Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

FORM 10-K

þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2022

For the fiscal year ended December 31, 2017

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-35955

Vuzix Corporation

Vuzix Corporation

(Exact name of registrant as specified in its charter )

Delaware

04-3392453

(State of incorporation)

(I.R.S. employer identification no.)

25 Hendrix Road Suite A

West Henrietta, New York

14586

(Address of principal executive office)

04-3392453
(I.R.S. employer identification no.)
14586

(Zip code)

(585) (585359-5900

(Registrant’s telephone number including area code)

Securities registered pursuant to Section 12(b) of the Act: common stock, par value $0.001 per share

Title of each class:

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.001

VUZI

Nasdaq Capital Market

Securities registered pursuant to Section 12(g) of the Act:

warrants to purchase common stockNone.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes¨Noþ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes¨Noþ

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 such filing requirements for the past 90 days. YesþNo¨

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesþ      No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference into Part III of this Form 10-K or any amendment to this Form 10-K.¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer¨

Accelerated filerþ

Non-accelerated filer¨

(Do not check if a smaller reporting company)þ

Smaller reporting company ¨

Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes       No

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b).

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes¨Noþ

The aggregate market value of the voting and non-voting common equity of the registrant held by non-affiliates as of June 30, 20172022 was approximately $111,187,000$409,000,000 (based on the closing price of the common stock of $6.55$7.10 per share on that date, as reported on the NASDAQ Capital Market and, for purposes of this computation only, the assumption that all of the registrant’s directors and executive officers are affiliates and that beneficial holders of 10% or more of the outstanding common stock are affiliates).

As of March 16, 2018,1, 2023, there were 27,301,20363,207,674 shares of the registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Part III of this Form 10-K incorporates by reference portions of the registrant’s proxy statement for its 20182023 annual meeting of stockholders.

TABLE OF CONTENTS

Page

Item 1

Business

1

Item 1A

Risk Factors

14

15

Item 1B

Unresolved Staff Comments

27

33

Item 2

Properties

27

33

Item 3

Legal Proceedings

27

34

Item 4

Mine Safety Disclosures

27

34

Item 5

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

27

34

Item 6

Selected Financial Data[Reserved]

30

36

Item 7

Management’s Discussion and Analysis of Financial Condition and Results of Operations

32

37

Item 7A

Quantitative and Qualitative Disclosures about Market Risk

44

49

Item 8

Financial Statements and Supplementary Data

44

50

Item 9

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

44

50

Item 9A

Controls and Procedures

44

50

Item 9B

Other Information

46

51

Item 9C

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

51

Item 10

Directors, Executive Officers and Corporate Governance

46

51

Item 11

Executive Compensation

46

51

Item 12

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

46

52

Item 13

Certain Relationships and Related Transactions, and Director Independence

46

52

Item 14

Principal AccountingAccountant Fees and Services

46

52

Item 15

Exhibits and Financial Statement Schedules

47

53

ii 

ii

FORWARD-LOOKING STATEMENTS

This annual report includes forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on our management’s beliefs and assumptions and on information currently available to our management. The forward-looking statements are contained principally under the headings “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business.” Forward-looking statements contained in this Annual Report on Form 10-K include, but are not limited to, statements concerning:

·trends in our operating expenses, including personnel costs, research and development expense, sales and marketing expense, and general and administrative expense;
·the effect of competitors and competition in our markets;
·the impact of further pandemics like COVID-19 on our business and our response to it;
our wearable display products and their market acceptance and future potential;
·our ability to develop, timely introduce and effectively manage the introduction of new products and services or improve our existing products and services;
·expected technological advances by us or by third parties and our ability to leverage them;
·our ability to attract and retain customers.customers;
·our ability to accurately forecast consumer demand and adequately manage inventory;
·our ability to deliver an adequate supply of product to meet demand;
·our ability to maintain and promote our brand and expand brand awareness;
·our ability to detect, prevent, or fix defects in our products;
·our reliance on third-party suppliers contractand manufacturers, andas well as logistics providers and our limited control over such parties;
·trends in revenue, costs of revenue, and gross margin and our possible or assumed future results of operations;
·our ability to attract and retain highly skilled employees;
·the impact of foreign currency exchange rates;
·the effect of future regulations; and
·the sufficiency of our existing cash and cash equivalent balances and cash flow from operations to meet our working capital and capital expenditure needs for at least the next 12 months; and
·general market, political, economic and business conditions.

All statements in this annual 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.

Forward-looking statements are made based on management’s beliefs, estimates and opinions on the date the statements are made and we undertake no obligation to update forward-looking statements if these beliefs, estimates and opinions or other circumstances should change, except as may be required by applicable law. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements.

PART I

Item 1.Business

Item 1.    Business

Company Overview

We are engaged in the design, manufacture, marketing and sale of augmented reality wearable display and computing devices, also referred to as head mounted displays (or HMDs, but also known as Video Eyewear, near-eye displays, near-eye virtual displays),(“HMDs”) in the form of Smart Glasses and Augmented Reality (AR) glasses. Our AR wearable display devices are worn like eyeglasses and contain varying features such as built-in video screens and audio.or attach to a head worn mount. These devices also oftentypically include a built-in computer, cameras, sensors, and a computer,sensors that enable the user to view, record and interact with video and digital content, such as movies, computer data, the Internet, enterprise data, social media or video games.entertainment applications effectively connecting the metaverse to the real world. Our AR wearable display products provide virtual large high-resolution screens and present a virtual image to the user through our proprietary optics and projection engines. Using these optics and displays, our AR wearable display devices provide a virtual image that appears to the wearer similar in size to the image from a typical smart phone screen at arm’s length away, all the way to models that offer wall-sized home theatre screens. Our virtual imaging products integrate microdisplaymicro-display technology with our advanced optics to produce compact high-resolution display engines, less than half an inch diagonally, which when viewed through our eyeglasses productsSmart Glasses and AR glasses create virtual images that appear comparable in size to that of a computer monitor or a large-screen television.


This includes the representative forms such as augmented reality (AR), mixed reality (MR) and extended reality (XR) and the areas interpolated to all real-and-virtual combined environments. Our Smart Glassessolutions are designedproven to work standalone or as a peripheral to the smartphonehelp our customers improve their operational efficiency and have many of the same capabilities of the smartphone itself, allowing them to be used as a hands-free wearable computer. Our products can be used as a wearable substitute for large-screen televisions, desktop computer monitors or tablets. Additionally, our Smart Glasses models allow users of our glasses to utilize many smartphone applications while keeping their smartphones in a pocketoperate hands free.

Today’s near-eye or purse. Users of mobile devices sometime employ tablets and smartphones to replace their personal computer or console game systems while they are outside their homes or offices. Our wearable displayHMD products enable users of these mobile devices to effectively view the entire screen on a small, eyeglass-like device allowing real world interaction while viewing the screen.

We believe some of the most promising future uses of wearable displays are Smart Glasses and AR glasses where virtual 2D and 3D computer-generated objects and information are superimposed to enhance real-world views. This see-through capability is accomplished using a see-through optic, built around our waveguide intellectual property or digitally with a forward-looking camera. Our wearable displays can also be used for AR, applications, inMR, XR and Virtual Reality are typically large goggles which the wearer has their real-world view augmented with computer generated information or graphics as is typical in either consumer or enterprise applications.

In the past, see-through HMDs displayed the real world using semi-transparent mirrors placed in front of the user’s eyes. These HMDs were large andare bulky and as a result, they had littlehave limited mass-market appeal. We have developed thin optics, called waveguides, that are fully see-through and enable miniature display engines to be mounted in the temples of the HMD which allows the form factor of the Smart Glasses to be near comparable to conventional eyeglasses. Our Smart Glasses and AR Glassesglasses are designed for all day use cases and are small enough to fit in a user’s pocket or purse.

With hands free wearable computers like No external cabling or tethering to an external computing device is required to use our M300 and M100current Smart Glasses the user can merge virtual information with the real world, known as AR. With this capability, we have the potential to penetrate many new markets in the consumer and enterprise markets. An example of AR is the yellow “first down” line seen in television broadcasts of American football games, in which the line the offensive team must cross to achieve a first down is superimposed on the field itself. The real-world elements are the football field and players; the virtual element is the yellow line. We believe see-through wearable displays will enable this kind of experience on Smart Glasses running their own native AR applications, virtually anywhere and anytime. Our Smart Glasses product line can run these kinds of applications natively as they have much of the capabilities of a smartphone built into them, including running full operating systems like Alphabet (Google) Inc.’s Android. 

Our waveguide and display engine products enable our original equipment manufacturer (OEM) customers to develop and market improved wearable products that are mobile so that people have immediate access to information and can experience new forms of communications, entertainment, and social media content.

unlike most competitors today.

We believe that our waveguide optics and display engines offer a number of significant advantages over other wearable display solutions, including higher contrast, greater power efficiency, less weight, more compact size, and high brightness images for use outdoors. We also believe that our waveguide optics give us a substantial advantage over other competitors’ optics, including other waveguides, because itour solution allows us to produce optics that are fully transparent when off along withwhile also delivering the high brightness required for AR and enterprise Smart Glasses applications.

We believe that a key growth area for us is the consumer electronic OEM market. Our potential channels to this market include supplying mass production of waveguide optics and display engines to select third parties to use in their products. We believe that our waveguides and compact display engine technologies coupled with our waveguides are a key differentiator for enabling next generation AR and Smart Glasses hardware for the consumerenterprise and enterprisemany other market segments because they will ultimately allow us to make HMDs nearly indistinguishable from regular fashion forward eyeglasses. We believe that key growth areas for us currently are the enterprise, medical, defense, and security and then ultimately will expand into broader consumer markets. We are addressing most of these markets by developing and selling our own finished products and building a growing eco-system of software and services internally and with our value-added resellers (VARs), distributors, software developers and end customers. Another potential channel to these markets that we are in the early stages of developing include the sale of components to Original Equipment Manufacturers (“OEMs”) where we intend to supply mass production of our waveguide optics and display engines to select third parties to use in their products or provide a white-labeled AR Smart Glasses reference design that select third parties can customize and sell as a branded product.

We have developed our own intellectual property portfolio that includes not only patents, but also over 2025 years of manufacturing know-how, andsoftware, proprietary processes, materials, and equipment to create high performance waveguides, and near-eye display products. Our in-house waveguide manufacturing processes and equipment has the ability to produce in volume and at broad market price points.

In 2022, we began investing in our own next generation micro-LED display technology with Atomistic SAS, a new entity based in France with whom we are engaged as a partner. We believe our technology, intellectual property portfolio and established position in the marketplace give us a leadership position in AR and Smart Glasses products, and waveguide optics, micro LEDs and display engine technology.

1

Our History

Historically, we have focused on three markets: the consumer markets for gaming,VR, entertainment and mobile video, smart glassesvideo; Smart Glasses products for enterprise,enterprise; and night-vision display electronics and rugged mobile displays for defense markets. We introduced our first HMD products over 2025 years ago and we have offered numerous product models and versions with ever advancingever-advancing features and capabilities that have served thethese three markets. In June 2012, we sold the assets that produced products and provided services to military organizations and defense organizations. Accordingly, we now focus primarily onorganizations and exited the enterprisedefense and security markets and consumer entertainment.

We produce both monocular and binocular wearable displays devicesby giving that may be simple video viewers that are not “smart” and others with integrated computers. In early 2014, we started selling M100 Smart Glasses,buyer a new categorynon-compete period of smart wearable displays that is aimed at enterprise customers. The M100 includes a wearable computer and has much of the capabilities of a smartphone including wireless internet access, GPS, Android OS and more, and are worn like a pair of glasses.


In December 2015, we began shipping the Vuzix iWear Video Headphones (iWear) which included partial supportexclusivity for Virtual Reality (VR) applications. The binocular iWear is worn like a pair of headphones and features dual HD Displays and revolutionary nano-optics that provide the equivalent experience of a 125" home television from 10 feet and allow the wearer to play games, interact with apps, watch 2D, 3D and 360°VR movies and even fly drones. iWear is completely portable and battery-driven so that the user can enjoy it at home or on-the-go. In early 2017, we decided to discontinue further production of iWear due to competitiveyears. Effective June 2022, all market conditionsrestrictions in the VR HMD marketplace. We expect to sell our remaining stock throughout 2018.

At CES in January 2016, we introduced a new prototype model of our monocular Smart Glasses products:defense and security space for the M300 Smart Glasses. The M300 represents our next generation Smart Glasses model with significantly improved ergonomicsCompany expired and, technical features, all in a ruggedized form designed specifically for enterprise and industrial use. The M300 Smart Glasses can connect to the cloud to deliver digital content directly to and from the job site and connecting it “overlaid” onto the real world.

In January 2018, we introduced our Vuzix Blade™ (The Blade) Smart Glasses at CES 2018. The Vuzix Blade received 4 innovation awards at CES and was named “Best of CES” by several notable media firms including TIME, Rolling Stone, CNET, Fox News, Tom’s Guide and TechRadar. The Blade provides a wearable AR smart display with a see-through viewing experience utilizing Vuzix' proprietary waveguide optics and Cobra II display engine. Using the Vuzix Blade is like having a computer or smartphone screen information right in front of the user, wherever they go and is designed to allow the user to keep their phone in their pocket. The lightweight (less than 2.8 oz) Blade Smart Glasses are the first smart glasses featuring style, performance and advanced see-through waveguide optics for hands-free computing and connectivity. The Blade is ideal for mobile applications including social media, navigation, artificial intelligence (AI) and HD photography and videography as well as a AR wearable display forresult, we have resumed marketing and sales initiatives directly into the enterprise sector. The Blade also is designed to integrate with AI enginesdefense and will ship out of the box with Amazon Alexa, an intelligent personal assistant featuring AI. It is capable of voice interaction, making to-do lists, setting alarms, streaming podcasts, playing audiobooks, taking pictures and providing weather, traffic, and other real-time information.

homeland security markets.

Overall Strategy

Our goal is to establish and maintain a leadership position as a worldwide supplier of wearable displays and computers including AR glasses and Smart Glasses solutions. We intendsolutions, as well as manufacturing related components needed to offer ourbuild such products, across major markets, platforms and applications.to third party OEMs. We strive to be an innovator in designing wearable display devices that can enable mobile video viewing, general entertainment, social media,hands-free enterprise productivity hands-free enhancementsapplications, see-what-I see remote viewing and most importantly, AR applications.

We seek to generate top and bottom-line revenue growth through the continued introduction of new AR Smart Glasses, waveguides and display engines, and, to a lesser degree, software applications and solutions.

To maintain and enhancebroaden our position as a leading provider of wearable display products for AR video viewing and smart glasses,hands-free computing, as well as waveguides and display engines for OEMs, we seek to:

·improve brand name recognition;
·provide excellent products and service;
·develop innovative products based on our unique technology for both specialized and large enterprise and consumer markets;medical markets, as well as for defense and security;
·broadendevelop a suite of software applications that can take advantage of our products, offering these solutions bundled with our hardware and develop strategic relationshipsthrough our “app store”;
promote and partnerships;enhance the development of third-party software that can take advantage of our products, including offering apps and software through our own “app store”;
·offer to sell our products or license our technology to third partythird-party companies that would incorporate and sell them as a new product with their own brand name (OEM partners);
·promotesell our waveguide products to OEMs as a standard product or on a custom order basis to meet their design requirements;
develop new micro-display engine products utilizing third-party displays and enhance development of third party software that can take advantage of our products, including offering apps and software throughultimately our own “app store”;micro LED displays to sell to third-party OEMs
·communicate the advantages of our proprietary waveguide optics and display engine technologies to the relevant customers in target market sectors and encourage their adoption through demonstrations and incorporation in the offerings of world-class companies;
·reduce production and overhead costs by further outsourcing while movingbuild or acquire our own internal capabilities to higher margin product offerings;deliver SaaS-based solutions directly to our customers;
·extend our innovative and proprietary technology leadership;
·enhance and protect our intellectual property portfolio;
·broaden and develop strategic relationships and partnerships;
establish multiple revenue sources;
·improve brand recognition;
provide excellent products and service; and
attract and retain highly qualified personnel; and
·

build and maintain strong product design capabilities.

personnel.

Our strategy is also to create a leadership position as a worldwide supplier of waveguide optics and virtual imagingnear-eye display technology solutions for applications in high growth segments of the consumer, enterprise and commercialconsumer electronics industry by capitalizing on our experience and expertise in wearable displays and the move to AR Smart Glasses for delivering AI, entertainment, work, social media and other applications.computers. We aim to provide waveguides, display engines and complementary optics to enable OEM customers to serve a variety of markets with new enhanced display electronic products. Some key elements of our OEM strategy to achieve these objectives include the following:include:


·Developstrengthening our technology leadership;
optimizing waveguide manufacturing efficiencies while protecting proprietary processes;

2

investing in new micro LED display technologies and products such as backplanes and the micro LEDs themselves;
developing OEM and mass production partnerships in the consumer AR Smart Glasses market. As consumer mobile electronics markets transition to AR glasses, Vuzix technology is positioned well to address the requirements of this segment. Developing customer partners is key to establishing Vuzix as the market leader for next generation display technologies for the consumer AR Smart Glasses market. In addition, executing on mass production partnerships will position us to capture a market predicted to experience significant growth through the 2020s.market; and

·Strengthen our technology leadership. As the first to exploit waveguides with miniature display engines, we believe that we enjoy a significant advantage in bringing this technology to the OEM market. By continuing to invest in research and development, and protecting our intellectual property, we expect to further develop performance improvements and provide a competitive edge for our customers who integrate our displays into their end products.

·Optimize waveguide manufacturing efficiencies while protecting proprietary processes. We intend to further improve our manufacturing yields and lower costs by way of increased automation as well as equipment upgrades. We intend to retain the waveguide design and final mold replication related processes in-house, where we have a core competency and manufacturing expertise. We also believe that by keeping these processes under tight control we can better protect our proprietaryleveraging third-party technology and process know-how. We believe that this strategy will also enhance our ability to continue to optimize and customize processes and devices to meet customer needs.marketing strategic relationships.

·Build and maintain strong design capabilities. We employ in-house design capabilities supplemented by outsourced design services. Building and maintaining this capability allows us to reduce engineering costs, accelerate the design process and enhance design accuracy to respond to our customers' needs as new markets develop. Given these capabilities, we continue to look for opportunities to add value to our displays to increase revenue.

·Leverage strategic relationships. External relationships serve an important role in our research and development efforts. Our relationships with suppliers, equipment vendors, contract research groups, external design companies, customer and corporate partners, all enhance our overall research and development effort and bring us new ideas and solutions.

The Market

The wireless and entertainment industry has evolved considerably, and continues to do so. The mobile phone has evolved into a ubiquitous, location-aware, and powerful smart mobile computing device. Mobile technology is redefininghas redefined the way people interact with their world, both at work and play, and it has become an essential lifestyle management and entertainment tool personalized to users’ unique needs.technology for most individuals around the globe. We believe that interactive AR content, Artificial Intelligence (“AI”), Edge Computing, internet of things (IoT), and AIspeech-based cloud services will significantly further change the way such mobile productscomputing devices are used and how content is delivered to the user.user, including the enabling of new experiences that cannot be experienced in any other way. We believe head worn wearablehead-worn displays that are hands free andhands-free can connect the digital world to the real world and have the ability to change the entire paradigm and future of the computing industry. We believe AR based wearable display and Smart Glasses can enable new experiences that cannot be experienced in any other way.

Current mobile display technology is almost universally based onupon direct view screens. These displays for mobility purposes are designed to be handheld and small andto make portability easy. At the same time, these displays must be held by the user and, depending upon their size, can be difficult for these displays to produce human readable high-resolution content without magnification zooming, which reduces screen resolution, or they must be held at a reasonably close reading distance. Our products are aimed at solving these problems by creatingprovide hands-free virtual large screens that are interactive and fit in tiny packages (eyeglasses). Head-wearableinto eyeglass form factors. AR-based displays may block out surroundings for a fully immersive experience, or beare designed to be "see-through" or "see-around" and allow the user'suser to still see and interact with their surroundings. They may contain one (monocular) or two (binocular) displays. We have leveraged our experience in developing wearable display products over the last 20 years and believe this experience will allow us to more rapidly introduce wearable displays suitable for specialized and mass market consumer AR and Smart Glasses applications than our competitors. 

Our business for the last five years has primarily focused on enterprise, industrial and industrial markets andmedical markets. We believe the mobile consumer entertainment markets. The demand for head worn wearablehead-worn displays in these markets is being driven by such factors and expectations as:

·Increasing demand for Internet, social media, and cloud services’ access “anywhere, anytime”;the continued growth of mobile computing devices;
·Anan increasing number of “ready-to-go” hands-free enterprise, commercial and medical applications for which our products are well suitedwell-suited;
increasing demand for Internet, and when wearable display products are employedcloud services’ access “anywhere, anytime”;
the expansion of IoT that enables the exchange of information amongst smart connected devices to improve timeliness and visibility;
the need for these use cases,better efficiencies from training and on-boarding to the ROI created by having hands-free mobile computing allowing frontline workers to work more efficiently and accurately;
the need to solve complex problems remotely ranging from medical technologists and doctors in a significant ROI is typically achieved;surgery to equipment in factories around the world; and
·We believe the growing use of ARAR/XR applications that will drive the need for a head worn wearablehead-worn display solutions to replace the need to hold up handheld devices to use the applications;applications.
·We believe applications like the AR Kit and AR Core from Apple and Google are driving this new experience in the mobile space.  But the Smart Phone is unnatural and difficult form factor by which to experience AR. We believe that AR Smart Glasses are needed to deliver this experience correctly; and
·More users are migrating a greater portion of their entertainments and information gathering time to mobile devices. We believe that our Virtual Display technologies can significantly increase user satisfaction and allow for wide spread

As a result, we believe that our near-eye display technologies can significantly increase user satisfaction and allow for widespread AR adoption and applications.

Target Markets

We offer smart wearable display and computing products that enable the development and deployment of AR applications. AR Smart Glasses enable the wearer to see computer-generated information, graphics or images projected into the real-world environment or upon an object that the user is observing.

Our target markets and applications by major sector are:

4

Enterprise

Our Smart Glasses products are currently focused on the enterprise market, including sectors such as industrial and medical markets.medical. These Smart Glasses products run native Android applications within the glasses that, for example, allow them to stream video in real-time, scan bar codes, share visuals that are related to the work at hand and much more, all of

3

which is veryare highly useful for many enterprise applications. We believe that increasing demand for easy and instant data accessibility in a wide variety of commercial and industrial markets offer significant opportunities for our products due to increasing demand for instant data accessibility in mobile workplace environments and due to theproducts. The benefit of hands-free mobile displays and computers over a handheld device or laptop on a cart is significant. Most mobile workers need the use of their hands while working and having ready access to the information required while being hands-free can significantly improve their work performance, enhance visual performancesafety, and worker productivity.reduce errors. Our Smart Glasses are being used for numerous applications including: remote camera viewfinder displays andservice video support, wearable computer displays, viewing of wireless sensor data, quality assurance, and assembly check list, providing hands-free access to manualswork instructions such as assembly checklists and other information and for on-site,manuals, in-the-field maintenance, warehouse pick and place, servicing, routine quality assurance inspection,pick-and-pack, real-time viewing of remote images, and training and education. Further,There are many reasons why enterprise users are adopting Smart Glasses, such as for:

Increasing productivity;
Eliminating travel costs;
Improving worker safety;
Lowering carbon footprint;
Reducing worker errors; and
Protecting worker health

Medical

The healthcare industry continues to be an early adopter of Smart Glasses to deliver a variety of benefits in and outside of the operating room. Our Smart Glasses are being used in operating rooms to enable MedTech experts, assisting surgeons, medical student training, patient care, and other healthcare professionals to see and communicate with surgeons in real-time. This unique solution empowers surgeons, medical device specialists, and other experts to work together remotely without incurring costly expenses to commute on-sight for consultations and surgeries. Our Smart Glasses are also being used in telemedicine for remote calls made to provide a virtual presence within hospitals and senior care facilities that are video broadcast securely. Further, our Smart Glasses provide virtual training, health care for patients in the ICU and the operating room, and assistance in performing virtual patient rounds.

Security and First Responders

Our Smart Glasses, particularly the versions that have a sunglass look, have the potential to become disruptive and market changing products for security providers and first responders such as police and firefighters. We believe there are significant business opportunities in having the Vuzix smart glasses offering a traditional eyeglass unique form factor that can be usedassist law enforcement and security personnel in keeping people safe or identifying suspicious persons or those associated with unlawful activities. The ability to enhance vision for many peopledeliver video feeds and real-time facial recognition and weapons detection alerts in a covert fashion to our smart glasses wearers literally provides security personnel and first responders with visual impairments. We have built an eco-systemeyes in the back of Value Added Resellers (VARs), established a growing number of system integratorstheir heads, allowing them to view and have garnered infrastructure support from leading mobile device management companies.interact with their immediate surroundings while also staying remotely connected and informed.

Consumer

Consumer

We believe that the most significant driver of the longer termlonger-term wearable display market isadoption that will change the growing consumer demand for mobile access to larger volumesfuture of informationcomputing and entertainmentwill result in broad adoption of AR smart glasses in smaller and wearable packages. We believe that there is an increasing demand for high-resolution, wearable displays to enjoy content such as videos, movies, entertainment, social media, andpackages will be the Internet in mobile environments.augmentation of the real world with cloud-based information. This desire for mobility has resulted in the development of mobile video personal viewer products in three general categories: (i) immersive Video Eyewear headset-application platforms such as accessories for gaming, video viewing and VR computers; (ii) AR electronic viewers incorporated in products such as data glasses and personal viewers for cell phones; and (iii) smart glasses for enterprise.

We also believe that there is a need for wearable display devices for use with desktop or belt-worn computers, consoles, tablets and other gaming products. We believe that viewing mobile device gaming on smaller direct view screens is not a satisfactory experience for many consumers when compared to laptop computers and gaming consoles. Both VR and AR are difficult to implement using traditional desktop computer monitors and televisions but can be successfully implemented with appropriately equipped wearable displays. Many of our wearable display products can enable both AR and VR applications for the end user.

We also believe that there is a growing need for activecapability will allow smart phone users to be able to keep their phones in their pocket and at the same time allowstill receive location-aware content fromoverlaid with their real-world view. These glasses are expected to be ideal for consumer needs such as language translation, closed captioning, messaging, directions, health reporting, and workout status, amongst many other things. The advent of AI programs such as OpenAI and ChatGPT are expected to, if anything, create awareness that could significantly accelerate this demand in the web merged with the real world. For example, while a user walks down the street, they could get directions and a Yelp score for the restaurant they are looking at; all within the view of their glasses. All of this can be achieved by leaving the phone in their pocket.

As we manufacture our waveguides and display engines in higher volumes at reduced costs and capitalize on our waveguide manufacturing technology, weupcoming years. We believe that our products will be increasingly well-positionedthe keys to compete with other see-through opticsthe consumer AR market are fashion forward light weight smart glasses that have the ability to support the user’s prescription. Vuzix new OEM solutions offerings are pointed directly at solving for these needs.

4

OEM Waveguide Optics and displays and cell phone size displays in the rapidly growing consumer market, particularly as demand expands for sophisticated mobile personal viewers offering higher resolution and better image quality for AR and Smart Glasses applications. Display Engines

We believe our waveguide and display engine technology addressestechnologies address the critical performance parameters for next generation AR products, including higher brightness, sharper resolution, true see-through capabilities, compact size, lower power consumption and longer operational life.

AR As we manufacture our waveguides and display engines in higher volumes at reduced costs and capitalize on our waveguide manufacturing expertise, we believe that our products will be increasingly well-positioned to compete with other see-through optics and displays, particularly as demand expands for all Markets

We offer smart wearable display products that enable developmentsophisticated mobile computing devices offering higher resolution and deployment of AR applications. ARbetter image quality for AR/XR and Smart Glasses enable its wearerapplications. We are developing, with partners, new micro LED display technologies that should greatly increase the ability to see computer-generated information, graphics or images projected into the real-world environment or upon an objectoffer high resolution displays that the user is observing. Thus, whether in the warehouse, on the factory floor, or in-the-field, users while wearing thecan overlay AR Smart Glasses may access a manual, tutorial, or image that is connected to the task at hand which will assist them in completing that task, while also viewing their current surroundings and nearby objects.

We anticipate AR applications will be employed in the following areas:

·Field service, warehousing, and maintenance;
·Quality assurance;
·Inspections in the field or on the plant floor;
·Task support for industrial, manufacturing and medical applications;
·Advanced navigation both for the enterprise and consumer markets;
·Social networking;
·Location and scene based entertainment and education applications;
·Cloud based AI services delivery;
·Mobile commerce and visual search applications; and
·Real time language translation. 

Additional possible applications of AR-enabled Smart Glasses for consumer use include hands-free alerts, messaging, location and context aware information and social interaction.graphics to wearers in nearly any environment. The goal is to have extremely efficient full color micro displays capable of high brightness for use in any conditions. We believe that our waveguide and display engine technologies address the critical performance parameters for next generation AR products, including higher brightness, sharper resolution, true see-through capabilities, compact size, lower power consumption and longer life.

5

Products

We now produce and sell two main types of wearable display products: AR Smart Glasses for a variety of enterprise and commercial users and applications, including AR; and Video Viewing glasses, for on-the-go users as mobile displays for entertainment and gaming.applications. Our products are available with varying features including with and without integrated computer processors, and are currently offered as eitherboth monocular orand binocular display systems.

Our ARcurrent products include:

M400 and M4000 Smart Glasses have many of the capabilities of a smartphone such as cameras(M series)

The M400 and computer processors that can allow applications to be run directly in the ARM4000 (the current “M series”) products are our monocular smart glasses designed for enterprise, industrial, commercial, and medical markets. The M400 is Vuzix’ work-horse Smart Glasses enabling cloud connected applications through a wireless link directlyoffering with its enhanced capabilities and is our fourth model in this family. This product began commercial production in September 2019 and the glasses. We believe we provide one of the broadest range of wearable display products for AR and Smart Glasses available inM4000 was introduced to the market and thatentered volume production in September 2020. The M400 is equipped with an occluded nHD OLED display and the M4000 employs our latest see-through waveguide optics with a WVGA DMD display. These two products contain some ofinclude an Android-based wearable computer similar in performance to a modern smart phone, enhanced with a wearable monocular display, speech control, camera, sensors and wireless connectivity capabilities. These Smart Glasses serve up the most advanced electronics, ergonomics,digital world “hands-free”, offering access to information to augment the real world, data collection and optics for their respective target markets and uses. Our products include:

Binocular Wearable Display Products

Our binocular wearable display products offered over the last 10 years have included several models with differing native resolutions, virtual screen sizes and various interface options before we standardized our current digital video interfaces. Our binocular wearable displays products contain two microdisplays (a separate display for each eye), typically mounted in a frame attached to eyeglass-style temples or stereo headphones. These products enable mobile and hands-free private viewing of video content on screens that simulate home theater-sized screens, all of which support 3D video applications. These products can be employed as mobile high-resolution displays with products such as smartphones with video output capability, laptop computers, tablet computers, portable DVD/Blu-Ray players, game consoles and personal digital media/video players. Our current model, the iWear Video Headphones, which was first released in December 2015 is being phased out and will be discontinued during 2018. Our focus is now on waveguide based AR products which can produce many of the same functions as iWear but in a more “eyeglass” framework.

Monocular Wearable Display Products

more. Monocular products, due to their single eye display, are best used for push notifications and “information snacking”. Typically, monocular products have smaller fields of view that result in less information display capabilityIntegrated head tracking, camera, touchpad, buttons and no stereoscopic 3D or depth information.

In early 2014, we began selling our first monocular pair ofspeech recognition gives versatility to navigate and use these M-series Smart Glasses in almost any environment. These products include pre-installed apps that can be used to record and play-back still pictures and broadcast quality video, track timed events, manage a user’s calendar, link to a phone, scan barcodes and much more. We offer connector applications, with annual subscriptions, that allow the M100, which was designed forsmart glasses to join the enterprise, industrial, commercialmost popular video conferencing applications including Microsoft Teams, Zoom, Blue Jeans, WebEx Teams and medical markets. The Vuzix M100 Smart Glasses are an Android-based wearable computer, enhanced with a wearable monocular display and onboard processor and wireless connectivity capabilities designed primarily for commercial, professional, and industrial users. Vuzix M100 Smart Glasses serve up the digital world “hands free”, offering access to information, data collection and more. The M100 providesothers. These products can provide enhancements to existing workflows and opensopen new opportunities in industrial, medical, retail, supply chain, remote help desk, and many more aspects of our customers’ businesses. An integrated head tracking, GPS system, camera

The M4000 offers all the performance and speech recognition gives versatility to navigatefunctionality of the M400, and use the M100 in almost any working environment. Its pre-installed apps can be used to record and playback still pictures and video, track timed events, manage a user’s calendar, link to a phone and more.

At the January 2017 CES tradeshow, we introduced the second generation pre-production model of our monocular Smart Glasses product, the M300, with significantly improved ergonomics, ruggedness and technical features. The M300 is a ruggedized form designed specifically for enterprise and industrial use. The M300 entered volume production and became commercially available in spring 2017. The second model, the M3000 was honored at CES 2017 for its innovative design and engineering, and is our next-generation waveguide based AR Smart Glasses for the enterprise sector. The M3000 features improved display resolution and employs our advancedVuzix’ proprietary waveguide optics and Cobra II projector engine that allowto provide a non-occluded, see-through, operation for more advanced AR applications. The M3000 uses many of the same components as the new M300 and we expect to begin commercial production of it by fall 2018. Both of these smart glasses can connect to the cloud to deliver digital content directly to and from the job site and connecting it “overlaid” onto the real world.heads-up display with higher display resolution.

Vuzix Blade® Smart Glasses

We introduced the Blade Smart SunglassesGlasses as a monocular system at CES 2018. In September 2022, we introduced the Blade 2, an upgraded replacement version, which added a host of advanced features and performance, including stereo audio, improved CPU performance, Android 11 OS and an autofocus camera, all to help meet the needs of connected workers. We believe the Vuzix Blade™Blade is the natural evolution of AR smart glasses by providing the user with thea wide range of features and capabilities in a natural glasses form factor that we believe people will want to wear. Fromfactor. The display imagery is projected visually out in front of the user like the heads-up display in a car. Current applications range from basic text messaging and answering the phone to overlaying mapping directions, menus, weather, events, stocks, video conferencing, sports updates, social feeds, bio-metricswork instructions, documentation, biometrics and more, right in frontmuch more. The

5

intuitive and feature packedfeature-packed Vuzix Blade OS allows the user to simply and intuitively navigate via simple swipes and taps, or leverage voice controls and external AI systems. This allowssystems, allowing users to leave their phones in their pockets for most functions and adds the ability to connect the information being presented to the real world, including that from cloud basedcloud-based speech AI platforms such as Amazon Alexa. The Blade also has connector applications, with annual subscriptions, that allow the glasses to join the most popular video conferencing applications including Microsoft Teams, Zoom, Blue Jeans, WebEx Teams and others. We believe the Blade Smart Glasses is the first natural step to replacing the smart phone with a ubiquitous wearable device for all.

Vuzix Shield™ Smart Glasses

WhileWe introduced the Vuzix M300Shield Smart Glasses, which we believe is a revolutionary leap for enterprise AR smart glasses, are the device of choice in many enterprise deployments, there is a sector of business, especially B2C, in which the form factor is a deterrent. Visual appearance and portability are crucial requirements when it comes to servicing retail customers in big box retail chains, supermarkets, restaurants, department stores, and other client facing work environments.as our first binocular AR system utilizing micro LED displays at CES January 2022. The Vuzix BladeShield Smart Glasses offer all the computing power and performance of our M400 series platform and its related enhanced AR capabilities coupled with its fashionable form factor and all-day wear-ability fills this gap. For the enterprise user,Vuzix' proprietary waveguide optics driven by miniature micro LED stereo displays to provide a completely non-occluded see-through heads-up display. Housed inside lightweight, stylish, prescription-ready safety glasses combined with stereo HD cameras, the Vuzix BladeShield delivers a singular wearable AR experience. The Shield, when commercially released in the first half of 2023, will pairalso have connector applications, with annual subscriptions, that allow the smart phone or connect directlyglasses to a Wi-Fi network, allowing for custom secure industrial applications. Although not as powerful asjoin the stand alone most popular video conferencing applications including Microsoft Teams, Zoom, Blue Jeans, WebEx Teams and others.

Vuzix M300 smart glasses, we expectUltralite™ Smart Glasses

We announced in November 2022 the introduction of the Vuzix Blade to open new and organic growth opportunities within the enterprise space.

We are currently also developing a binocularUltralite™ AR Smart Glasses productplatform as a go-to-market ready, turnkey offering. Weighing just 38 grams and power-efficient with 3Dtwo days of run-time on a single charge, Vuzix Ultralite™,we believe, is the world’s most fashion forward smart glasses available today and stereo cameras that we expect to introduce sometime in 2019. Future AR Smart Glasses versions will include increased resolutions and fields of view, more powerful computers and our thin waveguide see-through optics. 


AR Products

AR wearable displays provide the user a live, direct or indirect, view of a physical, real-world environment whose elements are “augmented” by computer generated sensory input such as sound, video, graphics or GPS data. Such systems also contain head tracking technology, which enables the user to look around the environment being viewed by moving his or her head which in turn sends that information back to the computer which then adjusts the computer-generated AR image accordingly. AR wearable displays typically include built-in cameras that can be used to overlay images connected to the real worldis designed specifically for both enterprise users as well as measurethe broader consumer market. Vuzix’ advanced monocular waveguide optics and track gesturescustom micro-display engine work together to create a crisp, transparent image that delivers all the important information on a user’s smartphone/watch, hands-free right before their eyes. Vuzix has started working with select industry-leading and global consumer electronic technology and fashion brands around the physical environment ofVuzix Ultralite™ platform to bring the AR wearer.

Our AR Smart Glasses are an intelligent wearable computing system specifically designed to enable computing and connecting AR cloud/internet of things information and AI to the real world. The embedded camerasultimate in our Smart Glasses are used for recording and/or seeing the real world. Input and control of ourlightweight, affordable smart glasses consistsolutions to market. This CES 2023 award winning product is expected to commence commercial shipments by the end of using the wirelessly connected smartphone, gesture sensor, speech recognition voice control,summer 2023.

