Vuzix Corp - Quarter Report: 2011 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the Quarterly Period Ended March 31, 2011
OR
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¨
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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
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State or other jurisdiction of
incorporation or organization
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(I.R.S. Employer
Identification No.)
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75 Town Centre Drive
Rochester, New York
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14623
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(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 ¨
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 ¨ No ¨
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 ¨
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Accelerated filer ¨
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Non-accelerated filer ¨
(Do not check if a smaller
reporting company)
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Smaller reporting company þ
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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 ¨ No þ
As of May 16, 2011, there were 263,600,274 shares of the registrant’s common stock outstanding.
INDEX
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Page
No.
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Part I – Financial Information
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Item 1.
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Consolidated Financial Statements (Unaudited):
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3 |
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Consolidated Balance Sheets as of March 31, 2011 (Unaudited) and December 31, 2010
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3
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Consolidated Statements of Operations for the Three Months Ended March 31, 2011 and 2010 (Unaudited)
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4
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Consolidated Statement of Cash Flows for the Three Months Ended March 31, 2011 and 2010 (Unaudited)
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5
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Notes to the Unaudited Condensed Consolidated Financial Statements
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6
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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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11 |
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
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18 |
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Item 4.
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Controls and Procedures
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18 |
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Part II – Other Information
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Item 1.
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Legal Proceedings
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19 |
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Item 1A.
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Risk Factors
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19 |
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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19 |
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Item 3.
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Defaults Upon Senior Securities
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20 |
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Item 4.
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Reserved
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20 |
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Item 5.
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Other Information
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20 |
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Item 6.
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Exhibits
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20 |
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Signatures
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21 | |
Part 1: FINANCIAL INFORMATION
VUZIX CORPORATION
CONSOLIDATED BALANCE SHEETS
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(Unaudited)
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||||||||
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March 31,
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December 31,
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|||||||
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2011
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2010
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|||||||
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Current Assets
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||||||||
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Cash and Cash Equivalents
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$ | 812,289 | $ | 2,636,819 | ||||
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Accounts Receivable, Net
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1,798,168 | 1,358,905 | ||||||
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Inventories, Net (Note 3)
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4,173,763 | 3,748,664 | ||||||
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Prepaid Expenses and Other Assets
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54,132 | 158,817 | ||||||
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Total Current Assets
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6,838,352 | 7,903,205 | ||||||
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Tooling and Equipment, Net
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596,822 | 562,085 | ||||||
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Patents and Trademarks, Net
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711,941 | 726,892 | ||||||
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Total Assets
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$ | 8,147,115 | $ | 9,192,182 | ||||
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||||||||
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Current Liabilities
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||||||||
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Accounts Payable
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$ | 3,658,664 | $ | 4,128,842 | ||||
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Lines of Credit (Note 4)
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825,000 | 96,040 | ||||||
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Current Portion of Long-term Debt, net of discount
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290,133 | 118,943 | ||||||
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Current Portion of Capital Leases
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91,255 | 99,523 | ||||||
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Customer Deposits (Note 5)
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377,330 | 1,289,592 | ||||||
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Current Portion of Deferred Trade Payables
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699,766 | 691,680 | ||||||
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Accrued Expenses (Note 6)
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222,336 | 288,798 | ||||||
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Income Taxes Payable
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2,425 | 9,100 | ||||||
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Total Current Liabilities
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6,166,909 | 6,722,518 | ||||||
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||||||||
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Long-Term Liabilities
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||||||||
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Accrued Compensation (Note 8)
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695,096 | 645,096 | ||||||
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Long Term Portion of Term Debt, net of discount (Note 9)
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3,339,479 | 3,479,843 | ||||||
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Long Term Portion of Deferred Trade Payables (Note 9)
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1,050,852 | 1,233,703 | ||||||
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Long Term Portion of Capital Leases
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88,798 | 102,071 | ||||||
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Accrued Interest
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568,369 | 420,448 | ||||||
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||||||||
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Total Long-Term Liabilities
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5,742,594 | 5,881,161 | ||||||
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||||||||
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Total Liabilities
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11,909,503 | 12,603,679 | ||||||
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||||||||
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Stockholders’ Equity
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||||||||
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Series C Preferred Stock — $.001 Par Value, 500,000 Shares Authorized; (Refer to Note 14 for Series A, Series B and Unauthorized Preferred Stock) 0, Shares Issued and Outstanding at December 31(Note 14)
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— | — | ||||||
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Common Stock — $.001 Par Value, 700,000,000 Shares Authorized; 263,600,274, Shares Issued and Outstanding at March 31 and December 31, Respectively
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263,600 | 263,600 | ||||||
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Additional Paid-in Capital
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19,211,217 | 19,141,802 | ||||||
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Accumulated (Deficit)
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(23,009,869 | ) | (22,589,563 | ) | ||||
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Subscriptions Receivable (Note 18)
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(227,336 | ) | (227,336 | ) | ||||
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||||||||
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Total Stockholders’ Equity
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(3,762,388 | ) | (3,411,497 | ) | ||||
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||||||||
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Total Liabilities and Stockholders’ Equity
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$ | 8,147,115 | $ | 9,192,182 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
3
(Unaudited)
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For Three Months
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||||||||
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Ended March 31,
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||||||||
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2011
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2010
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(Unaudited)
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(Unaudited)
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|||||||
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Sales of Products
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$ | 3,838,504 | $ | 1,968,824 | ||||
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Sales of Engineering Services
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234,605 | 93,135 | ||||||
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Total Sales
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4,073,109 | 2,061,959 | ||||||
