in a private placement for aggregate gross proceeds of $300,000.
Capital Resources.
As of March 31, 2010, we had a cash balance of $202,700. We had
$46,438 available under our bank lines of credit (the outstanding balances under
our lines of credit as of March 31, 2010 were $166,062. The credit lines are
with two banks, are payable on demand and secured by the personal guarantee of
our President and Chief Executive Officer, Paul J. Travers. The bank credit
agreements contain various restrictions on indebtedness, liens, guarantees,
redemptions, mergers, acquisitions or sale of assets, loans, transactions with
any affiliates, and investments. They also prohibit us from declaring and paying
cash dividends without the bank’s prior consent.
Unless
otherwise noted, this discussion and analysis relates only to results from
continuing operations. This discussion and analysis should be read in
conjunction with the condensed consolidated financial statements, including Note
2 thereto, and the related notes appearing in our annual report on Form 10-K for
the year ended December 31, 2009. We have the intent and ability to take actions
necessary for us to continue as a going concern, as discussed herein, and
accordingly our condensed consolidated financial statements have been prepared
assuming that we will continue as a going concern. The condensed consolidated
financial statements do not include any adjustments that might result from our
failure to continue as a going concern.
Our cash
requirements are primarily for research and development, product tooling, and
working capital. Historically, we have met these requirements through capital
generated from the sale and issuance of our common equity securities,
convertible debt and notes payable to private investors, cash flow provided from
operations and our revolving bank line of credit.
During
our prior fiscal years, we have been unable to generate cash flows sufficient to
support our operations and have been dependent on debt and equity financings,
including our IPO and debt raised from qualified investors. For the three
months ending March 31, 2010 we reported an operating loss of $(1,508,174). We
therefore remain dependent on outside sources of funding until our results of
operations provide positive cash flows. Our independent auditors issued a
going concern explanatory paragraph in their report on our financial statements
for the year ended December 31, 2009. With our current level of funding and
ongoing losses from operations, substantial doubt exists about our ability to
continue as a going concern. The consolidated financial statements contained in
this report do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or amounts and classification of
liabilities that might be necessary should we be unable to continue in
existence.
On
December 24, 2009, we completed our IPO, which resulted in gross proceeds of
$5,810,657 and net proceeds of $3,897,942 after payment of transaction expenses.
At that time, our working capital deficit was approximately $4.0 million and we
had two of our major trade suppliers extend their trade payable totaling
$1,746,500 out 13 months to January 15, 2011 to improve our net working capital
position. We used $746,417 of the net proceeds of the offering to repay
outstanding indebtedness as discussed below. We used the remaining net proceeds
for general corporate purposes and to finance our current operating
losses.
On
September 19, 2006, we borrowed $500,000 from an individual lender and
issued a convertible promissory note in the principal amount of $500,000 in
evidence of the loan. The loan principal of $500,000 was repaid in mid-January
but not the accrued interest which was $123,178 at March 31, 2010. The unpaid
accrued interest along with further accrued interest at an annual rate of 12.0%
is to be repaid by September 30, 2010. In August, September, and November 2009,
we borrowed an aggregate amount of $246,417 from three individual lenders,
including a total of $100,000 from Mr. Paul Churnetski, who was then our Vice
President of Quality Assurance and the beneficial owner of approximately 9% of
our issued and outstanding common stock and $46,417 from William Lee, one of our
independent directors. These loans along with accrued interest were repaid to
these individuals in January 2010. We have been unable to repay $215,500 to our
President and Chief Executive Officer, Paul J. Travers, under an October 2008
revolving loan as was contemplated as a use of proceeds in our recent IPO
prospectus.
15
We have
historically supported current operations by raising additional operating cash
through our sales of our securities and bridge loans. Our ability to continue as
a going concern is dependent upon our ability to have sufficient cash flows to
meet our obligations on a timely basis, to obtain additional financing as may be
required, and ultimately to attain positive cash flow from operations. We
are considering alternatives to address our cash flow situation that include
raising capital through additional sale of our equity and/or debt securities.
Additional sales of our securities could result in substantial dilution of
existing stockholders. There can be no assurance that our current financial
position can be improved, that we can raise additional working capital, or that
we can achieve positive cash flows from operations. Our long-term viability as a
going concern is dependent upon our ability to (i) locate sources of debt
or equity funding to meet current commitments and near-term future requirements
and (ii) generate sufficient cash flow from operations to sustain our
continuing operations.
If
we are unable to achieve profitable operations or obtain additional financing
when needed, we could be required to modify our business plan in accordance with
the extent of available financing and/or enter into a strategic partnership. We
also may not be able to respond to competitive pressures, develop and deploy new
or enhanced products or take advantage of unanticipated acquisition
opportunities. Finally, we may be required to sell all or a portion of our
assets or shut down the company and cease operations.
Our cash
on hand as of March 31, 2010, is not expected to be sufficient to fund our
anticipated cash requirements for maintaining full operations as well as
commitments and payments of principal and interest on borrowings for at least
the next twelve months. Our current fiscal 2010 plan contemplates a need for
more money to fund operating losses and maintain or grow our revenues as we are
constrained by limited working capital and reduced credit lines from our key
suppliers. Between December 31, 2009 and the date of this report, we have
reduced our employee count by 15 or 25% at our offices in Rochester, New York.