Mobilium® Logistics Mobility Software

We acquired Moviynt®, a series of builtUS-based SAP Certified ERP platform software solution provider, to support hand-held mobile phones and scanners used in sensors for head motionlogistics, warehousing and manufacturing applications in some cases gesture sensors. We are building an eco-system of developers around theseNovember 2022. Moviynt, a boutique-specialized software firm which was founded in 2018 by three principals, has developed a logistics mobility software platform (Mobilium®) which eliminates traditional middleware, and is device agnostic. Mobilium can ultimately support multiple ERP systems and modern-day warehouse picking with wearable devices such as Vuzix’ smart glasses, handheld devices such as scanners, and anticipateeven mobile phone-based systems. Moviynt’s SAP studio product is highly configurable and allows customers to customize and optimize specific mobile workflows for a given use case. Moviynt’s core technology and architecture consists of a certified SAP gateway module, IOS and Android client and mobile apps that mostrun on a wide range of handhelds and wearables. This technology is unique in that it plugs directly into the software beingcustomer’s SAP environment and does not require any new hardware, middleware or intermediate servers to process warehouse and logistics related transactions such as cycle counts and picks and transfers on the shop floor. Moviynt’s technology is SAP certified and compatible with other ERP systems including Oracle, which will also be fully developed can be used on future generationsand supported over time.

The acquisition of Moviynt further positions Vuzix as a software solutions provider capable of expanding access and interaction between wearable and handheld devices that will help drive further market adoption to manage day-to-day business activities such as supply chain operations that are tied to ERP systems.

6

Applications for Smart Glasses

VUZIX Basics™ is a new product line offeringDozens of standard applications that we introduced in December 2017. Vuzix Basics are essential out-of-the-box applications optimized for use with the growing lineup of Vuzix AR Smart Glasses includingare included on the devices and available for download from the Vuzix M300 industrialApp Store. Many of these applications are similar to what is available to the customer with modern smart glasses and the Vuzix Blade. VUZIX Basics™ arephones. These standard applications are designed to be simple to get started simple to use, and appseasy-to-use, and we believe can immediately provide the fundamental benefits of Smart Glasses to novice and expert users alike.

The first application in the platform, VUZIX Basics Video, providesVuzix also resells a variety of other applications, including TeamViewer Frontline and Vuzix Remote Assist (VRA), which provide remote telepresence capabilities, otherwise known as see-what-I-see“see-what-I-see” video collaboration enablingand work instructions, amongst other features. VRA enables an operator, mechanic, field technician or consultant to communicate in a hands-free manner with a remote expert to drive “just in time”“just-in-time” video support of a process or repair. VUZIX Basics VideoThese applications increase productivity and customer satisfaction by sharing information between field technicians and remote support experts. The VRA app enables clientsVuzix Smart Glasses customers to multiply their expert workforce, eliminate the high costs of travel, improve customer service levels and equipment operationand accelerate knowledge transfer and training. We believeare offering the launch of VUZIX Basics Video addresses an underserved portionVRA app on a monthly or one-year subscription basis. We have also developed “connector” applications to enable third party applications like Zoom, Cisco WebEx, Microsoft Teams, BlueJeans and others, for use with our smart glasses. In some cases these applications will be free to the user and in others we will charge annual fees.

Vuzix’ position as a Smart Glasses supplier fills a market need that can be long lasting and could be the basis of the enterprise space by providing an affordablefuture of computing if the glasses are developed into a much larger integration within current and standardfuture technology ecosystems. The idea that the Smart Glasses alone will lead to major innovations and use cases is a typical “chicken and egg scenario” that has played out in almost every massively disruptive technology advancement. The “build it and they will come” mentality works only when you build the “whole thing” or if you have a large enough ecosystem. Vuzix’ Smart Glasses have all the features and benefits consumers expect of a modern tablet or smart phone with the added benefit of being worn ergonomically on one’s head, allowing for hands-free operation, and at the same time connecting the visuals in the glasses to the real world. The steady advances in the Smart Glasses hardware are impressive but this alone is not what is driving market adoption to date. The “whole thing” is the solution to solve the customer pain point, problems and/or inefficiencies while simultaneously creating another use case in the form of a toolbox that allows for expert collaborationnew innovations or products.

We believe Vuzix is gaining market awareness and has the opportunity to companies worldwide. We are planningmove up the value chain, increase market share and to develop several more VUZIX Basics applications around work instructions and plant floor operations. VUZIX Basics application are being offered oncreate a sustainable higher software subscription basis.margin business by:

Properly implementing a digital solution strategy that retains more of the customer relationship across a wide range of industries; and
Improving Vuzix’ participation in more areas of the customer relationship and having less reliance on VARs to deliver the full solution. When VARs are heavily involved in the middle of the relationship, Vuzix is primarily relegated to being a product manufacturer and seller. There is significant customer value that can be captured by adopting a solutions model including recurring revenue opportunities.

App Store for Smart Glasses

We also have an App Storeapp store on our websiteswebsite where users can download and purchase Smart Glasses applications, including third partythird-party apps. We are fosteringcontinue to foster the development of an ecosystem of third partythird-party developers to offer applications and trials for their smart glasses apps, and many of which will be sold on an industry common revenue share model. The Vuzix third party developer community will be able leveragemodel, with the open Android platformpublisher receiving approximately 70% of the Vuzix M300 and the Vuzix Blade to bring new and creative ideas to life.subscriptions collected. Supported by Vuzix’ new App Store, developers can offer or sell their applications to all Vuzix Smart Glasses users, expanding into an ecosystem of AR applications for real world use today. The Appapp store supports free, onetimeone-time fee, and paid subscription monetization models. The Vuzix third-party developer community is able to leverage the open Android platform of the Vuzix M-Series and the Vuzix Blade to bring new and creative ideas to life.

7

Waveguide Optics, Display Engines and Design Reference Kits

We selectively offer waveguide optics and related coupling optics combined with our compact Cobra IIproprietary display engine to form a see-through display module. We sell limited numbers of our waveguide optic design reference kits to select qualified potential OEMs/ODMs, which include a Cobra II projector, waveguide optics and associated electronics, to help these customers evaluate our technologies and to assist their efforts to build and test new products incorporating our proprietary solutions.

We have shipped these customized modules to numerous customers, some of which may soon incorporate our products into their own commercial products. Our strategy for addressing the consumerbroader mass market includes developing partnerships with both select consumer companies, including wireless communications carriers, and select high volume production manufacturing companies.

Custom Solutions and Engineering Solutions

WeHistorically, we have in the past provided fully integratedfully-integrated wearable display systems, including head mounted displays, human computer interface devices, near-eye display relateddisplay-related engineering services and wearable computers to commercial, industrial and medical customers. Starting in June 2022 after the expiry of a 10-year non-compete, we are again able to market and sell to defense, first responders and security customers. AsSuch potential customers include police, fire fighters, EMTs, other first responders, and homeland and border security personnel.

We have an outward facing section of our website dedicated to offering our OEM and engineering services around our waveguides and display technologies. Waveguides require a resultdisplay engine built for the purpose of the saleintended design. Vuzix is able to address most of these design specifications regardless of size, light coupling, power consumption, or resolution.

Defense and Security Products

As noted above, in June 2022, the 10-year non-compete restrictions with the buyer of our former defense division, in June 2012, we no longerTDG Acquisition LLC (DBA – Six15 Technologies (“Six15”)) expired. This allows us to again pursue, general engineering services work with defense or security organizations.

In February 2017 we enteredon an unrestricted basis, opportunities related to the Company’s smart glasses and waveguide optics technologies into a development agreement with Toshibathese expanded market opportunities related to create a customized Window-based USB-C Type C AR Smart Glasses offering for Toshiba, which is a derivative productfirst responders, US Department of Defense, Security Organizations and the Vuzix M300 Smart Glasses. Throughout 2017 our design teams created an entirely new Vuzix product for Toshiba. We have delivered hundreds of engineering and development units and have begun volume manufacturing for Toshiba to fulfill their initial orders under our 3-year supply agreement, which was previously announced by Vuzix in December 2017.Military.


Product Development

We believe that the continued introduction of new products in our target markets is essential to our growth. Our products tend to have two to three-year life cycles. We have assembled a group of highly skilled engineers who work internally as well as with external consultants and our customers to continue our product development efforts. Our primary development efforts are focused on waveguide optics (and their manufacture), projection engines, displays,new micro LED-display technologies, low-power electronic designs, firmware and wearable computing software, and the design and ergonomics of wearable displays. Our display product development efforts are focused towards continually enhancing the resolution, performance and manufacturability of our display products. During 2017, 2016 and 2015, we invested $6,706,690, $6,947,878 and $3,595,437, respectively, on research and development activities. We expect to increase our research and development expenditures in the future and as our revenues grow. We have also acquired and licensed technologies developed by third parties and we may continue to do so in the future.

Technology

We believe that it is important to make substantial investments in research and development to maintain our competitive advantage. The development and procurement of intellectual property rights relating to our technologies is a key aspect of our business strategy. We believe that it is now technologically feasible to improve upon the weight, ergonomics, optical performance, see-through capabilities, luminance, power efficiency, compactness, field of view and resolution of the current generation of virtual displays and display components. “Early technology adopters” have been the majority of the purchasers of our consumer wearable display products to date and similarly within the enterprise customer base for our Smart Glasses. However, our near-eye virtual display technology has been gradually improving in performance and we believe is starting to meet the high expectations of both the enterprise and the consumer mass markets with respect to screen resolution, computer power, image size and ergonomics. We expect to continue to improve our products through our ongoing research and development and advancements made by our third-party suppliers of key components.

We also develop intellectual property through our ongoing performance under engineering service contracts. We intend to continue to pursue select development contracts for applications that enhance our waveguide optics and other display technology. Our policy is to retain our proprietary rights with respect to the principal commercial applications of our technology under any engineering services work we perform, whenever possible. However, in certain circumstances where the end finished product may be co-branded with the OEM, we may offer the OEM customer exclusivity, for a product or for a geography for a limited period, as we our doing with Toshiba Client Solutions, who received a 12 month product exclusivity for that particular smart glasses model, which is co-branded, subject to their purchase of minimum quantities.

We believe that the range of our proprietary technologies gives us a significant competitive advantage. Our technologies relate to advanced optics systems including passive and active see-through imaging waveguides; micro-projectionwaveguides, micro-

8

projection display engines; high resolution scanning displays; motion tracking systems;engines, investments in micro LED displays, and specialized software drivers and applications for video eyewear displays.wearable displays and computers. We also have a portfolio of trade secrets and expertise in nano-imprinting using quartzhigh stability mold substrates, nano structure embossing, and engineering tool setstool-sets for the design and manufacturing of diffractive waveguide optics.

We believe that display engines are also important for commercializing wearable displays. We have developed a proprietary micro digital light processing (DLP) based engine called the Cobra II and are working on laser modulated andmicro LED engines designed specifically for our waveguide optics solutions. We are currently working with multiple partners in the micro LED arena and unveiled our first micro LED display-based binocular AR Smart Glasses called the Shield as well as the Vuzix Ultralite at CES 2023. These next generation waveguides and Micro LED display engines have allowed us to shrink the entire assembly to fit in the space available in a typical off-the-shelf pair of sports sunglasses. We anticipate launching several new waveguide based productssunglasses in 2018the case of the Shield and beyond, withreading glasses in the first being our CES 2018 Innovation Award winning Blade Smart Glasses.

case of the Ultralite.

We entered into a technology license agreement with Nokia Corporation in August 2011 for their Exit Pupil Expanding (EPE) optics technology. This agreement was amended in October 2017 to allow us moregreater flexibility with sub-licensing and preferable royalty terms. Under these agreements, we perform on-going research and development on the EPE optics and are expected to manufacture and bring to market components and products containing the licensed technology. In addition, we will provide Nokia with the ability to purchase products and components which incorporate the licensed technology. The EPE technology is an important foundation of our diffraction baseddiffraction-based waveguide optics technology.

In October 2017 and June 2021, we acquired certain IP and patent applications from the inventor/seller related to holographic optics and display engines forimage and wave field projection through a diffusive media”. This technology is still in active development and we are making progress towards our first functional solution.

On May 12, 2022, the Company signed a series of agreements with Atomistic SAS, a goalFrench company that is developing new micro LED displays and a related backplane. These agreements provided for an exclusive license by the Company of creating functional demonstrator models within 24 months.key micro LED technology and for the custom design of a backplane, for cash commitments totaling $30 million along with equity issuance commitments to be made by the Company relating to certain deliverables and the achievement of performance milestones by Atomistic. On December 16, 2022, the Company signed new agreements with Atomistic (the “Atomistic Agreements”) that superseded the prior May 12, 2022 agreements, whereby the scope for the construction of a backplane was modified and the Company obtained an additional license in an alternative self-emissive micro LED technology. This multi-year project, if this new IP proves out, could result in industry-leading very efficient full color HD micro LED displays in an extremely small form-factor.

Major technologies that we employ in our products include:

MicrodisplayMicro-display opticsOptics: Optical components represent a significant cost of goods for both us and our competitors. This cost is a function of the physical size of the microdisplaymicro-display and the cost of the supporting optics. Smaller microdisplays are less expensive to produce but they require larger and more sophisticated optics to make solutions thatWe have no user adjustments, large fields of view and very low distortion specifications. Larger displays require less magnification and less complex optics, but these optics become very bulky and the displays are significantly more expensive to manufacture. To improve our wearable display’s fashion and ergonomics, we are developingdeveloped thin and lightweight optics that can be integrated with very small microdisplays thatmicro-displays where we expect willcan more closely match conventional eyewear frames in size and weight. These new optics and displays provide what we believe are significantly improved ergonomics compared to competing wearable display solutions.

8

See-Through Waveguides:  We have developed a range of patents and patents pendingpatents-pending around our see-through waveguides. We are developingwaveguides, as well as passive, dynamic and diffractive optics basedoptics-based waveguides that are the basis for some of our future slim wearable display AR and smart glasses products. Our dynamic waveguides use index modulated liquid crystal material to switch beam steering gratings built in a thin glass window to scan an image into the user’s eye. We are also developing passive optical displaystriving to develop ultra-compact micro-display engines that use the approximately 1.2 mm thick see-through blade of glass or plastic waveguide with an ultra-compact micro display engine to magnify and focus the light from a display into a user’s eye. TheOur development goal with these waveguides is to create AR basedAR-based wearable displays that will appear to others as practically indistinguishable from today’s conventional sunglasses by most every measure,measures, including comfort, size, weight and ergonomics.

Custom Display Engines: We have patents and patents pending on modulated laser based display engines and IP around micro DLP display engines. Our Cobra II micro DLP engine is one of the smallest volume engines built around DLPs. We are also performing research and development work on laser engines to drive scanned images into holograms, with the goal of such systems to offer next generation waveguides capable of 100 plus degree fields of view. Both the display engine and waveguide optic combine into a single monolithic design that we believe will enable us to produce low cost, HD resolution displays in a form factor that will be integrated into frames similar in size to ordinary sunglasses.  Our upcoming M3000 Smart Glasses and Blade Smart Glasses will both utilize the Cobra II DLP engine and latest waveguide optics.

Nanoimprinting: We continue to develop a portfolio of trade secrets and expertise in nanoimprinting usedfor use in our waveguide optics. We believe these technologies are essential to the production of our approximately 1.2 mm thick see-through lenses which we believe are the cornerstone to making fashionable eyeglass-styled Smart Glasses. We have developed technology for waveguide design and production, including: tool design and creation;creation, custom designed software for grating structures and layout;layout, lithography processes;processes, high index low shrinkage polymers and other materials;materials, mold treatments, automation equipment and test/QA processes and procedures, to name a few.

9

System level Engineering:Custom Display Engines: To design wearableWe have patents and patents-pending on intellectual property around micro DLP display solutions thatengines. We have also worked on very compact micro LED projectors and are the size of conventional eyeglasses requires an integrated approach. No single piece of technology can standalso working on its own. Vuzix engineering teams work togethermicro LED engines designed specifically for our waveguide optics solutions. We are currently working with multiple partners on micro LED engines, both monochrome and color, and have delivered preliminary evaluation systems to integrate optics, electronics, displays, industrial designselect partners and more to solve some of the biggest challenges in the wearable display engineering chain. The level of integration between these disciplines is significant and has resulted in new intellectual properties for Vuzix that we believe set us ahead of the competition. All of these items need to be taken into account individually and as a whole to create designs that allow the technology to “disappear” in a pair of glasses.potential OEM customers.

Patents and other Intellectual Property

We have an intellectual property policy which has as its objectives: (i) the development of new intellectual property to further our intellectual property position in relation to personal display technology; and (ii) the maintenance and protection of our valuable trade secrets and know-how. We seek to further achieve these objectives through the education and training of our engineering staff and the adoption of appropriate systems, policies and procedures for the creation, identification, and protection of intellectual property.

Our general practice is to file patent applications for our technology in the United States, Europe, Japan, and in additional countries, including Canada and China for inventions which we believe have the greatest potential. We file and prosecute our patent applications in pursuit of the most extensive fields of protection possible including, where appropriate, the application of the relevant technology to the broader display industry.

We believe that our intellectual property portfolio, coupled with our key supplier relationships and accumulated experience in the personalnear-eye display field, gives us an advantage over potential competitors. We also believe our copyrights, trademarks, and patents are critical to our success and we intend to maintain and protect these. We also rely on proprietary technology, trade secrets, and know-how, including manufacturing processes and procedures, which are not patented. To protect our rights in these areas, we require all employees and, where appropriate, contractors, consultants, advisors and collaborators, to enter into confidentiality, invention assignment, and non-competition agreements.

agreements with us.

Our technologies enable us to provide low-cost, small form factor, high-resolution wearable display products. To protect our technologies, we have developed a patent portfolio which currently consists of 63148 issued U.S. and foreign patents and 46130 pending U.S. and foreign patent applications. We are also currently preparing several invention disclosures for the purposes of submitting design and utility patent applications. Our U.S. and foreign patents expire on various dates from May 13, 2017 to July 6, 2041.January 24, 2040. In addition, in connection with ourthe sale of our defense division in 2012, we received a worldwide, royalty free,royalty-free, assignable grant-back license to all the patents and other intellectual property sold for use in the manufacture and sale of products in the consumer markets.

In addition to our various patents, we have 67 registered U.S. trademarks and 4179 trademark registrations worldwide.

Competitors and Competitive Advantage

The near-eye wearable computer or personal display and mobile device industry in which we operate is highly competitive and evolving rapidly. We compete against both direct view display technology in smart phones and tablets and wearable display technology. We believe that the principal competitive factors in the personal display industry include image size, image quality, image resolution, power efficiency, manufacturing cost, weight and dimension, feature implementation, AR capabilities, ergonomics, style, hands freehands-free capabilities and, finally,lastly, the interactive capabilities of the overall display system.


Many of our competitors’ products for mobile use are based on direct view display systems in which the user views the display device, or screen, directly without magnification. These products have several disadvantages compared to near-eye virtual displays and our wearable display products. If the screens are large enough to read a full conventional internet page or HD video without external magnification or image zooming, the products must be large and bulky, such as laptops, tablets, personal computers. If the displays are small, such as those incorporated in smartphones and smart watches, the screens can be difficult to read when displaying higher resolution content. Despite the limitations of direct view personal displays, smartphones, smart watches and other wearables are being produced in ever increasing volumes by a number of manufacturers, including Google (Alphabet), Sony, Blackberry, Samsung Electronics Co., Ltd., LG Electronics, Apple Inc., Microsoft, Garmin, Fitbit, focused firms, and many others. The displays on the latest smart phone and tablets are larger and very high resolution and thanks to touch zoom-in capabilities and improved internet content formatting are proving effective as mobile direct view personal displays for a variety of applications, including many that were once considered applications where Video Eyewear was superior. We expect that these large and well-funded companies, as well as newer entrants into the marketplace, will make products that are competitive with ours based on improvements to their existing direct view display technologies or on new technologies. Examples of new display technology include foldable displays, e-ink, flexible OMLEDs, see-through LCD displays and laser scanners and projectors.

Aside from direct view displays, we also have competitors who produce near eyenear-eye personal displays or wearable displays. For the past decade, most of these products were mainly low-resolution, bulky in size, poor ergonomically deficient, costly, and heavy in their power requirements. Additionally, the introduction

10

Competition - Binocular Video Viewer Wearable Display Products

Vuzix AR Smart Glasses competitors in theinclude binocular wearable display spacedisplays and virtual reality systems, using microdisplays eithermicro-displays or smaller flat panels. Examples of such companies include or have included Carl Zeiss, Seiko Epson (Epson), Sony Corporation, Microsoft Corporation, Avegant Osterhout Design Group (ODG)Corp., Meta (formerly Oculus/Facebook), HTC Corporation, Razer Inc., HP, Lenovo and Fat Shark. Manymany others. Some of these firms have discontinued their efforts while others have introduced VR viewers themselves.continue to introduce new products. We believe that most these competitive products have received limited customer acceptance, except for Meta’s products, due to their being bulky, limited operating time, and non-user-friendly designs as video viewers butwhen connected to a computer, extra cables. Despite their size, VR headsets from companies like Meta and Sony have become more acceptablebeen selling in the millions of units, primarily for immersivegame applications. VR experiences. Theresystems are either standalone devices or require a number of smaller companies that have products that have competed using binocular display modules (BDM) produced by Kopin Corporation as an OEM. Other companies that have stated their intention to enter this market when their product development is complete with either finished products or components with optics and display engines are Lumus and Microvision Corporation.

As an alternative to microdisplay based head worn display systems, most manufacturers have moved to using larger display panels that are typically found in smart phones. A Facebook unit, Oculus has been shipping its large field of view VR goggle HMD called the Oculus Rift since 2016. HTC that same year introduced it higher-end VR system called the HTC Vive. Sony after dropping their HMZ video viewer product, released on October 2016 its PlayStation VR goggle system specifically for its PlayStation 4 game console. All three companies have announced new improved VR goggles systems for 2018 with improved performance and reduced pricing.

Additionally, numerous manufacturers now offer head worn goggle attachments for smart phones that are designedwire to be used for VR applications. Theseconnected to a PC to operate. To date, the most popular units have been standalone devices contain simple optics that allow the user to insert their smart phone into the device and view their phone screen very close to their eyes and can offer an inexpensive way for owners of compatible smart phones to experience virtual reality. These products are generally priced under $100 and includefrom Meta which incorporate a wireless controller to allow the wearer to navigate and play VR games. We believe all these units are very bulky relativecomputer similar to the wearer’s head, offer limited, but improving resolution to each eye, and often have less than clear optical performance across their viewing area. While acceptable for VR games and 360 videos, they are less than satisfactory as a big-screen video viewer or computer display due to ‘screen-door’ and other optical distortions. We expect that, as the market grows and matures and as the technology becomes more refined, more companies may compete with us. ones used in our smart glasses products.

Another product incorporating recently developed technology is a handheld projector that utilizes micro-displays and optics to project digital images onto any nearby viewing surface, such as a wall. These devices are referred to as pocket projectors or pico projectors and are designed to overcome the limitations of the native small screen on smartphones and other mobile devices. Pico projectors use either liquid crystal on silicon displays (LCOS) or color lasers to create their image. We believe pico projectors have had higher unit sales to date than wearable display primarily because of their cost advantage and higher resolutions.

Competition – AR Glasses

In the AR markets, there are currently few competitors with most of this market currently pointedaimed at the high-end and researcherresearch markets. Companies eitherthat have offered or are offering products or intendingintend to do so in this area include the Microsoft Hololens, Meta, ODG,Corporation, Sony Corporation, Epson, Atheer, Darqri,Lenovo, Magic Leap, Nreal and CastAR. Further, industry watchers have speculated that companies such as Apple, Google, Snap, and Meta may offer or support AR wearable display products in the future, but to date, no specific product launch details have been officially announced. Today, many of these products are fairly bulky and are typically tethered to an external controller. Some are using external view cameras to simulate an AR environment where the wearer can see the outside world in effectively a pair of VR goggles with limited success thus far. The Meta Quest Pro announced in fall of 2022 is an example of this and it retails for $1,500. Many are being sold as AR Smart Glasses and are currently targeted at enterprise and academic researchers. The most complete and functional systems today are the Microsoft Hololens II and the ODG products and these systemsMagic Leap Two, both of which cost of $2,000$2,295 - $3,500 per unit. Microsoft has indicated they are working on their next version of Hololens, expected in 2019.


And Magic Leap a well-funded startup has announced its intention to release developer versions of its Magic Leap One creator edition in late 20182 for Enterprise starts at an expected price of over $1500. Further, industry bloggers have speculated that companies such as Apple$4,999 and Google may offer or support AR wearable display products in the future, but, to date, no specific product launch details have been officially announced.higher based upon features purchased.

Competition - Monocular Smart Glasses and Wearable Display Products

Although several companies produce monocular wearable displays, we believe that sales of their products to date have been limited. To date, the market opportunity for monocularthese products, other than night vision products, has been limited primarily to trial tests and smaller rollouts in enterprise markets rather than broad commercial volume purchases. Competitors in these markets include or have or includeincluded: Google/Alphabet, Lenovo, RealWear, Iristick, Liteye Systems, Inc., Lumus, Shimadzu Corporation, Sony, Kopin, Zebra Technologies (inclusive of the business unit formerly part of Motorola), Creative Display Systems, Brother, Google, Garmin, BAE Systems, Six-15 Technologies, LLC (the purchaser of our defense division), Lenovo, Optinvent, Realwear,Shimadzu Corporation, Sony Corporation, Kopin Corporation, tooz technologies GmbH, Creative Display Systems, Brother, Garmin, BAE Systems, Focals by North (acquired by Google), and Rockwell and Collins, Inc.. Google’s wearable display device, named Google Glass, was a headset product with similar form and function to our M100 Smart Glasses. In 2015, Google stopped selling its first version of Glass and then launched a refreshed version called Glass Enterprise. Collins.

Several Japanese electronics companies including Hitachi, Murata Manufacturing Co., Sony Westunitis,Corporation, WESTUNITIS, and Olympus have or had announced monocular smart glassglasses systems for industry.industry and many have exited the business over the last three years. There are also several Chinese basedChina-based companies that have been showing monocular smart glasses products, including Lenovo but their sales activities thus far have been somewhat limited and focused primarily on Asia. We expect that we will encounter competition in the future from major consumer electronics companies and suppliers of imaging and information products for defense applications.

There is competition in all classestypes of products manufactured by us, includingwe manufacture, from divisions ofboth large companies and many small companies. Our sales do not represent a significant share of the market for any class of products. The principal points of competition for these products include, among other factors: price, product performance, the availability of supporting applications, and the experience and brand name of the particular company and history of its dealings in such products. We believe that our monocular products match or exceed the display products currently offered by our competitors.

Competition – Waveguides and Display Engines

There are a limited number of manufacturers of waveguide optics, all targeted at OEM producers of AR and smart glasses. Competitors to our waveguide products include Lumus, WaveOptics (acquired by Snap), Digilens,

11

Dispelix, Optinvent and several others. In addition, several new waveguide manufacturers from China have begun demonstrating their solutions at recent trade shows. Snap Inc. recently purchased WaveOptics and it appears that Snap is planning to use such waveguides for their own internal solutions and likely no longer will be competitive as a waveguide component supplier.

Sales and Marketing

Sales

Our strategy is to sell our products and components both directly and through distributors and value addedvalue-added resellers (VARs)(VARs – also referred to as Vuzix Integration Partners or VIPs), and on a select basis to OEMs. As a result, we have distinct strategies for the sales of our products.

In the Smart Glasses and AR markets, we are currently focused on the enterprise space and as such are building strategic marketing relationships with software firms and distributors to address and support enterprise customers. We are, in parallel, developingsupporting a VAR network with leading companies in various vertical markets from warehousing to field service to medical. As theseThese VARs finishprovide their value added software and services offerings we expect them to roll out their finished solutions to their respective customer base. Some VARs, after qualification, are being designated a Vuzix Industrial Partner or VIP. Such VIP partners gain early access to our new Smart Glasses hardware, receive first access to the initial commercial shipments, and get access to co-marketing support, discounts and much more.bases. We are also supporting select larger key accounts and distributors with our in-house direct sales team. For our smart glasses,Smart Glasses, we are also developingcontinue to foster an ecosystem with application developers from around the world. We also have introduced our own hosted application store where our Smart GlassGlasses customers can download and purchase applications and software developer kits. We have and continue to host developer “hackathon” events with partner companies like NTT docomo. 

We currently sell our products internationally through resellers, distributors, direct to commercial customers, and via online stores and various Vuzix operated web stores in the USA, Europe and Japan. Our international focus is currently on Japan and the EU.EMEA (including the UK, Europe, Middle East and Africa). In Japan, we have a branch sales and service office in Tokyo, and a small warehouse outside ofin Tokyo. We employ two full-time staff in Japan. We have a wholly ownedwholly-owned subsidiary, Vuzix (Europe) Limited, through which we conduct our business in the EU and Middle Eastern markets. Resellers in 50 countries placed orders with us during the last two years. We maintain a small European sales officeoffices in Oxford, England and Munich, Germany that are staffed by twofull-time sales consultants as well as a further sales consultant who is located in Spain.or employees. For customer support and warehousing, we have contracted with a third-party end user technical support firmfulfillment center based in the UK and fulfillment centerthe Netherlands to service our customers in the EU.EMEA. We also currently serve other APAC customers through North American West Coast and Tokyo sales offices.

For customer support for the EMEA, we have contracted with a third-party end-user technical support firm that provides sixteen (16) hours of customer and technical support daily.

We intend to primarily provide our Vuzix Ultralite OEM platform, waveguide and miniature display engine modules and optics components to select OEMs to incorporate into their branded products and sell through their own well-established distribution channels. An OEM/ODM design cycle typically requires between 6 and 1824 months, depending onupon the uniqueness of the market, and the complexity of the end product. Because our waveguides and display engines are the main functional component that definesdefine the imaging as well as look and feel of many of our potential OEM customers' end products, we intend to work closely with these customers to provide technical assistance throughout their product evaluation and any eventual integration process.


We believe that the technical nature of our potential OEM products, such asincluding waveguides and display projectors with microdisplays,micro-displays, demands close relationships with such customers. Our sales and marketing staff, assisted by our technical staff and senior management, visit prospective and existing customers worldwide on a regular basis. We believe these contacts are vital to the development of a close, long-term working relationship with our OEM customers, and in obtainingsecuring accurate and regular forecasts, market updates and information regarding technical and market trends. We also participate in industry specific trade shows and conferences.

Marketing

Our marketing and sales group, in conjunction with external firms, is responsible for product management, planning, advertising, marketing communications, and public relations. We have both internal and external public

12

relations efforts in the U.S. and UK. We also employ marketing firms to help prepare brochures, packaging, tradeshow messaging and advertising campaigns, again focused on either the enterprise or consumer or enterpriseend markets. Most of our products are currently sold under the Vuzix brand name. Toshiba’s AR100, based on our M300 Smart Glasses is our first co-branded product. We seek to have Vuzix become known as one of the premier suppliers of wearable display products for video viewing, smartenterprise applications and AR smart glasses. We plan tocurrently undertake specific marketing activities as needed, including, but not limited to:

·product reviews, case studies and promotions in trade publications;

·case studies and white papers on successful enterprise uses of Smart Glasses and AR;

·product and technology views for our website and social media;

·enhancementinternet search engine ads and maintenance of our Website, Web Store and Social Media sites;

·internet and web pagesocial media advertising and targeted emails;

·public relations; and

·trade shows and event sponsorships.

Consumer Marketing

We engage in select marketing efforts that are intended to drive customers to our products and to help to grow awareness of our AR Smart Glasses and wearable displays in general. Public relations and product videos are an important aspect of our marketing and we intend to continue to distribute samples of our products to key industry participants. We intend to focus our marketing efforts for the next 12 months on:

·distinguishing our AR Smart Glasses products from current competitors and by offering products with superior performance and advanced optics to those of our competitors;

·working with third party software developers to support the unique capabilities of our new products; and

·creating brand awareness with the press and general public of Vuzix and its products, with particular emphasis on our new forthcoming waveguide based products.

Our wearable display products are currently primarily sold directly to consumers and at times through select specialty retailers and online retailers such as Amazon, and through third party North American distributors including D&H. Our monocular Smart Glasses are sold through valued addeddistributors, valued-added resellers, direct to end customers, through our webstore, and through our webstore.a limited number of third-party online stores, such as Amazon. Our website, www.vuzix.com, is an important part of our direct sales efforts.

Engineering Services and OEM Products

We primarily respond to sales inquiries for our engineering services programs and OEM component requests directly and usually in response to inbound inquiries. We do not typically offer “works for hire” services at Vuzix but rather offer our services to opportunities that could result in advancing our technology or end up indevelop into a long-term supply or OEM relationship. We believe that we have established a solidstrong reputation for quality, performance, and innovation for wearable virtualnear-eye display systems, waveguides, and display engines that will be attractive to many types of commercial users thatwho want to leverage our services and products within their businesses. Our design and engineering staff are actively involved with customers during all phases of prototype design through production by providing engineering data, up-to-date product application notes, regular follow-up and technical assistance.

Post CES 2018 we have received an influx ofWe continue to receive inbound requests for engagement related to our proprietary waveguide optics and miniature display engines from some of the world’s largest consumer and mobile electronics firms. We are now engaged with a list of major consumer electronic companies that have started building and/or are currently evaluating hardware designs and product roadmaps which incorporate Vuzix’ waveguide optics technology. Our business strategy is to commercialize our waveguide and display engine technologies and products to permit select ODMs and OEMs to integrate and embed our technologytechnologies and products in a way that best matches their unique capabilities and timeline for bringing their products to market.


Manufacturing Our design and engineering staff are actively involved with customers during all phases of prototype design through to production by providing engineering data, up-to-date product application notes, regular follow-up and technical assistance.

Manufacturing

We purchase product components from our suppliers, engage third partythird-party contract manufacturing firms to perform electronic circuit board and cable assemblies, and havenow do the final assembly of our products done primarily in China at our contract manufacturer there. In the past we have built products ourselves in our Rochester,West Henrietta, New York based facility. We are experienced in the successful production of our products in moderate volumes. Our current facilities are capable of producing tens of thousands of finished products annually, and we believe producing out of these facilities at these levels is more economical and easier to manage than through third parties. We expect to only perform, at most the final assemblyalso manufacture all of our new AR Smart Glasses products ourselves on a test or start-up basis before considering a move offshore, however we expect to manufacture allwaveguide optics in our waveguide opticscleanroom environments at our West Henrietta, New York facility. We believe that using outsourced manufacturing enables greater scale and flexibility at lower costs than establishing our own manufacturing facilities. We evaluate our current contract manufacturers and component suppliers on an ongoing basis, including whether or not to utilize new or alternative contract manufacturers or component suppliers. However, we also expect to manufacture all of our

13

waveguide optics only at our West Henrietta, New York facility. In October 2022, we announced the signing of a new lease agreement for additional floor space in a building adjacent to our West Henrietta facility for the express purpose of expanding our waveguide production capacity.

We currently purchase almost all of the microdisplaysmicro-displays used in our products from Kopin,Sony Corporation, Jade Bird Display and Texas Instruments and Omnivision.Instruments. Our relationship with these microdisplaymicro-display suppliers is generally on a purchase order basis and none have a contractual obligation to provide adequate supply or acceptable pricing to us on a long-term basis.basis, nor do we have any contractual obligation to purchase micro-displays from them. We have operated this way successfully for over a decade with these suppliers. Our Cobra II display engine is based on our proprietary design and is exclusively manufactured for us by a firm in Asia and it incorporates a DLP engine from Texas Instruments. We expect to have a formal supply agreement in place soon. We generally procure our other non-microdisplaynon-micro-display components and products from our vendors on a purchase order basis without any long-term commitments. Many of the raw materials used in our components are standard to the consumer electronics and computer industry. We provide forecasts that allow our contract manufacturers to stock component parts and other materials and plan capacity. Our contract manufacturers procure raw materials in volumes consistent with our forecasts, manufacture and/or assemble the products and perform tests according to our specifications. In some cases, we procure some specific components and either sell them or consign them to our contract manufacturers. Products are either shipped to our customers or shipped to our West Henrietta, New York headquartersfacility to be inventoried as finished goods. We currently use several Asian manufacturing sources in Asia where we have located some of our tooling.

While we do not manufacture our components, other than waveguides, we do own the tooling that is used to make our custom components. Some of our accessory products are sourced from third parties as finished goods. We typically have them print our Vuzix brand name on these products if they are co-branded. Suchthird party third-party products represented less than 5% of our sales in last three fiscal years.

Our manufacturing is not currently subject to seasonal variations, but in the future, depending onupon our customers'customers’ product mix, we may be affected by seasonal fluctuations which could affect working capital demands.

We work with a third-party fulfillment partner in the EU that deliver our products to customers in Europe, the Middle East, and Africa, which allows us to reduce order fulfillment time, reduce shipping costs, and improve inventory flexibility.

Backlog

There is a relatively short cycle between order and shipment of our product sales. Most purchase orders we receive are subject to rescheduling or cancellation by the customer with no or limited penalties. In regardsregard to sales of custom products and waveguides to our OEM customers, we believe that the backlog metric is currently of limited utility in predicting future sales because all these OEM customers operate on a ship-to-order basis. Therefore, we believe at this time that backlog information is not material to the understanding of our business.

Employees

As of March 16, 2018,1, 2023, we had 61105 full-time employees in North America: 6 in sales and marketing, distribution, and customer service; 31America, of which 50 are in research and development and engineering services support; 12 in manufacturing, operations and purchasing; 1 in quality assurance; 1 in investor relations; and 10 in accounting, management, IT, and administration. We also work with a group of sub-contractors, mainly for industrial and mechanical design assistance in the Rochester, New York area. To further our waveguide research development, we work with various commercial and academic researchers in the United States and Finland.support. In Japan we have 2 full-time employees and in theto manage our Asian sales activities. In Europe we have 2 full-time contractors in Englandemployees and 1 in Spain2 full-time contractors to manage our European sales and marketing activities.