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Cost of Sales — Products
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2,256,062 | 1,444,536 | ||||||
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Cost of Sales — Engineering Services
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119,648 | 57,539 | ||||||
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Total Cost of Sales
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2,375,710 | 1,502,075 | ||||||
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Gross Profit
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1,697,399 | 559,884 | ||||||
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Operating Expenses:
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||||||||
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Research and Development
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525,722 | 494,000 | ||||||
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Selling and Marketing
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504,761 | 617,186 | ||||||
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General and Administrative
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684,272 | 749,664 | ||||||
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Depreciation and Amortization
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111,098 | 110,266 | ||||||
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Total Operating Expenses
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1,825,853 | 1,971,116 | ||||||
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Loss from Operations
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(128,454 | ) | (1,411,232 | ) | ||||
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Other Income (Expense)
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||||||||
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Interest and Other (Expense) Income
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665 | 414 | ||||||
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Foreign Exchange Gain (Loss)
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3,714 | (5,174 | ) | |||||
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Amortization of Senior Term Debt Discount
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(62,284 | ) | ||||||
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Interest Expenses
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(214,672 | ) | (91,307 | ) | ||||
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Total Other Income (Expense)
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(272,577 | ) | (96,067 | ) | ||||
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Loss Before Provision for Income Taxes
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(401,031 | ) | (1,507,299 | ) | ||||
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Provision (Benefit) for Income Taxes
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19,275 | 875 | ||||||
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Net Loss
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(420,306 | ) | $ | (1,508,174 | ) | |||
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Basic and Diluted Loss per Share
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$ | (0.0016 | ) | $ | (0.0057 | ) | ||
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Weighted-average Shares Outstanding — Basic and Diluted
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263,600,274 | 263,600,274 | ||||||
4
(Unaudited)
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Three Months Ended
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||||||||
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March 31,
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||||||||
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2011
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2010
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|||
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Cash Flows from Operating Activities
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Net Loss
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$
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(420,306
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)
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$
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(1,508,174
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)
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Non-Cash Adjustments
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Depreciation and Amortization
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111,098
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110,266
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Stock-Based Compensation Expense
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69,415
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62,022
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Amortization of Senior Term Debt Discount
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62,284
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—
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||||||
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(Increase) Decrease in Operating Assets
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Accounts Receivable
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(439,263
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)
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649,693
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Inventories
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(425,099
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)
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(108,788
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)
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Prepaid Expenses and Other Assets
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104,685
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4,834
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Increase (Decrease) in Operating Liabilities
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Accounts Payable
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(470,180
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)
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(755,422
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)
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Accrued Expenses
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(66,462
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)
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(28,691
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)
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Customer Deposits
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(912,262
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)
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24,257
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Income Taxes Payable
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(6,675
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)
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(2,717
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)
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Accrued Compensation
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50,000
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50,000
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||||
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Accrued Interest
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147,921
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|
|
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54,786
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|
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Net Cash Flows Used in Operating Activities
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|
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(2,194,844
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)
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|
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(1,447,934
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)
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Cash Flows from Investing Activities
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|
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|
|
|
|
|
|
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Purchases of Tooling and Equipment
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|
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(128,801
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)
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|
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(29,549
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)
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Investments in Patents and Trademarks
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(2,084
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)
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|
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(34,736
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)
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Net Cash Used in Investing Activities
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|
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(130,885
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)
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|
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(64,285
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)
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Cash Flows from Financing Activities
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|
|
|
|
|
|
|
|
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Net Change in Lines of Credit
|
|
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728,960
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|
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(12,045
|
)
|
|
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Repayment of Capital Leases
|
|
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(21,540
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)
|
|
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(27,142
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)
|
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Repayment of Notes Payable
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(206,221
|
)
|
|
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(746,417
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)
|
||
|
|
|
|
|
|
|
|
|
|
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Net Cash Flows Provided (Used) by Financing Activities
|
|
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501,199
|
|
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(785,604
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)
|
|
|
|
|
|
|
|
|
|
|
|
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Net Increase (Decrease) in Cash and Cash Equivalents
|
|
|
(1,824,530
|
)
|
|
|
(2,297,823
|
)
|
|
Cash and Cash Equivalents — Beginning of Year
|
|
|
2,636,819
|
|
|
|
2,500,523
|
|
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Cash and Cash Equivalents — End of Period
|
|
$
|
812,289
|
|
|
$
|
202,700
|
|
|
|
|
|
|
|
|
|
|
|
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Supplemental Disclosures
|
|
|
|
|
|
|
|
|
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Interest Paid
|
|
|
66,503
|
|
|
|
36,521
|
|
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Income Taxes Paid
|
|
|
35,493
|
|
|
|
3,592
|
|
|
|
|
|
|
|
|
|
|
|
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Non-Cash Investing Transactions
|
|
|
|
|
|
|
|
|
|
Equipment Acquired Under Capital Lease
|
|
|
7,543
|
|
|
|
—
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
VUZIX CORPORATION AND SUBSIDIARY
Note 1 — Basis of Presentation
The accompanying 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, 2010, as reported in the Company’s 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. Certain prior year amounts have been reclassified to conform to the current year presentation.
