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File: v222925_Vuzix Corp_1Q 2011_10-Q_as-filed.pdf
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2011
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 000-53846
VUZIX CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
---> 04-3392453
State or other jurisdiction of
---> (I.R.S. Employer
incorporation or organization
---> Identification No.)
75 Town Centre Drive
---> 14623
Rochester, New York
(Address of principal executive offices)
---> (Zip Code)
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 1
--->5(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 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 m
--->onths (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-acceler
--->ated filer, or a smaller reporting company. See
definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exc
--->hange Act.
Large accelerated filer Accelerated filer Non-accelerated filer
---> Smaller reporting company
(Do not check if a smaller
reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act).
---> Yes No
As of May 16, 2011, there were 263,600,274 shares of the registrant's common stock outstanding.
Vuzix Corporation
INDEX
---> Page
---> No.
Part I � Financial Information
Item 1. Consolidated Financial Statements (Unaudited):
---> 3
Consolidated Balance Sheets as of March 31, 2011 (Unaudited) and December 31, 2010
---> 3
Consolidated Statements of Operations for the Three Months Ended March 31, 2011 and 2010 (Unaudit
--->ed) 4
Consolidated Statement of Cash Flows for the Three Months Ended March 31, 2011 and 2010 (Unaudite
--->d) 5
Notes to the Unaudited Condensed Consolidated Financial Statements
---> 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
---> 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk
---> 18
Item 4. Controls and Procedures
---> 18
Part II � Other Information
Item 1. Legal Proceedings
---> 19
Item 1A. Risk Factors
---> 19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
---> 19
Item 3. Defaults Upon Senior Securities
---> 20
Item 4. Reserved
---> 20
Item 5. Other Information
---> 20
Item 6. Exhibits
---> 20
Signatures
---> 21
2
Part 1: FINANCIAL INFORMATION
Item 1: Condensed Consolidated Financial Statements
VUZIX CORPORATION
CONSOLIDATED BALANCE SHEETS
---> (Unaudited)
---> March 31, December 31,
---> 2011 2010
Current Assets
Cash and Cash Equivalents
---> $ 812,289 $ 2,636,819
Accounts Receivable, Net
---> 1,798,168 1,358,905
Inventories, Net (Note 3)
---> 4,173,763 3,748,664
Prepaid Expenses and Other Assets
---> 54,132 158,817
Total Current Assets
---> 6,838,352 7,903,205
Tooling and Equipment, Net
---> 596,822 562,085
Patents and Trademarks, Net
---> 711,941 726,892
Total Assets
---> $ 8,147,115 $ 9,192,182
Current Liabilities
Accounts Payable
---> $ 3,658,664 $ 4,128,842
Lines of Credit (Note 4)
---> 825,000 96,040
Current Portion of Long-term Debt, net of discount
---> 290,133 118,943
Current Portion of Capital Leases
---> 91,255 99,523
Customer Deposits (Note 5)
---> 377,330 1,289,592
Current Portion of Deferred Trade Payables
---> 699,766 691,680
Accrued Expenses (Note 6)
---> 222,336 288,798
Income Taxes Payable
---> 2,425 9,100
Total Current Liabilities
---> 6,166,909 6,722,518
Long-Term Liabilities
Accrued Compensation (Note 8)
---> 695,096 645,096
Long Term Portion of Term Debt, net of discount (Note 9)
---> 3,339,479 3,479,843
Long Term Portion of Deferred Trade Payables (Note 9)
---> 1,050,852 1,233,703
Long Term Portion of Capital Leases
---> 88,798 102,071
Accrued Interest
---> 568,369 420,448
Total Long-Term Liabilities
---> 5,742,594 5,881,161
Total Liabilities
---> 11,909,503 12,603,679
Stockholders' Equity
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)
---> -- --
Common Stock -- $.001 Par Value, 700,000,000 Shares Authorized; 263,600,274, Shares Issued and Outstanding at
March 31 and December 31, Respectively
---> 263,600 263,600
Additional Paid-in Capital
---> 19,211,217 19,141,802
Accumulated (Deficit)
---> (23,009,869) (22,589,563)
Subscriptions Receivable (Note 18)
---> (227,336) (227,336)
Total Stockholders' Equity
---> (3,762,388) (3,411,497)
Total Liabilities and Stockholders' Equity
---> $ 8,147,115 $ 9,192,182
The accompanying notes are an integral part of these consolidated financial statem
--->ents.