Available Information

We make available free of charge through our website, www.vuzix.com, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and our proxy statements and other reports that we file or furnish with the SEC as soon as reasonably practicable after they are filed or furnished, as well as certain of our corporate governance policies, including the charters for the Board of Directors’ audit, compensation and nominating and corporate governance committees and our code of ethics, corporate governance guidelines and whistleblower policy. We will also provide to any person without charge, upon request, a copy of any of the foregoing materials. Any such request must be made in writing to us, c/oInvestor Relations, Vuzix Corporation, 25 Hendrix Road, West Henrietta, NY, 14586.

14

Information about Geographic Revenue

Information about geographic revenue is described in Note 17,19, “Geographic and Other Financial Information” in the notes to our consolidated financial statements.

History - Corporate

We were incorporated in Delaware in 1997 as VR Acquisition Corp. In 1997, we acquired substantially all of the assets of Forte Technologies, Inc. (Forte), which was engaged in the manufacture and sale of Virtual Reality headsets and the development of related technologies. Forte was originally owned and controlled by Kopin Corporation, one of our main current microdisplay supplier.prior micro-display suppliers. Most of the technologies developed by Forte are now owned and used by us.


Reference in this report to “Vuzix”, the “Company”, “we,” “us,” “our” and similar words refer to Vuzix Corporation and its wholly-owned subsidiaries.subsidiary.

Item 1AItem 1A.   Risk Factors

An investment in our securities involves a high degree of risk. An investor should carefully consider the risks described below, together with all of the other information included in this annual report, before making an investment decision. Our business, financial condition or results of operations could suffer as a result of these risks. In that case, the market value of our securities could decline, and an investor may lose all or part of his or her investment.

Summary of Risk Factors:

We have incurred net losses since our inception and may continue to incur losses.
We operate in a highly competitive market and the size, resources and brand name of some of our competitors may allow them to compete more effectively than we can, which could result in a loss of our market share and a decrease in our revenue and profitability.
We depend on advances in technology by other companies and if those advances do not materialize or are not accessible to us, some of our anticipated new products could be delayed or cancelled.
Our products could infringe on the intellectual property rights of others.
If we lose our rights under our third-party technology licenses, our operations could be adversely affected.

Risks Related to Our Business

We have incurred net losses since our inception and may continue to incur losses.

We reported a net loss of $19,663,502$40,763,573 for the year ended December 31, 2017, we reported2022, a net loss of $19,250,082$40,377,160 for the year ended December 31, 2016,2021, and we reported a net loss of $13,427,478$17,952,172 for the year ended December 31, 2015.2020. We have an accumulated deficit of $96,472,452$243,835,716 as of December 31, 2017 and had an accumulated deficit of $76,838,950 as of December 31, 2016.

2022.

We may not achieve or maintain profitability in the future. We will need to increase sales in order to achieve and maintain profitability. In addition, we expect that our expenses relating to product development and research, sales and marketing, as well as our general and administrative costs, may increase.increase as our business grows. If we do not soon achieve and maintain profitability, our financial condition will ultimately be materially and adversely affected and we would eventually be required to raise additional capital. We may not be able to raise any necessary capital on commercially reasonable terms or at all. If we fail to achieve or maintain profitability on a quarterly or annual basis within the timeframe expected by investors, the market price of our common stock may decline.

15

In preparing our consolidated financial statements, our management determined that our disclosure controls and procedures and internal controls over financial reporting were effective as

Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As of December 31, 2017 our management has determined that our disclosure controls and procedures and internal control over financial reporting were effective. As of December 31, 2016, our management has determined that our disclosure controls and procedures and internal control over financial reporting, while extensively remediated in 2016, had not been in operation long enough to demonstrate the repeatability and sustainability of their effectiveness in all areas. Accordingly, management concluded that material weaknesses continued to exist as of December 31, 2016.

If other material weaknesses or significant deficiencies in our internal controls are discovered or occur, we may fail to meet our future reporting obligations on a timely basis, our consolidated financial statements may contain material misstatements, we could be required to restate our prior period financial results, our operating results may be harmed, and we may be subject to class action litigation. Any failure to address the ineffectiveness of our disclosure controls and procedures could also adversely affect the results of the periodic management evaluations regarding the effectiveness of our internal control over financial reporting and our disclosure controls and procedures that are required to be included in our annual report on Form 10-K. Internal control deficiencies and ineffective disclosure controls and procedures could also cause investors to lose confidence in our reported financial information. We can give no assurance yet that all the measures we have taken will, on a permanent and sustainable basis, remediate the material weaknesses in our disclosure controls and procedures or that any other material weaknesses or restatements of financial results will not arise in the future due to a failure to maintain adequate internal control over financial reporting or adequate disclosure controls and procedures or circumvention of these controls. In addition, those controls and procedures may not be adequate to prevent or identify irregularities or errors or to facilitate the fair presentation of our consolidated financial statements.

We operate in a highly competitive market and the size, resources and brand name of some of our competitors may allow them to compete more effectively than we can, which could result in a loss of our market share and a decrease in our revenue and profitability.

The market for head wornhead-worn display devices, including AR and Smart Glasses, is highly competitive. Further, we expect competition to intensify in the future as existing competitors introduce new and more competitive offerings alongside their existing products, and as new market entrants introduce new products into our markets. We compete against established, well-known diversified consumer electronics manufacturers such as Samsung Electronics Co., Sony Corporation, LG Electronics (LGE), HTC, Lenovo, and large software and other products companies such as Google,Alphabet Inc. (Google), Microsoft FacebookCorporation, Meta (Facebook) and Snap. Many of our current competitors have substantial market share, longer operating histories, larger intellectual property portfolios, diversified product lines, ability to bundle competitive offerings with our products and services, well-established supply and distribution systems, strong worldwide brand recognition and greater financial, marketing, research and development and other resources than we do. In addition, many of our existing and potential competitors enjoy substantial competitive advantages, such as:


·longer operating histories;

·the capacity to leverage their sales efforts and marketing expenditures across a broader portfolio of products;

·broader distribution and established relationships with channel partners;

·access to larger established customer bases and known branding;

·greater resources to fund research and development and to make acquisitions;

·larger intellectual property portfolios; and

·the ability to bundle competitive offerings with other products and services.

Moreover, smartphones, tablets, and new wearable devices with ever growing largerever-expanding video display screens, including foldable and expandable screens, and ever-increasing computing power have significantly improved the mobile personal computing experience. In the future, the manufacturers of these devices, such as Apple Inc., Samsung, LGE, Fitbit,Lenovo, Google, Snap, Garmin, Meta/Facebook, Microsoft and others may design or develop products similar to ours. In addition to competition or potential competition from large, established companies, new companies may emerge and offer competitive products. Further, our current and prospective competitors may consolidate with each other or acquire companies that will allow them to develop products that better compete with our products, which would intensify the competition that we face and may also disrupt or lead to termination of our distribution, technology and content partnerships. Increased competition may result in pricing pressures and reduced profit margins and may impede our ability to increase the sales of our products, any one of which could substantially harm our business and results of operations.

Our lack of long-term purchase orders and commitments from our customers may lead to a rapid decline in our sales.

All of our customers issue purchase orders solely at their own discretion, often shortly before the requested date of shipment. Our customers are generally able to cancel orders (without penalty) or delay the delivery of products on relatively short notice. In addition, our current customers may decide not to purchase products from us for any reason. If those customers do not continue to purchase our products, our sales volume could decline rapidly with little or no warning.

We cannot currently rely on long-term purchase orders or commitments to protect us from the negative financial effects of a decline in demand for our products. We typically plan our production and inventory levels based on internal forecasts of customer demand, which are highly unpredictable and can fluctuate substantially. Our OEM customers are required to give us rolling forecasts and issue non-cancellable purchase orders but they have options to reschedule or pay cancellation fees. The uncertainty of product orders makes it difficult for us to forecast our sales and allocate our resources in a manner consistent with our actual sales. Moreover, our expense levels and the amounts we invest in capital equipment and new product development costs are based in part on our expectations of future sales and, if our expectations regarding future sales are inaccurate, we may be unable to reduce costs in a timely manner to adjust for sales shortfalls. Furthermore, because we have historically often depended on a small number of customers for the majority of our sales, the ramifications of these risks is greater than if we had a greater number of customers. As a result of our lack of long-term purchase orders and purchase commitments, we may experience a rapid decline in our sales.

As a result of these and other factors, investors should not rely on our revenues and our operating results for any one quarter or year as an indication of our future revenues or operating results. If our quarterly revenues or results of operations fall below the expectations of investors or public market analysts, the price of our common stock could fall substantially.

If we do not effectively maintain and further develop our sales channels for our products, including developing and supporting our retail sales channel, value added resellers (VARs), distributors and distributors,retail sales channels, our business could be harmed.

We depend upon effective sales channels to assist us in reaching the customers who are the ultimate purchasers of our Video Eyewear and Smart Glass and AR products. In the United States, weWe primarily sell our products directlyeither through distributors and VARs or from our in-house sales team our website, VARs and for our more consumer focused products through a mix of specialty retailers and online stores, some of which we reach certain U.S. markets through distributors. In international markets, we primarily sell directly to consumers, enterprises, VARsenterprise, medical and end users or occasionally through distributors who in turn sell to local retailers.our website.

16

Our distributors, third-party online resellers and VARs generally offer products from several different manufacturers. Accordingly, we are at risk that these distributors, resellers and VARs may give higher priority to selling other companies’ products. If we were to lose the services of a distributor, online reseller or VAR, we might need to find another in that area, and there can be no assurance of our ability to do so in a timely manner or on favorable terms. Further, our resellers and distributors can at times build inventories in anticipation of future sales, and if such sales do not occur as rapidly as they anticipate, our resellers and distributors will decrease the size of their future product orders. We are also subject to the risks of our distributors, resellers and VARs encountering financial difficulties, which could impede their effectiveness and also expose us to financial risk if they are unable to pay for the products they purchase from us. Any reduction in sales by our current distributors or VARs, loss of key distributors and VARs or decrease in revenue from our distributors and VARs could adversely affect our revenue, operating results and financial condition.

15

Our future growth and profitability may be adversely affected if our marketing initiatives are not effective in generating sufficient levels of brand awareness.

Our future growth and profitability from our consumer and enterprise products will depend in large part upon the effectiveness and efficiency of our marketing efforts, including our ability to:

·create awareness of our brand and products;

·convert consumer awareness into actual product purchases;

·effectively manage marketing costs (including creative and media) in order to maintain acceptable operating margins and return on marketing investment;

·successfully offer to sell our products or license our technology to third party companies for sale under their own brand name as OEM partners;

Our planned marketing expenditures may not result in increased total sales or generate sufficient levels of product and brand name awareness. We may not be able to manage our marketing expenditures on a cost-effective basis.

If we fail to accurately forecast seasonal demand for our consumer Video Eyewear products, our results of operations for the entire fiscal year may be materially adversely affected.

Historically, a high percentage of our consumer Video Eyewear product annual sales have been attributable to the winter holiday selling season. Like many manufacturers of consumer electronics products, we must make merchandising and inventory decisions for the winter holiday selling season well in advance of actual sales. Further compounding the difficulty of this forecasting are other fluctuations in demand for the consumer electronics products that work with our Video Eyewear products, often due to the same seasonal influences, as well as technological advances and new models which are often introduced later in the calendar year. Inaccurate projections of demand or deviations in the demand for our products may cause large fluctuations in our fourth quarter results and could have a material adverse effect on our results of operations for the entire fiscal year.

In contrast, a substantial portion of our expenses are personnel related and include salaries, stock-based compensation, benefits and research and development expenses, which are not seasonal in nature. Accordingly, in the event of revenue shortfalls, we are generally unable to mitigate the negative impact on our results from operations in the short term.

Our products require ongoing research and development and we may experience technical problems or delays, which could lead our business to fail.

Our research and development efforts remain subject to all of the risks associated with the development of new products based on emerging and innovative technologies, including, for example, unexpected technical problems or the possible insufficiency of funds for completing development of these products. If we experience technical problems or delays, further improvements in our products and the introduction of future products could be delayed,adversely impacted, and we could incur significant additional expenses and our business may fail.

We depend on advances in technology by other companies and if those advances do not materialize, some of our anticipated new products could be delayed or cancelled.

We rely on and will continue to rely on technologies (including microdisplays)micro-displays, mobile computing electronics and operating systems) that are developed and produced by other companies. The commercial success of certain of our planned future products will depend in part on advances in these and other technologies by other companies. We may, from time to time, contract with and support companies developing key technologies in order to accelerate the development of them for our specific uses. Such activities might not result in useful technologies or components for us. We are attempting to mitigate this risk by exploring ways to develop our own microdisplaymicro-display technologies using micro LED and laser scanning displays, but there can be no assurance that we will be successful in doing so.

If micro-display-based personal displays or near-eye displays do not gain greater acceptance in the market for mobile displays, our business strategy may fail.

The mobile display market is dominated by displays larger than one-inch, most of which are based on direct view liquid crystal display (LCD) and organic light emitting display (OLED) technology. A number of large established global companies have made and continue to make substantial investments in, and are conducting research to improve characteristics of, handheld direct view LCDs and OLED displays. Advances in direct view LCD and OLED technology, micro LED or other technologies, including foldable and stretchable displays may overcome current market limitations and permit them to remain or become more attractive technologies for personal viewing applications, which could limit the potential market for our near-eye display and computing technology and cause our business strategy to fail.

It is difficult to assess or predict with any certainty the potential size, timing and viability of market opportunities for our micro-display-based AR Smart Glasses products or their level of market acceptance. Market acceptance of AR and Smart Glasses technology will depend, in part, upon end-user acceptance of near-to-eye displays and upon micro-display technology providing benefits comparable to or greater than those provided by alternative direct view display technology at a competitive price. Smart Glasses and AR products work best when used close to the eye, which may not be acceptable to consumers. Such acceptance may depend on the relative complexity, reliability, usefulness and cost-effectiveness of our near-eye display products compared to other display products available in the market or that may be developed by our competitors. In addition, our products are not designed for a shared experience amongst multiple viewers at the same time. Potential customers may be reluctant to adopt our Smart Glasses and AR products because of concerns surrounding perceived risks relating to use and the fact that it is a new technology. Further, over half the world’s adult population needs some level of vision correction which adds complexities in the design and ergonomics of any AR Smart Glasses products. If end-users fail to accept near-to-eye displays in the numbers we

17

anticipate or as soon as we anticipate, the sales of our Smart Glasses and AR products and our results of operations would be adversely affected and our business strategy may fail.

There are a number of competing providers of micro-display-based personal display technology, including smart glasses, and we may fail to capture a substantial portion of the personal wearable display market.

In addition to competing with direct view displays, we also compete with micro-display-based personal display technologies that have been developed by other companies. Our primary personal display competitors are or have included Carl Zeiss, Inc., Sony, Epson, Alphabet (Google), Brother International, 5DT Inc., eMagin Corporation, Meta/Facebook (Oculus), Avegant, Kopin Corporation, Magic Leap, Lenovo, Microsoft, HTC, MicroVision, Inc., Lumus Ltd., Kaiser Electro Optics Inc., Garmin, Optinvent, HTC Valve, LGE, N-Real, Epson, Zebra and Accupix. Numerous other start-up companies have announced their intentions to offer smart glasses and AR products and developer kits in the near future. Further, industry blogs have speculated that companies such as Apple may offer AR glasses in the near future.

Most of our competitors have greater financial, marketing, distribution and technical resources than we do. Moreover, our competitors may succeed in developing new micro-display-based personal display technologies and near-eye display products that are more affordable or have more desirable features than our technology. If our products are unable to capture a reasonable portion of the smart wearable display market, our business strategy may fail.

Product quality issues and a higher-than-expected number of warranty claims or returns could harm our business and operating results.

The products that we sell could contain defects in design or manufacture. Defects could also occur in the products or components that are supplied to us. There can be no assurance we will be able to detect and remedy all defects in the hardware and software we sell, which could result in product recalls, product redesign efforts, loss of revenue, reputational damage and significant warranty and other remediation expenses. Similar to other mobile and consumer electronics, our products with batteries have a potential risk of overheating in the course of usage or upon malfunction. Any such defect could result in harm to property or in personal injury. If we determine that a product does not meet product quality standards or may contain a defect, the launch of such product could be delayed until we remedy the quality issue or defect. The costs associated with any protracted delay necessary to remedy a quality issue or defect in a new product could be substantial.

We generally provide a one-year warranty on all of our products, except in certain European countries where it can be two years if it is deemed a consumer-focused product. The occurrence of any material defects in our products could expose us to liability for damages and warranty claims in excess of our current reserves, and we could incur significant costs to correct any defects, warranty claims or other problems. In addition, if any of our product designs are defective or are alleged to be defective, we may be required to participate in a recall campaign. In part due to the terms of our warranty policy, any failure rate of our products that exceeds our expectations may result in unanticipated losses. Any negative publicity related to the perceived quality of our products could affect our brand image and decrease VAR, distributor and end customer confidence and demand, which could adversely affect our operating results and financial condition. Further, accidental damage coverage and extended warranties are regulated in the United States at the state level and are treated differently within each state. Additionally, outside of the United States, regulations for extended warranties and accidental damage vary from country to country. Changes in interpretation of the regulations concerning extended warranties and accidental damage coverage on a federal, state, local or international level may cause us to incur costs or have additional regulatory requirements to meet in the future in order to continue to offer our support services. Our failure to comply with past, present and future similar laws could result in reduced sales of our products, reputational damage, penalties and other sanctions, which could harm our business and financial condition.

Our products could likely experience declining unit prices and we may not be able to offset that decline with production cost decreases or higher unit sales.

In the markets in which we compete, prices of established consumer electronics displays, personal computers, and mobile products tend to decline significantly over time or as new enhanced versions are introduced, frequently every

18

12 to 24 months. In order to maintain adequate product profit margins over the long term, we believe that we will need to continuously develop product enhancements and new technologies that will either slow price declines of our products or reduce the cost of producing and delivering our products. While we anticipate many opportunities to reduce production costs over time, we may not be able to reduce our component costs. We expect to attempt to offset the anticipated decrease in our average selling price by introducing new products, increasing our sales volumes or adjusting our product mix. If we fail to do so, our results of operations will be materially and adversely affected.

Our products could infringe on the intellectual property rights of others.

Companies in the consumer electronics, wireless communications, semiconductor, IT and display industries steadfastly pursue and protect intellectual property rights, often times resulting in considerable and costly litigation to determine the validity of patents and claims by third parties of infringement of patents or other intellectual property rights. Our products could be found to infringe on the intellectual property rights of others. Other companies may hold or obtain patents or inventions or other proprietary rights in technology necessary for our business. Periodically, other companies inquire about our products and technology in their attempts to assess whether we violate their intellectual property rights. If we are forced to defend against infringement claims, we may face costly litigation, diversion of technical and management personnel, and product shipment delays, even if the allegations of infringement are unwarranted. If there is a successful claim of infringement against us and we are unable to develop non-infringing technology or license the infringed or similar technology on a timely basis, or if we are required to cease using one or more of our business or product names due to a successful trademark infringement claim against us, it could adversely affect our business.

Our intellectual property rights and proprietary rights may not adequately protect our products.

Our commercial success will depend substantially on our ability to obtain patents and other intellectual property rights and maintain adequate legal protection for our products in the United States and other countries. We will be able to protect our intellectual property from unauthorized use by third parties only to the extent that these assets are covered by valid and enforceable patents, trademarks, copyrights or other intellectual property rights, or are effectively maintained as trade secrets. As of the date of this filing, we have 148 issued U.S. and foreign patents and 130 pending U.S. and foreign patent applications. We apply for patents covering our products, services, technologies and designs, as we deem appropriate. We may fail to apply for patents on important products, services, technologies or designs in a timely fashion, or at all. We do not know whether any of our patent applications will result in the issuance of any patents. Even if patents are issued, they may not be sufficient to protect our products, services, technologies, or designs. Our existing and future patents may not be sufficiently broad to prevent others from developing competing products, services technologies, or designs. Intellectual property protection and patent rights outside of the United States are even less predictable. As a result, the validity and enforceability of patents cannot be predicted with certainty. Moreover, we cannot be certain whether:

we were the first to conceive, reduce to practice, invent, or file the inventions covered by each of our issued patents and pending patent applications;
others will independently develop similar or alternative products, technologies, services or designs or duplicate any of our products, technologies, services or designs;
any patents issued to us will provide us with any competitive advantages, or will be challenged by third parties;
we will develop additional proprietary products, services, technologies or designs that are patentable; or
the patents of others will have an adverse effect on our business.

The patents we own or license and those that may be issued to us in the future may be challenged, invalidated, rendered unenforceable or circumvented, and the rights granted under any issued patents may not provide us with

19

proprietary protection or competitive advantages. Moreover, third parties could replicate our inventions in territories where we do not have patent protection or in territories where they could obtain a compulsory license to our technology where patented. Such third parties may then try to import products made using our inventions into the United States or other territories. We cannot ensure that any of our pending patent applications will result in issued patents, or even if issued, predict the breadth, validity and enforceability of the claims upheld in our and other companies’ patents.

Unauthorized parties may attempt to copy or otherwise use aspects of our processes and products that we regard as proprietary. Policing unauthorized use of our proprietary information and technology is difficult and can be costly, and our efforts to do so may not prevent misappropriation of our technologies. We may become engaged in litigation to protect or enforce our patent and other intellectual property rights or in International Trade Commission proceedings to abate the importation of goods that would compete unfairly with our products and, if unsuccessful, these actions could result in the loss of patent or other intellectual property rights protection for the key technologies on which our business strategy depends.

We rely in part on unpatented proprietary technology, and others may independently develop the same or similar technology or otherwise obtain access to our unpatented technology. We require employees, contractors, consultants, financial advisors, suppliers and strategic partners to enter into confidentiality and intellectual property assignment agreements (as appropriate), but these agreements may not provide sufficient protection for our trade secrets, know-how or other proprietary information.

The laws of certain countries do not protect intellectual property and proprietary rights to the same extent as the laws of the United States and, therefore, in certain jurisdictions we may be unable to protect our products, services, technologies and designs adequately against unauthorized third-party copying, infringement or use, which could adversely affect our competitive position. To protect or enforce our intellectual property rights, we may initiate proceedings or litigation against third parties. Such proceedings or litigation may be necessary to protect our trade secrets or know-how, products, technologies, designs, brands, reputation, likeness, authorship works or other intellectual property rights. Such proceedings or litigation may also be necessary to determine the enforceability, scope and validity of the proprietary rights of others. Any proceedings or lawsuits that we initiate could be expensive, take significant time and divert management’s attention from other business concerns. Additionally, we may provoke third parties to assert claims against us, which could invalidate or narrow the scope of our own intellectual property rights. We may not prevail in any proceedings or lawsuits that we initiate and the damages or other remedies awarded, if any, may be significant. The occurrence of any of these events may adversely affect our business, financial condition and operating results.

We have registered and applied to register certain of our trademarks in several jurisdictions worldwide. In some jurisdictions where we have applied to register our trademarks, other applications or registrations exist for the same, similar or otherwise related products or services. If we are not successful in arguing that there is no likelihood of confusion between our marks and the marks that are the subject of the other applications or registrations owned by third parties, our applications may be denied, preventing us from obtaining trademark registrations and adequate protection for our marks in the relevant jurisdictions, which could impact our ability to build our brand identity and market our products and services in those jurisdictions. Whether or not our application is denied, third parties may claim that our trademarks infringe their rights. As a result, we could be forced to pay significant settlement costs or cease the use of these trademarks and associated elements of our brand in the United States or other jurisdictions.

Even in those jurisdictions where we are able to register our trademarks, competitors may adopt or apply to register similar trademarks to ours, may register domain names that mimic ours or incorporate our trademarks, or may purchase keywords that are identical or confusingly similar to our brand names as terms in Internet search engine advertising programs, which could impede our ability to build our brand identity and lead to confusion among potential customers of our products and services. If we are not successful in proving that we have prior rights in our marks and arguing that there is a likelihood of confusion between our marks and the marks of these third parties, our inability to prevent these third parties from using such may negatively impact the strength, value and effectiveness of our brand names and our ability to market our products and prevent consumer confusion.

20

If we lose our rights under our third-party technology licenses, our operations could be adversely affected.

Our business depends in part on technology rights and software licensed from third parties. We could lose our exclusivity or other rights to use the technology under our licenses if we fail to comply with the terms and performance requirements of the licenses. In addition, certain licensors may terminate a license upon our breach and have the right to consent to sublicense arrangements. If we were to lose our rights under any of these licenses, or if we were unable to obtain required consents to future sublicenses, we could lose a competitive advantage in the market, and may even lose the ability to commercialize certain products or technologies completely. Either of these results could substantially decrease our revenues.

Our business depends in part on access to third-party platforms or technologies, and if the access is withdrawn, denied, or is not available on terms acceptable to us, or if the platforms or technologies change without notice to us, our business and operating results could be adversely affected.

With the growth of mobile devices and personal voice assistants, cloud services and AI, the number of supporting platforms has grown, and with it the complexity and increased need for us to have business or contractual relationships with the platform owners in order to produce products compatible with these platforms and enable access to and use of these platforms with our products. Our product strategy includes current and future products designed for use with third-party platforms or software, such as iPhone, Android phones, Google Assistant and Amazon Alexa. Our business in these categories relies on our access to the platforms of third parties, some of whom are our competitors. Platform owners who are competitors may limit or decline access to their platforms, and in any case have a competitive advantage in designing products for their own platforms and may produce products that work better, or are perceived to work better, than our products in connection with those platforms. As we expand the number of platforms and software applications with which our products are compatible, we may not be successful in launching products for those platforms or software applications and/or we may not be successful in establishing strong relationships with the new platform or software owners, which could negatively impact our ability to develop and produce high-quality products on a timely basis for those platforms and software applications. We may otherwise fail to navigate various new relationships, which could adversely affect our relationships with existing platform or software owners.

Our access to third-party platforms may also require paying a royalty or licensing fee, which lowers our product margins or may otherwise be on terms that are not acceptable to us. In addition, the third-party platforms or technologies used to interact with our product portfolio can be delayed in production or can change without prior notice to us, which can result in our having excess inventory, lower margins, or customer support issues.

If we are unable to access third-party platforms or technologies, or if our access is withdrawn, denied, or is not available on terms acceptable to us, or if the platforms or technologies are delayed or change without notice to us, our business and operating results could be adversely affected.

Our use of open source software could negatively affect our ability to sell our products and could subject us to possible litigation.

We incorporate open source software into our products. Open source software is generally licensed by its authors or other third parties under open source licenses. Some of these licenses contain requirements that we make available source code for modifications or derivative works we create based upon the open source software, and that we license such modifications or derivative works under the terms of a particular open source license or other license granting third parties certain rights of further use. Additionally, if a third-party software provider has incorporated open source software into software that we license from such provider, we could be required to disclose any of our source code that incorporates or is a modification of our licensed software. If an author or other third-party that distributes open source software that we use or license were to allege that we had not complied with the conditions of the applicable license, we could be required to incur significant legal expenses defending against those allegations and could be subject to significant damages, enjoined from offering or selling our products that contained the open source software and be required to comply with the foregoing conditions. Any of the foregoing could disrupt and harm our business and financial condition.

21

Our dependence on sales to distributors, VARs, and resellers increases the risks of managing our supply chain and may result in excess inventory or inventory shortages.

Many of our various reseller relationships for our Smart Glasses and AR products and their accessories could involve them taking inventory positions and reselling to multiple customers. Under some possible distributor relationships, we would not recognize revenue until the distributors sell the product to their end user customers and receive payment thereon; however, at this time we do not currently enter into these types of arrangements. Our distributor and VAR relationships may reduce our ability to forecast sales and increase risks to our business. Since our distributors and VARs would act as intermediaries between us and the end user customers or resellers, we would be required to rely on our distributors to accurately report inventory levels and production forecasts. This may require us to manage a more complex supply chain and monitor the financial condition and credit worthiness of our distributors and VARs and their major end user customers. Our failure to manage one or more of these risks could result in excess inventory or shortages that could adversely impact our operating results and financial condition.

We may lose the services of key management personnel and may not be able to attract and retain other necessary personnel.

Changes in our management could have an adverse effect on our business, and in particular, while our staff is relatively small with just over 100 employees and full-time foreign contractors globally, we are dependent upon the active participation of several key management personnel, including Paul Travers, our President and Chief Executive Officer. Mr. Travers is critical to the strategic direction and overall management of our company as well as our research and development process. The loss of Mr. Travers could adversely affect our business, financial condition and operating results. We do not carry key person life insurance on any of our senior management or other key personnel. Our Executive Vice President and Chief Financial Officer, Grant Russell, a Canadian citizen, currently has his principal residence in Vancouver, Canada and a second residence in West Henrietta, New York. If he becomes unable to legally or efficiently travel to, and work in, the United States, his ability to perform some of his duties could be materially adversely affected.

We need to hire and retain highly skilled technical personnel as employees and independent contractors in order to develop our products and grow our business. The competition for highly skilled technical, managerial and other personnel is at times intense. Our human capital and labor issues related to recruiting and retention success is substantially dependent upon our ability to offer competitive salaries and benefits to our employees. We must compete with companies that possess greater financial and other resources than we do and that may be more attractive to potential employees and contractors. To be competitive, we may have to increase the compensation, bonuses, stock options and other fringe benefits we offer to employees in order to attract and retain such personnel. Further, during COVID-19, many employees began working remotely and many now want to make it a permanent arrangement, which can further complicate the management of such personnel. The costs of retaining or attracting new personnel may have a material adverse effect on our business and operating results. If we fail to attract and retain the technical and managerial personnel required to be successful, our business, operating results and financial condition could be materially adversely affected.

Risks Related to Manufacturing

The manufacture of waveguides encompasses several complex processes and several steps of our production processes are dependent upon certain critical machines and tools which could result in delivery interruptions, which could adversely affect our operating results.

Our product technology and manufacturing processes are evolving which can result in production challenges and difficulties. We may be unable to produce our products in sufficient quantity and quality to maintain existing customers and attract new customers. In addition, we may experience manufacturing problems which could result in delays in delivery of orders or product introductions. We currently do not have full equipment redundancy in our manufacturing facility. If we experience any significant disruption in the operation of our manufacturing facility or a serious failure of a critical piece of equipment, we may be unable to supply products to our customers in a timely manner. Interruptions in our manufacturing could be caused by equipment problems, the introduction of new equipment

22

into the manufacturing process or delays in the delivery of new manufacturing equipment. Lead-time for delivery, installation, testing, repair and maintenance of manufacturing equipment can be extensive. We have experienced production interruptions in the past and no assurance can be given that we will not lose potential sales or be able to meet production orders due to future production interruptions in our manufacturing lines.

Our waveguide and display engine products are subject to lengthy OEM development periods.

We intend to sell some of our waveguide and display engines with micro-displays to OEMs with the objective that they then incorporate them into products they sell. To date, this business has not been a material contributor to our overall revenues, but it could become so in the future. OEMs determine during their product development phase whether they will incorporate our products. The time elapsed between initial sampling of our products by OEMs, the custom design of our products to meet specific OEM product requirements, and the ultimate incorporation of our products into OEM products is significant, often with a duration of between one to two years or even longer. If our products fail to meet our eventual OEM customers’ cost, performance or technical requirements or if unexpected technical challenges arise in the integration of our products into OEM consumer products, our operating results could be significantly and adversely affected. Long delays in achieving customer qualification and incorporation of our products also could adversely affect our business.

We depend on third parties to provide integrated circuit chip sets and other critical components for use in our products.

We do not manufacture the integrated circuit chip sets, microprocessors, wireless chips, optics, micro-displays, backlights, projection engines, printed circuit boards or other electronic components which are used in our products. Instead, we purchase them from third-party suppliers or rely on third-party independent contractors for these integrated circuit chip sets and other critical components, some of which are customized or custom made for us. We also may use third parties to assemble all or portions of our products. Some of these third-party contractors and suppliers are small companies with limited financial resources. In addition, any partial or full government-mandated shutdowns resulting from health epidemics like COVID-19 may cause supply chain disruptions. If any of these third-party contractors or suppliers were unable or unwilling to supply these integrated circuit chip sets or other critical components to us, we would be unable to manufacture and sell our products until a suitable replacement supplier could be found. We may be unable to find, if and when needed, a replacement third-party contractor or supplier on reasonable terms or in a timely manner. Any interruption in our ability to manufacture and distribute our products could cause our business to be unsuccessful.

Risks Related to Our Common Stock

The rights of holders of common stock may be impaired by the possible future issuance of preferred stock.

Our Board of Directors has the right, without approval of the holders of our common stock (subject to the rules of any exchange on which our securities are then listed), to issue additional preferred stock with voting, dividend, conversion, liquidation and other rights which could adversely affect the voting power and equity interest of the holders of common stock, which could be issued with the right to more than one vote per share, and could be utilized as a method of discouraging, delaying or preventing a change-of-control. The possible negative impact of takeover attempts could adversely affect the price of our common stock. Although we have no present intention to issue any shares of preferred stock, we may issue these shares in the future.

We have not paid dividends in the past and do not expect to pay dividends in the future on our common stock.

We have never paid cash dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future. The payment of dividends on our common stock will depend on earnings, financial condition, and other business and economic factors affecting us at such time as our Board of Directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on a stockholders’ investment will only occur if our stock price appreciates.

23

Our stock price may be volatile in the future.

The trading price of our common stock has been subject to wide fluctuations in response to quarter-to-quarter variations in results of operations, announcements of technological innovations or new products introduced by us or our competitors, general conditions in the wireless communications, consumer electronics, semiconductor and display markets, changes in earnings estimates by analysts or other events or factors. In addition, the public stock markets recently have experienced high price and trading volatility. The risks related to rising inflation and rising interest rates could have a material impact on our revenues and costs. This volatility has significantly affected the market prices of securities of many technology companies for reasons frequently unrelated to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of our common stock.

There is uncertainty regarding the exclusive forum clause in our amended and restated bylaws.

Our amended and restated bylaws include a clause that provides that the Court of Chancery of the State of Delaware will be the exclusive forum for certain types of actions that may be brought against us. There is uncertainty as to whether we would seek to, or whether we could successfully, apply this exclusive forum provision to any actions that may be brought against us under the Securities Act.

Additional stock offerings in the future may dilute then existing stockholders’ percentage ownership of our company.

Given our capital plans, needs and expectations, we may issue additional shares of common stock or securities convertible or exercisable for shares of common stock, including convertible preferred stock, convertible notes, stock options or warrants. The issuance of additional securities in the future will dilute the percentage ownership of the then existing stockholders.

General Risk Factors

Our future growth and profitability may be adversely affected if our marketing initiatives are not effective in generating sufficient levels of our product and brand awareness.

Our future growth and profitability from our enterprise, industrial and medical markets focused products will depend in large part upon the effectiveness and efficiency of our marketing efforts, including our ability to:

create awareness of our brand and products;
convert customer awareness into actual product purchases;
effectively manage marketing costs (including creative and media) in order to maintain acceptable operating margins and return on marketing investment; and
successfully offer to sell our products or license our technology to third-party companies for sale under their own brand name as OEM partners.

Our planned marketing expenditures may not result in increased total sales or generate sufficient levels of product and brand name awareness. We may not be able to manage our marketing expenditures on a cost-effective basis.

If we fail to keep pace with changing technologies or are unable to anticipate customer preferences, our business and results of operations may be materially adversely affected.

Rapidly changing customer requirements, evolving technologies and industry standards characterize the consumer electronics, IT, mobile devises,devices, smart phone, wearables and display industries. To achieve our goals, we need to enhance our existing products and develop and market new products that keep pace with continuing changes in industry standards, requirements and customer preferences.

24

Our success depends on our ability to identifyoriginate new products and originateto identify product trends as well as to anticipate and react to changing customer demands in a timely manner. If we are unable to introduce new products or novel technologies in a timely manner or our new products or technologies are not accepted by customers, our competitors may introduce more attractive products, which could hurt our competitive position. Our new products might not receive customer acceptance if customer preferences shift to other products, and our future success depends in part on our ability to anticipate and respond to these changes. Failure to anticipate and respond in a timely manner to changing customer preferences could lead to, among other things, lower revenue and excess inventory levels.


If microdisplay-based personal displays do not gain some reasonable level of acceptance in the market for mobile displays, our business strategy may fail.

The mobile display market is dominated by displays larger than one-inch, most of which are based on direct view liquid crystal display, or LCD and organic light emitting display, or OLED technology. A number of companies have made and continue to make substantial investments in, and are conducting research to improve characteristics of, small direct view LCDs. Many of the leading manufacturers of these larger direct view LCDs, including LG Electronics, Royal Philips Electronics, Samsung Electronics Co., Ltd., Sony Corporation, HiMax, Omnivision, Citizen, and Sharp Corporation, are large, established companies with global marketing capabilities, widespread brand recognition and extensive financial resources. Advances in direct view LCD and OLED technology or other technologies may overcome their current limitations and permit them to remain or become more attractive technologies for personal viewing applications, which could limit the potential market for our Video Eyewear technology and cause our business strategy to fail. 

Another product incorporating recently developed technology is a handheld projector that utilizes microdisplays and optics to project digital images onto any nearby viewing surface, such as a wall. These devices are referred to as pocket projectors or Pico projectors and are designed to overcome the limitations of the native small screen on smartphones and other mobile devices. As a result, we view Pico projector as a competitive alternative to our mobile displays. Pico projectors use either liquid crystal on silicon displays (LCOS), digital light processing displays (DLP) or color lasers to create their image. To date, we believe Pico projectors have had higher unit sales than Video Eyewear primarily because of their cost advantage, which results from their requiring only a single display. Pico projectors have recently been incorporated into cellular phones in an effort to produce a shareable large screen that is easier to view.

Recently introduced head worn goggle attachments for smart phones, like the Samsung Gear VR, the Carl Zeiss VR One and the Google Cardboard can offer an inexpensive way for owners of compatible smart phones to experience virtual reality by taking advantage of the smart phone’s display. These systems require pre-formatted video content and simple optics, to allow the wearer to view the screens less than 1” for the wearer’s eyes.