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, 2010 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 $420,306 for the three months ended March 31, 2011 and has an accumulated deficit of $23,009,869 as of March 31, 2011. The Company’s losses in the current three month period and the prior two fiscal years 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. There can be no assurance that the Company will be able to borrow or sell securities in the future, which raises 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.
In late December 2010, the Company closed on a Convertible, Senior Secured Term loan in the principal amount of $4,000,000 with interest payable at the rate of 12% per annum. No payments of principal are required in first 12 months of the loan and beginning on January 13, 2012, the Company is required to make 24 equal monthly principal payments of $141,666. A final principal payment of $600,000 is due at the end of the 48-month period or December 23, 2014. Interest is due and payable semi-annually commencing June 23, 2011. In connection with the financing, four existing secured lenders that were owed $2,320,980 in principal and accrued interest have agreed to subordinate their security interests in favor of the Convertible, Senior Secured Term loan and to extend the period of debt repayments for 24 to 36 months following closing of the Loan transaction.
On March 22, 2011 the Company entered into an agreement with a bank for $2 million in credit facilities to support on-going working capital needs. The credit facility is an accounts receivable formula based line of credit, which matures on March 22, 2013. Under the agreement, the Company may borrow up to 80% of Company’s eligible accounts receivable generated by sales to customers based in the United States and, in addition, approved international accounts on a case-by-case basis.
Together these new loans and existing debt restructurings have improved the Company’s liquidity position and working capital. The Company’s business plan for fiscal year 2011 projects a significant improvement in cash flow, including EBITDA profitability levels that will be the minimum requirements of the Senior Term Debt Lenders. However, there is no assurance that the Company will achieve the sales, margin or cash flow projected in its business plan.
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, 2010:
|
March 31, 2011
|
December 31, 2010
|
|||||||
|
Purchased Parts and Components
|
|
$
|
2,166,396
|
|
|
$
|
2,219,918
|
|
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Work in Process
|
|
|
819,486
|
|
|
|
751,794
|
|
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Finished Goods
|
|
|
1,187,881
|
|
|
|
776,952
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
4,173,763
|
|
|
$
|
3,748,664
|
|
Note 4 – Bank Lines of Credit
The Company entered into an agreement with Bridge Bank National Association for $2 million in credit facilities to support on-going working capital needs. The credit facility is an accounts receivable formula based line of credit, which matures on March 22, 2013. Under the agreement, the Company may borrow up to 80% of the Company’s eligible accounts receivable generated by sales to customers based in the United States and, in addition, approved international accounts on a case-by-case basis. Bridge Bank has been granted a first position security interest in all of Company’s current and future assets, with the exception of Intellectual Property in which a second lien has been granted Bridge Bank. All secured debt is subordinated to the Bridge Bank facility, except to the extent of the first security interest granted in the Company’s Intellectual Property to the holders of its Convertible, Senior Secured Term Debt.
The borrowing rate for the facility is the Bridge Bank Prime Rate plus 1.25%, with a floor of 3.25%. As of March 31, 2011 the effective interest rate was 4.5%. Interest is payable monthly and principal is due at maturity. As of March 31, 2011 the loan balance was $825,000.
The Company must maintain an asset coverage ratio (ACR) of at least 1.5 to 1.00 on a monthly basis, and must also maintain quarterly earnings before interest, taxes, depreciation, and amortization (EBITDA) losses and non-cash compensation or expense, which are measured monthly on a trailing 90 days, not to exceed minus $(150,000), with annual EBITDA to be a minimum of $1 million. ACR is defined as the sum of unrestricted cash, which the Company holds at Bridge Bank, plus eligible accounts receivable divided by all Bank indebtedness.
Note 5 — Customer Deposits
Customer deposits represent advance payments made by customers when they place orders for customer specific defense products. These deposits range from 20 to 40% of the total order amount. These deposits are credited to the customer against product deliveries or at the completion of their order. During the three months ended March 31, 2011 no additional deposits were received.