3
VUZIX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
---> For Three Months
---> Ended March 31,
---> 2011 2010
---> (Unaudited) (Unaudited)
Sales of Products
---> $ 3,838,504 $ 1,968,824
Sales of Engineering Services
---> 234,605 93,135
Total Sales
---> 4,073,109 2,061,959
Cost of Sales -- Products
---> 2,256,062 1,444,536
Cost of Sales -- Engineering Services
---> 119,648 57,539
Total Cost of Sales
---> 2,375,710 1,502,075
Gross Profit
---> 1,697,399 559,884
Operating Expenses:
Research and Development
---> 525,722 494,000
Selling and Marketing
---> 504,761 617,186
General and Administrative
---> 684,272 749,664
Depreciation and Amortization
---> 111,098 110,266
Total Operating Expenses
---> 1,825,853 1,971,116
Loss from Operations
---> (128,454) (1,411,232)
Other Income (Expense)
Interest and Other (Expense) Income
---> 665 414
Foreign Exchange Gain (Loss)
---> 3,714 (5,174)
Amortization of Senior Term Debt Discount
---> (62,284)
Interest Expenses
---> (214,672) (91,307)
Total Other Income (Expense)
---> (272,577) (96,067)
Loss Before Provision for Income Taxes
---> (401,031) (1,507,299)
Provision (Benefit) for Income Taxes
---> 19,275 875
Net Loss
---> (420,306) $ (1,508,174)
Basic and Diluted Loss per Share
---> $ (0.0016) $ (0.0057)
Weighted-average Shares Outstanding -- Basic and Diluted
---> 263,600,274 263,600,274
The accompanying notes are an integral part of these condensed consolidated financial
--->statements.
4
VUZIX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
---> Three Months Ended
---> March 31,
---> 2011 2010
Cash Flows from Operating Activities
Net Loss
---> $ (420,306) $ (1,508,174)
Non-Cash Adjustments
Depreciation and Amortization
---> 111,098 110,266
Stock-Based Compensation Expense
---> 69,415 62,022
Amortization of Senior Term Debt Discount
---> 62,284 --
(Increase) Decrease in Operating Assets
Accounts Receivable
---> (439,263) 649,693
Inventories
---> (425,099) (108,788)
Prepaid Expenses and Other Assets
---> 104,685 4,834
Increase (Decrease) in Operating Liabilities
Accounts Payable
---> (470,180) (755,422)
Accrued Expenses
---> (66,462) (28,691)
Customer Deposits
---> (912,262) 24,257
Income Taxes Payable
---> (6,675) (2,717)
Accrued Compensation
---> 50,000 50,000
Accrued Interest
---> 147,921 54,786
Net Cash Flows Used in Operating Activities
---> (2,194,844) (1,447,934)
Cash Flows from Investing Activities
Purchases of Tooling and Equipment
---> (128,801) (29,549)
Investments in Patents and Trademarks
---> (2,084) (34,736)
Net Cash Used in Investing Activities
---> (130,885) (64,285)
Cash Flows from Financing Activities
Net Change in Lines of Credit
---> 728,960 (12,045)
Repayment of Capital Leases
---> (21,540) (27,142)
Repayment of Notes Payable
---> (206,221) (746,417)
Net Cash Flows Provided (Used) by Financing Activities
---> 501,199 (785,604)
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
Cash and Cash Equivalents -- End of Period
---> $ 812,289 $ 202,700
Supplemental Disclosures
Interest Paid
---> 66,503 36,521
Income Taxes Paid
---> 35,493 3,592
Non-Cash Investing Transactions
Equipment Acquired Under Capital Lease
---> 7,543 --
The accompanying notes are an integral part of these condensed consolidated financial st
--->atements.