It is difficult to assess or predict with any certainty the potential size, timing and viability of market opportunities for our microdisplay-based Video Eyewear products or their level of market acceptance. Market acceptance of Video Eyewear technology will depend, in part, upon consumer acceptance of near-to-eye displays and upon microdisplay technology providing benefits comparable to or greater than those provided by alternative direct view display technology at a competitive price. Video Eyewear products work best when used close to the eye, which may not be acceptable to consumers. Such acceptance may depend on the relative complexity, reliability, usefulness and cost-effectiveness of our near-eye display products compared to other display products available in the market or that may be developed by our competitors. In addition, our products are not designed for a shared experience amongst multiple viewers at the same time. Potential customers may be reluctant to adopt our Video Eyewear products because of concerns surrounding perceived risks relating to use and the fact that it is a new technology. If consumers fail to accept near-to-eye displays in the numbers we anticipate or as soon as we anticipate, the sales of our Video Eyewear products and our results of operations would be adversely affected and our business strategy may fail.

There are a number of competing providers of microdisplay-based personal display technology, including smart glasses, and we may fail to capture a substantial portion of the personal display market.

In addition to competing with direct view displays, we also compete with microdisplay-based personal display technologies that have been developed by other companies. Our primary personal display competitors include Carl Zeiss, Inc., Sony, Epson, Google, Brother International, 5DT Inc., eMagin Corporation, Facebook (Oculus VR), Avegant, Kopin Corporation, Lenovo, HTC, MicroVision, Inc., Lumus Ltd., Kaiser Electro Optics Inc., ODG, Toshiba, Razer, Garmin, Optinvent, HTC Value, LGE, and Accupix of Korea. Samsung since September 2014 has been shipping a head worn goggle frame, called the Gear VR which allow users to mount their smart phones inside it to create an Oculus content compatible immersive VR system. There are similar smart phone mounting and viewing systems now available from a variety of manufactures ranging from simple ones like the Google Cardboard and their latest Daydream smart phone holder, which can turn compatible android phones into a display device complete with an interactive controller for VR content. Numerous other start-up companies have announced their intentions to offer AR smart glass and VR products and developer kits in the near future. Further, industry blogs have speculated that companies such as Apple may offer or support VR and AR Video Eyewear products in the near future. Microsoft in 2015 introduced its Hololens project, a head worn AR smart glass helmet with transparent holographic optics. Another new company, Magic Leap says it is working on a head-mounted virtual display system for AR applications, which they intend to begin shipping in 2018.

The Gear VR, Zeiss VR One, and even Google Daydream and Cardboard utilize the wearer’s existing smart phone rather than microdisplays, which reduces the cost of these VR systems substantially, assuming the customer already owns the compatible smart phone. Such systems can be also be used for playing games and watching videos, making them a competitive and lower cost alternative to our iWear Video Eyewear products for big screen viewing on a smart phone. Most of our competitors have greater financial, marketing, distribution and technical resources than we do. Moreover, our competitors may succeed in developing new microdisplay-based personal display technologies and near-eye products that are more affordable or have more or more desirable features than our technology. If our products are unable to capture a reasonable portion of the personal display market, our business strategy may fail.


Our business and products are subject to government regulation and we may incur additional compliance costs or, if we fail to comply with applicable regulations, may incur fines or be forced to suspend or cease operations.

In our current business and as we expand into new markets and product categories, we must comply with a wide variety of laws, regulations, standards and other requirements governing, among other things, electrical safety, wireless emissions, health and safety, e-commerce, consumer protection, export and import requirements, hazardous materials usage, product-related energy consumption, packaging, recycling and environmental matters. Compliance with these laws, regulations, standards and other requirements may be onerous and expensive, and they may be inconsistent from jurisdiction to jurisdiction (including from country to country), further increasing the cost of compliance and conducting business activities. Our products may require regulatory approvals or satisfaction of other regulatory concerns in the various jurisdictions in which they are manufactured, sold or both. These requirements create procurement and design challenges that require us to incur additional costs identifying suppliers and manufacturers who can obtain and produce compliant materials, parts and products. Failure to comply with such requirements can subject us to liability, additional costs and reputational harm and, in extreme cases, force us to recall products or prevent us from selling our products in certain jurisdictions. If there is a new regulation, or change to an existing regulation, that significantly increases our costs of manufacturing or causes us to significantly alter the way that we manufacture our products, this would have a material adverse effect on our business, financial condition and results of operations. Additionally, while we have implemented policies and procedures designed to ensure compliance with applicable laws and regulations, there can be no assurance that our employees, contractors and agents will not violate such laws and regulations or our policies and procedures.

Our products must comply with certain requirements of the U.S. Federal Communications Commission (FCC) regulating electromagnetic radiation in order to be sold in the United States and with comparable requirements of the regulatory authorities of the European Union, or EU, Japan, China and other jurisdictions in order to be sold in those jurisdictions. Our AR smart glasses products include wireless radios and receivers which require additional emission testing. We are also subject to various environmental laws and governmental regulations related to toxic, volatile, and other hazardous chemicals used in the third partythird-party components incorporated into our products, including the Restriction of Certain Hazardous Substances Directive, or RoHS and the EU Waste Electrical and Electronic Equipment Directive, or the WEEE Directive, as well as the implementing legislation of the EU member states. Thisstates, which directive restricts the distribution of products within the EU that exceed very low maximum concentration amounts of certain substances, including lead. Similar laws and regulations have been passed or are pending in China, Japan, and numerous countries around the world and may be enacted in other regions, including in the United States, and we are, or may in the future be, subject to these laws and regulations.

We believe that all our current products comply with the regulations of the jurisdictions in which they are sold. From time to time, our products are subject to new domestic and international requirements. Compliance with regulations enacted in the future could substantially increase our cost of doing business or otherwise have a material adverse effect on our results of operations and our business. Any inability by us to comply with regulations in the future could result in the imposition of fines or in the suspension or cessation of our operations or sales in the applicable jurisdictions. Any such inability by us to comply with regulations may also result in our not being permitted, or limit our ability, to ship our products which would adversely affect our revenue and ability to achieve or maintain profitability.

Although we have policies and procedures in place requiring our contract manufacturers and major component suppliers to comply with the supply chain transparency requirements, such as RoHS Directive, requirements, we cannot provide assurance that our manufacturers and suppliers consistently comply with these requirements. In addition, if there are changes to these or other laws (or their interpretation) or if new similarrelated laws are passed in other jurisdictions, we may be

25

required to re-engineer our products to use components compatible with these regulations. This re-engineering and component substitution could result in additional costs to us or disrupt our operations or logistics.

The WEEE Directive requires electronic goods producers to be responsible for the collection, recycling and treatment of such products. Changes in interpretation of the directive may cause us to incur costs or have additional regulatory requirements to meet in the future in order to comply with this directive, or with any similar laws adopted in other jurisdictions. Our failure to comply with past, present and future similar laws could result in reduced sales of our products, substantial product inventory write-offs, reputational damage, penalties and other sanctions, which could harm our business and financial condition. We also expect that our products will be affected by new environmental laws and regulations on an ongoing basis. To date, our expenditures for environmental compliance have not had a material impact on our results of operations or cash flows and, although we cannot predict the future impact of such laws or regulations, they will likely result in additional costs and may increase penalties associated with violations or require us to change the content of our products or how they are manufactured, which could have a material adverse effect on our business and financial condition.

While we may incur increasing costs to comply with such other government regulations, we do not believe that our compliance with such requirements will have a material effect on our capital expenditures, competitive position, consolidated results of operations, earnings, or cash flows. Nonetheless, we believe that certain environmental, social and governance ("ESG") regulations could potentially materially impact our business.

Our products may beWe are subject to risks related to environmental, social and governance activities and disclosures (ESG) and sustainability requirements.

Concern over climate change may result in new or additional legal, legislative and regulatory requirements to reduce or mitigate the effects of climate change on the environment, which could result in future healthtax, transportation and safety regulationsother cost increases that could increase our development and production costs.

Products incorporating microdisplays and wearable computers could become subject to new health and safety regulations that would reduce our ability to commercialize these near-eye display products. Compliance with any such new regulations could increase our cost to develop and produce products using the microdisplay display engine and adversely affect our business. Compliance with such requirements could also require additional expenditures by us or our suppliers, which could have a material adverse effect on our business, results of operations, financial results.condition and cash flows. Our operations, supply chain and products are not currently subject to carbon pricing or other legally required carbon taxation or penalties.

Our operations, supply chain and our products are expected to become increasingly subject to federal, state, local and foreign laws, regulations and international treaties relating to climate change, such as climate disclosure, carbon pricing or product energy efficiency requirements, requiring us to comply or potentially face market access limitations or other sanctions including fines. We intend to strive to improve the energy and carbon efficiency of our operations, supply chain and product portfolio.

In addition, ESG reporting and disclosure requirements are continuing to evolve, with increasing global regulation and heightened investor expectations. Companies must develop an expanded set of metrics and measures, data collection and processing, controls, and reporting processes in order to meet regulatory requirements and stakeholder expectations. Failure to promptly and accurately meet these expectations and requirements may result in reputational and brand damage, regulatory penalties and litigation, among other things.

Regulations related to conflict minerals may cause us to incur additional expenses and could limit the supply and increase the costs of certain materials used in the manufacturing of our products.

As a public company, we are subject to requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, that require us to determine, disclose and report whether or not our products contain conflict minerals. The implementation of these newThese requirements could adversely affect the sourcing, availability and pricing of the materials used in the manufacture of components used in our products. In addition, we have and will continue to incur additional costs to comply with the disclosure requirements, including costs related to conducting diligence procedures to determine the sources of conflict minerals that may be used in, or necessary tofor the production of, our products and, if applicable, potential changes to products, processes or sources of supply as a consequence of such verification activities. We also may face reputational harm if we determine that certain of our products contain minerals

26

not determined to be conflict free or if we are unable to alter our products, processes or sources of supply to avoid such materials.

Our products will likely experience declining unit prices and we may not be able to offset that decline with production cost decreases or higher unit sales.

In the markets in which we compete, prices of established consumer electronics display and mobile products tend to decline significantly over time or new enhanced versions are introduced frequently every 12 to 24 months. In order to maintain adequate product profit margins over the long term, we believe that we will need to continuously develop product enhancements and new technologies that will either slow price declines of our products or reduce the cost of producing and delivering our products. While we anticipate many opportunities to reduce production costs over time, we may not be able to reduce our component costs. We expect to attempt to offset the anticipated decrease in our average selling price by introducing new products, increasing our sales volumes or adjusting our product mix. If we fail to do so, our results of operations will be materially and adversely affected.


If we cannot obtain and maintain appropriate patent and other intellectual property rights protection for our technology, our business will suffer.

The value of our personal display, AR Smart Glasses and related technologies is dependent on our ability to secure and maintain appropriate patent and other intellectual property rights protection. We intend to continue to pursue additional patent protection for our new products and technology. Although we own many patents covering our technology that have already been issued, we may not be able to obtain additional patents for which we apply, our patents may be found invalid if challenged and our patents may not afford the degree of protection that we desire or require.

Any patent or trademark owned by us may be challenged and invalidated or circumvented. Patents may not issue from any of our pending or future patent applications. Any claims and issued patents or pending patent applications may not be broad or strong enough to adequately protect our business. Effective intellectual property protection may be unavailable or limited in certain foreign countries.

Unauthorized parties may attempt to copy or otherwise use aspects of our processes and products that we regard as proprietary. Policing unauthorized use of our proprietary information and technology is difficult and can be costly, and our efforts to do so may not prevent misappropriation of our technologies. We may become engaged in litigation to protect or enforce our patent and other intellectual property rights or in International Trade Commission proceedings to abate the importation of goods that would compete unfairly with our products and, if unsuccessful, these actions could result in the loss of patent or other intellectual property rights protection for the key technologies on which our business strategy depends.

We rely in part on unpatented proprietary technology, and others may independently develop the same or similar technology or otherwise obtain access to our unpatented technology. We require employees, consultants, financial advisors, suppliers and strategic partners to enter into confidentiality agreements, but these agreements may not provide sufficient protection for our trade secrets, know-how or other proprietary information

Our products could infringe on the intellectual property rights of others.

Companies in the consumer electronics, wireless communications, semiconductor and display industries steadfastly pursue and protect intellectual property rights. This has resulted in considerable and costly litigation to determine the validity of patents and claims by third parties of infringement of patents or other intellectual property rights. Our products could be found to infringe on the intellectual property rights of others. Other companies may hold or obtain patents or inventions or other proprietary rights in technology necessary for our business. Periodically, other companies inquire about our products and technology in their attempts to assess whether we violate their intellectual property rights. If we are forced to defend against infringement claims, we may face costly litigation, diversion of technical and management personnel, and product shipment delays, even if the allegations of infringement are unwarranted. If there is a successful claim of infringement against us and we are unable to develop non-infringing technology or license the infringed or similar technology on a timely basis, or if we are required to cease using one or more of our business or product names due to a successful trademark infringement claim against us, it could adversely affect our business. 

Our intellectual property rights and proprietary rights may not adequately protect our products.

Our commercial success will depend substantially on our ability to obtain patents and other intellectual property rights and maintain adequate legal protection for our products in the United States and other countries. We will be able to protect our intellectual property from unauthorized use by third parties only to the extent that these assets are covered by valid and enforceable patents, trademarks, copyrights or other intellectual property rights, or are effectively maintained as trade secrets. As of the date of this filing, we have 63 issued U.S. and foreign patents and 46 pending U.S. and foreign patent applications. We apply for patents covering our products, services, technologies and designs, as we deem appropriate. We may fail to apply for patents on important products, services, technologies or designs in a timely fashion, or at all. We do not know whether any of our patent applications will result in the issuance of any patents. Even if patents are issued, they may not be sufficient to protect our products, services, technologies, or designs. Our existing and future patents may not be sufficiently broad to prevent others from developing competing products, services technologies, or designs. Intellectual property protection and patent rights outside of the United States are even less predictable. As a result, the validity and enforceability of patents cannot be predicted with certainty. Moreover, we cannot be certain whether:

·we were the first to conceive of or invent the inventions covered by each of our issued patents and pending patent applications;
·we were the first to reduce to practice inventions covered by each of our issued patents and pending patent applications;
·we were the first to file patent applications for these inventions;
·others will independently develop similar or alternative products, technologies, services or designs or duplicate any of our products, technologies, services or designs;
·any patents issued to us will provide us with any competitive advantages, or will be challenged by third parties;
·we will develop additional proprietary products, services, technologies or designs that are patentable; or
·the patents of others will have an adverse effect on our business. 

The patents we own or license and those that may be issued to us in the future may be challenged, invalidated, rendered unenforceable or circumvented, and the rights granted under any issued patents may not provide us with proprietary protection or competitive advantages. Moreover, third parties could practice our inventions in territories where we do not have patent protection or in territories where they could obtain a compulsory license to our technology where patented. Such third parties may then try to import products made using our inventions into the United States or other territories. We cannot ensure that any of our pending patent applications will result in issued patents, or even if issued, predict the breadth, validity and enforceability of the claims upheld in our and other companies’ patents.

We have registered and applied to register certain of our trademarks in several jurisdictions worldwide. In some jurisdictions where we have applied to register our trademarks, other applications or registrations exist for the same, similar or otherwise related products or services. If we are not successful in arguing that there is no likelihood of confusion between our marks and the marks that are the subject of the other applications or registrations owned by third parties, our applications may be denied, preventing us from obtaining trademark registrations and adequate protection for our marks in the relevant jurisdictions, which could impact our ability to build our brand identity and market our products and services in those jurisdictions. Whether or not our application is denied, third parties may claim that our trademarks infringe their rights. As a result, we could be forced to pay significant settlement costs or cease the use of these trademarks and associated elements of our brand in the United States or other jurisdictions.

Even in those jurisdictions where we are able to register our trademarks, competitors may adopt or apply to register similar trademarks to ours, may register domain names that mimic ours or incorporate our trademarks, or may purchase keywords that are identical or confusingly similar to our brand names as terms in Internet search engine advertising programs, which could impede our ability to build our brand identity and lead to confusion among potential customers of our products and services. If we are not successful in proving that we have prior rights in our marks and arguing that there is a likelihood of confusion between our marks and the marks of these third parties, our inability to prevent these third parties from use may negatively impact the strength, value and effectiveness of our brand names and our ability to market our products and prevent consumer confusion.

The laws of certain countries do not protect intellectual property and proprietary rights to the same extent as the laws of the United States and, therefore, in certain jurisdictions, we may be unable to protect our products, services, technologies and designs adequately against unauthorized third-party copying, infringement or use, which could adversely affect our competitive position. To protect or enforce our intellectual property rights, we may initiate proceedings or litigation against third parties. Such proceedings or litigation may be necessary to protect our trade secrets or know-how, products, technologies, designs, brands, reputation, likeness, authorship works or other intellectual property rights. Such proceedings or litigation also may be necessary to determine the enforceability, scope and validity of the proprietary rights of others. Any proceedings or lawsuits that we initiate could be expensive, take significant time and divert management’s attention from other business concerns. Additionally, we may provoke third parties to assert claims against us. These claims could invalidate or narrow the scope of our own intellectual property rights. We may not prevail in any proceedings or lawsuits that we initiate and the damages or other remedies awarded, if any, may be commercially valuable. The occurrence of any of these events may adversely affect our business, financial condition and operating results.

If we lose our rights under our third-party technology licenses, our operations could be adversely affected.

Our business depends in part on technology rights and software licensed from third parties. We could lose our exclusivity or other rights to use the technology under our licenses if we fail to comply with the terms and performance requirements of the licenses. In addition, certain licensors may terminate a license upon our breach and have the right to consent to sublicense arrangements. If we were to lose our rights under any of these licenses, or if we were unable to obtain required consents to future sublicenses, we could lose a competitive advantage in the market, and may even lose the ability to commercialize certain products or technologies completely. Either of these results could substantially decrease our revenues.

If our customers are not satisfied with our technical support, firmware or software updates on some of our products, they may choose not to purchase our products, either of which would adversely impact our business and operating results.

Our business relies, in part, on our customers’ satisfaction with the technical support, and firmware, software and security updates we provide to support our products. If we fail to provide technical support services and necessary updates that are responsive, satisfy our customers’ expectations and resolve issues that they encounter with our products, customers may choose not to purchase additional products and we may face brand and reputational harm, which could adversely affect our operating results.

We may be subject to product liability or warranty claims that could result in significant direct or indirect costs, or we could experience greater returns from our resellers and end customers than expected, which could harm our business and operating results.

We generally provide a one-year warranty on all of our consumer and enterprise products, except in the European Union, or EU, where we are required to provide a two-year warranty on our consumer targeted products. The occurrence of any material defects in our products could make us liable for damages and warranty claims in excess of our current warranty reserves. In addition, we could incur significant costs to correct any defects, warranty claims or other problems, including costs related to product recalls. Any negative publicity related to the perceived quality and safety of our products could affect our brand image, decrease retailer, distributor and customer demand, and adversely affect our operating results and financial condition. Also, while our warranty is limited to repairs and returns, warranty claims may result in litigation, the occurrence of which could adversely affect our business and operating results.

20

Our dependence on sales to VARs, resellers, and distributors increases the risks of managing our supply chain and may result in excess inventory or inventory shortages.

We expect the majority of our various reseller relationships for our Video Eyewear and Smart Glasses products and their accessories could involve them taking inventory positions and reselling to multiple customers. Under some typical distributor relationships, we would not recognize revenue until the distributors sell the product through to their end user customers and receive payment thereon; however, at this time we do not currently enter into these types of arrangements. Our distributor and VAR relationships may reduce our ability to forecast sales and increase risks to our business. Since our distributors and VARs would act as intermediaries between us and the end user customers or resellers, we would be required to rely on our distributors to accurately report inventory levels and production forecasts. This may require us to manage a more complex supply chain and monitor the financial condition and credit worthiness of our distributors and VARs and their major end user customers. Our failure to manage one or more of these risks could result in excess inventory or shortages that could adversely impact our operating results and financial condition.

Our operating results may be adversely impacted by worldwide political, and economic, public health uncertainties, wars and specific conditions in the markets we address.

Any worsening of global economic, and financial, or public health conditions, including global pandemics, such as COVID-19, could materially adversely affect (i) our ability to raise, or the costterms of needed capital, andcapital; (ii) demand for our current and future products; and (iii) the supply of components for our products. We cannot predict the timing, strength, or duration of any economic slowdown or subsequent economic recovery, worldwide, or insuch impact on the display industry.

Our results of operations may suffer if we are not able to successfully manage our increasing exposure to foreign exchange rate risks.

A substantial majority of our sales and cost of components are denominated in U.S. dollars. As our business grows, both our sales and production costs may increasingly be denominated in other currencies. Where such sales or production costs are denominated in other currencies, they are converted to U.S. dollars for the purpose of calculating any sales or costs to us. Our sales may decrease as a result of any appreciation of the U.S. dollar against these other currencies.

The majority of our current expenditures are incurred in U.S. dollars and many of our components come from countries that currently peg their currency against the U.S. dollar. If the pegged exchange rates changeschange adversely or isare allowed to float up, additional U.S. dollars will be required to fund our purchases of these components.

Although we do not currently enter into currency option contracts or engage in other hedging activities, we may do so in the future. There is no assurance that we will undertake any such hedging activities or that, if we do so, they will be successful in reducing the risks to us of our exposure to foreign currency fluctuations.

Due to our significant level of international operations, including the use of foreign suppliers and contract manufactures, we are subject to international operational, financial, legal, political and politicalpublic health risks which could harm our operating results.

We purchase product components from our suppliers and engage third partythird-party contract manufacturing firms to perform electronic circuit board and cable assemblies. WhileWe assemble our finished products to our plant in the pastWest Henrietta, New York. Additionally, we have performed the final assembly of our products ourselves in our Rochester, New York facility, and we did so for the start of our M100 Smart Glasses production, our M300 Smart Glasses and iWear units are assembled in China. We expect to continue to have final assembly of most of our products performed externally; however, we intend to use our new West Henrietta, New York facility primarily for the production of waveguides and their related display engines. Someengines and intend to do so for some time. In the future, our mature products could have their final assembly initial production runs of new products may also continue at our Henrietta plant.performed outside the United States. Accordingly, a substantial part of our operations, including manufacturing of certain components used in our products, arecould be outside of the United States and many of our customers and suppliers have some or all of their operations in countries other than the United States. Risks associated with our doing business outside of the United States include:

·compliance burdens and costs with a wide variety of foreign laws and regulations, particularly labor, environmental and other laws and regulations that govern our operations in those countries;

27

·legal uncertainties regarding foreign taxes, tariffs, border taxes, quotas, export controls, export licenses, import controls and other trade barriers;

·economic instability and high levels of inflation in the countries of our suppliers and customers, particularly in the Asia-Pacific region, causing delays or reductions in orders for their products and therefore our sales;

·political or public health instability, including global pandemics, such as COVID-19, in the countries in which our suppliers operate, particularly in China, Korea and Taiwan;operate;

·changes or volatility in currency exchange rates; and

·difficulties in collecting accounts receivable and longer accounts receivable payment cycles; and

·potentially adverse tax consequences.cycles.

Any of these factors could harm our own, our suppliers’ and our customers’ international operations and businesses and impair our and/or their ability to continue expanding into international markets.

We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act or similar anti-bribery laws in other jurisdictions in which we operate.

The global nature of our business and the significance of our international revenue create various domestic and local regulatory challenges and subject us to risks associated with our international operations. We operate in areas of the world that experience corruption by government officials to some degree and, in certain circumstances, compliance with anti-bribery and anticorruption laws may conflict with local customs and practices. Our global operations require us to import and export to and from several countries, which geographically expands our compliance obligations. In addition, changes in such laws could result in increased regulatory requirements and compliance costs which could adversely affect our business, financial condition and results of operations.

The U.S. Foreign Corrupt Practices Act (FCPA), the U.K. Bribery Act 2010 (U.K. Bribery Act), and similar anti-bribery and anticorruption laws in other jurisdictions generally prohibit U.S.-based companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business, directing business to another, or securing an advantage. In addition, U.S. public companies are required to maintain records that accurately and fairly represent their transactions and have an adequate system of internal accounting controls. Under the FCPA, U.S. companies may be held liable for the corrupt actions taken by directors, officers, employees, agents, or other strategic or local partners or representatives. As such, if we or our intermediaries fail to comply with the requirements of the FCPA or similar legislation, governmental authorities in the United States and elsewhere could seek to impose substantial civil and/or criminal fines and penalties which could have a material adverse effect on our business, reputation, operating results and financial condition.

We are subject to governmental export and import controls and economic sanctions laws that could subject us to liability and impair our ability to compete in international markets.

The U.S. and various foreign governments have imposed controls, export license requirements and restrictions on the import or export of some technologies. Our products are subject to U.S. export controls, including the Commerce Department’s Export Administration Regulations and various economic and trade sanctions regulations established by the Treasury Department’s Office of Foreign Assets Controls, and exports of our products must be made in compliance with these laws. Furthermore, U.S. export control laws and economic sanctions prohibit the provision of products and services to countries, governments, and persons targeted by U.S. sanctions. Even though we take precautions to prevent our products from being provided to targets of U.S. sanctions, our products, including our firmware updates, could be provided to those targets or provided by our customers despite such precautions. Any such provision could have negative consequences, including government investigations, penalties and reputational harm. Our failure to obtain required import or export approval for our products could harm our international and domestic sales and adversely affect our revenue.

28


If significant tariffs or other restrictions are placed and maintained on Chinese imports or any related counter-measures are taken by China, our revenue and results of operations may be materially harmed.

If additional significant tariffs or other restrictions are placed on Chinese imports or any related counter-measures are taken by China, our revenue and results of operations may be materially harmed. Since July 2018, the US Administration introduced a list of thousands of categories of goods that began facing tariffs of up to 25%, inclusive of many components and services we have sourced or have performed for us in China by suppliers there. These tariffs currently affect most of our products and we may be required to raise our prices on those products due to the tariffs, which may result in a loss of customers and harm our operating performance. If the existing tariffs are expanded or interpreted by a court or governmental agency to apply to any of our other products, we may be required to raise our prices on those products also, which may further result in a loss of customers and harm our operating performance. It is possible further tariffs will be imposed on imports of our products, or that our business will be impacted by retaliatory trade measures taken by China or other countries in response to existing or future tariffs, causing us to raise prices or make changes to our operations, any of which could materially harm our revenue or operating results.

Changes in trade policy in the United States and other countries, including changes in trade agreements and the imposition of tariffs and the resulting consequences, may have adverse impacts on our business, results of operations and financial condition.

The SEC is conductingU.S. government has indicated and demonstrated its intent to alter its approach to international trade policy through the renegotiation, and potential termination, of certain existing bilateral or multilateral trade agreements and treaties with, and the imposition of tariffs on a wide range of products and other goods from China, countries in EMEA and other countries. Given our manufacturing in those countries, and our lack of manufacturing elsewhere, policy changes in the United States or other countries, such as the tariffs already proposed, implemented and threatened, present particular risks for us. Tariffs already implemented are having an informal inquiry relatingadverse effect on certain of our products and threatened additional tariffs could adversely affect more or all of our products. There are also risks associated with retaliatory tariffs and resulting trade wars. We cannot predict future trade policy, the terms of any renegotiated trade agreements or treaties, or tariffs and their impact on our business. A trade war could have a significant adverse effect on world trade and the world economy. To the extent that trade tariffs and other restrictions imposed by the United States or other countries increase the price of, or limit the amount of, our products or components or materials used in our products imported into the United States or other countries, or create adverse tax consequences, the sales, cost or gross margin of our products may be adversely affected and the demand from our customers for products and services may be diminished. Uncertainty surrounding international trade policy and disputes and protectionist measures could also have an adverse effect on consumer confidence and spending. If we deem it necessary to us.

On May 24, 2016, we receivedalter all or a letter from the SEC, dated May 19, 2016, notifying us that the SEC is conducting an informal inquiry relatingportion of our activities or operations in response to us,such policies, agreements or tariffs, our capital and requestingoperating costs may increase. Our ongoing efforts to address these risks may not be effective and may have long-term adverse effects on our operations and operating results that we produce certain documents relatingmay not be able to reverse. Such efforts may also take time to implement or to have an effect, and may result in adverse quarterly financial results or fluctuations in our internal control overquarterly financial reporting. We have produced the requested documentsresults. As a result, changes in international trade policy, changes in trade agreements and thus far have not received requests for additional information. If, in connection with this informal inquiry, the SEC determines to take action against us,tariffs could adversely affect our business, results of operations and financial position could be adversely affected.condition.

Any significant disruption to our ecommerce business could result in lost sales.

Our sales through our ecommerce channel have been growing. Sales through vuzix.com and our related EU, UK and Japanese web stores generally have higher profit margins than sales through resellers, VARs and distributors. Online sales are subject to a number of risks. System interruptions or delays could cause potential customers to fail to purchase our products and could harm our brand. The operation of our direct to consumerdirect-to-consumer ecommerce business through vuzix.com depends on our ability to maintain the efficient and uninterrupted operation of online order-taking and fulfillment operations. Our ecommerce operations subject us to certain risks that could have an adverse effect on our operating results, including risks related to the computer systems that operate our website and related support systems, such as system failures, viruses, denial of servicesidentity information thefts, denial-of-services attacks, computer hackers and similar disruptions. If we are unable to continually add software and hardware, effectively upgrade our systems and network infrastructure and take other steps to improve the efficiency of our systems, system interruptions or delays could occur that would adversely affect our operating results.

29

We utilize third partythird-party vendors for our customer-facing ecommerce technology, portions of our order management system and fulfillment internationally. We depend on our technology vendors to manage “up-time” of the front-end ecommerce store, manage the intake of our orders, and export orders for fulfillment. Any failure on the part of our third partythird-party ecommerce vendors or in our ability to transition third partythird-party services effectively could result in lost sales and harm our business.

FailureWe collect, store, process and use portions of our customers’ personally identifiable information and other data, which subjects us to adequately protect customergovernmental regulation and other legal obligations related to privacy, information security and data protection. Any cybersecurity breaches or our actual or perceived failure to comply with such legal obligations by us, or by our third-party service providers or partners, could harm our business.

We collect, store, process and use our customers’ personally identifiable information and other data in our transactions with them, and we rely on third parties who are not directly under our control to do so as well. While we take reasonable measures intended to protect the security, integrity and confidentiality of the personal information and other sensitive information we collect, store or transmit, we cannot guarantee that inadvertent or unauthorized use or disclosure will not occur, or that third parties will not gain unauthorized access to this information. While our privacy policies currently prohibit such activities, our third-party service providers or partners may engage in such activity without our knowledge or consent. If we or our third-party service providers were to experience a breach, disruption or failure of systems compromising our customers’ data, or if one of our third-party service providers or partners were to access our customers’ personal data without our authorization, our brand and reputation could be adversely affected, use of our reputation in the marketplace.products could decrease and we could be exposed to a risk of loss, litigation and regulatory proceedings.

Changing regulations and laws governing the Internet, dataRegulatory scrutiny of privacy, data collection, use of data and data protection is intensifying globally, and ecommerce transactions (including taxation, pricingthe personal information and electronic communications) could impedeother data we collect, store, process and use is increasingly subject to legislation and regulations in numerous jurisdictions around the growth of our ecommerce business,world, especially in Europe. These laws often develop in ways we cannot predict and may materially increase our cost of doing business, particularly as we expand the nature and limit our abilitytypes of products we offer. For example, the General Data Protection Regulation (the "GDPR"), which came into effect in the EU, and the State of California enacted California Consumer Privacy Act of 2018 (the "CCPA"), which went into effect on January 1, 2020, impose more stringent data protection requirements and provide for greater penalties for noncompliance. These regulations require companies that process information to collect and use information collected from our customers. Further,make new regulations limiting our abilitydisclosures to collect,consumers about their data collection, use and disclose customersharing practices, and allows consumers to opt out of certain data sharing with third parties while providing a new cause of action for data breaches. Further, data protection legislation is also becoming increasingly common in the United States at both the federal and state level. The burdens imposed by these and other similar laws that may be enacted at the federal and state level may require us to modify our data processing practices and policies and/or imposing additional requirements with respect to the retention and security of customer data, could limit our marketing activities and could adversely affect our business and financial condition.incur substantial expenditures in order to comply.

In connection with our ecommerce services, we process, store and transmit customer data. We also collect customer data through certain marketing activities. Failure to prevent or mitigate data loss or other security breaches, including breaches of our vendors’ technology and systems, could expose us or our customers to a risk of loss or misuse of such information, adversely affect our operating results, result in litigation or potential liability for us and otherwise harm our business. Further, we are subject to general business regulations and laws, as well as regulations and laws specifically governing the Internet, ecommerce and electronic devices and new interpretations of these laws, may adversely affect our ability to conduct our ecommerce business.

Cybersecurity risks could adversely affect our business and disrupt our operations.

The threats to network and data security are increasingly diverse and sophisticated. Despite our efforts and processes to prevent breaches, our devices, as well as our servers, computer systems, and those of third parties that we use in our operations are vulnerable to cybersecurity risks, including cyber-attacks such as viruses and worms, phishing attacks, denial-of-service attacks, physical or electronic break-ins, employee theft or misuse, and similar disruptions from unauthorized tampering with our servers and computer systems or those of third parties that we use in our operations, which could lead to interruptions, delays, loss of critical data, unauthorized access to user data, and loss of consumer confidence. In addition, we may be the target of email scams that attempt to acquire personal information or company assets. Despite our efforts to create security barriers to such threats, we may not be able to entirely mitigate these risks. Any cyber-attack that attempts to obtain our or our users’ data and assets, disrupt our service, or otherwise access our systems, or those of third parties we use, if successful, could adversely affect our business, operating results, and financial condition, be expensive to remedy, and damage our reputation. In addition, any such breaches may result in negative publicity, adversely affect our brand, decrease demand for our products and services, and adversely affect our operating results and financial condition.

30

We may lose the services

Changes in our management could have an adverse effect on our business, and in particular while our staff is relatively small. We are dependent upon the active participation of several key management personnel, including Paul J. Travers, our President and Chief Executive Officer. Mr. Travers is critical to the strategic direction and overall management of our company as well as our research and development process. The loss of Mr. Travers could adversely affect our business, financial condition and operating results. We do not carry key person life insurance on any of our senior management or other key personnel other than our CEO. Our Executive Vice President and Chief Financial Officer, Grant Russell, a Canadian citizen, currently has his principal residence in Vancouver, Canada and a second residence in West Henrietta, New York. If he becomes unable to legally or efficiently travel to and work in the United States, his ability to perform some of his duties could be materially adversely affected.

We will need to hire and retain highly skilled technical personnel as employees and as independent contractors in order to develop our products. The competition for highly skilled technical, managerial and other personnel is at times intense. Our recruiting and retention success is substantially dependent on our ability to offer competitive salaries and benefits to our employees. We must compete with companies that possess greater financial and other resources than we do and that may be more attractive to potential employees and contractors. To be competitive, we may have to increase the compensation, bonuses, stock options and other fringe benefits we offer to employees in order to attract and retain such personnel. The costs of retaining or attracting new personnel may have a material adverse effect on our business and operating results. If we fail to attract and retain the technical and managerial personnel we need to be successful, our business, operating results and financial condition could be materially adversely affected.


Our failure to effectively manage growth could harm our business.

We intend to expand the number and types of products we sell. We will need to replace and regularly introduce on a timely basis new products and technologies, enhance existing products, and effectively stimulate customer demand for new products and upgraded or enhanced versions of our existing products.

The replacement and expansion of our products places a significant strain on our management, operations and engineering resources. Specifically, the areas that are strained most by these activities include the following:

·New Product Launch:Launches: With the changes in and growth of our product portfolio, we will experience increased complexity in coordinating product development, manufacturing, and shipping. As this complexity increases, it places a strain on our ability to accurately coordinate the commercial launch of our products with adequate supply to meet anticipated customer demand and effectively market to stimulate demand and market acceptance. We have experienced delays in the past. If we are unable to scale and improve our product launch coordination, we could frustrate our customers and lose possible retail shelf space and product sales;

·Existing Products Impacted by New Introductions:Introductions: The introduction of new products or product enhancements may shorten the life cycle of our existing products, or replace sales of some of our current products, thereby offsetting the benefit of even a successful product introduction and may cause customers to defer purchasing our existing products in anticipation of the new products and potentially lead to challenges in managing inventory of existing products. We may also provide price protection to some of our retailers as a result of our new product introductions.introductions and reduce the prices of existing products. If we fail to effectively manage new product introductions, our revenue and profitability may be harmed; and

·Forecasting, Planning and Supply Chain Logistics:Logistics: With the changes in and growth of our product portfolio, we will experience increased complexity in forecasting customer demand, in planning for production, and in transportation and logistics management. If we are unable to scale and improve our forecasting, planning, production, and logistics management, we could frustrate our customers, lose product sales or accumulate excess inventory.

Our facilities and information systems and those of our key suppliers could be damaged as a result of disasters or unpredictable events, which could have an adverse effect on our business operations.

We operate the majority of our business from one location in the West Henrietta, aNew York (a suburb of the Rochester, New York area.Rochester). We also rely on third partythird-party manufacturing plants in the United States and Asia and third partythird-party logistics, sales and marketing facilities in Japan and England,Europe, and in other parts of the world to provide key components offor our products and services. If major disasters such as earthquakes, pandemics, fires, floods, wars, terrorist attacks, computer viruses, transportation disasters or other events occur in any of these locations, or our information systems or communications network or those of any of our key component suppliers breaks down or operates improperly as a result of such events, our facilities or those of our key suppliers may be seriously damaged, and we may have to stop or delay production and shipment of our products. We may also incur expenses relating to such damages. If production or shipment of our products or components is stopped or delayed or if we incur any increased expenses as a result of damage to our facilities, our business, operating results and financial condition could be materially adversely affected.

Risks Related to Manufacturing

We do not manufacture our own microdisplays, one of the key components of our AR Smart Glasses and near-eye display products, and we may not be able to obtain the microdisplays we need.