Note 6 — Accrued Expenses
Accrued expenses consisted of the following:
|
March 31, 2011
|
December 31, 2010
|
|||||||
|
Accrued Wages and Related Costs
|
|
$
|
71,609
|
|
|
$
|
68,954
|
|
|
Accrued Professional Services
|
|
|
41,000
|
|
|
|
91,000
|
|
|
Accrued Warranty Obligations
|
|
|
104,277
|
|
|
|
99,257
|
|
|
Other Accrued Expenses
|
|
|
5,450
|
|
|
|
29,587
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
222,336
|
|
|
$
|
288,798
|
|
7
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 certain 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, 2011 were as follows:
|
March 31, 2011
|
||||
|
Accrued Warranty Obligations at December 31
|
|
$
|
99,257
|
|
|
Reductions for Settling Warranties
|
(58,475
|
)
|
||
|
Warranties Issued During Period
|
63,495
|
|||
|
Adjustments to Pre-Existing Warranties
|
|
|
-
|
|
|
Accrued Warranty Obligations at March 31
|
|
$
|
104,277
|
|
Note 7 – 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 three months ended March 31, 2011 and 2010, 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 8 — Accrued Compensation
Accrued compensation represents amounts owed to officers of the Company for services. The principal is not subject to a fixed repayment schedule, and interest on the outstanding balances is payable at 8% per annum, compounding monthly from and after the completion of the Company’s initial public offering. $50,000 in compensation was accrued for the three months ended March 31, 2011 and 2010.
Note 9 — Long-Term Debt
Long-term debt consisted of the following as of:
|
March 31,
|
December 31,
|
|||||||
|
|
2011
|
|
|
2010
|
|
|||
|
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
|
|
|
Note payable to an officer of the Company. The principal and interest is subject to a fixed blended repayment schedule of 36 months, commencing January 31, 2011. The loan bears interest at 12% per annum and is secured by a subordinated position in all the assets of the Company
|
|
|
238,028
|
|
|
|
258,658
|
|
|
Convertible, Senior Secured Term Debt. The principal is subject to a fixed repayment schedule beginning in December 2011 through to December 2014, bears interest at 12%, which is due and payable semi-annually, beginning June 23, 2011. The loan is secured by a first security position in all the Intellectual Property assets of the Company and subordinated first security interest, after our operating bank lender, in all the other assets of the Company
|
|
|
4,000,000
|
|
|
|
4,000,000
|
|
|
Unamortized debt discount related Warrants issued pursuant to Senior Term Debt net of $62,284 and $5,536 in recognized interest expense in 2011 and 2010.
|
(942,559)
|
(1,004,843
|
)
|
|||||
|
Long-term secured deferred trade payable
|
|
|
1,750,618
|
|
|
|
1,925,384
|
|
|
Note payable for which the principal and interest is subject to a fixed blended repayment schedule of 36 months, commencing January 31, 2011. The loan bears interest at 12% per annum and is secured by a subordinated position in all the assets of the Company
|
124,935
|
135,763
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,380,230
|
|
|
$
|
5,524,170
|
|
|
Less: Amount Due Within One Year
|
|
|
989,899
|
|
|
|
810,623
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount Due After One Year
|
|
$
|
4,390,331
|
|
|
$
|
4,713,547
|
|
8
At the date of deferral, December 23, 2010, accrued interest was reclassified into principal on certain Notes Payable and the Long-term secured deferred trade payable itemized in the above Long-Term Debt table.
Note 10 — 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, 2010, the Company had unrecognized tax benefits totaling $4,244,000, which would have a favorable impact on the Company’s provision (benefit), if recognized.
In the three months ended March 31, 2011 and 2010, the Company generated federal and state net operating losses for income tax purposes. These federal and state net operating loss carry forwards total approximately $18,500,000 at March 31, 2011 and begin to expire in 2018, if not utilized. Of the Company’s tax credit carry forwards, $1,272,000 expires between 2017 and 2018, if not utilized.
Note 11 — Stock Warrants
A summary of the various changes in warrants during the three-month period ended March 31, 2011 is as follows.
|
Number of
Shares
|
||||
|
Warrants Outstanding at December 31, 2010
|
65,604,786 | |||
|
Exercised During the Period
|
— | |||
|
Issued During the Period
|
— | |||
|
Expired During the Period
|
— | |||
|
Warrants Outstanding, March 31, 2011
|
65,604,786 | |||
The outstanding warrants as of March 31, 2011 expire from April 30, 2011 to December 31, 2015. The weighted average remaining term of the warrants is 3.2 years. The weighted average exercise price is $0.1440 per share.
Note 12 — Stock Option Plans
A summary of stock option activity for the three months ended March 31, 2011 is as follows.
|
Weighted
|
||||||||||||
|
Number of
|
Average
|
Exercise Price
|
||||||||||
|
Shares
|
Exercise
Price
|
Range
|
||||||||||
|
Outstanding at December 31, 2010
|
|
|
15,435,674
|
|
|
$
|
0.1182
|
|
|
$
|
0.0061 – $ 0.2334
|
|
|
Granted
|
|
|
5,512,690
|
|
|
$
|
0.1500
|
|
|
$
|
0.1500
|
|
|
Exercised
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Expired or Forfeited
|
|
|
(125,000
|
)
|
|
$
|
0.1500
|
|
|
$
|
0.1500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2011
|
|
|
20,823,364
|
|
|
$
|
0.1265
|
|
|
$
|
0.0061 – $ 0.2334
|
|
As of March 31, 2011, there were 13,974,121 options that were fully vested and exercisable at a weighted average exercise price of $0.1126 per share. The weighted average remaining contractual term on the vested options is 4.4 years.