5
VUZIX CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 -- Basis of Presentation
The accompanying unaudited Consolidated Financial Statements of Vuzix Corporation and Subsidiary ("the Compa
--->ny") have been prepared in
accordance with generally accepted accounting principles in the United States of America for interim financial informa
--->tion ("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 Fin
--->ancial Statements do not include all
of the information and footnotes required by generally accepted accounting principles for complete financial statement
--->s. In the opinion of management, all
adjustments considered necessary for a fair presentation have been included. The accompanying Consolidated Financial S
--->tatements 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 st
--->atements for the year ended December 31,
2010 included an explanatory paragraph describing the existence of conditions that raise substantial doubt about the C
--->ompany's ability to continue as a going
concern, including continued operating losses and the potential inability to pay currently due debts. The Company incu
--->rred 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 i
--->n 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, princi
--->pal and interest payments on debt
obligations, and capital expenditures. Historically, these cash needs have been met by borrowings of notes and convert
--->ible 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 reco
--->verability and classification of assets
carrying amounts or the amount of and classification of liabilities that may result should the Company be unable to co
--->ntinue 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 Janua
--->ry 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 4
--->8-month period or December 23, 2014.
Interest is due and payable semi-annually commencing June 23, 2011. In connection with the financing, four existing se
--->cured lenders that were owed $2,320,980
in principal and accrued interest have agreed to subordinate their security interests in favor of the Convertible, Sen
--->ior 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 s
--->upport 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 agr
--->eement, 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 addit
--->ion, 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 lev
--->els 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 cas
--->h 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 me
--->thod) 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
Work in Process
---> 819,486 751,794
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. Un
--->der 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 Sta
--->tes 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 subord
--->inated 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 Conv
--->ertible, 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 Mar
--->ch 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 mus
--->t also maintain quarterly earnings before
interest, taxes, depreciation, and amortization (EBITDA) losses and non-cash compensation or expense, which are measur
--->ed 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 c
--->ash, 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 def
--->ense 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 per
--->iod 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 obligatio
--->ns 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 perfo
--->rmance 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 co
--->mmon 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 subj
--->ect 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 a
--->ll
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 fr
--->om the U.S. statutory rate due to taxes on
foreign income, permanent differences including tax-exempt interest, and the resolution of tax uncertainties, offset b
--->y 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 favorab
--->le 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 2
--->018, 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
---> Exercise
Shares
---> Price Range
Outstanding at December 31, 2010 15,435,6
--->74 $ 0.1182 $0.0061 � $ 0.2334
Granted 5,512,6
--->90 $ 0.1500 $ 0.1500
Exercised
--->-- $ -- $ --
Expired or Forfeited (125,0
--->00) $ 0.1500 $ 0.1500
Outstanding at March 31, 2011 20,823,3
--->64 $ 0.1265 $0.0061 � $ 0.2334
9
As of March 31, 2011, there were 13,974,121 options that were fully vested and exercisable at a weighted averag
--->e 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.
No cash was received from option exercises for the three months ended March 31, 2011.
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, March 31,
2011 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 me
--->thod. At March 31, 2011, the Company
had approximately $424,851 of unrecognized stock compensation expense, which will be recognized over a weighted averag
--->e 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 e
--->nded March31, 2011 and 2010:
Three Months Ended
March 31, March 31,
2011 2010
Consumer Video Eyewear $ 648,707 $ 1,225,8
--->90
Defense Products 3,189,797 742,9
--->34
Engineering Services 234,605 93,1
--->35
Total $ 4,073,109 $ 2,061,9
--->59
Note 16 -- Recent Accounting Pronouncements
There are no recent accounting pronouncements that have a material impact on the condensed consolidated fina
--->ncial statements.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of financial condition and results of operations in con
--->junction 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 withi
--->n 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 subjec
--->t to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those discussed in the f
--->orward-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 st
--->atements and related notes appearing elsewhere
in this quarterly report. The preparation of these statements in conformity with generally accepted accounting princip
--->les 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 th
--->e financial statements.