We do not currently own or operate any manufacturing facilities for microdisplays, one of the key components in our products. Certain other components and services necessary for the manufacture of our products are available from only a limited number of sources, and other components and services are only available from a single source. We currently purchase almost all of the microdisplays used in our Smart Glasses products from Kopin or Texas Instruments. Our relationship with these companies generally is on a purchase order basis and neither firm has a contractual obligation to provide adequate supply or acceptable pricing to us on a long-term basis. Either firm could discontinue sourcing merchandise for us at any time. If one or both of these firms were to discontinue its relationships with us, or discontinue providing specific products to us, and we are unable to contract with a new supplier that can meet our requirements, or if they or such other supplier were to suffer a disruption in their production, we could experience disruption of our inventory flow, a decrease in sales and the possible need to redesign our products. Any such event could disrupt our operations and have an adverse effect on our business, financial condition and results of operations. Recently, several new LCOS and alternative OLED suppliers have begun offering microdisplays suitable for use in our products. These manufacturers include Syndiant, HiMax, eMagin, Silicon Microdisplay, Sony, Citizen and others. With new tooling and electronics, any one of these alternative displays could be incorporated into our products but our costs of production could be higher, they may offer less performance, and make our products too costly and less desirable.

If we lose access to components from a particular supplier, or experience a significant disruption in the supply of products and components from a current supplier, we may be unable to locate alternative suppliers of comparable quality at an acceptable price, or at all, and our business could be materially and adversely affected. In addition, if we experience a significant increase in demand for our products, our suppliers might not have the capacity or elect to meet our needs as they allocate components to other customers. Identifying a suitable supplier is an involved process that requires us to become satisfied with the supplier’s quality control, responsiveness and service, financial stability and labor and other ethical practices, and if we seek to source materials from new suppliers there can be no assurance that we could do so in a manner that does not disrupt the manufacture and sale of our products. Our reliance on a single or limited number of suppliers involves a number of additional risks, including risks related to:


·supplier capacity constraints;

·price increases;

·timely delivery;

·component quality;

·failure of a key supplier to remain in business and adjust to market conditions;

·delays in, or the inability to execute on, a supplier roadmap for components and technologies; and

·natural disasters, fire, acts of terrorism or other catastrophic events. 

Our inability to obtain sufficient quantities of high quality components or services on a timely basis could result in future manufacturing delays, increased costs and ultimately in reduced or delayed sales or lost orders which could materially and adversely affect our operating results.

We do not control our component suppliers, service providers and contract manufacturers or suppliers, orcurrently require them to comply with a formal code of conduct, and actions that they might take could harm our reputation and sales.

We do not control our component suppliers, service providers and contract manufacturers, or suppliers, including their labor, environmental or other practices, or require them to comply with a formal code of conduct. Though we conduct periodic visits to some of our contract manufacturers and suppliers, these visits are not so frequent or thorough enough to detect non-compliance with applicable laws and good industry practices. A violation of labor, environmental or other laws by our contract manufacturers or suppliers, or a failure of these parties to follow ethical business practices, could lead to negative publicity and harm our reputation. In addition, we may choose to seek alternative manufacturers or suppliers if

31

these violations or failures were to occur. Identifying and qualifying new manufacturers or suppliers can be time consuming and we might not be able to substitute suitable alternatives in a timely manner or at an acceptable cost. Other consumer products companies have faced significant criticism for the actions of their manufacturers and suppliers, and we could face such criticism ourselves. Any of these events could adversely affect our brand, harm our reputation, reduce demand for our products and harm our ability to meet demand if we need to identify alternative manufacturers or suppliers.

We depend on third parties to provide integrated circuit chip sets and other critical components for use in our products.

We do not manufacture the integrated circuit chip sets, optics, microdisplays, backlights, printed circuit boards or other electronic components which are used in our products. Instead, we purchase them from third party suppliers or rely on third party independent contractors for these integrated circuit chip sets and other critical components,third-party suppliers, some of which are customized or specially madesole-source suppliers, to provide components for us. We alsoour products which may use third parties to assemble all or portions of our products. Some of these third party contractors and suppliers are small companies with limited financial resources. If any of these third party contractors or suppliers were unable or unwillinglead to supply these integrated circuit chip sets or other criticalshortages, long lead times for components, to us, we would be unable to manufacture and sellsupply changes, any one of which could disrupt our products until a suitable replacement supplier could be found. We cannot assure investors that a replacement third party contractor or supplier could be found on reasonable terms or in a timely manner. Any interruption insupply chain, may increase our ability to manufacturecosts, and distribute our products could cause our display business to be unsuccessful.

The consumer electronics industry is subject to significant fluctuations in the availability of components. If we do not properly anticipate the need for critical components, we may be unable to meet the demands of our customers and end-users on a timely basis.

Our ability to meet customer demand depends, in part, on our ability to obtain timely and adequate delivery of components for our products. All of the components that go into the manufacturing of our smart glasses products and accessories, other than waveguide optics, are sourced from third-party suppliers. The availability of certain of the components that we require to produce our AR Smart Glasses and other near-eye display products may decrease.

Some of the key components used to manufacture our products come from a limited or single source of supply, or by a supplier that could potentially become a competitor. Our contract manufacturers generally purchase these components on our behalf from approved suppliers. We are subject to the risk of shortages and long lead times in the supply of these components and the risk that our suppliers discontinue or modify components used in our products. The potential of partial or full government mandated shutdowns resulting from COVID-19 or other pandemics may increase these risks. In addition, the lead times associated with certain components are lengthy and preclude rapid changes in quantities and delivery schedules. Further the electronic components we utilize can go end-of-life due to technological changes, which can require us to invest in implementation costs of alternatives and the potential for the forced obsolescence of other related items. We have in the past experienced end-of-life issues and expect to see more shortages in the future. As such, the availability of these components may be unpredictable.

As the availability of components decreases, the cost of acquiring those components ordinarily increases. High growth product categories such as the consumer electronics and mobile phone markets have experienced chronic shortages of components during periods of exceptionally high demand. If we do not properly anticipate the need for or procure critical components, we may pay higher prices for those components, our gross margins may decrease and we may be unable to meet the demands of our customers and end-users, which could reduce our competitiveness, cause a decline in our market share and have a material adverse effect on our results of operations.

Unanticipated disruptionsIf we lose access to components from a particular supplier or experience a significant disruption in the supply of products and components from a current supplier, we may be unable to locate alternative suppliers of comparable quality at an acceptable price, or at all, and our operations or slowdowns bybusiness could be materially and adversely affected. In addition, if we experience a significant increase in demand for our products, our suppliers distributorsmight not have the capacity or elect not to meet our needs as they allocate components to other customers. Developing suitable alternate sources of supply for these components may be time-consuming, difficult and shipping companies couldcostly, and we may not be able to source these components on terms that are acceptable to us, or at all, which may adversely affect our ability to delivermeet our development requirements or to fill our orders in a timely or cost-effective manner. Identifying a suitable supplier is an involved process that requires us to become satisfied with the supplier’s quality control, responsiveness and service, financial stability, labor and other ethical practices, and if we seek to source materials from new suppliers, there can be no assurance that we could do so in a manner that does not disrupt the manufacture and sale of our products.

Our reliance on single source, or a small number of suppliers involves a number of additional risks, including risks related to supplier capacity constraints, price increases, timely delivery, component quality, failure of a key supplier to remain in business and adjust to market conditions, delays in, or the inability to execute on, a supplier roadmap for components and technologies; and natural disasters, fire, wars, acts of terrorism or other catastrophic events, including global pandemics.

32

We do not currently own or operate any manufacturing facilities for any types of micro-displays, one of the key components in our products. Certain other components and services necessary for the manufacture of our products are available from only a limited number of sources, and serviceother components and services are only available from a single source. We currently purchase almost all of the micro-displays used in our customers.

Smart Glasses products from Sony Corporation and Texas Instruments. Our abilityrelationship with these companies generally is on a purchase order basis and these firms do not have a contractual obligation to provide high quality customer service, process and fulfill orders and manage inventory dependsadequate supply or acceptable pricing to us on the efficient, timely and uninterrupted performance of our manufacturing and distribution facilities and our management information systems and the facilities and systems of our third party suppliers, distributors and shipping companies.


Any material disruption or slowdown in the operation of our manufacturing and distribution facilities or our management information systems, or comparable disruptions or slowdowns suffered by our principal suppliers, distributors or shippersa long-term basis. These firms could cause delays in our ability to receive, process and fulfill customer orders and may cause orders to be canceled, lost or delivered late, goods to be returned or receipt of goods to be refused.discontinue sourcing components for us at any time. If any of these events occur,firms were to discontinue its relationship with us, or discontinue providing specific products to us, and we are unable to contract with a new supplier that can meet our requirements, or if they or such other supplier were to suffer a disruption in their production, we could experience disruption of our inventory flow, a decrease in sales and the possible need to re-design our products. Any such event could disrupt our operations and have an adverse effect on our business, financial condition and results of operations. Several new LCOS, alternative OLED, as well as micro-LED suppliers have begun offering micro-displays suitable for use in our products. With new tooling and electronics, any one of these alternative displays could be incorporated into our products but our costs of production could be higher, they may offer less performance, and, as a result, may make our products too costly and less desirable.

If our estimates or judgments relating to our critical accounting policies prove to be incorrect, our operating results could be materially and adversely affected.

Risks RelatedThe preparation of financial statements in conformity with U.S. GAAP requires management to Our Common Stock

Additional stock offeringsmake estimates and assumptions that affect the amounts reported in the future may dilute then existing stockholders’ percentage ownership ofconsolidated financial statements and accompanying notes. We base our company.

Given our plansestimates on historical experience and expectationson various other assumptions that we may need additional capital, we may needbelieve to issue additional sharesbe reasonable under the circumstances, as provided in “Management’s Discussion and Analysis of common stock or securities convertible or exercisableFinancial Condition and Results of Operations” in this Annual Report on Form 10-K. The results of these estimates form the basis for sharesmaking judgments about the carrying values of common stock, including convertible preferred stock, convertible notes, stock options or warrants. The issuanceassets, liabilities, and equity, and the amount of additional securitiesrevenue and expenses that are not readily apparent from other sources. Significant assumptions and estimates used in the future will dilute the percentage ownership of then existing stockholders.

The rights of holders of common stockpreparing our consolidated financial statements include those related to revenue recognition, inventories, product warranty reserves, accounting for income taxes, and stock-based compensation expense. Our operating results may be impaired by the possible future issuance of additional preferred stock.

Our board of directors has the right, without approval of the holders ofadversely affected if our common stock, to issue additional preferred stock with voting, dividend, conversion, liquidation and other rightsassumptions change or if actual circumstances differ from those in our assumptions, which could adversely affectcause our operating results to fall below the voting power and equity interestexpectations of the holders of common stock, which could be issued with the right to more than one vote per share, and could be utilized as a method of discouraging, delaying or preventing a change of control. The possible negative impact on takeover attempts could adversely affect the price of our common stock. Although we have no present intention to issue any shares of preferred stock other than the Series A Preferred Stock currently outstanding or to create any additional series of preferred stock, we may issue these shares in the future.

We have not paid dividends in the past and do not expect to pay dividends in the future on our common stock.

We have never paid cash dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future. The payment of dividends on our common stock will depend on earnings, financial condition, debt covenants in place, and other business and economic factors affecting us at such time as our board of directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on a stockholders’ investment will only occur if our stock price appreciates. In addition, the holder of our outstanding shares of Series A Preferred Stock is entitled to certain dividends prior to payments of dividends to holders of common stock.

If securities analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock dependsinvestors, resulting in part on the research and reports that securities or industry analysts publish about us or our business. If one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. Securities analysts have only recently commenced research coverage on us. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume to decline.

Our issuance of common stock upon conversion of convertible notes or preferred stock or exercise of warrants or options may depress the price of our common stock.

As of March 16, 2018, we have issued and outstanding 27,301,203 shares of common stock, 49,626 shares of Series A Preferred Stock convertible into 4,962,600 shares of common stock, warrants to purchase 2,369,912 shares of common stock, and options to purchase 1,510,244 shares of common stock. The issuance of shares of common stock upon conversion of preferred stock, or exercise of outstanding warrants or options could resulta decline in substantial dilution to our stockholders, which may have a negative effect on the price of our common stock.

The interests of the holder of our Series A Preferred Stock, which holds shares representing approximately 15% of the voting power of our stock and has the right to nominate and elect two directors, may conflict with the interests of our other stockholders.Item 1B.

On January 2, 2015, we entered into and closed a Series A Preferred Stock Purchase Agreement, pursuant to which we issued and sold to Intel Corporation (the “Series A Purchaser”) 49,626 shares of Series A Preferred Stock. Each share of Series A Preferred Stock is convertible into 100 shares of common stock and votes on an as-converted basis with the common stock. As of the date of this filing, the shares issuable upon conversion of the Series A Preferred Stock represent approximately 15% of the total voting power of our outstanding stock. The Series A Purchaser may vote these shares with respect to any matter submitted to stockholders for a vote. In addition, the Series A Purchaser is entitled to nominate and elect two additional directors to the Company’s Board of Directors (the “Board Election Right”), one of whom is required to qualify as an “independent” director, as that term is used in applicable exchange listing rules. The Series A Purchaser has not yet exercised the Board Election Right, but if it does so, the Series A Purchaser will have increased influence over matters considered by the Board of Directors. The Series A Purchaser may exercise its stockholder rights in a way that it believes is in its best interests, which may conflict with the interests of our other stockholders. Pursuant to a letter we received from the Series A Purchaser on November 10, 2016, the Series A Purchaser stated, among other things, that for the time being they would continue to refrain from designating any directors to the Vuzix board and would not exercise its board observer rights and that the Company should not provide them with any board materials or correspondence.


The Series A Purchaser has notified us that it no longer desires to pursue a strategic relationship with us.

The shares of common stock issuable upon conversion of the outstanding shares of Series A Preferred Stock currently represent approximately 15% of our outstanding common stock on an as-converted basis. On November 10, 2016, we received a letter from the Series A Purchaser stating that it had been evaluating its alternatives with respect to its significant investment in and strategic relationship with us and that it has concluded that it no longer desires to pursue a strategic relationship with us. While the Series A Purchaser stated it had high regard for the Company’s team and its technology, the technology did not fit into its strategic plans. Furthermore, the Series A Purchaser added that it wanted to work with us to undertake an orderly disposition of its stock, subject to pricing and other conditions, that would minimize disruption in the markets, although it has not made any final decisions regarding its stock or the timing of a disposition. Resale of such conversion shares by the Series A Purchaser may depress the price of our common stock.

Our stock price may be volatile in the future.

The trading price of our common stock has been subject to wide fluctuations in response to quarter-to-quarter variations in results of operations, announcements of technological innovations or new products by us or our competitors, general conditions in the wireless communications, semiconductor and display markets, changes in earnings estimates by analysts or other events or factors. In addition, the public stock markets recently have experienced extreme price and trading volatility. This volatility has significantly affected the market prices of securities of many technology companies for reasons frequently unrelated to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of our common stock.

Item 1B.Unresolved Staff Comments

None.

Item 2.Item 2.Properties

We lease approximately 29,00039,000 square feet as our main facility at 25 Hendrix Road, West Henrietta, New York, 14586.14586 (a suburb of Rochester). This facility houses our headquarters office, R&D and manufacturing space under an operating lease for the facility that we began occupying in October 2015. In October 2022, we leased an additional 12,000 square feet for our new waveguide manufacturing facility at 30 Becker Road, also in West Henrietta, New York. The base rent contractual payment obligations under thisthese operating leaseleases is $396,961currently $698,000 per year. The lease at 25 Hendrix Road has an original five-year term with an option by the Company to renew for two additional three-year terms at pre-agreed to lease rates. As of June 25, 2020, the Company exercised the first of the two renewal terms, extending our current lease expiration date to January 31, 2024. The lease at 30 Becker Road has an original three-year term with an option by the Company to renew for two additional one-year terms at pre-agreed to lease rates. We believe that our Rochester facility isWest Henrietta facilities are in good operating condition and currently adequately serves our needs; however, we expect to exerciseneeds. Note, our option to take another 9,000 square feet in our adjacent unit in August 2018.

new expansion space at 30 Becker Road is currently under construction and its planned completion is May or June of 2023.

In Oxford, England, we rent 400 square feet of office space at a cost of approximately $10,900$9,700 per year. WeThe lease for this location pursuant to a renewable two-year lease which is scheduled to expireexpired on September 29, 2019.30, 2021 and is currently on a month-to-month basis.

33

In Tokyo, Japan, we rent 175577 square feet of office space at a cost of approximately $25,000$85,000 per year. We lease this location pursuant to a renewable one-year lease which expired on February 28, 2022 and is scheduled to expirecurrently on March 1, 2018.a month-to-month basis.

Item 3.Item 3.Legal Proceedings

We are not currently involved in any actual or pending legal proceedingproceedings or litigation that we consider to be material, and we are not aware of any such material proceedings contemplated by or against us.us or involving our property.

Item 4.Item 4.Mine Safety Disclosures

Not applicable.

PART II

Item 5.Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market for our Common Stock

Our common stock is listed on the NASDAQ Capital Market under the symbol “VUZI”.

The following table sets forth, for the fiscal quarters indicated, the high and low sales prices for our common stock as quoted on NASDAQ.


Vuzix Stock Prices Low  High 
Fiscal Quarters        
First 2017 $5.45  $7.55 
Second 2017  5.28   6.60 
Third 2017  5.45   7.00 
Fourth 2017  4.60   6.95 

Vuzix Stock Prices Low  High 
Fiscal Quarters        
First 2016 $5.00  $7.81 
Second 2016  4.32   7.55 
Third 2016  6.35   9.69 
Fourth 2016  5.85   8.75 

Company Stock Performance

The following graph shows a five-year comparison of cumulative total shareholder return for the Company, the NASDAQ US Benchmark TR Index and the S&P 500 Information Technology index. The graph assumes $100 was invested in each of the Company’s common stock, the NASDAQ Composite Index and the S&P 500 Information

34

Technology index on December 31, 2012.2017. Data points on the graph are annual. Note that historical price performance is not necessarily indicative of future performance.


 Graphic

Holders of Record

As of March 16, 2018,1, 2023, there were 4961 holders of record of our common stock.

Dividends

We have not historically and currently do not pay dividends on our outstanding common stock. The declaration of any future dividends and, if declared, the amount of any such dividends, will be subject to our actual future earnings, capital requirements, regulatory restrictions, debt covenants, otherany applicable contractual restrictions and at the discretion of our Board of Directors. Our Board of Directors may take into account such matters as general business conditions, our financial condition and results of operations, our capital requirements, our prospects and such other factors as our Board of Directors may deem relevant.

Shares of Series A Preferred stock arewere entitled to receive dividends at a rate of 6% per year, compounded quarterly and payable in cash or in kind, at our discretion. On January 28, 2021, the holder converted all of its shares of Series A Preferred Stock into 4,962,600 shares of common stock. The shares of Series A Preferred were retired and cannot be reissued. On the same date, the Company and the holder entered into a Dividend Settlement Agreement pursuant to which the holder agreed to accept $10,000,000 in cash in full payment of all accrued Series A Preferred Stock dividends in the approximate amount of $10,800,000.


35

Issuer Purchases of Equity Securities

We did not purchase equity securities that are registered under Section 12 of the Exchange Act during the year ended December 31, 2017.

2022.

Unregistered Sales of Equity Securities and use of Proceeds

Sales of Unregistered Securities - Nonenone

Purchase of Equity Securities:

Period

    

Total number
of shares
purchased (1)

    

Average
price paid
per share (1)

    

Total number
of shares
purchased under the
Company's Share
Buyback
Program (1)

    

Maximum dollar value
that may yet be
purchased (1)

March 30 - 31, 2022

36,685

$

6.84

36,685

$

24,748,906

November 29 – December 31, 2022

427,987

$

4.10

427,987

$

22,994,256

(1)On March 2, 2022, our Board of Directors approved the repurchase by the Company of up to an aggregate of $25 million of our common stock by open market or privately negotiated transactions under the Share Buyback Program. This program is in effect for one year, does not obligate the Company to acquire any particular amount of common stock and may be suspended or discontinued at any time at the Company’s sole discretion.

Equity Compensation Plan Information

The following table provides information about our equity compensation plansplan as of December 31, 2017.2022.

  Number of
Securities to
  Weighted
Average
    
  be Issued
Upon Exercise
  Exercise Price
of
  Number of
Securities
 
  of Outstanding
Options,
  Outstanding
Options,
  Remaining
Available for
 
Plan Category Warrants and
Rights
  Warrants and
Rights
  Future Issuance
(1)
 
Equity compensation plans approved by security holders  1,510,244  $5.04   1,045,143 
Equity compensation plans not approved by security holders         
Total  1,510,244  $5.04   1,045,143 

    

Number of 

    

Weighted

    

Securities to 

Average

be Issued

Exercise Price

Number of

Upon Exercise

of

Securities

of Outstanding

Outstanding

Remaining

Options,

Options,

Available for

Warrants and

Warrants and

Future Issuance

Plan Category

Rights

Rights

(1)

Equity compensation plans approved by security holders

 

8,589,673

$

15.34

 

1,495,760

Equity compensation plans not approved by security holders

 

 

 

Total

 

8,589,673

$

15.34

 

1,495,760

(1)The amount appearing under “Number of securities remaining available for future issuance” includes shares available under our 2014 Equity Incentive Plan. The 2014 Plan (as amended) has an “evergreen provision”, under which the maximum number of shares of common stock that may be issued under the 2014 Plan automatically increases each time the Company issues additional shares of common stock so that the total number of shares issuable thereunder at all times equals 10%20% of the then outstanding shares of common stock, unless in any case the Board of Directors adopts a resolution providing that the number of shares issuable under the 2014 Plan not be so increased. Refer to Note 14 for further details.

 Item 6.Item 6.  [Reserved]Selected Financial Data

We derived the selected consolidated statements

36


  For Years Ended December 31, 
  2017  2016  2015  2014  2013 
                
Sales of Products $4,548,689  $1,987,878  $2,544,153  $2,474,559  $1,856,806 
Sales of Engineering Services  989,064   139,500   205,831   557,517   532,247 
                     
Total Sales  5,537,753   2,127,378   2,749,984   3,032,076   2,389,053 
                     
Cost of Sales — Products  5,269,900   3,251,906   2,101,466   1,884,678   1,354,909 
Cost of Sales — Engineering Services  944,451   39,060   82,332   217,233   227,186 
                     
Total Cost of Sales  6,214,351   3,290,966   2,183,798   2,101,911   1,582,095 
                     
Gross Profit (Loss)
(exclusive of depreciation shown separately below)
  (676,598)  (1,163,588)  566,186   930,165   806,958 
Operating Expenses:                    
Research and Development  6,706,690   6,947,878   3,595,437   1,752,560   1,751,397 
Selling and Marketing  3,694,913   3,394,580   1,798,041   1,232,520   1,091,514 
General and Administrative  6,126,335   5,114,139   6,120,101   2,593,384   2,165,341 
Depreciation and Amortization  998,528   770,668   380,841   279,317   377,840 
Loss on Inventory Valuation  1,151,482   1,124,401          
Impairment of Patents and Trademarks     20,506   13,222   104,716   73,423 
                     
Total Operating Expenses  18,677,948   17,372,172   11,907,642   5,962,497   5,459,515 
Loss from Operations  (19,354,546)  (18,535,760)  (11,341,456)  (5,032,332)  (4,652,557)
                     
Other Income (Expense)  (278,956)  (714,322)  (2,086,022)  (2,836,526)  (5,493,671)
                     
Loss Before Provision for Income Taxes  (19,633,502)  (19,250,082)  (13,427,478)  (7,868,858)  (10,146,228)
Provision for Income Taxes               
                     
Net Loss  (19,633,502)  (19,250,082)  (13,427,478)  (7,868,858)  (10,146,228)
Preferred Stock Dividends  (1,714,934)  (1,620,048)  (1,514,081)      
Loss Attributable to Common Stockholders $(21,348,436) $(20,870,130) $(14,941,559) $(7,868,858) $(10,146,228)
                     
Basic and Diluted Loss per Share $(1.02) $(1.23) $(0.97) $(0.75) $(1.69)
Weighted-average Shares Outstanding – Basic and Diluted  21,013,907   16,908,544   15,408,724   10,476,971   5,988,595 

  As of December 31, 
  2017  2016  2015  2014  2013 
                
Consolidated Balance Sheet Data:                    
Cash, cash equivalents, and marketable securities $14,889,636  $14,533,944  $11,877,058  $84,967  $310,140 
Working capital  15,807,364   13,808,094   14,728,089   (1,427,139)  (1,981,232)
Total assets  26,833,253   22,345,260   19,562,629   3,700,162   2,862,121 
Total long-term liabilities  18,331   201,464   1,667,636   14,711,585   12,239,559 
Retained earnings (accumulated deficit)  (96,472,452)  (76,838,950)  (57,588,868)  (44,161,390)  (36,292,532)
Total stockholders’ equity (deficit)  21,379,713   17,721,837   16,092,871   (14,398,011)  (13,038,293)

 Item 7.Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of financial condition and results of operations should be read in conjunction with our financial statements and related notes appearing elsewhere in this annual report. In addition to historical information, the following discussion and analysis includes forward looking statements that involve risks, uncertainties and assumptions. Our actual results and the timing of events could differ materially from those anticipated in these forward lookingforward-looking statements as a result of a variety of factors, including those discussed in “Risk Factors” and elsewhere in this annual report. See the discussion under “Forward Looking Statements” beginning on page 1 of this annual report.

Overview

We are engaged in the design, manufacture, marketing and sale of augmented reality wearable display devices also referred to as head mounted displays (or HMDs)HMDs, but also known as near-eye displays), in the form of AR glasses, Video HeadphonesSmart Glasses and Smart Glasses.Augmented Reality (AR) glasses. Our wearable display devices are worn like eyeglasses or attach to a head worn mount. These devices typically include cameras, sensors, and a computer that enable the user to view, record and interact with video and digital content, such as computer data, the Internet, social media or entertainment applications. Our wearable display products are referredintegrate micro-display technology with our advanced optics to as Video Eyewear, head mounted wearable displays, videoproduce compact high-resolution display engines, less than half an inch diagonally, which when viewed through our smart glasses personal viewers, near-eyeproducts create virtual displays, and near-eye displays or NEDs. Our wearable display products provide virtual large high-resolution screens, fitimages that appear comparable in a user’s pocket or purse and can be viewed practically anywhere, anytime. Somesize to that of these models can also be used for AR and light virtual reality applications, in which the wearer is either immersed in a computer generated worldmonitor or has their real world view augmented with computer generated information or graphics. We produce and sell two main types of wearable display products: Smart Glasses for a variety of enterprise and commercial users and applications, including AR; and Video Viewing glasses, for on-the-go users as mobile displays for entertainment and gaming, as well as support for stepping into virtual worlds, simulations, and gaming. Our products are available with varying features, including with and without applications running computer processors, and are offered as either monocular or binocular display systems.

large-screen television.

With respect to our Smart Glasses and AR products, we are focused on the enterprise, industrial, medical and commercial and medical markets while our Video Eyewear products are sold in the consumer markets and are targeted at applications including video viewing and gaming.markets. All of the mobile display and mobile electronics markets in which we compete have been subject to rapid technological change over the last decade including the rapid adoption of tablets, larger screen sizes and display resolutions along with declining prices on mobile phones and other computing devices, and as a result we must continue to improve our products’ performance and lower our costs. We believe our technology, intellectual property portfolio givesand position in the marketplace give us a leadership position in microdisplay projection engines, waveguides, ergonomics, packaging,AR and optical systems.

Smart Glasses products, waveguide optics, micro LEDs and display engine technology.

Critical Accounting Policies and Significant Developments and Estimates

The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements and related notes appearing elsewhere in this annual 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 consolidated financial statements, including the statement of operations, balance sheet, cash flow and related notes. We continually evaluate our estimates used in the preparation of our consolidated financial statements, including those related to revenue recognition, bad debts, inventories, warranty reserves, product warranty, carrying value of long-lived assets, derivatives, valuation of stock compensation awards, and income taxes. We base our estimates on historical experience and on various other assumptions that are believedwe believe to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not apparent from other sources. Since we cannot determine future events and their impact cannot be determined with certainty, the actual results will likelymay differ from our estimates. Such differences could be material to the consolidated financial statements.

We believe that our application of accounting policies, and the estimates inherently required therein, are reasonable. We periodically reevaluatere-evaluate these accounting policies and estimates and make adjustments 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 consolidated financial statements included in this annual report on Form 10-K. The critical accounting policies, judgments and estimates that we believe have the most significant effect on our financial statements are:

·Valuation of inventories;

37

·Variable interest entities;
Business combinations:
Carrying value of long-lived assets, goodwill and other intangible assets;

·Software development costs;
·Revenue recognition;
·Product warranty;
·Derivatives and fair value measurements;
·Stock-based compensation; and
·Income taxes.

Valuation of Inventories

Inventory is stated at the lower of cost or net realizable value, with cost determined on a weighted average first-in, first-out method. Inventory includes purchased parts and components, work in process and finished goods. Provisions for excess, obsolete or slow movingslow-moving inventory are recorded after periodic evaluation of historical sales, current economic trends, forecasted sales, estimated product life cycles and estimated inventory levels. Purchasing practices, electronic component obsolescence, accuracy of sales and production forecasts, introduction of new products, product life cycles, 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, production, and after-sale support. If actual demand, market conditions or product life cycles differ from estimates, inventory adjustments to lower marketnet realizable values would result in a reduction to the carrying value of inventory, an increase in inventory write-offs and a decrease to gross margins.

The Company wrote down to net realizable value all of its componentwrite-down and obsolescence provision for finished goods inventory related to its iWear Video Headphones resulting fromand components totaled $290,405, $519,950 and $1,273,835 for the decision in early 2017 to reduce the suggested retail selling price to a price below the cost. The write down provision totaled $1,124,401years ended December 31, 2022, 2021 and represents the estimated net realizable of such existing inventory, net of the costs of completion of components and work in progress. In the third quarter of 2017, an additional provision was recorded in the amount of $1,151,482. This provision has been2020, respectively. These provisions are included in Operating ExpensesCost of Sales on the Consolidated Statements of Operations.

Business Combinations

The Company applied the acquisition method of accounting for business acquisitions for its business acquisition, described in further detail in Note 2. Under the acquisition method, identifiable assets acquired, liabilities assumed and consideration transferred are measured at their acquisition-date fair value. The Company used an income approach to determine the fair values, described in further detail in Note 2. We relied upon the use of reports from third-party valuation specialists to assist in the estimation of fair values. Purchase price allocations are subject to revision within the measurement period, not to exceed one year from the date of acquisition. Costs to acquire a business may include, but are not limited to, fees for accounting, legal and valuation services, and are expensed as incurred in the Consolidated Statements of Income.

38

Variable Interest Entities

We determine at the inception of each arrangement whether an entity in which we have made an investment or in which we have other variable interests is considered a variable interest entity (VIE). We consolidate VIEs when we are the primary beneficiary. We are the primary beneficiary of a VIE when we have the power to direct activities that most significantly affect the economic performance of the VIE and have the obligation to absorb the majority of their losses or benefits. If we are not the primary beneficiary in a VIE, we account for the investment or other variable interests in a VIE in accordance with applicable GAAP. Each reporting period, we assess whether any changes in our interest or relationship with the entity affect our determination of whether the entity is a VIE and, if so, whether we are the primary beneficiary.

Carrying Value of Long-Lived Assets

If facts and circumstances indicate that a long-lived asset, including a products’ mold tooling and equipment, may be impaired, the carrying value is reviewed in accordance with FASB ASC Topic 360-10Accounting for the Impairment or Disposal of Long-Lived Assets. 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. Impairment losses are dependent on a number of factors such as general economic trends and major technology advances, and thus could be significantly different thanfrom historical results. For the years ended December 31, 2022 and 2021, we recorded a loss on fixed asset disposal of $35,350 and $183,614, respectively, upon the retirement of certain tooling and manufacturing equipment assets no longer in use. No impairmentloss on fixed asset disposal charges on tooling and equipment were recorded in 2017, 2016 or 2015.

2020.

We perform a valuation of our patents and trademark assets when events or circumstances indicate their carrying amounts may be unrecoverable. ThereFor the years ended December 31, 2022, 2021 and 2020, there was no impairment charge recorded in 2017. We recorded an impairment charge of $20,506 representing cost of $44,371, less accumulated amortization of $23,865 in 2016,$97,675, $80,163 and an impairment charge of $13,222 representing cost of $21,954, less accumulated amortization of $8,732 in 2015 regarding our abandoned patents and trademarks.$73,532, respectively. The value of the remaining intellectual property, such as patents and trademarks, werewas valued (net of accumulated amortization) at $535,461$2,220,094 as of December 31, 2016,2022, because management believes that itsthis value is recoverable.

Software Development Costs

The Company capitalizes the costs of obtaining and developing its software once technological feasibility has been determined by management.management or of purchased software solutions when placed into service. Such costs are accumulated and capitalized. These projects could take several years to complete. The capitalized costs are then amortized over 3 to 5 years on a straight-line basis. Unsuccessful or discontinued software projects are written off and expensed in the fiscal period where the application is abandoned or discontinued. The value of the unamortized software development costs remaining were valued (net of accumulated amortization) at $408,723$500,000 as of December 31, 2017, because management2022. Management believes that itsthis value is recoverable.

Revenue Recognition

We recognize revenueThe Company adopted the guidance on Revenue from product sales in accordanceContracts with Customers under FASB ASC Topic 605Revenue Recognition.606, “Revenue from Contracts with Customers”, as of January 1, 2018. Product sales represent the majority of our revenue and there have been no material changes in or inflation in our product pricing over the past three fiscal years. We recognizeCompany’s revenue. The Company recognizes revenue from these product sales when persuasive evidenceas performance obligations are satisfied and transfer of an arrangement exists, deliverycontrol to the customer has occurred, or services have been provided,typically upon physical shipment. Revenue is recognized in the amount that the Company expects to receive in exchange from the sale priceof our products. FOB shipping point is fixed or determinable,our standard shipping term and collectabilityrevenue is reasonably assured. Additionally, we sellrecognized as our products on terms which transfer title and riskship to customers, as control is transferred at that time. All of loss at a specified location, typically shipping point. Accordingly, revenue recognition fromour standard product sales occurs wheninclude a 30-day money back guarantee and expected returns are estimated at each reporting period date and a portion of revenue is deferred for all factors are met, including transferestimated returns. As of titleDecember 31, 2022 and risk of loss, which typically occurs upon shipment by us. If these conditions are not met, we will defer the2021, deferred revenue recognition until such time as these conditions have been satisfied. We collectassociated with our expected returns was immaterial. The Company collects and remitremits sales taxes in certain jurisdictions and reportreports 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 downward price adjustments 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 ourThe Company accounts for its longer-term development contracts, which to date have all been firm fixed-priced contracts, we recognize revenue on

39

the percentage-of-completion method. Under this method, whereby income is recognized as work on contracts progresses, but estimated losses on contracts in progress are charged to operations immediately. The percentage-of-completion is determined using the cost-to-cost method. To date, all of our longer-term developmentsuch 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.

 We recognize software license revenue under ASC 985-605Software Revenue Recognition and under ASC 605-25Revenue Arrangements with Multiple Deliverables, and related interpretations, as amended. Licensed software may be sold as a stand-alone element, with other software elements, or in conjunction with hardware products. When our products consist of more than one element, the product is considered to be a multiple element arrangement (MEA). When sold as a stand-alone element, the revenue is recognized upon shipment as discussed above. When sold as part of a MEA, revenue from the licensed software is recognized when the product with its embedded software is shipped to the customer.

For either a single element transaction or a MEA, the Company allocates consideration to all deliverables based on their relative stand-alone selling prices. Amendments to ASC 605-25 establish a hierarchy to determine the stand-alone selling price as follows:

·Vendor Specific Objective Evidence of the fair value (VSOE);
·Third Party Evidence (TPE); and
·Best Estimate of the Selling Price (ESP)

Sales which constitute a MEA are accounted for by determining if the elements can be accounted for as separate accounting units, and if so, by applying values to those units, per the hierarchy above. If VSOE is not available, management estimates the fair selling price using historical pricing for similar items, in conjunction with current pricing and discount policies.

Revenue from licensed software is recognized upon shipment and in accordance with industry-specific software recognition accounting guidance. Software updates that will be provided free of charge are evaluated on a case-by-case basis to determine whether they meet the definition of an upgrade and create a multiple element arrangement.

Fees charged to customers for post-contract Technical Support are recognized ratably over the term of the contract. Costs related to maintenance obligations are expensed as incurred.

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 except in European countries where it is two years.and up to 18 months for certain distributors. Customers may also purchase an additional twelve (12) month extended warranty. Warranty costs are accrued, to the extent that they are not recoverable from third partythird-party manufacturers, for the estimated cost to repair or replace products for the balance of the warranty periods. We provide for the costs of expected future warranty claims at the time of product shipment or over-builds to cover replacements. The adequacy of the provision is assessed at each quarter end and is based on historical experience of warranty claims and costs. The costs incurred to provide for these warranty obligations are estimated and recorded as an accrued liability at the time of sale. Future warranty costs are estimated based on historical performance rates and related costs to repair given products. The accounting estimate related to product warranty is considered a “critical accounting estimate” because judgment is exercised in determining future estimated warranty costs. Should actual performance rates or repair costs differ from estimates, revision to the estimated warranty liability would be required.

Derivatives and Fair Value Measurements

FASB ASC Topic 820Fair Value Measurements and Disclosures (ASC 820) defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. ASC 820 permits an entity to measure certain financial assets and financial liabilities at fair value with changes in fair value recognized in earnings each period. In accordance with ASC 815-10-25Derivatives and Hedging we measured the derivative liability using a Monte Carlo Options Lattice pricing model at their issuance date and subsequently as they are remeasured. Accordingly, at the end of each quarterly reporting date, the derivative fair market value is remeasured and adjusted to current market value. Derivatives that have more than one year remaining in their life are shown as long term.

Significant unobservable inputs are used in the fair value measurement of the Company’s derivative liability. The primary input factors driving the economic or fair value of the derivatives warrants and convertible notes are the stock price of the Company’s shares, the price volatility of the shares, reset events, and exercise behavior. An important valuation input factor used in determining fair value was the expected volatility of observed share prices and the probability of projected resets in warrant exercise and note conversion prices from financing before each security’s maturity. For exercise behavior, the Company assumed that without a target price of 2 times the projected reset price or higher, the holders of the warrants and convertible notes would hold to maturity. In determining the fair value of the derivatives it was assumed that the Company’s business would be conducted as a going concern and that holding to maturity was reasonable. Further, the January 2, 2015 Series A Preferred financing reduced the expected probability to near zero for price resets from financing events.