As of March 31, 2011 there were 6,849,243 unvested options exercisable at a weighted average exercise price of $0.1500 per share. The weighted average remaining contractual term on the unvested options is 9.2 years.
Note 13 — Stock-based Compensation Expense
The table below summarizes the impact of outstanding stock options on the results of operations for the three months ended March 31, 2011 and 2010:
|
Three Months Ended
|
||||||||
|
March 31,
2011
|
March 31,
2010
|
|||||||
|
|
||||||||
|
Stock-based compensation expense:
|
||||||||
|
Stock Options
|
$ | 69,415 | $ | 62,022 | ||||
|
Income tax benefit
|
— | — | ||||||
|
Net Decrease in Net Income
|
$ | 69,415 | $ | 62,022 | ||||
|
Per share increased in Loss Per Share:
|
||||||||
|
Basic and Diluted
|
$ | 0.0003 | $ | 0.0002 | ||||
The weighted average fair value of option grants was calculated using the Black-Scholes-Merton option pricing method. At March 31, 2011, the Company had approximately $424,851 of unrecognized stock compensation expense, which will be recognized over a weighted average period of approximately 1.1 years.
Note 14 — Litigation
The Company is not subject to any legal proceedings or claims.
Note 15 — Product Revenue
The following table represents the Company’s total sales classified by product category for the three months ended March31, 2011 and 2010:
|
Three Months Ended
|
||||||||
|
March 31,
2011
|
March 31,
2010
|
|||||||
|
|
||||||||
|
Consumer Video Eyewear
|
$ | 648,707 | $ | 1,225,890 | ||||
|
Defense Products
|
3,189,797 | 742,934 | ||||||
|
Engineering Services
|
234,605 | 93,135 | ||||||
|
|
||||||||
|
Total
|
$ | 4,073,109 | $ | 2,061,959 | ||||
Note 16 — Recent Accounting Pronouncements
There are no recent accounting pronouncements that have a material impact on the condensed consolidated financial statements.
10
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 interim report. In addition to historical information, the matters discussed in Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this Form 10-Q include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those discussed in the forward-looking statements.
As used in this report, unless otherwise indicated, the terms “Company,” “Vuzix” “management,” “we,” “our,” and “us” refer to Vuzix Corporation and its subsidiary.
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 annual report on Form 10-K for the year ended December 31, 2010. 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:
|
·
|
valuation of inventories;
|
|
·
|
carrying value of long-lived assets;
|
|
·
|
valuation of intangible assets;
|
|
·
|
revenue recognition;
|
|
|
·
|
product warranty;
|
|
·
|
research & 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.
11
Carrying Value of Long-Lived Assets
If facts and circumstances indicate that the value of a long-lived asset, including a product’s 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 $711,941 as of March 31, 2011, because management believes that its value is recoverable.
We recorded an impairment charge of $49,956 representing cost of $89,151, less accumulated amortization of $39,195 in 2010 regarding our abandoned patents and trademarks. The value of the remaining intellectual property, such as patents and trademarks, were valued (net of accumulated amortization) at $726,892 as of December 31, 2010.
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.
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. 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 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.
12
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 is determined based on the most recent quoted sales price on the TSX-V Exchange.
Income Taxes
We have historically incurred domestic operating losses from both a financial reporting and tax return standpoint. Accordingly, we record 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 that 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 amount currently recorded, an adjustment of the valuation allowance would increase income to be recognized in the period such determination was made.
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. 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 $18,500,000 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
There are no recent accounting pronouncements that have a material impact on the condensed consolidated financial statements.
Key Performance Indicators
We believe that a key indicator for our business is the trend for the volume of orders received from customers, especially those orders related to night-vision electronic modules. 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. Total shipments of night vision electronics module customers for the three months ended March 31, 2011 and 2010 were $1,346,979, and $Nil, respectively.
13
Results of Operations
Comparison of Three Months Ended March 31, 2011 and March 31, 2010
Sales. Our sales were $4,073,109 for the first quarter of 2011 compared to $2,061,959 for the same period in 2010. This represents a 97.5% increase for the three month period 2011 as compared to 2010. Our sales from defense products increased to $3,189,797 or 78.3% of our total sales in the first quarter of 2011 compared to $742,934 or 36.0% of total sales in the same period of 2010, an increase of $2,446,863 or 329%. The increase primarily resulted from shipments of $1,346,979 in night vision electronics in the first quarter of 2011 as compared to 2010 when they were Nil and a 110% increase in sales of our Tac-Eye Video Eyewear. Sales from our defense-related engineering programs for the first quarter of 2011, increased to $234,605 or 5.8% of total sales compared to $93,135 or 4.5% of total sales in same quarter 2010. The $141,470 increase resulted from having 2 active programs during the first quarter of 2011 versus only one engineering service program in the same quarter in 2010. Consumer Video Eyewear product sales decreased to $648,707 or 15.9% of total sales for the first quarter of 2011 compared to $1,225,890 or 47.1% of our total sales for the first quarter of 2010. This decrease resulted from delays in the introduction of our new Wrap 1200 Video Eyewear, which was announced in early January and is still not available. Many of our customers appear to be waiting for the new version and not purchasing our current models. Further in first quarter of 2010, we had stronger revenues from the backorder demand for the new products we launched late in the fall of 2009 but had been unable to ship..