We believe that our application of accounting policies, and the estimates inherently required therein, are reaso
--->nable. These accounting policies and
estimates are periodically reevaluated, and adjustments are made when facts and circumstances dictate a change. Histor
--->ically, we have found our application of
accounting policies to be appropriate, and actual results have not differed materially from those determined using nec
--->essary estimates.
Our accounting policies are more fully described in the notes to our financial statements included in this quar
--->terly 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 tr
--->ends that our management believes are
important in understanding our financial performance. The critical accounting policies, judgments and estimates that w
--->e 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. Inven
--->tory includes purchased parts and components,
work in process and finished goods. Provisions for excess, obsolete or slow moving inventory are recorded after period
--->ic 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 regul
--->ations 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 "criti
--->cal 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-off
--->s 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 an
--->d 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 as
--->set 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 ass
--->et 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 numbe
--->r 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 va
--->lued (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 sa
--->les 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 an
--->y associated sales taxes. We also sell certain
products through distributors who are granted limited rights of return for stock balancing against purchases made with
--->in a prior 90-day period, including price
adjustments downwards on any existing inventory. The provision for product returns and price adjustments is assessed f
--->or 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-complet
--->ion method. Under this method income is
recognized as work on contracts progresses, but estimated losses on contracts in progress are charged to operations im
--->mediately. 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 und
--->er 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 t
--->erms 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 fo
--->r 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 a
--->nd 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, "Re
--->search and Development," and
include employee related costs, office expenses, third party design and engineering services, and new product prototyp
--->ing costs.
Stock-Based Compensation
Our board of directors approves grants of stock options to employees to purchase our common stock. A stock compensatio
--->n 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 compensa
--->tion is considered a "critical accounting
estimate" because estimates are made in calculating compensation expense including expected option lives, forfeiture r
--->ates 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 standpoi
--->nt. Accordingly, we record deferred income
tax assets and liabilities based on the estimated future tax effects of differences between the financial and tax base
--->s 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 exercis
--->ed 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 valuati
--->on 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 r
--->esolution 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 m
--->ore than 50% likely of being realized upon
ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as this requires us to determ
--->ine 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 rec
--->ognition 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 fu
--->ture taxable income in the jurisdictions in
which we operate. These assets consist of research credit carry-forwards, capital and net operating loss carry-forward
--->s and the future tax effect of temporary
differences between balances recorded for financial statement purposes and for tax return purposes. It will require fu
--->ture 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 ne
--->t losses, it may be necessary to record
valuation allowances against such deferred tax assets in order to recognize impairments in their estimated future econ
--->omic 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 finan
--->cial statements.
Key Performance Indicators
We believe that a key indicator for our business is the trend for the volume of orders received from customer
--->s, especially those orders related to night-
vision electronic modules. During weak economic periods, customers' ability to forecast their requirements deteriorate
--->s 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 custom
--->ers (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 2
--->010. 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 o
--->ur 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 increa
--->se 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 firs
--->t 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 result
--->ed 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 deman
--->d 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 $559,88
--->4 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 compar
--->ed 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 ove
--->r 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 quarte
--->r 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 co
--->sts of goods sold.
Selling and Marketing. Selling and marketing expenses were $504,761 for the first quarter of 2011 compared to $6
--->17,186 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 ext
--->ernal public relations consulting fees.
General and Administrative. General and administrative expenses were $684,272 for the first quarter costs of 20
--->11 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 t
--->o $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 o
--->f 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) re
--->duction 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 an
--->d 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, where
--->as 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 dra
--->wings 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 restric
--->tions on indebtedness, liens, guarantees,
redemptions, mergers, acquisitions or sale of assets, loans, transactions with any affiliates, and investments. They a
--->lso 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 custom
--->ers 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 secur
--->ity 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 o
--->ther 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 s
--->tatements, 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 unabl
--->e to generate cash flows sufficient to
support our operations and have been dependent on term debt financings, equity financings. There can be no assurance t
--->hat 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 da
--->ted 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 con
--->cern.