ASC 820 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs are inputs other than quoted prices included in Level 1 that are directly or indirectly observable for the asset or liability. Such inputs include quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, or inputs derived principally from or corroborated by observable market data by correlation or other means. Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value.

StockStock-Based Compensation Expense

Our Board of Directors approves grants of stock awards and options to employees to purchase our common stock. StockStock-based compensation expense is recorded based upon the estimated fair value of the stock option or stock award at the date of grant. The Company uses the Black-Scholes MertonBlack-Scholes-Merton option pricing model to estimate the fair value of stock options granted subsequentpursuant to the adoption of ASC Topic 718. The application of this pricing model involves assumptions that are judgmental and sensitive in the determination of compensation expense. 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 our primary trading stock exchange, currently the NASDAQ Capital Market. For stock options awards under the Company's LTIP (Long-term Incentive Plan), options vest upon the achievement of certain equity market conditions and performance-based milestones. The fair value of options granted under this program were calculated by using a Monte Carlo simulation for the equity market condition tranches and the Black-Scholes-Merton option pricing method for the performance-based tranches. The equity market condition awards are expensed over their derived service periods, which is an output of the Monte Carlo model. Upon the achievement of any market condition milestone, any unrecognized expense to-date would be expensed immediately. The performance-based tranches, that are currently considered probable of achievement, are expensed over their respective implicit service periods. We may experience significant catch-up or reversal of expense in the future in a period when any performance-based milestones first are determined to be probable of achievement or when any that are currently deemed probable are considered no longer probable.

Income Taxes

We have historically incurred domestic operating losses from both a financial reporting and tax return standpoint. Accordingly, weWe provide deferred income tax assets and liabilities based on the estimated future tax effects of differences between the financial and tax bases of assets and liabilities based onupon currently enacted tax laws. Any future recorded value of our deferred tax assets will be dependent upon our ability to generate taxable income in the jurisdictions in which we operate. These assets consist primarily of credit carry-forwards and net operating loss carry-forwards and the future tax effects of temporary differences between balances recorded for financial statement purposes and for tax return purposes. A valuation allowance is established for deferred tax assets in amounts for which realization is not considered more likely than not to occur. The accounting estimate related to income taxes is considered a “critical accounting estimate” because judgment is exercised in estimating future taxable income, including prudent and feasible tax planning strategies, and in assessing the need for any valuation allowance. To date, we have determined a 100% valuation allowance is required and accordingly no deferred tax asset has 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 more likely than not to be realized, an adjustment (reduction) of the valuation allowance would increase income to be recognized in the period such determination was made.

40

In addition, the calculation of our deferred taxes involves dealing with uncertainties in the application of complex tax regulations. As a result, we recognize liabilities for uncertain tax positions based on the two-step process prescribed within the interpretation.by GAAP. 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 isbasis 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. The Company currently has no uncertain tax positions.

Off BalanceOff-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, ana material effect on our financial condition, financial statements, revenues or expenses.

Recent Accounting Pronouncements

Refer to Note 1

41

In July 2017, the FASB issued ASU 2017-11,Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815).This ASU requires that when determining whether certain financial instruments should be classified as liabilities or equity instruments, an entity should not consider the down round feature. The ASU also recharacterizes as a scope exception the indefinite deferral available to private companies with mandatorily redeemable financial instrument and certain noncontrolling interests, which does not have an accounting effect but addresses navigational concerns within the FASB Accounting Standards Codification. The provisions

In May 2017, the Financial Accounting Standards Board (FASB) issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting, which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The new standard is effective for annual reporting periods, including interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. We do not expect the adoption of ASU 2017-09 to have a material impact on our consolidated financial statements and related disclosures because we do not anticipate any changes to our share-based payment plans.

In November 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2016-18 (ASU 2016-18), Restricted Cash. The standard requires restricted cash and cash equivalents to be included with cash and cash equivalents on the statement of cash flows. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The new guidance shall be applied using a retrospective approach. We do not expect the implementation of this standard to have a material effect on our financial statements.


In February 2016, the FASB issued Accounting Standards Update 2016-02 (ASU 2016-02), Leases (Topic 842). ASU 2016-02 requires lessees to recognize a right-of-use asset and lease liability in the balance sheet for all leases, including operating leases, with terms of more than twelve months. Recognition, measurement and presentation of expenses and cash flows from a lease by a lessee have not significantly changed from previous guidance. The amendments also require qualitative disclosures along with specific quantitative disclosures. The new guidance will be effective for fiscal years beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. The amendments must be applied on a modified retrospective basis. We anticipate the adoption of this standard will have a material impact on our financial statements. While we are continuing to assess all the potential impacts of the standard, we currently believe the most significant impact relates to our accounting for our office lease. Under the new guidance, the net present value of the obligation for our office lease will appear on the balance sheet. Currently, it is classified as an operating lease and payments are expensed in the period incurred.

In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (Topic 606) "Revenue from Contracts with Customers." Topic 606 supersedes the revenue recognition requirements in Topic 605 “Revenue Recognition” (Topic 605), and requires entities to recognize revenues when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. We adopted Topic 606 as of January 1, 2018 using the modified retrospective transition method. Results for reporting periods beginning after January 1, 2018 will be presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting treatment under Topic 605. We recorded a net increase to opening retained earnings of less than $100,000, net of tax, as of January 1, 2018 due to the cumulative impact of adopting Topic 606, with the impact primarily related to our post contract support (PCS deferred revenue).

Recently Adopted Accounting Pronouncements

In March 2016, the FASB issued ASU No. 2016-09Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting which amends the current stock compensation guidance. The amendments simplify the accounting for the taxes related to stock based compensation, including adjustments to how excess tax benefits and a company's payments for tax withholdings should be classified. Under this new guidance, entities must elect whether to account for forfeitures of share-based payments by (1) recognizing forfeitures of awards as they occur or (2) apply an estimated forfeiture rate, as is currently required. The standard is effective for fiscal periods beginning after December 15, 2016. We have adopted this standard for the year ended December 31, 2017 and have elected to account for forfeitures as they occur. The adoption of this standard did not have a material impact on our consolidated financial statements.

In November 2015, the FASB issued Accounting Standards Update (“ASU”) No. 2015-17, Income Taxes (Topic 740):Balance Sheet Classification of Deferred Taxes. ASU 2015-17 simplifies the presentation of deferred income taxes by requiring that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The standard is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods and may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. We have adopted this standard for the year ended December 31, 2017 on a prospective basis; therefore, all deferred tax assets and liabilities have been classified as noncurrent in the accompanying Consolidated Balance Sheets. Noncurrent deferred tax assets and noncurrent deferred tax liabilities are included in other assets and other long-term liabilities, respectively, in the accompanying Consolidated Balance Sheets.  As of December 31, 2017, the Company had a full valuation allowance against all net deferred tax assets, as such the adoption of this standard did not have a material impact on our consolidated financial statements.

There are no other recent accounting pronouncements that are expected to have a material impact on the consolidated financial statements.

Results of Operations for Fiscal Years Ended December 31, 20172022 and December 31, 2016

2021

The following table compares the Company’s consolidated statements of operations data for the years ended December 31, 20172022 and 2016.2021.

 Years Ended December 31, 
 2017  2016  Dollar Change  % Increase
(Decrease)
 
         

Year Ended December 31, 

    

    

    

Dollar

    

% Increase

 

2022

2021

Change

(Decrease)

 

Sales:         

 

  

 

  

 

  

 

  

Sales of Products $4,548,689  $1,987,878  $2,560,811   129%

$

10,505,763

$

12,784,600

$

(2,278,837)

 

(18)

%

Sales of Engineering Services  989,064   139,500   849,564   609%

 

1,330,119

 

380,333

 

949,786

 

250

%

                

Total Sales  5,537,753   2,127,378   3,410,375   160%

 

11,835,882

 

13,164,933

 

(1,329,051)

 

(10)

%

                

Cost of Sales:                 

 

  

 

  

 

  

 

  

Cost of Sales — Products  5,269,900   3,251,906   2,017,994   62%
Cost of Sales — Engineering Services  944,451   39,060   905,391   2,318%
                

Cost of Sales - Products Sold

 

8,737,852

 

9,709,268

 

(971,416)

 

(10)

%

Cost of Sales - Inventory Reserve for Obsolescence

 

290,405

 

519,950

 

(229,545)

 

(44)

%

Cost of Sales - Depreciation and Amortization

 

799,317

 

1,321,467

 

(522,150)

 

(40)

%

Cost of Sales - Engineering Services

 

525,182

 

45,758

 

479,424

 

1,048

%

Total Cost of Sales  6,214,351   3,290,966   2,923,385   89%

 

10,352,756

 

11,596,443

 

(1,243,687)

 

(11)

%

                
Gross Profit (Loss) (exclusive of depreciation shown separately below)  (676,598)  (1,163,588)  486,990   42%
Gross Margin %  (12)%  (55)%        
                

Gross Profit

 

1,483,126

 

1,568,490

 

(85,364)

 

(5)

%

Gross Profit %

 

13

%  

 

12

%  

 

  

 

  

Operating Expenses:                

 

  

 

  

 

  

 

  

Research and Development  6,706,690   6,947,878   (241,188)  (3)%

 

12,676,688

 

11,674,954

 

1,001,734

 

9

%

Selling and Marketing  3,694,913   3,394,580   300,333   9%

 

8,078,538

 

6,118,929

 

1,959,609

 

32

%

General and Administrative  6,126,335   5,114,139   1,012,196   20%

 

21,038,562

 

22,502,833

 

(1,464,271)

 

(7)

%

Depreciation and Amortization  998,528   770,668   227,860   30%

 

1,788,584

 

988,104

 

800,480

 

81

%

Loss on Inventory Revaluation  1,151,482   1,124,401   27,081   2%

Loss on Fixed Asset Disposal

 

35,350

 

183,614

 

(148,264)

 

(81)

%

Impairment of Patents and Trademarks  -   20,506   (20,506)  (100)%

 

97,675

 

80,163

 

17,512

 

22

%

                

Loss from Operations  (19,354,546)  (18,535,760)  (818,786)  (4)%

 

(42,232,271)

 

(39,980,107)

 

(2,252,164)

 

6

%

                
Other Income (Expense)                

Other Income (Expense):

 

  

 

  

 

  

 

  

Investment Income  58,530   26,693   31,837   119%

 

1,395,579

 

53,511

 

1,342,068

 

2,508

%

Other Taxes  (28,363)  (52,271)  23,908   46%

Income and Other Taxes

 

(212,997)

 

(307,368)

 

94,371

 

(31)

%

Foreign Exchange Loss  (65,248)  (33,079)  (32,169)  (97)%

 

(180,589)

 

(143,196)

 

(37,393)

 

26

%

Gain (Loss) on Derivative Valuation  20,204   34,744   (14,540)  (42)%
Loss on Fixed Asset Disposal  (585)  (25,890)  25,305   98%
Amortization of Senior Term Debt Discount  (155,760)  (486,856)  331,096   68%
Amortization of Deferred Financing Costs  (19,500)  (46,574)  27,074   58%
Interest Expense  (88,234)  (131,089)  42,855   33%
                
Total Other Income (Expense)  (278,956)  (714,322)  435,366   61%
                
Loss Before Provision for Income Taxes  (19,633,502)  (19,250,082)  (383,420)  (2)%
Provision for Income Taxes     ——       
                

Employee Retention Credit Refund

 

466,705

 

 

466,705

 

NM

Total Other Income (Expense), Net

 

1,468,698

 

(397,053)

 

1,865,751

 

(470)

%

Net Loss $(19,633,502) $(19,250,082) $(383,420)  (2)%

$

(40,763,573)

$

(40,377,160)

$

(386,413)

 

1

%


42

Sales.   There was an overall increasea decrease in producttotal sales for the year ended December 31, 2017 over the same period2022, from those in 20162021 of $3,410,375$1,329,051 or 160%10%. The following table reflects the major components of our sales:

  2017  % of
Sales
  2016  % of
Sales
  Dollar
Change
  % Increase
(Decrease)
 
                   
Sales of Smart Glasses $3,840,300   69% $1,433,729   67% $2,406,571   168%
Sales of Video Eyewear  296,752   5%  395,053   19%  (98,301)  (25)%
Sales of Waveguide Components  351,056   6%  109,754   5%  241,302   220%
Sales Freight out  60,581   1%  49,342   2%  11,239   23%
Sales of Engineering Services  989,064   18%  139,500   7%  849,564   609%
Total Sales $5,537,753   100% $2,127,378   100% $3,410,375   160%

Year Ended

% of

Year Ended

% of

Dollar

% Increase

December 31, 2022

Total Sales

December 31, 2021

Total Sales

Change

(Decrease)

Sales of Products

$

10,505,763

 

89

%  

$

12,784,600

 

97

%  

$

(2,278,837)

 

(18)

%

Sales of Engineering Services

 

1,330,119

 

11

%  

 

380,333

 

3

%  

 

949,786

 

250

%

Total Sales

$

11,835,882

 

100

%  

$

13,164,933

 

100

%  

$

(1,329,051)

 

(10)

%

The 168% increase in Smart Glasses 2017 sales was primarily the resultSales of the volume production release and commencement of sales of the M300 Smart Glasses. M300 sales increased 495%products decreased by 18% for the year ended December 31, 2017 as2022, compared to the prior 2016same period when the M300 was just commencing its early developer onlyin 2021. Smart glasses revenues declined primarily due to a combination of higher average sales discounts due to larger volume reseller sales, negative foreign exchange comparatives and to a lesser extent, a decrease in overall unit sales. Sales of waveguides and display engines for our original M100 Smart Glasses, which represented 18% of 2017 Smart Glasses revenues, decreasedengineering services customers included in product sales rose by 24% in 2017 over the same 2016 period as customers moved over to the newer M300. Our iWear Video Headphones sales were down 25%$394,150 for the year ended December 31, 20172022, as compared to the same period in 2016. This overall revenue decrease was primarily the result of much lower selling prices for the year ended December 31, 2017 versus the same period in 2016. Sales of waveguide systems in the 2017 period were related to two new programs with tier-1 consumer electronics firms and others versus a smaller single program in the comparable 2016 period.

2021.

Sales of engineering services for the period increased to $989,064 from $139,500 in 2016, due to work on the Toshiba smart glasses development program that commenced in February 2017.The amount recorded for the year ended December 31, 2017, represents accrued billings recognized on a percentage-of-completion basis.

2022, were $1,330,119, as compared to $380,333 in the same period of 2021, an increase of 250%.

Cost of Sales and Gross Profit (Loss). Cost of product revenues and engineering services isare comprised of materials, components, labor, warranty costs, freight costs, manufacturing overhead, software royalties, and the non-cash depreciation for our tooling and manufacturing equipment and amortization of software development costs related to the production of our products and rendering of engineering services. The following table reflects the components of our cost of goods sold for products:sold:


Component of Cost of Sales Year Ended
December 31,
2017
  As %
Related
Sales
  Year Ended
December 31,
2016
  As % of
Related
Sales
  Dollar
Change
 
Product Cost of Sales $3,152,729   69% $1,473,277   74% $1,679,452 
Freight Costs  610,228   13%  482,010   24%  128,218 
Manufacturing Overhead  886,593   19%  795,835   40%  90,758 
Warranty Costs  283,402   6%  80,395   4%  203,007 
Amortization of Software Costs  214,837   5%  286,450   14%  (71,613)
Software Royalties  122,111   3%  133,939   7%  (11,828)
                     
Total Cost of Sales – Products $5,269,900   116% $3,251,906   164% $2,017,994 
                     
Gross Profit (Loss) – Product Sales $(721,211)  (16)% $(1,264,028)  (64)% $542,817 

Year Ended

% of

Year Ended

% of

Dollar

% Increase

December 31, 2022

Total Sales

December 31, 2021

Total Sales

Change

(Decrease)

Product Cost of Sales

$

6,815,981

 

58

%  

$

7,832,397

 

59

%  

$

(1,016,416)

 

(13)

%

Manufacturing Overhead - Unapplied

 

2,212,276

 

19

%  

 

2,396,821

 

18

%  

 

(184,545)

 

(8)

%

Depreciation and Amortization

 

799,317

 

7

%  

 

1,321,467

 

10

%  

 

(522,150)

 

(40)

%

Engineering Services Cost of Sales

 

525,182

 

4

%  

 

45,758

 

0

%  

 

479,424

 

1,048

%

Total Cost of Sales

10,352,756

 

87

%  

11,596,443

 

88

%  

(1,243,687)

 

(11)

%

Gross Profit

$

1,483,126

13

%

$

1,568,490

 

12

%

$

(85,364)

 

(5)

%

For the year ended December 31, 2017, we reported a reduced2022, gross lossprofit from producttotal sales was $1,483,126 or 13% as compared to the prior year’s period. On a direct product cost of sales only basis, product direct costs were 69% of sales for the 2017 period versus 74% for the same year’s period in 2016. These product costs, while improved for 2017 as a percentage of sales, were negatively impacted by four main factors: (i) the near zero margin being earned on our written down iWear Video Headphones sales, which are now effectively being sold at their net realizable value, pursuant to our write-down at end of fiscal 2016 and again as of September 30, 2017; (ii) higher startup M300 manufacturing costs, a product not offered in the 2016 comparative period; (iii) an increase in the inventory obsolescence provisions related to our first M300 smart glasses production runs and the move from our contract manufacturer’s California site to their China facility; and (iv) the provision of additional obsolescence provisions resulting from cable and component quality issues, and lower initial production yields of the M300 and its accessories, some of which were deemed not saleable. Most of these factors occurred in the first 6 months of 2017. As a result, we have increased our provisions for possible future warranty costs to 8% versus 4% of products sales$1,568,490 or 12% in the same period in 2021.

Manufacturing overhead costs, not already added in Cost of 2016. Manufacturing Overhead costs rose as a result of additional staff in the area over the 2016 period. Freight costs rose in absolute dollar terms in 2017 versus the 2016 period, butSales, decreased as a percentage of product sales to 13% from 24% in 2016.

Costs for engineering services accruedby $184,545 or 8% for the year ended December 31, 2017 represent direct project costs as well as2022 over the reclassification of internal research and development wage costs related2021 comparable period to the Toshiba engineering program, plus accruals for the expected overall program’s completion costs19% as a percentage of accrued expenses. There was only one small projecttotal sales as compared to 18% in 2021. The decrease in the 2016net dollar amount of these unapplied overhead costs in the current period however we earned substantiallyversus the prior period is primarily due to more absorption of fixed costs being allocated directly to Product Cost of Sales and inventory.

Depreciation and amortization expense decreased by $522,150 or 40% for the year ended December 31, 2022, over the 2021 comparable period to 7% as a percentage of total sales as compared to 10% in gross profit2021. The decrease was due to some of our tooling and manufacturing equipment becoming fully depreciated in 2016 than we have earned on the larger Toshiba 2017 project.

first half of 2022.

Research and Development.   Our research and development expensescosts consist primarily of compensation costs for personnel, related stockstock-based compensation expenses, third partythird-party services, purchase of research supplies and materials, and consulting fees related to research and development costs.development. Software development expenses prior to establishingdetermine technical

43

feasibility before final development and ongoing maintenance that are not capitalized and are included in research and development costs.

  2017  % of
Sales
  2016  % of
Sales
  Dollar
Change
  % Increase
(Decrease)
 
                         
Research and Development $6,706,690   121% $6,947,878   327% $(241,188)  (3)%

Year Ended

% of

Year Ended

% of

Dollar

% Increase

December 31, 2022

Total Sales

December 31, 2021

Total Sales

Change

(Decrease)

Research and Development

$

12,676,688

 

107

%  

$

11,674,954

 

89

%  

$

1,001,734

 

9

%

Comparing researchResearch and development costs for the year ended December 31, 2017 versus2022, increased by $1,001,734 or 9%, as compared to the same period in 2016, there2021. This increase was a decreaselargely due to an increase of $557,165 in projectexternal development and research costs of $241,188 primarilyexpenses related to the fact that the new M300our Next Generation Smart Glasses entered into production in early 2017 as compared to 2016 when they were in active development; an overall net(Shield) and Blade 2.0; a $386,821 increase in 2017 salary and benefits and stock compensation expenses due to additional personnel; an increase of $302,228, primarily the result of additional R&D staff versus the same period$78,920 in 2016, and that was offset by a $743,489 reclassification of internal salary costs to cost of sales for engineering services related to the Toshiba engineering services project;technology licensing fees; and an increase of $840,824$84,300 in external research related to additional userecruitment and hiring fees, and partially offset by a decrease of software contractors for the M300$147,843 in supplies and Blade Smart Glasses and consulting fees related to our optics and waveguide research.consumables expense.

Selling and Marketing.    Selling and marketing costs consist of trade show costs, advertising, sales samples, travel costs, sales staff compensation costs including stockstock-based compensation expense, consulting fees, PRpublic relations agency fees, website costs and sales commissions paid to full-time staff and outside consultants.

  2017  % of
Sales
  2016  % of
Sales
  Dollar
Change
  % Increase
(Decrease)
 
                         
Selling and Marketing $3,694,913   67% $3,394,580   160% $300,333   9%

Year Ended

% of

Year Ended

% of

Dollar

% Increase

December 31, 2022

Total Sales

December 31, 2021

Total Sales

Change

(Decrease)

Selling and Marketing

$

8,078,538

 

68

%  

$

6,118,929

 

46

%  

$

1,959,609

 

32

%

These

Selling and marketing costs for the year ended December 31, 2022, increased overallby $1,959,609 or 32%, as compared to the same period in 2021. This increase was largely due to the following factors: highera $1,685,428 increase in salary commissions,and salary benefits and stock compensation expenses related to new staff additions totaling $222,310 in North America; a net increase of $106,263 in advertising costs, consisting mainly ofexpense; an increase of $386,150$368,018 in product sample costs, increasedtravel related expenses; an increase of $360,034 in trade show costsexpenses; an increase of $18,899, less$117,423 in recruiting and hiring expenses; and a $47,794 increase in advertising costs; and partially offset by a decrease of $305,364$441,585 in marketing agency feeswebsite development and reduced spending on product videos; a $40,770 increase in computer and software subscription expenses;maintenance costs; and a $61,537$196,478 decrease in website maintenance and developmentfor consulting costs.

General and Administrative.   General and administrative costs include professional fees, investor relations (IR) costs, including shares and warrants issued for IR services, salaries and related stock compensation, travel costs, office and rental costs.

  2017  % of
Sales
  2016  % of
Sales
  Dollar
Change
  % Increase
(Decrease)
 
                         
General and Administrative $6,126,335   111% $5,114,139   240% $1,012,196   20%

Year Ended

% of

Year Ended

% of

Dollar

% Increase

December 31, 2022

Total Sales

December 31, 2021

Total Sales

Change

(Decrease)

General and Administrative

$

21,038,562

 

178

%  

$

22,502,833

 

171

%  

$

(1,464,271)

 

(7)

%

General and administrative costs were $6,126,335 for the year ended December 31, 20172022 decreased by $1,464,271 or 7%, as compared to $5,114,139the same period in 2021. This decrease was largely due to a $1,259,137 decrease in non-cash stock-based compensation which was significantly higher in the first quarter of 2021 due to the vesting of an achieved equity market capitalization milestone under the LTIP; a $515,952 decrease in legal expenses; a $89,262 decrease in recruitment and hiring expenses related to new external board members who joined the Board of Directors in June 2021; and partially offset by increases in audit and tax advisory fees of $261,958, and insurance premiums of $209,528.

Depreciation and Amortization.  Depreciation and amortization expense, not included in Cost of Sales, for the year ended December 31, 2016, an increase of $1,012,196 or 20%. These costs were higher overall primarily because of: increased salary and stock compensation costs of $998,488 due to the hiring of new accounting and internal IR personnel and the Company’s new COO; an increase of $42,836 in hiring expenses for new accounting staff; an increase of $145,658 in board and stock compensation costs due an increase in the number of external board members from 3 to 4; a $39,725 increase in IT consulting fees; a $65,707 increase in auditor fees; a $63,366 increase in travel costs; a $26,961 increase in bad debt expense; and partially offset by reduced spending of $428,359 for IR and stockholder communications activities.

Depreciation and Amortization.   Depreciation and amortization expense for the year ended December 31, 20172022 was $998,528$1,788,584 as compared to $770,668$988,104 in the same period in 2016,2021, an increase of $227,860.$800,480. The increase in depreciation and amortization expense is primarily due to new investments in depreciable assets over the last two years.

amortization of our technology license related to the Atomistic Agreements which began on May 12, 2022.

Loss on Inventory Revaluation.Other Income (Expense), Net   There. Total other income was a loss on inventory revaluation$1,468,698 for the year ended December 31, 2017 of $1,151,4822022, as compared to $1,124,401other expense of $397,053 in the same period in 2016. These write-downs are2021, an increase of $1,865,851. The overall increase in other income was primarily the result of management’s decisionan increase of $1,342,068 in early 2017 to reduceinvestment income resulting from the suggested retail selling pricerecent rise in interest rates earned on the Company’s excess cash period over period; a $466,705 gain recorded for an employee

44

retention credit refund claim that was filed with the IRS on hand and again in September 2017 to a price well below the product’s cost.

Other Income (Expense).  Total other expense was $278,956 for the year ended December 31, 2017 compared to an expense of $714,322 in the same period in 2016, a reduction of $435,366. The overall decrease in these other expenses was primarily due to reduced costs of $358,170 for the amortization of senior term debt discounts and deferred financing costs for the 2017 period as compared to 2016 period,November 10, 2022; and a related reductiondecrease of $94,371 in interest expenseincome and other taxes, partially offset by an increase of $42,855 and $31,837$37,393 in investment income. All of the senior term debt was converted to common stock prior to its maturity on June 3, 2017.

foreign exchange losses.

Provision for Income Taxes.Taxes.  There were no provisions for income taxes in 20172022 or 2016.  2021.

39

Results of Operations for Fiscal Years Ended December 31, 20162021 and December 31, 20152020

The following table compares the Company’s consolidated statements of operations data for the years ended December 31, 20162021 and 2015.2020.

  Years Ended December 31, 
  2016  2015  Dollar Change  % Increase
(Decrease)
 
             
Sales of Products $1,987,878  $2,544,153  $(556,275)  (22)%
Sales of Engineering Services  139,500   205,831   (66,331)  (32)%
                 
Total Sales  2,127,378   2,749,984   (622,606)  (23)%
                 
Cost of Sales — Products  3,251,906   2,101,466   1,150,440   55%
Cost of Sales — Engineering Services  39,060   82,332   (43,272)  (53)%
                 
Total Cost of Sales  3,290,966   2,183,798   1,107,168   51%
                 
Gross Profit (Loss)(exclusive of depreciation shown separately below)  (1,163,588)  566,186   (1,729,774)  (306)%
Gross Margin %  (55)%  21%      (76)%
                 
Operating Expenses:                
Research and Development  6,947,878   3,595,437   3,352,441   93%
Selling and Marketing  3,394,580   1,798,041   1,596,539   89%
General and Administrative  5,114,139   6,120,101   (1,005,962)  (16)%
Depreciation and Amortization  770,668   380,841   389,827   102%
Loss on Inventory Valuation  1,124,401   -   1,124,401   100%
Impairment of Patents and Trademarks  20,506   13,222   7,284   55%
                 
Loss from  Operations  (18,535,760)  (11,341,456)  (7,194,304)  63%
                 
Other Income (Expense)                
Other Taxes  (52,271)  (54,432)  2,161   (4)%
Foreign Exchange Loss  (33,079)  (277)  (32,802)  (100)%
Loss on Asset Disposal  (25,890)     (25,890)  (100)%
Interest Income and Gain on Debt Conversions and Extinguishment  26,693   20,790   5,903   28%
Gain (Loss) on Derivative Valuation  34,744   (1,098,465)  1,133,209   103%
Amortization of Senior Term Debt Discount  (486,856)  (751,968)  265,112   (35)%
Amortization of Deferred Financing Costs  (46,574)  (46,447)  (127)  0%
Interest Expense  (131,089)  (155,223)  24,134   (16)%
                 
Total Other Income (Expense)  (714,322)  (2,086,022)  1,371,700   (66)%
                 
Loss Before Provision for Income Taxes  (19,250,082)  (13,427,478)  (5,822,604)  43%
Provision for Income Taxes            
                 
Net Loss $(19,250,082) $(13,427,478) $(5,822,604)  43%

Year Ended December 31,

 

    

    

    

Dollar

    

% Increase

 

2021

2020

Change

(Decrease)

 

Sales:

 

  

 

  

 

  

 

  

Sales of Products

$

12,784,600

 

$

10,081,209

 

$

2,703,391

 

27

%

Sales of Engineering Services

 

380,333

 

1,500,287

 

(1,119,954)

 

(75)

%

 

  

 

  

 

  

 

  

Total Sales

 

13,164,933

 

11,581,496

 

1,583,437

 

14

%

 

  

 

  

 

  

 

  

Cost of Sales:

 

  

 

  

 

  

 

  

Cost of Sales - Products

 

9,709,268

 

7,914,686

 

1,794,582

 

23

%

Cost of Sales - Inventory Reserve for Obsolescence

519,950

1,273,835

(753,885)

(59)

%

Cost of Sales - Depreciation and Amortization

 

1,321,467

 

1,512,979

 

(191,512)

 

(13)

%

Cost of Sales - Engineering Services

 

45,758

 

282,038

 

(236,280)

 

(84)

%

 

  

 

  

 

  

 

  

Total Cost of Sales

 

11,596,443

 

10,983,538

 

612,905

 

6

%

 

  

 

  

 

  

 

  

Gross Profit

 

1,568,490

 

597,958

 

970,532

 

162

%

Gross Profit %

 

12

%  

5

%  

  

 

  

 

  

 

  

 

  

 

  

Operating Expenses:

 

  

 

  

 

  

 

  

Research and Development

 

11,674,954

 

7,568,074

 

4,106,880

 

54

%

Selling and Marketing

 

6,118,929

 

4,039,772

 

2,079,157

 

51

%

General and Administrative

 

22,502,833

 

6,915,213

 

15,587,620

 

225

%

Depreciation and Amortization

 

988,104

 

1,128,831

 

(140,727)

 

(12)

%

Loss on Fixed Asset Disposal

 

183,614

 

 

183,614

 

NM

Impairment of Patents and Trademarks

 

80,163

 

73,532

 

6,631

 

9

%

 

  

 

  

 

  

 

  

Loss from Operations

 

(39,980,107)

 

(19,127,464)

 

(20,852,643)

 

109

%

 

  

 

  

 

  

 

Other Income (Expense):

 

  

 

  

 

  

 

  

Investment Income

 

53,511

 

41,120

 

12,391

 

30

%

Income and Other Taxes

 

(307,368)

 

(103,833)

 

(203,535)

 

196

%

Foreign Exchange Loss

 

(143,196)

 

(67,895)

 

(75,301)

 

111

%

Gain on Debt Extinguishment, net of Loss on Note Receivable

 

 

1,305,900

 

(1,305,900)

 

(100)

%

 

  

 

  

 

  

 

  

Total Other Income (Expense), Net

 

(397,053)

 

1,175,292

 

(1,572,345)

 

(134)

%

 

  

 

  

 

  

 

  

Loss Before Provision for Income Taxes

 

(40,377,160)

 

(17,952,172)

 

(22,424,988)

 

125

%

Provision for Income Taxes

 

 

 

 

%

 

  

 

  

 

  

 

  

Net Loss

$

(40,377,160)

$

(17,952,172)

$

(22,424,988)

 

125

%


45

Sales.   There was an overall decreaseincrease in total sales for the year ended December 31, 2016 over the same period2021 from those in 20152020 of $622,606$1,583,437 or 23%14%. The following table reflects the major components of our sales:

 2016  % of
Sales
  2015  % of
Sales
  Dollar
Change
  % Increase
(Decrease)
 
             

Year Ended

% of

Year Ended

% of

Dollar

% Increase

December 31, 2021

Total Sales

December 31, 2020

Total Sales

Change

(Decrease)

Sales of Smart Glasses $1,433,729   68% $1,912,960   70% $(479,231)  (25)%

$

12,784,600

 

97

%  

$

10,081,209

 

87

%  

$

2,703,391

 

27

%

Sales of Video Eyewear  395,052   18%  211,257   8%  183,795   87%
Sales of Waveguide Components  109,754   5%  385,385   14%  (275,631)  (72)%
Sales Freight out  49,343   2%  34,551   1%  14,792   43%
Sales of Engineering Services  139,500   7%  205,831   7%  (66,331)  (32)%

 

380,333

 

3

%  

 

1,500,287

 

13

%  

 

(1,119,954)

 

(75)

%

Total Sales $2,127,378   100% $2,749,984   100% $(622,606)  (23)%

$

13,164,933

 

100

%  

$

11,581,496

 

100

%  

$

1,583,437

 

14

%

The decrease inSales of Smart Glasses wasproducts rose by $2,703,391 or 27% in the year ended December 31, 2021, primarily theas a result of a 25% decrease in sales of the M100 Smart Glasses. After the announcement of the new M300 at CES in January 2016, many customers delayed further purchasescontinued growth of our M400 model and M4000 Smart Glasses until we commenced shipping the M300 Smart Glasses. Pre-orders for the new M300, including migration packages, are included primarilysales, as deferred revenues and will not be recognized as revenues until those orders shippedcompared to the customer. Our iWear Video Headphonessame period in 2020. Sales revenues from our M-Series Smart Glasses were $10,254,905, a 22% increase of $1,848,282 over the prior year. Revenues of Blade Smart Glasses decreased by $395,529 or 23% in the year ended December 31, 2021 versus the comparable period in 2020 primarily driven by component shortages required to make Blade projector engines in the second half of 2021 and higher unit sales were 18%in the prior year’s comparable quarter when we offered lower selling prices on the previous Blade model, which we discontinued in the fall of product revenues2020.

Sales of Engineering Services for the year ended December 31, 2016 versus nil2021, were $380,333 as compared to $1,500,287 in the same period in 2015 when it was not yet available. Revenues from this product line were constrained throughout most of 2016 due to production difficulties. For the 2015 comparative period, approximately 8% of revenues came from the Wrap AR series of Video Eyewear products which was discontinued2020 comparable period. The revenue recognized in the summeryear ended December 31, 2021 for engineering services was primarily a result of 2015, whereas no such product revenueswaveguide and display engine development projects which commenced in 2020 and were reportedcompleted in the 2016 period. Salesfirst quarter of waveguide related components were 5%2021. We believe that ongoing and new engineering services programs have been deferred to give customers time to evaluate and present to their end customers the solutions we helped to design and delivered in 2020 and the first quarter of total sales versus 14% in2021, which has been made more difficult by the prior period, partially due to customers awaiting shipments of the next generation of waveguides.

ongoing disruptions caused by COVID-19.

Cost of Sales and Gross Profit (Loss).Profit.  Cost of product revenues and engineering services isare comprised of materials, components, labor, warranty costs, freight costs, manufacturing overhead, software royalties, and the non-cash depreciation for our tooling and manufacturing equipment and amortization of software development costs related to the production of our products and rendering of engineering services. The following table reflects the components of our cost of goods sold for products:sold:

Component of Cost of Sales Year Ended
December 31,
2016
  As %
Related
Sales
  Year Ended
December 31,
2015
  As % of
Related
Sales
  Dollar
Change
 
Product Cost of Sales $1,473,277   74% $917,620   36% $555,657 
Freight Costs  482,010   24%  250,981   10%  231,029 
Manufacturing Overhead  795,835   40%  410,149   16%  385,686 
Warranty Costs  80,395   4%  92,236   4%  (11,841)
Amortization of Software Costs  286,450   14%  286,450   11%  - 
Software Royalties  133,939   7%  144,030   6%  (10,091)
                     
Total Cost of Sales – Products $3,251,906   164% $2,101,466   83% $1,150,440 
                     
Gross Profit (Loss) – Product Sales $(1,264,028)  (64)% $442,687   17% $(1,706,715)

Year Ended

% of

Year Ended

% of

Dollar

% Increase

December 31, 2021

Total Sales

December 31, 2020

Total Sales

Change

(Decrease)

Product Cost of Sales

    

7,832,397

    

59

%  

$

7,573,557

    

65

%  

$

258,840

    

3

%

Engineering Services Cost of Sales

 

45,758

 

0

%  

282,038

 

2

%  

(236,280)

 

(84)

%

Manufacturing Overhead - Unapplied

 

2,396,821

 

18

%  

1,614,964

 

14

%  

781,857

 

48

%

Depreciation and Amortization

1,321,467

10

%  

1,512,979

13

%  

(191,512)

(13)

%  

 

  

 

  

 

  

 

  

 

  

 

  

Total Cost of Sales

$

11,596,443

 

88

%  

$

10,983,538

 

95

%  

$

612,905

 

6

%

 

  

 

  

 

  

 

  

 

  

 

  

Gross Profit

$

1,568,490

 

12

%  

$

597,958

 

5

%  

$

970,532

 

162

%

The decreased net gross profit (loss) percentage earned inFor the year ended December 31, 2016,2021, gross profit from total sales was $1,568,490 or 12% as compared to $597,958 or 5% in the same period in 2015 was primarily2021.

Manufacturing overhead costs, not already added in Cost of Sales, increased by $781,857 or 48% for the resultyear ended December 31, 2021, over the 2020 comparable period to 18% as a percentage of lowertotal sales levels to absorb many of our relatively fixed manufacturing overheads and amortization costs and the fact that we earn significantly lower gross margins on iWear as compared to our Smart Glasses and prior Wrap AR products. Production issues and product shortages contributed to a negative margin on iWear for 2016. Manufacturing overhead costs increased14% in 2020, primarily due to manufacturing supply chain additional personnel and increased salariesnon-cash stock-based compensation expense.

46

In addition to its normal Reserve for Obsolescence provision, the Company reserved for (i) an additional 25% of its remaining M300XL finished goods and production labor costsrelated accessory inventory on-hand as of $198,862, with over half related to iWear rework costing; increased rent and utility cost allocationsDecember 31, 2021and (ii) all of $162,293its Blade 1.5 excess components that will not be used in current planned builds of the Blade in 2022, due to our larger plant, resultedend-of-life availability of some required components. The total reserve write-down recorded at December 31, 2021 was $519,950. The write-down and obsolescence provision for finished goods and components, included in an increaseProduct Cost of $361,155 from 2015. Freight costs of $482,010 were substantially higherSales, totaled $1,273,835 for the 2016 period as compared to $250,981 in 2015. As our new iWear product is bulkier and heavier and ships in a larger retail package than our prior products, the costs of air shipments became prohibitive material given that production volumes from China increased from 2015.year ended December 31, 2020.