Cost of Sales and Gross Profit. Gross profit increased to $1,697,399 for the first quarter of 2011 from $559,884 for the same period in 2010, a increase of $1,137,516 or 203%. As a percentage of net sales, gross profit increased to 47.1% for the first quarter of 2011 compared to 27.2% for the same period in 2010. This increase was the primarily the result of our higher margin earned on selling our defense products, which were over 78% of total sales versus 36.0% in the prior period.
Research and Development. Our research and development expenses increased by $31,722 or 6.4% in the first quarter of 2011, to $525,722 compared to $494,000 in the same period of 2010. Expenses we incur under government funded engineering programs are included in costs of goods sold.
Selling and Marketing. Selling and marketing expenses were $504,761 for the first quarter of 2011 compared to $617,186 for the same period in 2010, a decrease of $112,425 or 18.2%. The decreases were mainly attributable to low catalog advertising costs and reduced external public relations consulting fees.
General and Administrative. General and administrative expenses were $684,272 for the first quarter costs of 2011 as compared to $749,664 for the same period in 2010, a decrease of $65,392 or 8.7%. The lower general and administrative costs related to reduced spending on legal and accounting expenses, which were higher in the same period in 2010 as we had just become a public company.
Depreciation and Amortization. Our depreciation and amortization expense for the first quarter of 2011 was $111,098 as compared to $110,266 in the same period in 2010.
Other Income (Expense). Total other expenses, consisting primarily of interest expense, was $(272,577) in the first quarter of 2011 compared to $(96,067) in the same period in 2010. The increase in expenses was primarily attributable to interest costs on our new term debt along with $62,284 in costs related to the amortization of senior term debt expense.
Provision for Income Taxes. The provision for income taxes for the first quarter of 2011 was $19,275 compared to $875 for the same period in 2010. The increase is the result of the commencement of having to pay Japan Branch office tax commencing in 2011.
Net (Loss) and (Loss) per Share. Our net loss was $(420,306) or $(0.0016) per share in the first quarter of 2011, a decreased loss of $1,087,868, or 72.1%, from $(1,508,174) or $(0.0057) per share in the same period in 2010.
Liquidity and Capital Resources
As of March 31, 2011, we had cash and cash equivalents of $812,289 a decrease of $1,824,530 from $2,636,819 as of December 31, 2010.
Operating Activities. Cash (used in) operating activities was $(2,194,844) in the first quarter of 2011 and $(1,447,934) in the same period in 2010. Changes in non-cash operating assets and liabilities were $(2,017,335) in the first quarter of 2011 and $(112,048) in the same period in 2010. The major non-cash operating items for first quarter of 2011 resulted from a $(470,180) reduction in accounts payable and a $(912,262) reduction in customer deposits, along with increases in accounts receivable of $(439,263) and $(425,099) in inventories.
14
Investing Activities. Cash (used in) investing activities was $(130,885) in the first quarter of 2011 and $(64,285) in the same period in 2010. Cash used for investing activities in the first quarter of 2011 related primarily to the purchase of computer equipment additions and tooling. The costs of registering our intellectual property rights, included in the investing activities totals described above, were $(2,084) in the first quarter of 2011 and $(34,736) in the same period in 2010.
Financing Activities. Cash from (used in) financing activities was $501,199 in the first quarter of 2011, whereas in the same period in 2010, our net financing activities used $(785,604). During the first quarter of 2011, the primary source of cash was $728,960 in drawings under our new operating line of credit before payments of $206,224 and $21,540 on Notes payable and Capital leases, respectively.
Capital Resources. As of March 31, 2011, we had a cash balance of $812,289. We had $56,497 available under our bank lines of credit. The outstanding balance under our line of credit as of March 31, 2011 was $825,000. 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. The credit facility is an accounts receivable formula based line of credit, which matures on March 22. 2013. Under the agreement, the Company may borrow up to 80% of the Company’s eligible accounts receivable generated by sales to customers based in the United States and, in addition, approved international accounts on a case-by-case basis. Bridge Bank has been granted a first position security interest in all of Company’s current and future assets, with the exception of Intellectual Property in which a second lien has been granted. All secured debt other than that secured by Intellectual Property is subordinated to the bank credit facility.
The following 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, 2010. We have been unable to generate cash flows sufficient to support our operations and have been dependent on term debt financings, equity financings. There can be no assurance that we will be able to raise cash from those sources in the future. Our independent auditors issued a going concern explanatory paragraph in their reports dated December 31, 2010 and 2009. With our current level of funding and ongoing losses from operations, doubt exists about our ability to continue as a going concern.