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 goi
--->ng 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 co
--->mmercialize our products, their timely
market acceptance, selling prices and gross margins, and other factors. To the extent we have sufficient operating fun
--->ds, we expect to carefully devote capital
resources to continue our development programs, hire and train additional staff, expand our research and development a
--->ctivities, new product marketing and
increased inventory levels. Assuming we are able to increase our sales and achieve our planned gross margins, we antic
--->ipate that we will also experience growth
in our operating expenses for the foreseeable future. Our future net operating losses, product tooling expenses, and r
--->elated working capital investments will be the
principal use of our cash. In particular, we expect that potentially significant amounts of working capital investment
--->s 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 opera
--->ting expenses, capital expenditures, and
working capital requirements through December 31, 2011 without additional sources of cash and/or the deferral, reducti
--->on or elimination of significant planned
expenditures on new products, tooling, R&D, and marketing. A shortfall from projected sales levels could have a materi
--->al 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 pos
--->sible, 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 aga
--->inst 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 o
--->n 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 capit
--->al 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 b
--->e forced to liquidate assets and/or curtail or
cease operations or to obtain funds through entering into additional collaborative agreements or other arrangements th
--->at may be on unfavorable terms.
15
These factors raise substantial doubt about the Company's ability to continue as a going concern. The accompanyi
--->ng financial statements have been
prepared assuming that the Company will continue as a going concern. This basis of accounting contemplates the recover
--->y of the Company's assets and the
satisfaction of liabilities in the normal course of business. In addition, these financial statements do not include a
--->ny adjustments to the specific amounts and
classifications of assets and liabilities, which might be necessary should the Company be unable to continue as a goin
--->g 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 re
--->quired 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 pr
--->incipal 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 m
--->onths 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 agr
--->eement, 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 pro
--->ducts.
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 c
--->onsumer 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 ope
--->rating costs wherever possible for fiscal
2011;
� reducing public relations expenses for fiscal 2011;
� minimizing our capital expenditures by eliminating, delaying or curtailing discretionary and non-essenti
--->al spending;
� reducing and deferring some research and development and delaying some planned product and new technolog
--->y introductions if required; and
� exploring our options with respect to new debt borrowings and equity financings;
We anticipate, based on current discussions with our defense customers that some of our expected orders for defen
--->se 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 yea
--->r over year in these products. Additionally
we are seeing a faster than expected market demand towards higher resolution portable displays, partially driven by th
--->e 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 pur
--->chases 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 t
--->erms 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 ope
--->rations. These factors raise substantial doubt
about our ability to continue as a going concern.
16
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 "Refor
--->m Act") provides a "safe harbor" for
forward-looking statements. Certain written and oral statements made by management of Vuzix Corporation include forwar
--->d-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:
� 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, i
--->n 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 fact
--->ors 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 l
--->ight 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 introduct
--->ions, competitive pressures,
dependence on key customers, inability to gauge order flows from customers, fluctuations in quarterly and annual resul
--->ts, the reliance on a limited number of
third party suppliers, limitations of the Company's manufacturing capacity and arrangements, the protection of the Com
--->pany's proprietary technology, the effects
of pending or threatened litigation, the dependence on key personnel, changes in critical accounting estimates, potent
--->ial impairments related to investments,
foreign regulations, and potential material weaknesses in internal control over financial reporting. In addition, duri
--->ng weak or uncertain economic periods,
customers' visibility deteriorates causing delays in the placement of their orders. These factors often result in a su
--->bstantial 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 m
--->ore 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 suc
--->h 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 updat
--->e 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
Not applicable
Item 4. Controls and Procedures
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 discuss
--->ed 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 record
--->ed, 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 assuranc
--->e that transactions are recorded as necessary to
permit preparation of consolidated financial statements in accordance with US GAAP, and that our receipts and expendit
--->ures are being made only in accordance
with authorizations of our management and directors; and (c) provide reasonable assurance regarding prevention or time
--->ly 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 re
--->porting such that there is a reasonable
possibility that a material misstatement of our annual or interim financial statements will not be prevented or detect
--->ed 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 bec
--->ause of the material weaknesses set forth
below.