The majority of these reductions took place in early April 2010. We currently
rely mainly upon vendor financing in managing our liquidity. As a result, if our
trade creditors were to impose unfavorable terms on us, it would negatively
impact our ability to obtain products and services on acceptable terms and
operate our business. Such events along with a further deterioration in our
working capital would adversely affect our results of operations, cash flows and
financial performance.
When and
if we obtain sufficient additional financing, we do plan to return to our
business original strategy in 2010 of introducing new and improved products, we
will be limited in our pursuit of this strategy while we continue to manage our
liquidity. We plan to manage our liquidity under an operational plan that
contemplates, among other things:
|
·
|
managing our working capital
through better optimization of inventory
levels;
|
|
·
|
focusing on selling higher gross
margin products, which will mean a greater emphasis on defense versus
consumer products;
|
|
·
|
restructuring and reengineering
our organization and processes to increase efficiency and reduce our
operating costs for fiscal
2010;
|
|
·
|
minimizing our capital
expenditures by eliminating, delaying or curtailing discretionary and
non-essential
spending;
|
|
·
|
reducing the square footage we
rent;
|
|
·
|
reducing and deferring some
research and development and delaying some planned product and new
technology introductions;
and
|
|
exploring our options with
respect to new debt
borrowings.
|
We cannot
make assurances as to whether any of these actions can be effected on a timely
basis, on satisfactory terms or maintained once initiated, and even if
successful, our liquidity plan will limit certain of our operational and
strategic initiatives designed to grow our business over the long term.
Furthermore, if we are unable to soon generate sufficient cash flow from
operations to service our indebtedness or otherwise fund our operations, or if
we are unable to restructure our outstanding debt and/or equity securities, we
could be forced to file for protection under the U.S. Bankruptcy
Code.
Forward
Looking Statements
This
quarterly report includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 (the “Exchange Act”). The Private Securities Litigation
Reform Act of 1995 (the “Reform Act”) provides a “safe harbor” for
forward-looking statements. Certain written and oral statements made by
management of Vuzix Corporation include forward-looking statements intended to
qualify for the safe harbor from liability established by the Reform Act. These
statements are based on our management’s beliefs and assumptions and on
information currently available to our management. Forward-looking statements
include statements concerning:
16
|
·
|
our possible or assumed future
results of
operations;
|
|
·
|
our business
strategies;
|
|
·
|
our ability to attract and retain
customers;
|
|
·
|
our ability to sell additional
products and services to
customers;
|
|
·
|
our cash needs and financing
plans;
|
|
·
|
our competitive
position;
|
|
·
|
our industry
environment;
|
|
·
|
our potential growth
opportunities;
|
|
·
|
expected technological advances
by us or by third parties and our ability to leverage
them;
|
|
·
|
the effects of future
regulation; and
|
|
·
|
the effects of
competition.
|
All
statements in this quarterly report that are not historical facts are
forward-looking statements. We may, in some cases, use terms such as
“anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,”
“plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would” or
similar expressions that convey uncertainty of future events or outcomes to
identify forward-looking statements.
The
outcome of the events described in these forward-looking statements are subject
to known and unknown risks, uncertainties and other factors that may cause our
actual results, performance or achievements to be materially different from any
future results, performances or achievements expressed or implied by the
forward-looking statements. These important factors include our financial
performance and the other important factors set forth in our annual report on
Form 10-K for the year ended December 31, 2009 and in other filings with the
Securities and Exchange Commission.
All such
forward-looking statements are subject to certain risks and uncertainties and
should be evaluated in light of important risk factors. These risk factors
include, but are not limited to, the following as well as those that are
described in “Risk Factors” under Item 1A and elsewhere in the Annual Report on
Form 10-K: business and economic conditions, rapid technological changes
accompanied by frequent new product introductions, competitive pressures,
dependence on key customers, inability to gauge order flows from customers,
fluctuations in quarterly and annual results, the reliance on a limited number
of third party suppliers, limitations of the Company’s manufacturing capacity
and arrangements, the protection of the Company’s proprietary technology, the
effects of pending or threatened litigation, the dependence on key personnel,
changes in critical accounting estimates, potential impairments related to
investments, foreign regulations, and potential material weaknesses in internal
control over financial reporting. In addition, during weak or uncertain economic
periods, customers’ visibility deteriorates causing delays in the placement of
their orders. These factors often result in a substantial portion of the
Company’s revenue being derived from orders placed within a quarter and shipped
in the final month of the same quarter.
Any of these factors could cause our
actual results to differ materially from its anticipated results. For a more
detailed discussion of these factors, see the "Risk Factors" discussion in Item
1A in the Annual Report on Form 10-K. The Company cautions readers to carefully
consider such factors. Many of these factors are beyond the Company’s control.
In addition, any forward-looking statements represent the Company’s estimates
only as of the date they are made, and should not be relied upon as representing
the Company’s estimates as of any subsequent date. While the Company may elect
to update forward-looking statements at some point in the future, the Company
specifically disclaims any obligation to do so, even if its estimates
change.