We have the intent and believe that we have the ability to take actions necessary for the Company 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 consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Our cash requirements depend on numerous factors, including new product development activities, our ability to commercialize our products, their timely market acceptance, selling prices and gross margins, and other factors. To the extent we have sufficient operating funds, we expect to carefully devote capital resources to continue our development programs, hire and train additional staff, expand our research and development activities, new product marketing and increased inventory levels. Assuming we are able to increase our sales and achieve our planned gross margins, we anticipate that we will also experience growth in our operating expenses for the foreseeable future. Our future net operating losses, product tooling expenses, and related working capital investments will be the principal use of our cash. In particular, we expect that potentially significant amounts of working capital investments in accounts receivable and inventories that are not offset by corresponding increases in accounts payable will use cash.
Based on our current operating plan, our existing working capital may not be sufficient to fund our planned operating expenses, capital expenditures, and working capital requirements through December 31, 2011 without additional sources of cash and/or the deferral, reduction or elimination of significant planned expenditures on new products, tooling, R&D, and marketing. A shortfall from projected sales levels could have a material adverse effect on our ability to continue operations at current levels. If this were to occur, we would be forced to liquidate certain assets where possible, and/or to suspend or curtail certain of our operations. Any of these actions could harm our business, results of operations and future prospects. To guard against this risk, we intend to seek additional debt, equity or equity-based financing. We can give no assurance that we will be able to obtain additional financing on favorable terms or at all. If we raise additional funds by selling additional shares of our capital stock, or securities convertible into shares of our capital stock, the ownership interest of our existing shareholders may be diluted. The amount of dilution could be increased by the issuance of warrants or securities with other dilutive characteristics, such as anti-dilution clauses or price resets. If we need additional funding for operations and we are unable to raise it, we may be forced to liquidate assets and/or curtail or cease operations or to obtain funds through entering into additional collaborative agreements or other arrangements that may be on unfavorable terms.
15
These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. This basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of liabilities in the normal course of business. In addition, these financial statements do not include any adjustments to the specific amounts and classifications of assets and liabilities, which might be necessary should the Company be unable to continue as a going concern.
In late December 2010 we closed on a Convertible, Senior Secured Term loan in the principal amount of $4,000,000 with a 12% per annum interest rate. No payments of principal are required in first 12 months of the loan and beginning on January 13, 2012, the Company is required to make 24 equal monthly payments of principal $141,666. A final principal payment of $600,000 is due on December 23, 2014. Interest is due and payable semi-annually commencing June 23, 2011. In connection with the financing, four existing secured lenders who are currently owed $2,320,980 in principal and accrued interest agreed to subordinate their security interests in favor of the Lender and to extend the period of debt repayments for 24 to 36 months following closing of the Loan transaction.
We also at times rely on credit lines from our key suppliers and customer deposits in managing our liquidity. As a result, if our trade creditors were to impose unfavorable terms on us or customers decline to make advance deposits for their orders, it would negatively impact our ability to obtain products and services on acceptable terms and operate our business.
On March 22, 2011 the Company entered into an agreement with a bank for $2 million in credit facilities to support on-going working capital needs. The credit facility is an accounts receivable formula based line of credit, which matures on March 22, 2013. Under the agreement, the Company may borrow up to 80% of eligible North American accounts receivable and, in addition, approved international accounts on a case-by-case basis.
If we meet our 2011 sales forecasts, we plan to follow our business strategy of introducing new and improved products.
Additionally 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; the phasing out of the low resolution Video Eyewear models for which we earn a lower gross margin; and the introduction of see-through and new high resolution Video Eyewear;
|
|
|
•
|
restructuring and reengineering our organization and processes to increase efficiency and reduce our operating costs wherever possible for fiscal 2011;
|
|
|
•
|
reducing public relations expenses for fiscal 2011;
|
|
|
•
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minimizing our capital expenditures by eliminating, delaying or curtailing discretionary and non-essential spending;
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reducing and deferring some research and development and delaying some planned product and new technology introductions if required; and
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exploring our options with respect to new debt borrowings and equity financings;
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We anticipate, based on current discussions with our defense customers that some of our expected orders for defense products may be deferred or cancelled due to US Government budget and defense spending cuts. Until the US Government’s longer term deficit and budget plans are finalized we expect to see delays in many areas for our defense products demand. As a result we do not see being able to continue the rate of growth year over year in these products. Additionally we are seeing a faster than expected market demand towards higher resolution portable displays, partially driven by the larger higher resolution products on mobile devices such as the Apple iPad. More customers appear to be stating that they may defer their Video Eyewear purchases until high resolution models are introduced by companies like Vuzix. Management is accessing the impact of this rapidly changing technology market and our ability to get high resolution Video Eyewear products to market within the next year to avoid large sales declines in our existing products.
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, whether our liquidity plan will limit certain of our operational and strategic initiatives designed to grow our business over the long term or whether we will be able to generate sufficient cash flow from operations to service our indebtedness or otherwise fund our operations. These factors raise substantial doubt about our ability to continue as a going concern.
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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:
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Our possible or assumed future results of operations;
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Our business strategies;
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Our ability to attract and retain customers;
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Our ability to sell additional products and services to customers;
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Our cash needs and financing plans;
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Our competitive position;
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Our industry environment;
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Our potential growth opportunities;
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Expected technological advances by us or by third parties and our ability to leverage them;
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The effects of future regulation; and
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The effects of competition.