During our last fiscal quarter, there were no changes in our internal control over financial reporting. The fol
--->lowing 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 d
--->id not maintain effective controls over the
period-end financial close and reporting processes in relation to the consolidation of our subsidiary's financial info
--->rmation. The specific deficiencies contributing
to this material weakness related (a) to inadequate policies and procedures, (b) ineffective procedures and controls o
--->ver journal entries, accruals and reserves, (c)
inadequate controls and procedures related to the timely preparation and review of account reconciliations, (d) inadeq
--->uate 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 con
--->stituted a material weakness in internal
control over financial reporting. We intend to establish and document financial close processes and procedures includi
--->ng responsibilities and due dates. We also
intend to commence utilizing a closing checklist to ensure all procedures are performed and appropriate reviews are co
--->mpleted on a timely basis each quarter and
year-end period. Additionally, we intend to implement controls over critical spreadsheets, including change control, i
--->nput control, access and data security and
appropriate review procedures. Further, we intend to seek additional resources with strong accounting and reporting ex
--->perience when financial resources are
available.
Segregation of Duties
There is limited segregation of duties which could result in a material misstatement in our financial stateme
--->nts. Given our staff levels, certain duties
within the accounting and finance department cannot be properly segregated. However, we believe that none of these seg
--->regation of duty deficiencies resulted in
material misstatement to the financial statements as we rely on certain compensating controls, including periodic subs
--->tantive review of the financial statements by
the Chief Executive Officer, Chief Financial Officer, Audit Committee and Board of Directors.
18
Monitoring of Subsidiaries
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:
� 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.
� Inventory valuation processes and controls are not sufficiently documented and are not working eff
--->ectively including costs to be expensed
versus inventoried and maintenance of adequate supporting documentation for current unit costs and
---> bill of materials.
Warranty Reserve
Controls to ensure valuation and adequacy of our warranty reserve were not operating effectively. Specificall
--->y, 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 recor
--->ds, 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 cont
--->rols 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 implementati
--->on of controls to prevent or detect errors or
fraud that could result in material misstatements.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
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 benefici
--->al 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 m
--->aterial interest adverse to us or any of our
subsidiaries.
Item 1A. Risk Factors
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 a
--->ffect 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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Sale of Unregistered Securities � none
Purchase of Equity Securities - none
19
Item 3. Defaults Upon Senior Securities
None
Item 4. Reserved
Item 5. Other Information
None
Item 6. Exhibits
Exhibit No. Description
31.1 Certification of the Chief Executive Officer of the Registrant pursuant to Section 302 of the Sarba
--->nes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer of the Registrant pursuant to Section 302 of the Sarba
--->nes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer of the Registrant pursuant to 18 U.S.C. Section 1350 a
--->dopted 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 a
--->dopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
20
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 16, 2011 By: /s/ Paul J. Travers
Paul J. Travers
President, Chief Executive Of
--->ficer
(Principal Executive Officer)
Date: May 16, 2011 By: /s/ Grant Russell
Grant Russell
Executive Vice President and
--->Chief Financial Officer
(Principal Financial and Acco
--->unting Officer)
21
---> Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Paul J. Travers, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Vuzix Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
--->material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respe
--->ct to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairl
--->y present in all material respects the financial
condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this
---> report;
4. The Registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure
--->controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchan
--->ge Act Rules 13a-15(f) and 15d-15(f)) for
the Registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to b
--->e designed under our supervision, to ensure
that material information relating to the Registrant, including its consolidated subsidiaries, is made k
--->nown to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
--->reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the pr
--->eparation of financial statements for external
purposes in accordance with generally accepted accounting principles.