17
|
Item 3.
|
Quantitative and Qualitative
Disclosures about Market
Risk
|
Disclosure
Controls and Procedures
Our
management, including our Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of our disclosure controls and procedures as of the
end of the period covered by this quarterly report as required by Rule 13a-15
under the Securities Exchange Act of 1934 (the “Exchange Act”). Based
on that evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that, as of the end of the period covered by this quarterly report,
our disclosure controls and procedures (as defined in Rule 13a-15(e) under
the Exchange Act) are effective, in all material respects, to ensure that
information we are required to disclose in reports that we file or submit under
the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms, and that such information is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.
Change in
Internal Control over Financial Reporting
No change
in our internal control over financial reporting (as defined in
Rule 13a-15(f) under the Exchange Act) occurred during our most recent
fiscal quarter that has materially affected, or is likely to materially affect,
our internal control over financial reporting.
Part
II. OTHER INFORMATION
There are
no material legal proceedings pending to which we or any of our subsidiaries is
a party or of which any of our property is subject. To our knowledge,
there are no material legal proceedings to which any our directors, officers or
affiliates, or any beneficial owner of more than five percent of our common
stock, or any associate of any of the foregoing, is a party adverse to us or any
of our subsidiaries or has a material interest adverse to us or any of our
subsidiaries.
In
addition to the other information set forth in this report and the risk factor
set forth below, you should carefully consider the factors discussed in Part I,
Item 1A. “Risk Factors” in our Annual Report on Form 10-K for our fiscal year
ended December 31, 2009. The risks discussed in our Annual Report on Form 10-K
could materially affect our business, financial condition and future results.
The risks described in our Annual Report on Form 10-K are not the only risks
facing us. Additional risks and uncertainties not currently known to us or that
we currently deem to be immaterial also may materially and adversely affect our
business, financial condition or operating results. There are no material
changes to the Risk Factors described in Item 1A in our annual report on Form
10-K for the year ended December 31, 2009.
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of
Proceeds
|
Use of
Proceeds
On December 8 2009, our
registration statement (File No. 333-160417) was declared effective
for our initial public offering, pursuant to which we registered the offering
and sale on a best efforts basis of up to 50,000,000 units, each
unit consisting of one share of our common stock and one-half of one common
stock purchase warrant, at a public offering price
of between Cdn$0.15 and Cdn$0.25 per unit, on a best efforts basis. The offering was made
simultaneously in Canada and in the United States and Canaccord Capital
Corporation and Bolder Investment Partners, Ltd. acted as our co-lead agents in
Canada and Canaccord Adams Inc. acted as our agent in the United
States.
The
offering closed on December 24, 2009. At the closing, we issued and sold
33,790,060 units, consisting of 33,790,060 shares of common stock and warrants
to purchase an additional 15,590,079 shares of common stock, at a public
offering price of Cdn$.0.20 per unit, resulting in gross proceeds to us of
approximately $5.8 million. The total offering expenses were approximately $1.9
million, consisting of agents’ commissions of approximately $0.5 million
and other offering-related expenses of approximately $1.4 million. None of the offering
related expenses were direct or indirect payments to any of our directors or
officers or their associates, to persons owning ten percent or more of any class
of our equity securities or to any of our
affiliates.
18
The net
proceeds to us from the offering, after deducting all offering-related expenses,
was approximately $3.9 million. In January 2010, we used
approximately $746,000 of the net proceeds from the offering to repay
outstanding notes payable indebtedness. We have used the remaining approximately
$3.2 million in net proceeds from the offering for the payment of some old trade
payables and general corporate purposes, including the financing our
current operating losses. None of the uses of the proceeds from the offering
were direct or indirect payments to any of our directors ($46,417 was repaid to
W Lee) or officers or their associates, to persons owning ten percent or more of
any class of our equity securities or to any of our affiliates.
Purchase
of Equity Securities - none
|
Item
3.
|
Defaults
Upon Senior Securities
|
None
|
Item
5.
|
Other
Information
|
None
|
Description
|
||
|
31.1
|
Certification
of the Chief Executive Officer of the Registrant pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
|
|
|
31.2
|
Certification
of the Chief Financial Officer of the Registrant pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
|
|
|
32.1
|
Certification
of the Chief Executive Officer of the Registrant pursuant to 18 U.S.C.
Section 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
32.2
|
Certification
of the Chief Financial Officer of the Registrant pursuant to 18 U.S.C.
Section 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
19
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
VUZIX
CORPORATION
(Registrant)
|
||
|
Date:
May __, 2010
|
By:
|
/s/ Paul
J. Travers
|
|
Paul
J. Travers
|
||
|
President,
Chief Executive Officer
|
||
|
(Principal
Executive Officer)
|
||
|
Date:
May __, 2010
|
By:
|
/s/ Grant
Russell
|
|
Grant
Russell
|
||
|
Executive
Vice President and Chief Financial Officer
|
||
|
(Principal
Financial and Accounting
Officer)
|
||
20