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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, 2010 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, those that are described in “Risk Factors” under Item 1A and elsewhere in our 2010 annual report on Form 10-K and the following: 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 our 2010 annual report. 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.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable
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) were not effective as discussed below, 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.
Management’s Interim Report on Internal Control Over Financial Reporting
Our internal control over financial reporting includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with US GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized use, acquisition, or disposition of our assets that could have a material effect on the consolidated financial statements.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. As a result of this evaluation, we concluded that our internal control over financial reporting was not effective as of March 31, 2011 because of the material weaknesses set forth below.
During our last fiscal quarter, there were no changes in our internal control over financial reporting. The following is a summary of our material weaknesses as of March 31, 2011:
Financial Reporting and Close Process
Our current financial close process does not ensure accurate financial reporting on a timely basis. We also did not maintain effective controls over the period-end financial close and reporting processes in relation to the consolidation of our subsidiary’s financial information. The specific deficiencies contributing to this material weakness related (a) to inadequate policies and procedures, (b) ineffective procedures and controls over journal entries, accruals and reserves, (c) inadequate controls and procedures related to the timely preparation and review of account reconciliations, (d) inadequate segregation of duties, (e) inadequate controls over cut-off procedures, (f) deficiencies in end-user computing controls of critical spreadsheets, and (g) an insufficient complement of personnel with appropriate levels of knowledge and experience. Due to the actual and potential errors on financial statement balances and disclosures, management has concluded that these deficiencies in internal controls over the period-end financial close and reporting processes constituted a material weakness in internal control over financial reporting. We intend to establish and document financial close processes and procedures including responsibilities and due dates. We also intend to commence utilizing a closing checklist to ensure all procedures are performed and appropriate reviews are completed on a timely basis each quarter and year-end period. Additionally, we intend to implement controls over critical spreadsheets, including change control, input control, access and data security and appropriate review procedures. Further, we intend to seek additional resources with strong accounting and reporting experience when financial resources are available.
Segregation of Duties
There is limited segregation of duties which could result in a material misstatement in our financial statements. Given our staff levels, certain duties within the accounting and finance department cannot be properly segregated. However, we believe that none of these segregation of duty deficiencies resulted in material misstatement to the financial statements as we rely on certain compensating controls, including periodic substantive review of the financial statements by the Chief Executive Officer, Chief Financial Officer, Audit Committee and Board of Directors.
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We have not designed adequate monitoring controls related to our European subsidiary or Japanese branch sales office, such that we can be assured that a material misstatement of financial results would be prevented or detected on a timely basis.
Inventory
We have identified weaknesses in our inventory controls as follows:
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Documented processes and controls are insufficient and are not working effectively for several key inventory processes including inventory adjustments and reserves for excess, defective and obsolete inventory.
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Inventory valuation processes and controls are not sufficiently documented and are not working effectively including costs to be expensed versus inventoried and maintenance of adequate supporting documentation for current unit costs and bill of materials.
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Warranty Reserve
Controls to ensure valuation and adequacy of our warranty reserve were not operating effectively. Specifically, we do not have an adequate process to properly analyze average length of period of return for use in establishing an adequate reserve.
Intangible Asset Impairment Assessment
We have not established adequate controls to properly evaluate intangible assets for impairment consistently on an annual basis or identify when indicators for impairment are present requiring an evaluation.
Internal Controls Procedures and Risk Assessment Program
We have concluded that formal written internal control policies and procedures do not currently exist for all areas within our operations. A well-established and documented internal control structure is pertinent to our ability to maintain accurate books and records, prevent and detect fraud, maintain segregation of duties, report timely financial results and to properly comply with management’s requirements to report on the effectiveness of internal controls over financial reporting pursuant to the Sarbanes-Oxley Act. In determining key controls and appropriate internal controls for us management needs to further develop its risk assessment process, including a fraud risk assessment and monitoring program, that is appropriate for our size and complexity, to assess the risks of material misstatement in the significant accounts and disclosures and related assertions and to ensure implementation of controls to prevent or detect errors or fraud that could result in material misstatements.
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 the year ended December 31, 2010. The risks discussed in our 2010 annual report could materially affect our business, financial condition and future results. The risks described in our 2010 annual report 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 2010 annual report.
Sale of Unregistered Securities – none
Purchase of Equity Securities - none
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None
None
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Description
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31.1
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Certification of the Chief Executive Officer of the Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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31.2
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Certification of the Chief Financial Officer of the Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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32.1
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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.
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32.2
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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.
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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.
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VUZIX CORPORATION
(Registrant)
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Date: May 16, 2011
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By:
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/s/ Paul J. Travers
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Paul J. Travers
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President, Chief Executive Officer
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(Principal Executive Officer)
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Date: May 16, 2011
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By:
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/s/ Grant Russell
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Grant Russell
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Executive Vice President and Chief Financial Officer
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(Principal Financial and Accounting Officer)
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