Research and Development.   Our research and development expensescosts consist primarily of compensation costs for personnel, related stockstock-based compensation expenses, third partythird-party services, purchase of research supplies and materials, and consulting fees related to research and development costs.development. Software development expenses to determine technical feasibility before final development and ongoing maintenance that are not capitalized and are included in research and development costs.

  2016  % of
Sales
  2015  % of
Sales
  Dollar
Change
  % Increase
(Decrease)
 
                         
Research and Development $6,947,878   327% $3,595,437   131% $3,352,441   93%

Year Ended

% of

Year Ended

% of

Dollar

% Increase

December 31, 2021

Total Sales

December 31, 2020

Total Sales

Change

(Decrease)

Research and Development

$

11,674,954

 

89

%  

$

7,568,074

 

65

%  

$

4,106,880

 

54

%

Comparing researchResearch and development costs for the year ended December 31, 2016 versus the same period2021, increased by $4,106,880 or 54% as compared to 2020. This increase was largely due to a $2,532,628 increase in 2015, theresalary and salary benefits related expenses, of which $944,065 was related to non-cash stock-based compensation; an increase of $1,173,817 in 2016 salary, benefits and stock compensationexternal development expenses of $1,040,841, primarily the result of additional R&D staff versus the same period in 2015; a $131,654 reduction in new staff recruitment fees; an increase in project development and research costs of $1,937,091 primarily related to the new product development for the M300our Next Generation Smart Glasses and to a smaller extent the M3000, with the majority of these amounts being spent on outside contractors who assisted in the development work; an increase in $208,665 in rent and utility costs related to the expanded R&D portion of our new corporate facilities;Glasses; an increase of $231,773$296,748 in externalother research relatedand development consulting fees for optics and waveguide research;fees; and an $11,612 increase of $99,947 in travel costs related to our outside production contractorresearch and development contractors.supplies.

Selling and Marketing.    Selling and marketing costs consist of trade show costs, advertising, sales samples, travel costs, sales staff compensation costs including stockstock-based compensation expense, consulting fees, PRpublic relations agency fees, website costs and sales commissions paid to full-time staff and outside consultants.

  2016  % of
Sales
  2015  % of
Sales
  Dollar
Change
  % Increase
(Decrease)
 
                         
Selling and Marketing $3,394,580   160% $1,798,041   65% $1,596,539   89%

Year Ended

% of

Year Ended

% of

Dollar

% Increase

December 31, 2021

Total Sales

December 31, 2020

Total Sales

Change

(Decrease)

Selling and Marketing

$

6,118,929

 

46

%  

$

4,039,772

 

35

%  

$

2,079,157

 

51

%

These costs increased overall due to the following factors: higher salary, commissions, benefits and stock compensation expenses related to new staff additions totaling $418,180 in both North America and Europe; increased trade show costs of $402,380 due to larger exhibit booth sizes and show rentals and attendance at several additional major trade shows during 2016 versus 2015; increased public relations and video production costs of $340,761 due to the hiring of an additional PRSelling and marketing service firmcosts for the year ended December 31, 2021, increased by $2,079,157 or 51% as compared to the 2015 period and the production of 4 new product videos in 2016;2020. This increase was largely due to a $144,319$1,089,571 increase in website costs including additionssalary and salary benefits related expenses, of which $420,661 was related to our main new corporatenon-cash stock-based compensation; an increase of $578,621 in sales consulting and European websites;marketing fees, primarily for foreign full-time contractors; a $92,093$595,263 increase in traveladvertising costs; an increase of $242,570 in website development and maintenance costs; partially offset by decreases of $316,319 in trade show expenses; a decrease of $102,215 in commissions largely due to a reduction in commissions payable to TDG for defense related engineering services; and a $42,736 increasedecrease of $35,670 in rent and utility costs.

travel related expenses.

General and Administrative.   General and administrative costs include professional fees, investor relations (IR) costs, including shares and warrants issued for IR services, salaries and related stock compensation, travel costs, office and rental costs.

  2016  % of
Sales
  2015  % of
Sales
  Dollar
Change
  % Increase
(Decrease)
 
                         
General and Administrative $5,114,139   240% $6,120,101   223% $(1,005,962)  (16)%

Year Ended

% of

Year Ended

% of

Dollar

% Increase

December 31, 2021

Total Sales

December 31, 2020

Total Sales

Change

(Decrease)

General and Administrative

$

22,502,833

 

171

%  

$

6,915,213

 

60

%  

$

15,587,620

 

225

%

General and administrative costs were $5,114,139 for the year ended December 31, 20162021, increased by $15,587,620 or 225% as compared 2020. This increase was largely due to $6,120,101a $13,471,358 increase in salary and salary benefits related expenses, of which $12,668,230 was related to non-cash stock-based compensation, primarily related to the Company’s LTIP, which was implemented in the first quarter of 2021 and unlike traditional time vesting options, option awards under the LTIP vest only upon the achievement of predetermined market equity capitalization, revenue and EBITDA milestones and if participants are currently employed by the Company when the milestones are achieved; an increase of $875,230 in legal expenses; an increase of $357,444 in insurance premiums; an increase of $217,433 in audit and tax advisory fees; an increase of $205,329 in recruitment and hiring fees; an increase in shareholder related expenses of $151,524; an increase of $109,846 in regulatory filing fees; and an increase of $100,228 in software subscription expenses.

47

Depreciation and Amortization.  Depreciation and amortization expense, not included in Cost of Sales, for the year ended December 31, 2015, a decrease of $1,005,962 or 16%. These costs were lower overall primarily because of: lower compensation expense related to stock awards totaling $1,375,000 to our officers and directors awarded in January 2015, partially offset by an increase in incentive bonuses of $302,500; a $56,267 decrease in travel costs; $84,727 decrease in legal fees, primarily related to a stock award made to our attorneys in January 2015; a $217,303 increase in accounting and audit fees, with the majority of the change being for Sarbanes-Oxley Section 404 consultants retained to assist management in designing and implementing improvements in our financial reporting controls and accruals for expected additional external audit fees,2021, was $988,104 as compared to $1,128,831 in the same period in 2015 when no such consultants were retained.

2020, a decrease of $140,727. The decrease in depreciation expense is primarily due to leasehold improvements in our West Henrietta, New York, location, which became fully amortized in October 2020.

Depreciation and Amortization.Other Income (Expense), Net   Depreciation and amortization. Total other expense, net was $397,053 for the year ended December 31, 2016 was $770,6682021 as compared to $380,841income of $1,175,292 in the same period in 2015, an increase2020. The overall decrease of $389,827. The increase$1,572,345 in depreciation and amortization expense is due to new investmentsother income was primarily the result of no gain from debt extinguishment in depreciable assets during 2016.

Loss on Inventory Valuation.   There was a loss on inventory valuation for the year ended December 31, 20162021, whereas we had a net gain on debt extinguishment of $1,124,401 as compared to nil$1,305,900 in the same period2020; an increase of $203,535 in 2015. This write-down was the resultincome, foreign enterprise and other taxes; and an increase of management’s decision$75,301 in early 2017 to reduce the suggested retail selling price of its iWear Video Eyewear inventory on hand to a price below the product’s cost.foreign exchange losses.

Other Income (Expense).  Total other expense was $714,322 for the year ended December 31, 2016 compared to an expense of $2,086,022 in the same period in 2015, a reduction of $1,371,700. The overall reduction in these other expenses was primarily the result of a profit of $34,744 on the derivative liability mark-to-market revaluation for the 2016 period versus a loss of $1,098,465 for the 2015 period, and a reduction of $264,985 in senior debt discount and amortization for the 2016 period versus 2015, and lower interest expense of $24,134, both due primarily to ongoing debt conversions.


Provision for Income Taxes.Taxes.  There were no provisions for income taxes in 20162022 or 2015.  2021.

Liquidity and Capital Resources

Capital Resources: As of December 31, 2017,2022, we had cash and cash equivalents of $14,899,636, an increase$72,563,943, a decrease of $355,692$47,639,930 from $14,533,944$120,203,873 as of December 31, 2016.2021.

AtAs of December 31, 2017,2022, we had current assets of $21,242,573$91,241,241 as compared to current liabilities of $5,435,209$15,277,358 which resulted in a positive working capital position of $15,807,364.$75,963,883. As atof December 31, 2016,2021, we had a working capital position of $13,808,094.$132,994,189. Our current liabilities are comprised principally of accounts payable, accrued expenses, licensing fee commitments, and accrued expenses.operating lease right-of-use liabilities.

Operating Activities.   We used $16,465,706Summary of Cash Flow:

The following table summarizes our select cash for operating activities in 2017 compared to $14,396,964 in 2016. In addition to the net loss adjusted for non-cash items, working capital operating uses for 2017 resulted from a $2,352,581 increase in inventory, a $870,858 increase in accounts receivable, a $497,784 increase in accrued project revenue, a $401,748 decrease in unearned revenues, a $321,250 decrease in accrued compensation, and a $2,640,584 increase in accounts payable. The major working capital operating items for 2016 resulted from a $426,521 increase in inventory, a $440,091 increase in unearned revenue, and $290,000 increase in accrued compensation. The major working capital operating items for 2015 resulted from a $2,437,149 increase in inventory and a $1,276,132 reduction in accounts payable.

Investing Activities.   Investing activities used $2,689,425 of cash for 2017 as compared to a use of $2,186,303flows for the same period in 2016. In 2017, we used $1,681,258 of cash primarily for waveguide production equipment, new product tooling, additional manufacturing and R&D equipment, and new computer equipment and software as compared to $2,039,299 of cash used in 2016 primarily for the completion of our new clean room, new product tooling, and new projection optics tooling and additional manufacturing and R&D equipment. In 2015, $1,892,831 of cash was used for the purchase of lease improvements and equipment for our new office and manufacturing facility as well as additions to product tooling. The costs of registering our intellectual property rights and purchases thereof and licences were $599,444 in 2017, $147,004 in 2016 and $191,908 in 2015. In 2017, we invested $408,723 in software development costs related to our products, as compared to nil in 2016 and 2015.years ended:

December 31, 

December 31, 

December 31, 

    

2022

    

2021

    

2020

Net Cash Provided by (used in)

 

  

 

  

 

  

Operating Activities

(24,521,082)

(26,980,411)

(13,964,053)

Investing Activities

 

(21,170,816)

 

(4,852,452)

 

(1,485,513)

Financing Activities

 

(1,948,032)

 

115,967,228

 

40,912,983

Financing Activities.   We generated $19,510,823 of cash from financing activities in 2017 as compared to generating $19,240,153 of cash from financing activities in 2016. During the year ended December 31, 2017, the primary sources2022, we used $24,521,082 of cash for operating activities. Net changes in working capital items were $2,544,394 for the year ended December 31, 2022, with the largest factors resulting from financing activities werea $2,052,376 increase in trade accounts receivables and other accrued receivables and a decrease of $591,784 in net trade payables and accrued expenses, partially offset by a $98,988 decrease in inventory and vendor prepayments. For the proceedsyear ended December 31, 2021, we used a total of $21,128,502 from the sale of 3,566,116 common shares$26,980,411 in public offerings in August and December 2017, less their combined direct offering costs of $1,617,679. cash for operating activities.

During the year ended December 31, 2016, the primary sources2022, we used $21,170,816 of cash from financingfor investing activities, werewhich included $16,500,000, in payments made towards our $30,000,000 technology license fee commitment (as discussed in Note 7), $2,300,000 for the proceedspurchase price for the Moviynt acquisition (as discussed in Note 2), $1,723,622 for purchases of $21,112,500 frommanufacturing equipment and product mold tooling; $499,031 in patent and trademark expenditures; and a further investment of $125,000 in the salepurchase of 3,150,000 common sharessoftware operating license upgrades for our smart glasses platform. For the year ended December 31, 2021, we used a total of $4,852,452 in public offerings in July and November 2016, less their combined direct offering costs of $1,874,485 and the cash proceeds of $60,750 from warrant exercises. for investing activities.

During the year ended December 31, 2015, the primary sources of2022, we used $1,948,032 in net cash from financing activities, were thewhich included $2,005,744 for share repurchases under our Share Buyback Program that was announced on March 2, 2022, and partially offset by $57,712 in proceeds of $24,813,000 from the saleexercise of Series A Preferred Stock on January 2, 2015 to Intel Corporation, less direct offering costsstock options. For the year ended December 31, 2021, we received $115,967,228 in proceeds from financing activities, primarily from sales of $214,169 and the cash proceedsour equity securities.

48

Capital Resources.As of December 31, 2017, we had cash and cash equivalents of $14,889,636, an increase of $355,692 from $14,533,944 as of December 31, 2016. Our cash and cash equivalents as of December 31, 20172022, the Company does not include our receipthave any current or long-term debt obligations outstanding other than licensing fee commitments totaling $11,500,000 related to the Atomistic Agreements described in Note 7 of net proceeds the consolidated financial statements.

Additionally, as part of approximately $28 million from the financing that we completed in January 2018.

TheAtomistic Agreements, the Company incurred annual net lossesentered a Stock Purchase Agreement with the stockholders of $19,633,502 in 2017 and $19,250,082 in 2016, and has an accumulated deficit of $96,472,452 as of December 31, 2017. TheAtomistic under which the Company will needbuy Series B Preferred shares of Atomistic through the issuance of Vuzix common shares based on certain deliverables and the achievement of milestones as defined in the Share Purchase Agreement. This will result, depending upon Vuzix’ share price at the time of each issuance, in the Company’s issuance of a minimum of 1,750,000 to growa maximum of 2,843,750 common shares to Atomistic stockholders in exchange for convertible preferred shares of Atomistic over approximately the next six to 24 months. Once Atomistic has achieved all its businessmilestones or has them waived by the Company, and product sales significantly to become profitable and self-sustaining on a cash flow basis or it willthe Company issues the required number of Vuzix common shares, in exchange for Series B Preferred shares in Atomistic that could ultimately be required to raise new capital.

converted into common shares of Atomistic, the Company would ultimately own just under 99.9% of Atomistic.

The Company’s cash requirements are primarily for funding operating losses, working capital, research and development, capital expenditures, and capital expenditures.Our cash requirementslicense fee commitments. We incurred a net loss for the years ended December 31, 2022, 2021 and 2020 of $40,763,573 (of which $15,775,553 was related to funding operating losses depend on numerous factors, including new product development activities,non-cash stock-based compensation primarily due to our abilityLTIP), $40,377,160 (of which $17,302,833 was related to commercializenon-cash stock-based compensation primarily due to our products,LTIP), and $17,952,172 in 2020, respectively. The Company has an accumulated deficit of $243,835,716 as of December 31, 2022.

On March 2, 2022, our products’ timely market acceptance, selling prices and gross margins, and other factors. Historically,Board of Directors approved the repurchase by the Company has met its cash needs by the sale of equity, borrowings under notes, and salesup to an aggregate of convertible debt. During 2017 we sold 3,566,116 common shares in public offerings in August and December resulting in net proceeds$25 million of $19,510,823. During 2017 all of the Company’s convertible senior secured notes payable were converted to shares ofour common stock before their maturity on June 3, 2017. On January 29, 2018 we closed a public offering of 3,000,000 sharesby open market or privately negotiated transactions under the Share Buyback Program. This program is in effect for one year, does not obligate the Company to acquire any particular amount of common stock, and 1,200,000 warrants resultingmay be suspended or discontinued at any time at the Company’s sole discretion.During the year ended December 31, 2022, the Company repurchased 464,672 shares of our common stock at an average cost of $4.32. As of December 31, 2022, 464,672 shares of our common stock were held in treasury.

Our operations have historically been financed primarily through net proceeds from the sale of approximately $28,000,000 after estimated offering expenses.

We believe our existingequity securities. As of December 31, 2022, our principal sources of liquidity consisted of cash and cash equivalent balances will be sufficient to meet our working capital and capital expenditure needs for at least the next twelve months. We will continue to invest in our research and development, IP portfolio, and new products offerings. Our future capital requirements may vary materially from those currently planned and will depend on many factors, including our levelsequivalents of revenue, the timing and extent of spending on research and development efforts and other business initiatives, the expansion of sales and marketing activities, the timing of new product introductions, market acceptance of our products, acquisitions, and overall economic conditions. To the extent that current and anticipated future sources of liquidity are insufficient to fund our future business activities and requirements, we may be required to seek additional equity or debt financing. If the Company raises additional equity funds by these methods, the ownership interests of existing shareholders may be diluted. The amount of such dilution could increase due to the issuance of new warrants or securities with other dilutive characteristics, such as full ratchet anti-dilution clauses or price resets. The incurrence of debt financing would result in debt service obligations and the instruments governing such debt could provide for operating and financing covenants that would restrict our future operations. However, there can be no assurance that we will be able to raise capital in the future or that if we raise additional capital it will be sufficient to execute our business plans in the future.$72,563,943.


Contractual Obligations

The following is a summary of our contractual payment obligations for operating leases as of December 31, 2017:2022:

Less than

More than

Contractual Obligations  Total   Less than 1 Year   1-3 Years   3-5 Years   More than 5
Years
 

Total

1 Year

1-3 Years

3-5 Years

5 Years

Operating Lease Obligations $1,178,746  $411,135  $767,611   -   - 

    

$

1,021,753

    

$

    

$

1,021,753

    

    

Licensing Fees Commitment

11,500,000

 

11,500,000

 

 

 

Open Purchase Obligations  7,000,000   7,000,000   -   -   - 

 

8,082,184

 

8,082,184

 

 

 

Item 7A.

Item 7A.Quantitative and Qualitative Disclosures about Market Risk.

We invest our excess cash in short-term highly raterated corporate debt instruments or commercial paper, which bear lower levels of relative risk. We believe that the effect, if any, of reasonably possible near-term changes in interest rates on our financial position, results of operations and cash flows should not be material to our cash flows or income. It is possible that interest rate movements would increase our unrecognized gain or loss on interest rate securities. Our portfolio of marketable debt securities is subject to interest rate risk although our intent is to hold securities until maturity. The credit rating of our investments may be affected by the underlying financial health of the guarantors of our investments. Our investment policy generally directs our investment managers to select investments to achieve the following goals: principal preservation, adequate liquidity, and return.

49

We are exposed to changes in foreign currency exchange rates primarily through ourthe translation of our foreign subsidiary’s financial positions, results of operations, and transaction gains and losses as a result of non-U.S. dollar denominated cash flows related to business activities in Asia and the United Kingdom, and remeasurementre-measurement of U.S. dollars to the functional currency of our foreign subsidiaries. We are also exposed to the effects of exchange rates in the purchase of certain raw materials whose price is in U.S. dollars but the price on future purchases is subject to change based on the relationship of the Japanese Yen to the U.S. dollar.Dollar. We do not currently hedge our foreign currency exchange rate risk. We estimate that any market risk associated with our international operations is unlikely to have a material adverse effect on our business, financial condition or results of operation.

Item 8.Item 8.Financial Statements and Supplementary Data

The information required by this item is incorporated herein by reference to pages F-1 through F-29 of this annual report and is indexed under Item 15(a)(1) and (2).

Item 9.Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.Controls and Procedures

Item 9A.    Controls and Procedures

The information contained in this section covers management’s evaluation of our disclosure controls and procedures and our assessment of our internal control over financial reporting as of December 31, 2017.2022.

(a)(a)  Evaluation of 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 annual report as required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Disclosure controls and procedures are those controls and other procedures that are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is properly recorded, processed, summarized, and reported, within the time periods specified by the rules and forms promulgated by the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is properly accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. As a result of this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of December 31, 2017,2022, our disclosure controls and procedures were effective.


(b)

(b)          Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate “internal control over financial reporting,” as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act. Our system of internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external reporting purposes in accordance with US GAAP.

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;Board of 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.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our internal control over financial reporting as of December 31, 2017,2022, and they concluded that our

50

internal control over financial reporting was effective as of December 31, 2017.2022. In making this assessment, we utilized the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control — Integrated Framework (2013).

The company’sCompany’s independent registered public accounting firm, Freed Maxick CPAs, P.C., who audited the consolidated financial statements included in this Annual Report on Form 10-K, has issued an attestation report on the effectiveness of the management’s internal control over financial reporting as of December 31, 2017.2022. This report states that the internal control over financial reporting was effective and appears on page F-2 of this Annual Report on Form 10-K.

(c)(c)          Limitations on the Effectiveness of Controls.

Because of its inherent limitations, internal control over financial reporting, no matter how well conceivedwell-conceived or operated, can only provide reasonable assurance, not absolute assurance, that the objectives of the control system are met. Such controls may not prevent or detect every misstatement. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

(d)(d)          Change in Internal Control Over Financial Reporting

As reported in our assessment of the effectiveness of our internal control over financial reporting as of December 31, 2016, included in “Item 9A. Controls and Procedures” of our Annual Report on Form 10-K for the year ended December 31, 2016, our internal control over inventory was considered ineffective as of that date as a result of certain material weaknesses. The material weaknesses that existed over inventory related to (i) ineffective procedures and controls over inventory valuation; (ii) insufficient procedures over consigned inventory with our 3rd party contract manufacturers; and (iii) inadequate procedures to maintain up to date unit costs and bill of materials.

In the fourth quarter of 2016, we implemented new controls to remediate the material weakness stated above, however, management concluded those controls had not been operating effectively for a sufficient number of periods to demonstrate sustainability. These controls have continued to operate throughout the year ended December 31, 2017. Management has further tested these controls during the year ended December 31, 2017 and found them to have continued to be effective. Accordingly, management has concluded that, as of December 31, 2017, this material weakness has been remediated.

Except as noted above,There were no changechanges in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during the three months ended December 31, 20172022, except for the full remediation of the material weakness the Company reported for the year ended December 31, 2021, that has materially affected, or is likely to materially affect, our internal control over financial reporting.


Item 9B.

Item 9B.Other Information

None.

Item 9C.

Not applicable.

PART III

 Item 10.Item 10.Directors, Executive Officers and Corporate Governance

The information required by this item will be presented in our definitive proxy statement not later than 120 days after the end of the fiscal year covered by this annual report and is incorporated in this annual report by reference thereto.

 Item 11.Item 11.Executive Compensation

The information required by this item will be presented in our definitive proxy statement not later than 120 days after the end of the fiscal year covered by this annual report and is incorporated in this annual report by reference thereto, except, however, the section entitled “Compensation Committee Report” shall not be deemed to be “soliciting material” or to be filed with the Securities and Exchange Commission or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Exchange Act of 1934, as amended.

51

 Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this item will be presented in our definitive proxy statement not later than 120 days after the end of the fiscal year covered by this annual report and is incorporated in this annual report by reference thereto.

Item 13.    Certain Relationships and Related Transactions, and Director Independence

The information required by this item will be presented in our definitive proxy statement not later than 120 days after the end of the fiscal year covered by this annual report and is incorporated in this annual report by reference thereto.

Item 14.    Principal Accountant Fees and Services

The information required by this item will be presented in our definitive proxy statement not later than 120 days after the end of the fiscal year covered by this annual report and is incorporated in this annual report by reference thereto.

52

Certain Relationships and Related Transactions, and Director Independence

The information required by this item will be presented in our definitive proxy statement not later than 120 days after the end of the fiscal year covered by this annual report and is incorporated in this annual report by reference thereto.

 Item 14.Principal Accounting Fees and Services

The information required by this item will be presented in our definitive proxy statement not later than 120 days after the end of the fiscal year covered by this annual report and is incorporated in this annual report by reference thereto.


PART IV

Item 15.    Exhibits and Financial Statement Schedules

 Item 15.Exhibits and Financial Statement Schedules

(a)The following documents are filed as part of this report

(a)The following documents are filed as part of this report

(1) Financial Statements

Page

Report of Freed Maxick CPAs, P.C., Independent Registered Public Accounting Firm (PCAOB ID 317)

F-2

Consolidated Balance Sheets as— As of December 31, 20172022 and 20162021

F-3

F-5

Consolidated Statements of Changes In Stockholders’ Equity — For The Years Ended December 31, 2017, 20162022, 2021 and 20152020

F-4

F-6

Consolidated Statements of Operations — For the Years Ended December 31, 2017, 20162022, 2021 and 20152020

F-5

F-7

Consolidated Statements of Cash Flows — For the Years Ended December 31, 2017, 20162022, 2021 and 20152020

F-6

F-8

Notes to Consolidated Financial Statements

F-7

F-9

(2) Financial Statement Schedules

Schedule II – Valuation and Qualifying Accounts

Schedules other than the one listed above have been omitted because of the absence of conditions under which they are required or because the required information is included in the consolidated financial statements or the notes thereto.

(3) Exhibits

A list of exhibits filed with this annual report is set forth in the Exhibit Index and is incorporated in this Item 15(a)(3) by reference.


53

VUZIX CORPORATION

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

Page

Report of Freed Maxick CPAs, P.C., Independent Registered Public Accounting Firm

F-2

Consolidated Balance Sheets — As of December 31, 20172022 and 20162021

F-3

F-5

Consolidated Statements of Changes In Stockholders’ Equity — For The Years Ended December 31, 2017, 20162022, 2021 and 20152020

F-4

F-6

Consolidated Statements of Operations — For the Years Ended December 31, 2017, 20162022, 2021 and 20152020

F-5

F-7

Consolidated Statements of Cash Flows — For the Years Ended December 31, 2017, 20162022, 2021 and 20152020

F-6

F-8

Notes to Consolidated Financial Statements

F-7

F-9

F-1

F-1

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors and Stockholders

of Vuzix Corporation

Rochester, New York

Opinions on the Financial Statements and Internal Control Over Financial Reporting

We have audited the accompanying consolidated balance sheets of Vuzix Corporation and subsidiarySubsidiaries (the Company) as of December 31, 20172022 and 2016,2021, and the related consolidated statements of changes in stockholders' equity, operations, and cash flows for each of the three years in the period ended December 31, 2017,2022, and the related notes and schedules (collectively, the financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2017,2022, based on criteria established inInternal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20172022 and 2016,2021, and the results of its operations and its cash flows for each of the three years in the three-year period ended December 31, 2017,2022, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2022, based on criteria established inInternal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

Basis for Opinions

The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's financial statements and an opinion on the company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control Over Financial Reporting

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

F-2

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Estimate for excess, obsolete and slow-moving inventory reserve

Critical Audit Matter Description

As discussed in Notes 1 and 4 to the consolidated financial statements, inventories are stated at the lower of cost or net realizable value using the weighted average first-in, first-out method. The Company records provisions for excess, obsolete or slow-moving inventory based on changes in customer demand, technology developments or other economic factors. The Company’s products have product life cycles that range on average from two to three years. At both the product introduction and product discontinuation stage, there is a higher degree of risk of inventory obsolescence. The excess, obsolete or slow-moving reserve serves to reduce the Company’s inventory balance through a charge to cost of sales – products sold.  

The Company’s reserve for excess, obsolete or slow-moving inventory is based upon estimates on the evaluation of changes in customer demand, technology developments, and expected future product sales, which can be difficult to forecast. If the actual realization of excess, obsolete, and slow-moving inventory does not meet the Company’s assumptions future inventory adjustments would result in a decrease in gross profit. Due to the magnitude of the inventory, and the subjectivity involved in estimating the reserve we identified the evaluation of the reserve as a critical audit matter, which required a high degree of auditor judgment.

How the Critical Audit Matter Was Addressed in the Audit

Addressing the matter involved performing subjective procedures and evaluating audit evidence in connecting with forming our overall opinion on the financial statements. The primary procedures we performed include, performing a retrospective review of prior year-estimates used to identify potential bias of management judgments; obtaining an understanding of the process and assumptions used by management to develop the reserve for excess, obsolete and slow-moving inventory; testing the operating effectiveness of controls over management’s estimate of reserves for excess, obsolete, and slow-moving inventory; and testing management’s calculation of the reserve for excess, obsolete, and slow-moving inventory by: testing the completeness and accuracy of the source information used,  testing the mathematical accuracy of management’s calculations, and  evaluating the reasonableness and consistency of methodology and assumptions applied by management.

Accounting for Atomistic Agreements

Critical Audit Matter Description

As discussed in Notes 1, 5, 7 and 12 to the consolidated financial statements the Company has a series of agreements with a Variable Interest Entity (‘VIE’), Atomistic.  The agreements provide for an exclusive license by the Company of key technology which includes cash commitments of $30 million.  Upon achievement or acceleration of performance milestones contained in the agreements, the Company is committed to pay $2.5 million and issue a minimum of 1,750,000 shares of common stock of Company to the stockholders of Atomistic as consideration for certain shares of Atomistic. In the event the fair market value of Company stock, which is determined based upon the trailing 10-day volume weighted average price of the Company’s common shares, is between a floor of $8.00 and a ceiling of $13.00, the Company may opt, at its sole discretion, to pay any fair market valuation shortfall with up to 1,093,754 additional Vuzix common stock or cash to the Atomistic owners.

The Company determined based upon interactions with Atomistic, review of agreements as well as the assessment of the activity of Atomistic that most significantly impacts its economic performance, that the operating and governance structure of Atomistic does not allow the Company to direct the activities that would significantly affect their economic performance as of December 31, 2022. As a result, the Company accounted for the series of agreements under other relevant accounting principles generally accepted in the United States of America. If the facts and circumstances change and the Company is determined to be the primary beneficiary, the Company would consolidate Atomistic into their consolidated financial statements.

F-3

How the Critical Audit Matter Was Addressed in the Audit

Addressing the matter involved performing subjective procedures and evaluating audit evidence in connecting with forming our overall opinion on the financial statements. The primary procedures we performed include, reviewing the agreements associated with the arrangement and management’s memo regarding VIE treatment and corroborating management’s conclusion, testing the design and operating effectiveness of controls over management’s determination of primary beneficiary, and testing the accounting treatment to ensure it is in accordance with other relevant accounting principles generally accepted in the United States of America.

/s/ Freed Maxick CPAs, P.C.

We have served as the Company's auditor since 2014.

Rochester,

Buffalo, New York

March 16, 20181, 2023

F-2

F-4

VUZIX CORPORATION

CONSOLIDATED BALANCE SHEETS

  December 31,  December 31, 
  2017  2016 
ASSETS        
Current Assets        
Cash and Cash Equivalents $14,889,636  $14,533,944 
Accounts Receivable, Net  974,172   103,314 
Accrued Project Revenue  497,784   - 
Inventories, Net  3,852,317   2,651,218 
Manufacturing Vendor Prepayments  154,717   144,168 
Prepaid Expenses and Other Assets  873,947   797,409 
         
Total Current Assets  21,242,573   18,230,053 
         
Long-Term Assets        
Fixed Assets, Net  4,124,466   3,364,908 
Patents and Trademarks, Net  813,774   535,461 
Software Development Costs, Net  408,723   214,838 
Licenses, Net  243,717   - 
         
Total Assets $26,833,253  $22,345,260 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY        
Current Liabilities        
Accounts Payable $3,726,056  $1,085,472 
Current Portion of Long-term Debt, Net of discounts  -   1,416,480 
Customer Deposits  73,462   66,162 
Unearned Revenue  107,824   509,572 
Accrued Expenses  1,371,440   1,331,983 
Derivative Liability  152,927   - 
Income and Other Taxes Payable  3,500   12,290 
         
Total Current Liabilities  5,435,209   4,421,959 
         
Long-Term Liabilities        
Derivative Liability  -   173,131 
Accrued Expenses  18,331   28,333 
         
Total Long-Term Liabilities  18,331   201,464 
         
Total Liabilities  5,453,540   4,623,423 
         
Stockholders’ Equity        
Preferred Stock — $.001 Par Value, 5,000,000 Shares Authorized; 49,626 and 49,626 Shares Issued and Outstanding December 31, 2017 and 2016.  50   50 
Common Stock — $.001 Par Value, 100,000,000 Shares Authorized December 31, 2017 and 2016; 24,276,275 and 19,569,247 Shares Issued and Outstanding December 31, 2017 and 2016, respectively.  24,276   19,569 
Additional Paid-in Capital  117,827,839   94,541,168 
Accumulated Deficit  (96,472,452)  (76,838,950)
         
Total Stockholders’ Equity  21,379,713   17,721,837 
         
Total Liabilities and Stockholders’ Equity $26,833,253  $22,345,260 

    

December 31, 

December 31, 

    

2022

    

2021

ASSETS

 

  

 

  

Current Assets

 

  

 

  

Cash and Cash Equivalents

$

72,563,943

$

120,203,873

Accounts Receivable

 

3,558,971

 

2,242,429

Accrued Revenues in Excess of Billings

 

269,129

 

Employee Retention Credit Receivable

466,705

Inventories, Net

 

11,267,969

 

12,151,982

Manufacturing Vendor Prepayments

 

998,671

 

504,051

Prepaid Expenses and Other Assets

 

2,115,853

 

2,047,819

Total Current Assets

 

91,241,241

 

137,150,154

Long-Term Assets

 

  

 

  

Fixed Assets, Net

 

3,878,505

 

5,190,438

Operating Lease Right-of-Use Asset

956,165

1,117,022

Patents and Trademarks, Net

 

2,220,094

 

1,988,370

Technology Licenses, Net

 

30,158,689

 

1,389,936

Intangible Asset, Net

 

675,313

 

147,548

Goodwill

 

1,601,400

 

Other Assets, Net

 

1,581,143

 

1,483,589

Total Assets

$

132,312,550

$

148,467,057

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

  

Current Liabilities

 

  

 

  

Accounts Payable

$

1,211,747

$

2,054,762

Unearned Revenue

 

29,064

 

27,797

Accrued Expenses

 

1,670,539

 

1,419,308

Licensing Fees Commitment

 

11,500,000

 

Income and Other Taxes Payable

 

214,997

 

120,242

Operating Lease Right-of-Use Liability

651,011

534,146

Total Current Liabilities

 

15,277,358

 

4,156,255

Long-Term Liabilities

Operating Lease Right-of-Use Liability

305,154

582,876

Total Liabilities

 

15,582,512

 

4,739,131

Stockholders' Equity

 

  

 

  

Common Stock - $0.001 Par Value, 100,000,000 shares authorized; 63,783,779 shares issued and 63,319,107 shares outstanding as of December 31, 2022 and 63,672,268 shares issued and outstanding as of December 31, 2021.

 

63,783

 

63,672

Additional Paid-in Capital

 

362,507,715

 

346,736,397

Accumulated Deficit

 

(243,835,716)

 

(203,072,143)

Treasury Stock, at cost, 464,672 shares as of December 31, 2022 and 0 shares as of December 31, 2021

 

(2,005,744)

 

Total Stockholders' Equity

 

116,730,038

 

143,727,926

Total Liabilities and Stockholders' Equity

$

132,312,550

$

148,467,057

The accompanying notes are an integral part of these consolidated financial statements.