(c) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this
---> report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this rep
--->ort based on such evaluation; and
(d) Disclosed in this report any change in the Registrant's internal control over financial reporting that o
--->ccurred during the Registrant's most recent
fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materia
--->lly affected, or is reasonably likely to materially
affect, the Registrant's internal control over financial reporting; and
5. The Registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of inter
--->nal control over financial reporting, to the
Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the
---> equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over
---> financial reporting which are reasonably
likely to adversely affect the Registrant's ability to record, process, summarize and report financial i
--->nformation; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant r
--->ole in the Registrant's internal control
over financial reporting.
Date: May 16, 2011 /s/ Paul J. Trav
--->ers
Paul J. Travers
President and Ch
--->ief Executive Officer
---> Exhibit 31.2
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Grant Russell, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Vuzix Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
--->material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respe
--->ct to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairl
--->y present in all material respects the financial
condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this
---> report;
4. The Registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure
--->controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchan
--->ge Act Rules 13a-15(f) and 15d-15(f)) for
the Registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to b
--->e designed under our supervision, to ensure
that material information relating to the Registrant, including its consolidated subsidiaries, is made k
--->nown to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
--->reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the pr
--->eparation of financial statements for external
purposes in accordance with generally accepted accounting principles.
(c) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this
---> report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this rep
--->ort based on such evaluation; and
(d) Disclosed in this report any change in the Registrant's internal control over financial reporting that o
--->ccurred during the Registrant's most recent
fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materia
--->lly affected, or is reasonably likely to materially
affect, the Registrant's internal control over financial reporting; and
5. The Registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of inter
--->nal control over financial reporting, to the
Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the
---> equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over
---> financial reporting which are reasonably
likely to adversely affect the Registrant's ability to record, process, summarize and report financial i
--->nformation; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant r
--->ole in the Registrant's internal control
over financial reporting.
Date: May 16, 2011 /s/ Grant Russel
--->l
Grant Russell
Executive Vice P
--->resident and
Chief Financial
--->Officer
---> Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Vuzix Corporation ("Vuzix") on Form 10-Q for the quarterly period ended
---> March 31, 2011 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Paul J. Travers, President and Chief Executiv
--->e Officer of Vuzix, certify, pursuant to 18
U.S.C. � 1350, as adopted pursuant to � 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 19
--->34; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and
---> results of operations of Vuzix.
/s/ Paul J. Travers
Paul J. Travers
President and Chief
---> Executive Officer
Date: May 16, 2011
The foregoing certification is being furnished to accompany Vuzix Corporation's Quarterly Report on Form 10-Q for th
--->e quarterly period ended March 31,
2011 (the "Report") solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed as
--->part of the Report or as a separate
disclosure document and shall not be deemed incorporated by reference into any other filing of Vuzix Corporation that
--->incorporates the Report by reference. A
signed original of this written certification required by Section 906 has been provided to Vuzix Corporation and will
--->be retained by Vuzix Corporation and
furnished to the Securities and Exchange Commission or its staff upon request.
---> Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Vuzix Corporation ("Vuzix") on Form 10-Q for the quarterly period ende
--->d March 31, 2011 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Grant Russell, Chief Financial Officer of Vuz
--->ix, certify, pursuant to 18 U.S.C. � 1350,
as adopted pursuant to � 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 19
--->34; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and
---> results of operations of Vuzix.
/s/ Grant Russell
Grant Russell
Chief Financial Off
--->icer
Date: May 16, 2011
The foregoing certification is being furnished to accompany Vuzix Corporation's Quarterly Report on Form 10-Q for th
--->e quarterly period ended March 31,
2011 (the "Report") solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed as
--->part of the Report or as a separate
disclosure document and shall not be deemed incorporated by reference into any other filing of Vuzix Corporation that
--->incorporates the Report by reference. A
signed original of this written certification required by Section 906 has been provided to Vuzix Corporation and will
--->be retained by Vuzix Corporation and
furnished to the Securities and Exchange Commission or its staff upon request.
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