F-3

F-5

VUZIX CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

  Preferred Stock  Common Stock  Additional  Accumulated    
  Shares  Amount  Shares  Amount  Paid-in Capital  Deficit  Total 
Balance — December 31, 2014  -  $-   11,295,387  $11,296  $29,752,083  $(44,161,390) $(14,398,011)
                             
Stock Issued for Services  -   -   120,837   121   676,544   -   676,665 
Conversion of Note Payable and Accrued Interest  -   -   210,000   210   472,290   -   472,500 
Exercise of Warrants  -   -   4,128,271   4,128   1,268,498   -   1,272,626 
Warrants Issued for Services  -   -   -   -   260,373   -   260,373 
Stock Compensation Expense  -   -   -   -   568,848   -   568,848 
Common Stock Awards to Officers, Directors And Law Firm  -   -   325,000   325   1,669,375   -   1,669,700 
Proceeds from Preferred Stock Offering  49,626   50   -   -   24,812,950   -   24,813,000 
Direct Costs of Preferred Stock Offering  -   -   -   -   (214,169)  -   (214,169)
Reclass Fair Value of Derivative Liability upon Waiver of Certain Anti-Dilutive Provisions  -   -   -   -   8,736,412   -   8,736,412 
Reclass Fair Value of Note Derivative Liability upon Waiver of Certain Anti-Dilutive Provisions  -   -   -   -   2,806,942   -   2,806,942 
Reclass Fair Value of Warrant Derivative Liability upon Exercise  -   -   -   -   2,855,463   -   2,855,463 
Exercise of Stock Options  -   -   8,456   8   (8)  -     
2015 Net Loss  -   -   -   -   -   (13,427,478)  (13,427,478)
                             
Balance — December 31, 2015  49,626  $50   16,087,951  $16,088  $73,665,601  $(57,588,868) $16,092,871 
                             
Exercise of Warrants  -   -   96,620   97   60,654   -   60,751 
Reclass Fair Value of Warrant Derivative Liability upon Exercise  -   -   -   -   32,911   -   32,911 
Conversion of Notes Payable and Accrued Interest  -   -   152,016   152   341,884   -   342,036 
Stock Issued for Services  -   -   32,578   32   173,993   -   174,025 
Stock Compensation Expense  -   -   -   -   756,928   -   756,928 
Common Stock Awards to Directors  -   -   40,000   40   241,260   -   241,300 
Proceeds from Common Stock Offerings  -   -   3,150,000   3,150   21,109,350   -   21,112,500 
Direct Costs of Common Stock Offerings  -   -   -   -   (1,874,485)  -   (1,874,485)
Exercise of Stock Options  -   -   10,082   10   33,072   -   33,082 
2016 Net Loss  -   -   -   -   -   (19,250,082)  (19,250,082)
                             
Balance — December 31, 2016  49,626  $50   19,569,247  $19,569  $94,541,168  $(76,838,950) $17,721,837 
                             
Exercise of Warrants  -   -   168,203   168   (168)  -   - 
Conversion of Notes Payable and Accrued Interest  -   -   827,237   827   1,860,456   -   1,861,283 
Stock Issued for Services  -   -   41,543   42   228,708   -   228,750 
Stock Compensation Expense  -   -   16,668   17   1,355,505   -   1,355,522 
Common Stock Awards to Directors  -   -   50,000   50   334,950   -   335,000 
Proceeds from Common Stock Offerings  -   -   3,566,116   3,566   21,124,936   -   21,128,502 
Direct Costs of Common Stock Offerings  -   -   -   -   (1,617,679)  -   (1,617,679)
Exercise of Stock Options  -   -   37,261   37   (37)  -   - 
2017 Net Loss  -   -   -   -   -   (19,633,502)  (19,633,502)
                             
Balance — December 31, 2017  49,626  $50   24,276,275  $24,276  $117,827,839  $(96,472,452) $21,379,713 

Preferred Stock

Common Stock

Additional

Accumulated

Treasury Stock

    

Shares

    

Amount

    

Shares

    

Amount

    

Paid-In Capital

    

Deficit

    

Shares

    

Amount

    

Total

Balance - December 31,  2019

49,626

$

50

 

33,128,620

$

33,128

$

168,950,076

$

(144,742,811)

 

$

$

24,240,443

Stock-Based Compensation Expense

 

 

 

942,986

 

943

 

2,656,888

 

 

 

 

2,657,831

Proceeds from Common Stock Offerings

 

 

 

8,647,059

 

8,647

 

26,741,355

 

 

 

 

26,750,002

Direct Costs of Common Stock Offerings

 

 

 

 

 

(1,550,666)

 

 

 

 

(1,550,666)

Stock Warrant Exercises

 

 

 

2,882,647

 

2,883

 

14,125,644

 

 

 

 

14,128,527

Stock Option Exercises

 

 

 

43,854

 

44

 

29,176

 

 

 

 

29,220

2020 Net Loss

 

 

 

 

 

 

(17,952,172)

 

 

 

(17,952,172)

Balance - December 31,  2020

 

49,626

$

50

 

45,645,166

$

45,645

$

210,952,473

$

(162,694,983)

 

$

$

48,303,185

Stock-Based Compensation Expense

 

 

 

368,047

 

368

 

18,429,556

 

 

 

 

18,429,924

Stock Option Exercises

 

 

 

659,398

 

659

 

781,618

 

 

 

 

782,277

Stock Warrant Exercises

 

 

 

7,276,928

 

7,277

 

34,708,451

 

 

 

 

34,715,728

Proceeds from Common Stock Offerings

 

 

 

4,768,293

 

4,768

 

97,745,239

 

 

 

 

97,750,007

Direct Costs of Common Stock Offerings

 

 

 

 

 

(6,136,420)

 

 

 

 

(6,136,420)

Shares Redeemed to Cover Employee Tax Withholdings

 

 

 

(83,164)

 

(83)

 

(1,144,282)

 

 

 

 

(1,144,365)

Stock Issued for Technology License Purchase

 

 

 

75,000

 

75

 

1,404,675

 

 

 

 

1,404,750

Preferred Stock Converted

 

(49,626)

 

(50)

 

4,962,600

 

4,963

 

(10,004,913)

 

 

 

 

(10,000,000)

2021 Net Loss

 

 

 

 

 

 

(40,377,160)

 

 

 

(40,377,160)

Balance - December 31,  2021

 

$

 

63,672,268

$

63,672

$

346,736,397

$

(203,072,143)

 

$

$

143,727,926

Stock-Based Compensation Expense

 

 

 

(3,017)

 

(3)

 

15,713,732

 

 

 

 

15,713,729

Stock Option Exercises

 

 

 

114,528

 

114

 

57,586

 

 

 

 

57,700

Purchases of Treasury Stock

 

 

 

 

 

 

 

(464,672)

 

(2,005,744)

 

(2,005,744)

2022 Net Loss

 

 

 

 

 

 

(40,763,573)

 

 

 

(40,763,573)

Balance - December 31,  2022

 

$

 

63,783,779

$

63,783

$

362,507,715

$

(243,835,716)

 

(464,672)

$

(2,005,744)

$

116,730,038

The accompanying notes are an integral part of these consolidated financial statements.

F-4

F-6

VUZIX CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

  For Years Ended December 31, 
  2017  2016  2015 
          
Sales:         
Sales of Products $4,548,689  $1,987,878  $2,544,153 
Sales of Engineering Services  989,064   139,500   205,831 
             
Total Sales  5,537,753   2,127,378   2,749,984 
             
Cost of Sales:            
Cost of Sales — Products  5,269,900   3,251,906   2,101,466 
Cost of Sales — Engineering Services  944,451   39,060   82,332 
             
Total Cost of Sales  6,214,351   3,290,966   2,183,798 
             
Gross Profit (Loss) (exclusive of depreciation shown separately below)  (676,598)  (1,163,588)  566,186 
             
Operating Expenses:            
Research and Development  6,706,690   6,947,878   3,595,437 
Selling and Marketing  3,694,913   3,394,580   1,798,041 
General and Administrative  6,126,335   5,114,139   6,120,101 
Depreciation and Amortization  998,528   770,668   380,841 
Loss on Inventory Revaluation  1,151,482   1,124,401   - 
Impairment of Patents and Trademarks  -   20,506   13,222 
             
Total Operating Expenses:  18,677,948   17,372,172   11,907,642 
Loss from Operations  (19,354,546)  (18,535,760)  (11,341,456)
             
Other Income (Expense)            
Investment Income  58,530   26,693   20,790 
Other Taxes  (28,363)  (52,271)  (54,432)
Foreign Exchange Loss  (65,248)  (33,079)  (277)
Gain (Loss) on Derivative Valuation  20,204   34,744   (1,098,465)
Loss on Fixed Asset Disposal  (585)  (25,890)  - 
Amortization of Senior Term Debt Discounts  (155,760)  (486,856)  (751,968)
Amortization of Deferred Financing Costs  (19,500)  (46,574)  (46,447)
Interest Expense  (88,234)  (131,089)  (155,223)
             
Total Other Income (Expense)  (278,956)  (714,322)  (2,086,022)
             
Loss Before Provision for Income Taxes  (19,633,502)  (19,250,082)  (13,427,478)
Provision for Income Taxes         
             
Net Loss (19,633,502)  (19,250,082)  (13,427,478)
Preferred Stock Dividends  (1,714,934)  (1,620,048)  (1,514,081)
Loss Attributable to Common Stockholders $(21,348,436) $(20,870,130) $(14,941,559)
             
Basic and Diluted Loss per Share $(1.02) $(1.23) $(0.97)
Weighted-average Shares Outstanding – Basic and Diluted  21,013,907   16,908,544   15,408,724 

The accompanying notes are an integral part of these consolidated financial statements.

F-5

VUZIX CORPORATION

For Years Ended December 31, 

    

2022

    

2021

    

2020

Sales:

 

  

 

  

 

  

Sales of Products

$

10,505,763

$

12,784,600

$

10,081,209

Sales of Engineering Services

 

1,330,119

 

380,333

 

1,500,287

Total Sales

 

11,835,882

 

13,164,933

 

11,581,496

Cost of Sales:

 

  

 

  

 

  

Cost of Sales - Products Sold

 

8,737,852

 

9,709,268

 

7,914,686

Cost of Sales - Inventory Reserve for Obsolescence

290,405

519,950

1,273,835

Cost of Sales - Depreciation and Amortization

 

799,317

 

1,321,467

 

1,512,979

Cost of Sales - Engineering Services

525,182

45,758

282,038

Total Cost of Sales

 

10,352,756

 

11,596,443

 

10,983,538

Gross Profit

 

1,483,126

 

1,568,490

 

597,958

Operating Expenses:

 

  

 

  

 

  

Research and Development

 

12,676,688

 

11,674,954

 

7,568,074

Selling and Marketing

 

8,078,538

 

6,118,929

 

4,039,772

General and Administrative

 

21,038,562

 

22,502,833

 

6,915,213

Depreciation and Amortization

 

1,788,584

 

988,104

 

1,128,831

Loss on Fixed Asset Disposal

 

35,350

 

183,614

 

Impairment of Patents and Trademarks

 

97,675

 

80,163

 

73,532

Total Operating Expenses

 

43,715,397

 

41,548,597

 

19,725,422

Loss From Operations

 

(42,232,271)

 

(39,980,107)

 

(19,127,464)

Other Income (Expense):

 

  

 

  

 

  

Investment Income

 

1,395,579

 

53,511

 

41,120

Income and Other Taxes

 

(212,997)

 

(307,368)

 

(103,833)

Foreign Exchange Loss

 

(180,589)

 

(143,196)

 

(67,895)

Employee Retention Credit Refund

 

466,705

 

 

Gain on Debt Extinguishment, net of Loss on Note Receivable

 

 

 

1,305,900

Total Other Income (Expense), Net

 

1,468,698

 

(397,053)

 

1,175,292

Loss Before Provision for Income Taxes

 

(40,763,573)

 

(40,377,160)

 

(17,952,172)

Provision for Income Taxes

 

 

 

Net Loss

 

(40,763,573)

 

(40,377,160)

 

(17,952,172)

Preferred Stock Dividends - Accrued not Paid

 

 

 

(2,056,150)

Loss Attributable to Common Stockholders

$

(40,763,573)

$

(40,377,160)

$

(20,008,322)

Basic and Diluted Loss per Common Share

$

(0.64)

$

(0.66)

$

(0.53)

Weighted-average Shares Outstanding - Basic and Diluted

 

63,708,986

 

61,125,215

 

38,109,765

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

  For the Years Ended 
  December 31, 
  2017  2016  2015 
          
Cash Flows from Operating Activities            
Net Loss $(19,633,502) $(19,250,082) $(13,427,478)
Non-Cash Adjustments:            
Depreciation and Amortization  998,528   770,668   380,841 
Amortization of Software Development Costs in Cost of Sales - Products  214,838   286,450   286,450 
Impairment of Patents and Trademarks  -   20,506   13,222 
Common Stock Awards Compensation Expense  267,750   146,050   1,669,700 
Loss on Disposal of Fixed Assets  585   25,890   - 
Stock-Based Option Compensation Expense  1,355,522   756,928   568,848 
Amortization of Term Debt Discount  155,760   486,856   751,968 
Amortization of Debt Issuance Costs  19,500   46,574   46,447 
Common Stock and Warrants Issued for Services  228,750   174,026   1,057,074 
(Gain) Loss on Derivative Revaluation  (20,204)  (34,744)  1,098,465 
Loss on Inventory Revaluation  1,151,482   1,124,401   - 
(Increase) Decrease in Operating Assets:            
Accounts Receivable  (870,858)  222,380   57,839 
Accrued Project Revenue  (497,784)  -   - 
Inventories  (2,352,581)  (426,521)  (2,437,149)
Vendor Prepayments  (10,549)  225,243   (213,320)
Prepaid Expenses and Other Assets  (9,288)  (78,389)  (306,078)
Increase (Decrease) in Operating Liabilities:            
Accounts Payable  2,640,584   178,037   (1,276,132)
Accrued Expense  554,832   31,909   143,830 
Customer Deposits  7,300   38,315   (92,703)
Unearned Revenue  (401,748)  440,091   16,078 
Income and Other Taxes Payable  (8,790)  5,217   (28,085)
Accrued Compensation  (321,250)  290,000   (70,067)
Accrued Interest & Long-Term Accrued Interest Converted  65,417   123,231   92,171 
             
Net Cash Flows Used in Operating Activities  (16,465,706)  (14,396,964)  (11,668,079)
             
Cash Flows from Investing Activities:            
Purchases of Fixed Assets  (1,681,258)  (2,039,299)  (1,892,831)
Investments in Licenses, Patents and Trademarks  (599,444)  (147,004)  (191,908)
Investments in Software Development  (408,723)  -   - 
             
Net Cash Used in Investing Activities  (2,689,425)  (2,186,303)  (2,084,739)
             
Cash Flows from Financing Activities:            
Proceeds from Exercise of Warrants  -   60,750   1,272,627 
Repayment of Capital Leases  -   -   (16,882)
Repayment of Long-Term Debt and Notes Payable  -   (76,875)  (197,167)
Proceeds from Preferred Stock Offering  -   -   24,813,000 
Issuance Costs on Preferred Stock Offering  -   -   (214,169)
Proceeds from Common Stock Offerings  21,128,502   21,112,500   - 
Issuance Costs on Common Stock Offerings  (1,617,679)  (1,874,485)  - 
Net Change in Lines of Credit  -   -   (112,500)
Proceeds from Exercise of Stock Options  -   18,263   - 
             
Net Cash Flows Provided by Financing Activities  19,510,823   19,240,153   25,544,909 
             
Net Increase in Cash and Cash Equivalents  355,692   2,656,886   11,792,091 
Cash and Cash Equivalents — Beginning of Period  14,533,944   11,877,058   84,967 
             
Cash and Cash Equivalents — End of Period $14,889,636  $14,533,944  $11,877,058 
             
Supplemental Disclosures            
Interest Paid in Cash $22,814  $7,696  $41,194 
Common Stock and Warrants Issued for Services $228,750  $174,026  $936,937 
Conversion of Term Debt and Accrued Interest into Common Stock $1,861,283  $342,036  $472,500 
Reclassification of Derivative Liability to Paid-In Capital upon Waiver of Certain Anti-Dilutive Provisions of Warrants and Convertible Debt $-  $-  $11,543,354 
Reclassification of Derivative Liability Upon Warrant Exercises $-  $32,911  $2,855,463 
Receivable from Stock Option Exercise $-  $14,820   - 

The accompanying notes are an integral part of these consolidated financial statements.

F-6

F-7

VUZIX CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31, 

    

2022

    

2021

    

2020

Cash Flows from Operating Activities

 

  

 

  

 

Net Loss

$

(40,763,573)

$

(40,377,160)

$

(17,952,172)

Non-Cash Adjustments

 

  

 

  

 

Depreciation and Amortization

 

2,587,901

 

2,309,571

2,641,810

Stock-Based Compensation

 

15,775,553

 

17,302,833

2,805,842

Impairment of Patents and Trademarks

 

97,675

 

80,163

73,532

Loss on Fixed Asset Disposal

 

35,350

 

183,614

Gain on Debt Extinguishment, net of Loss on Note Receivable

 

 

(1,305,900)

Change in Inventory Reserve for Obsolescence

290,405

519,950

1,273,835

(Increase) Decrease in Operating Assets

 

  

 

  

 

Accounts Receivable

 

(1,316,542)

 

(853,547)

(289,413)

Accrued Revenues in Excess of Billings

 

(269,129)

 

Employee Retention Credit Receivable

(466,705)

Inventories

 

593,608

 

(6,571,108)

(1,666,792)

Manufacturing Vendor Prepayments

 

(494,620)

 

(19,019)

(242,493)

Prepaid Expenses and Other Assets

 

(95,244)

 

(526,825)

156,537

Increase (Decrease) in Operating Liabilities

 

  

 

  

 

Accounts Payable

 

(843,015)

 

537,607

454,370

Accrued Expenses

 

251,231

 

436,276

97,136

Unearned Revenue

 

1,268

 

(13,355)

(101,311)

Income and Other Taxes Payable

 

94,755

 

10,589

90,966

Net Cash Flows Used in Operating Activities

 

(24,521,082)

 

(26,980,411)

(13,964,053)

Cash Flows from Investing Activities

 

  

 

  

 

Purchases of Fixed Assets

 

(1,723,622)

 

(3,809,268)

(496,629)

Investments in Patents and Trademarks

 

(499,031)

 

(593,184)

(488,884)

Investments in Licenses, Intangibles and Other Assets

 

(16,523,163)

 

(200,000)

Investments in Software Development

(125,000)

(250,000)

(500,000)

Business Acquisition, net of cash acquired

 

(2,300,000)

 

Net Cash Flows Used in Investing Activities

 

(21,170,816)

 

(4,852,452)

(1,485,513)

Cash Flows from Financing Activities

 

  

 

  

 

Proceeds from Exercise of Warrants

 

 

34,715,728

14,128,527

Proceeds from Exercise of Stock Options

 

57,712

 

782,277

29,220

Proceeds from Common Stock Offering, Net

91,613,587

25,199,336

Purchases of Treasury Stock

(2,005,744)

Preferred Dividend Settlement Payment

 

 

(10,000,000)

 

Employee Tax Withholdings Payment

 

 

(1,144,364)

 

Proceeds from Term Note

1,555,900

Net Cash Flows (Used in) Provided from Financing Activities

 

(1,948,032)

 

115,967,228

40,912,983

Net (Decrease) Increase in Cash and Cash Equivalents

 

(47,639,930)

 

84,134,365

25,463,417

Cash and Cash Equivalents - Beginning of Period

 

120,203,873

 

36,069,508

10,606,091

Cash and Cash Equivalents - End of Period

$

72,563,943

$

120,203,873

$

36,069,508

Supplemental Disclosures

 

  

 

  

 

Unamortized Common Stock Expense included in Prepaid Expenses and Other Assets

$

1,240,156

$

1,365,242

$

219,051

Non-Cash Investment in Licenses

11,500,000

1,294,262

272,444

Stock-Based Compensation Expense - Expensed less Previously Issued

61,824

(1,127,091)

148,011

The accompanying notes are an integral part of these consolidated financial statements.

F-8

VUZIX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Summary of Significant Accounting Policies

Operations

Vuzix Corporation (the Company) was formed in 1997 under the laws of the State of Delaware and maintains its corporate offices in Rochester,West Henrietta, New York. The Company isYork (a suburb of Rochester). We are engaged in the design, manufacture, marketing and sale of augmented reality wearable display devices, that are generally worn like eyeglasses, and arecomputing devices also referred to as head mounted displays (or HMDs)HMDs, but also known as near-eye displays), in the form of Smart Glasses and Augmented Reality (AR) glassesglasses. Our AR wearable display devices are worn like eyeglasses or attach to a head worn mount. These devices typically include cameras, sensors, and Smart Glasses.a computer that enable the user to view, record and interact with video and digital content, such as computer data, the internet, social media or entertainment applications. Our wearable display products provideintegrate micro-display technology with our advanced optics to produce compact high-resolution display engines, less than half an inch diagonally, which when viewed through our smart glasses products create virtual large high-resolution screens, fitimages that appear comparable in size to that of a user’s pocketcomputer monitor or purse anda large-screen television. The wearable display products we produce can be viewed practically anywhere, anytime. We produce and sell two main types of wearable display products: Smart Glassesused for a variety of enterprise, commercial and commercial usersmedical uses and applications, including AR; and Video Viewing glasses,AR for on-the-go users and as mobile displays for entertainment and social media use.remote service support. Our products are available with varying features including with and without applications running computer processors, and are offered as either monocular orand binocular display systems.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary,wholly-owned subsidiaries, Vuzix Europe.(Europe) Limited and Moviynt, Inc. All significant inter-company transactions have been eliminated. Certain prior

Business Acquisitions

The Company applied the acquisition method of accounting for business acquisitions, as described in further detail in Note 2. Under the acquisition method, identifiable assets acquired, liabilities assumed and consideration transferred are measured at their acquisition-date fair value. The Company used various income methods to determine the fair values, described in further detail in Note 2. We relied upon the use of reports from third-party valuation specialists to assist in the estimation of fair values. Purchase price allocations are subject to revision within the measurement period, not to exceed one year amountsfrom the date of acquisition. Costs to acquire a business may include, but are not limited to, fees for accounting, legal and valuation services, and are expensed as incurred in the Consolidated Statements of Operations.

Variable Interest Entities

The Company determines at the inception of each arrangement whether an entity in which it has made an investment or in which the Company has other variable interests is considered a variable interest entity (VIE). The Company consolidates VIEs when it is the primary beneficiary. The Company is the primary beneficiary of a VIE when it has the power to direct activities that most significantly affect the economic performance of the VIE and have been reclassifiedthe obligation to be consistentabsorb the majority of their losses or benefits. If the Company is not the primary beneficiary in a VIE, the Company accounts for the investment or other variable interests in a VIE in accordance with applicable GAAP. Each reporting period, the Company assesses whether any changes in our interest or relationship with the entity affect our determination of whether the entity is a VIE and, if so, whether the Company is the primary beneficiary.

We have an investment in a VIE in which we are not the primary beneficiary. This VIE includes a private company investment, described further in Notes 5, 7 and 12. We have determined that the governance and operating structures of this entity do not allow us to direct the activities that would significantly affect their economic performance. Therefore, we are not the primary beneficiary, and the results of operations and financial position of this VIE is not included in our consolidated financial statements. We account for this investment as a technology license. The maximum

F-9

exposure of this unconsolidated VIEs is generally based on the current year presentation.carrying value of the investment. We have determined that the single source of our exposure to this VIE is our capital investment in them. The carrying value and maximum exposure of these unconsolidated VIE was $30 million as of December 31, 2022.

Segment Data, Geographic Information and Significant Customers

The Company is not organized by market and is managed and operated as one business. A single management team that reports to the chief operating decision maker comprehensively manages the entire business. The Company does not operate any material separate lines of business or separate business entities. Accordingly, the Company does not accumulate discrete information, other than product and engineering services revenue and material engineering services costs, with respect to separate product lines and does not have separately reportable segments as defined by FASB ASC Topic 280, “Disclosures about Segments of an Enterprise and Related Information”.

Refer to Note 1719 — Geographic and Other Financial Information Significant Customers and other financial information.(Unaudited).

F-7

VUZIX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Foreign Currency Transactions

The British Pound isCompany considers the US dollar as the functional currency of the Company’s United Kingdom subsidiary. The Company’s United Kingdom subsidiary transacts in Euros and British pounds. All transactions in foreign subsidiary. Transactionscurrencies are recorded in U.S. dollars at the functional currencythen current exchange rate(s). Upon settlement of each subsidiary. Gains and losses arising upon settlementthe underlying transaction, all amounts are re-measured to U.S. dollars at the current exchange rate on date of settlement. All unsettled foreign currency transactions that remain in accounts receivable and trade account payables are includedre-measured to U.S. dollars at the period-end exchange rates. All re-measurement gains and losses are recorded in the determination ofcurrent period net loss. The financial statements of the foreign subsidiary are translated to the US dollar at each reporting date. The cumulative translation adjustment at December 31, 2017, 2016 and 2015 was not material, as well as from inception of UK subsidiary.income.

Use of Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at year endyear-end and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Concentration of Credit Risk

The Company maintains its cash in bank deposit accounts, which at times may exceed federally insured limits.

Cash and Cash Equivalents

Cash and cash equivalents can include highly liquid investments with original maturities of three months or less.

Fair Value of Financial Instruments

The Company’s financial instruments primarily consistsconsist of cash and cash equivalents, accounts receivable, accounts payable, long-term debt, customer deposits,unearned revenue, accrued expenses, and income and other taxes payable.

As of the consolidated balance sheet dates, the estimated fair values of the financial instruments were not materially different from their carrying values as presented due to both the short maturities of these instruments and that the interest rates on borrowing approximate those that would have been available for loans for similar remaining maturity and risk profiles.instruments.

Accounts Receivable

The Company carries its trade accounts receivable at the invoice amount less an allowance for doubtful accounts. The Company establishes an allowance for uncollectible trade accounts receivable based on the age of outstanding invoices and management’s evaluation of collectability of outstanding balances. These provisions are established when the aging of outstanding amounts exceeds allowable terms and are re-evaluated at each quarter endquarter-end for

F-10

adequacy. In determining the adequacy of the provision, the Company considers known uncollectible or at riskat-risk receivables. There was an allowance of $29,960 as of December 31, 2017. There was noThe allowance for doubtful accounts as of December 31, 2016.2022, and 2021 was nil. The Company does not accrue interest on aany past due accounts receivable unless itsuch receivable goes into collection.

Reclassification of Prior Year Presentation

Certain prior year amounts have been reclassified for consistency with the current year’s presentation. These reclassifications had no effect on the reported results of operations. An adjustment has been made to the Consolidated Statements of Operations for the years ended December 31, 2021 and 2020 to reclassify depreciation expense related to our manufacturing operations from the amounts of reported depreciation and amortization expenses originally included in Operating Expenses. This change in classification does not affect previously reported Net Loss or reported Cash Flows Used in Operating Activities in the Consolidated Statements of Cash Flows or Consolidated Balance Sheets. The below table is a summary of the impact to these reclassifications:

 

    

For the Year Ended December 31, 2021

    

For the Year Ended December 31, 2020

Condensed Statement of Operations

As Previously Presented

Reclassification

Revised

As Previously Presented

Reclassification

Revised

Total Sales

$

13,164,933

$

$

13,164,933

$

11,581,496

$

$

11,581,496

Total Cost of Sales

10,714,088

882,355

11,596,443

9,653,887

1,329,651

10,983,538

Gross Profit

2,450,845

(882,355)

1,568,490

1,927,609

(1,329,651)

597,958

Operating Expenses:

Research and Development

11,674,954

11,674,954

7,568,074

7,568,074

Selling and Marketing

6,118,929

6,118,929

4,039,772

4,039,772

General and Administrative

22,502,833

22,502,833

6,915,213

6,915,213

Depreciation and Amortization

1,870,459

(882,355)

988,104

2,458,482

(1,329,651)

1,128,831

Loss on Fixed Asset Disposal

183,614

183,614

Impairment of Patents and Trademarks

80,163

80,163

73,532

73,532

Total Operating Expenses

42,430,952

(882,355)

41,548,597

21,055,073

(1,329,651)

19,725,422

Loss From Operations

 

(39,980,107)

 

 

(39,980,107)

 

(19,127,464)

 

 

(19,127,464)

Total Other (Expense) Income, Net

(397,053)

(397,053)

1,175,292

1,175,292

Net Loss

$

(40,377,160)

$

$

(40,377,160)

$

(17,952,172)

$

$

(17,952,172)

Customer and Supplier Concentrations

One customer represented 14% of total product revenue and two customers represented 48% and 39%, respectively, of engineering services revenue for the year ended December 31, 2022. One customer represented 10% of total product revenue and four customers represented 39%, 28%, 16% and 12%, respectively, of our engineering services revenue for the year ended December 31, 2021. No one customer represented more than 10% of total product revenue and two customers represented 48% and 26%, respectively, of our engineering services revenue for the year ended December 31, 2020.

One customer represented 26% of accounts receivable at December 31, 2022. Three customers represented 27%, 20% and 10%, respectively, of accounts receivable at December 31, 2021. Two customers represented 21% and 14%, respectively, of accounts receivable at December 31, 2020.

One third-party vendor represented 15% of purchases for the year ended December 31, 2022. As of December 31, 2022, the net amount due to this vendor was $478,382. Two third-party vendors represented 38% and 24%, respectively, of material purchases for the year ended December 31, 2021. As of December 31, 2021, the net amount due to these vendors was $504,073.

F-11

Accrued Project Revenue

The Company carries its accrued project revenue based on the percentage of completion on the project measured using the input method based upon costs incurred to-date as a percentage of total expected costs to complete the project.project less amounts invoiced, if any. As of December 31, 2022 there was $269,129 in accrued project revenue and nil as of December 31, 2021 and 2020.

Inventories

Inventories are valued at the lower of cost or net realizable value using the weighted average first-in, first-out method. The Company includes labor and overhead costs in its inventory valuation costing. The Company records provisions for excess, obsolete or slow movingslow-moving inventory based on changes in customer demand, technology developments or other economic factors. The Company’s products have product life cycles that range on average from two to three years currently. At both the product introduction and product discontinuation stage, there is a higher degree of risk of inventory obsolescence. The provision for obsolete and excess inventory is evaluated for adequacy at each quarter end. The estimate of the provision for obsolete and excess inventory is partially based on expected future product sales, which are difficult to forecast for certain products.

F-8

VUZIX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Revenue Recognition

The Company recognizes revenue from product sales in accordanceContracts with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)Customers under FASB ASC Topic 605 “Revenue Recognition.606, "Revenue from Contracts with Customers", as of January 1, 2018. Product sales represent the majority of the Company’s revenue. The Company recognizes revenue from these product sales when persuasive evidenceas performance obligations are satisfied and transfer of an arrangement exists, deliverycontrol and ownership to the customer has occurred, typically upon physical shipment. Revenue is recognized in the amount that the Company expects to receive in exchange from the sale priceof our products. FOB shipping point is fixed or determinable,our standard shipping term and collectabilityrevenue is reasonably assured. The Company sells itsrecognized as our products on terms which transfer titleship to customers, as control and riskownership are transferred at this time. All of loss at a specified location, typically shipping point. Accordingly, revenue recognition fromour standard product sales occurs wheninclude a 30-day money back guarantee and expected returns are estimated at each reporting period date, and a portion of revenue is deferred for all factors are met. If these conditions are not met, the Company will deferestimated returns. As of December 31, 2022 and 2021, unearned revenue recognition until such time as these conditions have been satisfied.consisted of deferred revenue associated with our expected returns were immaterial. The Company collects and remits sales taxes in certain jurisdictions and reports revenue net of any associated sales taxes. The Company also sells certain products through distributors who are granted limited rights of return for stock balancing against purchases made within a prior 90 day period, including downward price adjustments that the Company implements 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 and was not material as of December 31, 2017, 2016 or 2015.

Revenue from any engineering consulting and other services is recognized at the time the services are rendered. The Company accounts for its longer-term development contracts, which to date have all been firm fixed-priced contracts, on the percentage-of-completion method, whereby income is recognized as work on contracts progresses, but estimated losses on contracts in progress are charged to operations immediately. The percentage-of-completion is determined using the cost-to-cost method. To date, all such contracts have been less than one calendar year in duration.

The Company recognizes software license revenue under ASC 985-605 “Software Revenue Recognition” and under ASC 605-25 “Revenue Arrangements with Multiple Deliverables”, and related interpretations, as amended.

Licensed software may be sold as a stand-alone element, with other software elements, or in conjunction with hardware products. When the Company’s products consist of more than one element, the product is considered to be a multiple element arrangement (MEA). When sold as a stand-alone element, the revenue is recognized upon shipment as discussed above. When sold as part of a MEA, revenue from the licensed software is recognized when the product with this embedded software is shipped to the customer.

For either a single element transaction or a MEA, the Company allocates consideration to all deliverables based on their relative stand-alone selling prices. Amendments to ASC 605-25 establish a hierarchy to determine the stand-alone selling price as follows:

·Vendor Specific Objective Evidence of the fair value (VSOE);
·Third Party Evidence (TPE); and
·Best Estimate of the Selling Price (BESP)

Sales which constitute a MEA are accounted for by determining if the elements can be accounted for as separate accounting units, and if so, by applying values to those units, per the hierarchy above. If VSOE is not available, management estimates the fair selling price using historical pricing for similar items, in conjunction with current pricing and discount policies.

Revenue from licensed software is recognized upon shipment and in accordance with industry-specific software recognition accounting guidance. Software updates that will be provided free of charge are evaluated on a case-by-case basis to determine whether they meet the definition of an upgrade and create a multiple element arrangement. The consideration allocated to the unspecified software upgrade rights and non-software services is deferred and recognized ratably over the 24-month estimated life of the devices. The Company’s BESP for the unspecified software upgrade right and non-software services is $25 per unit for the M300 and M100 Smart Glass and had been $40 for M100 software developer kits, which became free in Fall 2015 and therefore no new amounts are being deferred related to developer kits.

Refer to Recent Accounting Pronouncements later in this Note for the expected future impact of updated FASB accounting guidance.

F-9

VUZIX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Unearned Revenue

These amounts represent deferred revenue against unfulfilled deliverables of multiple-elementour expected product sales returns for all December 2022 and 2021 products including unspecified post-delivery support and software updates.sales that are subject to the Company’s 30-day money back guarantee return policy.

Cost of Product Revenues

Sales

Cost of product revenuesales includes the direct and allocated indirect costs of products sold to customers. Direct costs include labor, materials, reserves for estimated warranty expenses, and other costs incurred directly, or charged to us by our contract manufacturers in the manufacture of these products. Indirect costs include labor, manufacturing overhead, and other costs associated with operating our manufacturing capabilitiesfacility and capacity. Manufacturing overhead includes the costs of procuring, inspecting and storing material, facility and other costs, and is allocated to cost of product revenue based on the proportion of indirect labor which supported production activities. Depreciation of manufacturing tools and equipment and amortization of software development costs are included in our cost of product sales. The cost of product revenuesales can fluctuate significantly from period to period, depending onupon the product mix and volume, the level of manufacturing overhead expense and the volume of direct material purchased.cost of materials.

F-12

Cost of Engineering Services Revenues

Sales

Cost of contract revenueengineering services revenues includes both the direct and allocated indirect costs of performing on contracts and producing prototype units. Direct costs include labor, materials and other costs incurred directly in producing prototype units and product deliveries or performing on aunder the contract. IndirectDirect costs also include labor and other costs associated with operating our research and development department based on the level of effort supporting the development activity. Cost of contract revenueengineering sales is determined by the level of direct and indirect costs incurred, which can fluctuate substantially from period to period.

Fixed Assets

Fixed assets are stated at cost. Depreciation of fixed assets is provided for using the straight-line method over the following estimated useful lives:

Computers and Purchased Software

3 years

Leasehold Improvements

Lesser of expected life or lease term

Manufacturing Equipment

5 years

Tooling

3 years

Furniture and Equipment

5 years

Repairs and maintenance costs are expensed as incurred. Asset betterments are capitalized and depreciated over their expected useful life.

Patents and Trademarks

The Company capitalizes the costs of obtaining its patents and registration of trademarks. Such costs are accumulated and capitalized during the filing periods, which can take several years to complete. Successful applications that result in the granting of a patent or trademark are then amortized over 15 years on a straight-line basis. Unsuccessful applications are written offwritten-off and expensed in the fiscal period where the application is abandoned or discontinued. Ongoing maintenance and legal fees for issued patents and trademarks are expensed as incurred.

F-10

VUZIX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Software Development Costs

The Company capitalizes the costs of obtaining or developing its software once technological feasibility has been determined by management.management or of purchased software solutions when placed into service. Such costs are accumulated and capitalized and projectscapitalized. Projects can take several years to complete. Unsuccessful or discontinued software projects are written offwritten-off and expensed in the fiscal period wherewhen the software development effort is abandoned or discontinued. Costs incurred internally in researching and developing a computer software product are charged to expense until technological feasibility has been established for the product. Once technological feasibility is established, all software costs are capitalized until the product is available for general release to customers. Judgment is required in determining when technological feasibility of a product is established. Once the product is available for general release, accumulated costs are amortized over the life of the asset. The amortization of these costs is included in cost of revenueproduct sales over the estimated life of the products, which currently is estimated as 3at three years using a straight-line basis. As of December 31, 2022, 2021 and 2020, we had $500,000, $541,666 and $458,333, respectively, of net software development costs included in Other Assets. For the years ended December 31, 2022, 2021 and 2020, there was nil in impairment of software development costs.

Licenses

The Company capitalizes the costs of acquiring licenses and prepaid royalties. They are amortized on either a per unit basis or straight line over the expected life of the license. In some cases, future royalties are subject to annual limits.

F-13

Long-Lived Assets,

Goodwill and Other Acquired Intangible Assets

The Company at least annually assesses all of its long-lived assets and intangibles, excluding goodwill, for impairment and when events or circumstances indicate their carrying amounts may not be recoverable, in accordance with FASB ASC Topic 360-10, “Accounting forrecoverable. For the Impairment or Disposal of Long-Lived Assets.” Thereyears ended December 31, 2022, 2021 and 2020, there was no impairment charge in 2017. In 2016, an impairment charge of $20,506$97,675, $80,163 and $73,532, respectively, to Patents and Trademarks. For the years ended December 31, 2022 and 2021, we recorded a loss on fixed asset disposal of $35,350 and $183,614, respectively, upon the retirement of certain tooling and manufacturing equipment assets no longer in use. No loss on fixed asset disposal charges on tooling and equipment were recorded in 2020.

We test our goodwill for impairment at least annually, or more frequently if events or changes in circumstances indicate that the asset may be impaired.

There was recorded related to abandoned patents and trademarks. In 2015, anno goodwill impairment charge of $13,222 was recorded related to abandoned patents and trademarks.recognized for the periods presented. Intangible assets with definite lives are amortized over their estimated useful lives on a straight-line basis over a five-year period.

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 partythird-party design and engineering services, and new product prototyping costs. Costs incurred internally in researching and developing a computer software product are charged to expense until technological feasibility has been established for the product.

Shipping and Handling Costs

Amounts charged to customers and costs incurred by the Company related to shipping and handling are included in net sales and cost of sales, respectively.

F-11

VUZIX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Provision for Future Warranty Costs

The Company provides for the estimated returns under warranty and the costs of fulfilling our obligations under product warranties at the time the related revenue is recognized. The Company estimates the costs based on historical and projected product failure rates, historical and projected repair costs, and knowledge of specific product failures (if any). The specific warranty terms and conditions vary depending upon the country in which we do business, but generally include parts and labor over a period generally ranging from one to two years from the date of product shipment. The Company provides a reserve for expected future warranty returns at the time of product shipment or produces over-builds to cover replacements. We regularly reevaluatere-evaluate our estimates to assess the adequacy of the recorded warranty liabilities and adjust the amounts as necessary each quarter end, based onupon historical experience of warranty claims and costs.

Customer Deposits

Customer deposits represent money the Company has received in advance of providing a product or engineering services to a customer. All such deposits are short term in nature as the Company delivers the product, unfulfilled portions or engineering services to the customer before the end of its next annual fiscal period. These deposits are credited to the customer against product deliveries or at the completion of the customer’s order.

Advertising

Advertising costs are expensed as incurred and recorded in “Selling and Marketing” in the Consolidated Statements of Operations. Advertising expense for the years ended December 31, 2017, 20162022, 2021 and 2015 amounted to $1,386,977, $1,279,9982020 was $1,668,910, $1,263,897 and $432,325,$974,461, respectively.

Income Taxes

The Company accounts for income taxes in accordance with FASB ASC Topic 740-10, “Income Taxes.” Accordingly, the Company provides 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.

F-14

The Company reports any interest and penalties accrued relating to uncertain income tax positions as a component of the income tax provision.

Net Loss Per Share

Basic earnings per share is computed by dividing the net income (loss) less accrued dividends on any outstanding preferred stock by the weighted average number of common shares outstanding for the period. Diluted earnings per share calculations reflect the assumed exercise of all dilutive employee stock options and warrants applying the treasury stock method promulgated by FASB ASC Topic 260, “Earnings Per Share” and the conversion of any outstanding convertible preferred shares or notes payable that are-in-the-money, applying the as-if-converted method. However, if the assumed exercise of stock options and warrants and the conversion of any preferred shares or convertible notes payable are anti-dilutive, basic and diluted earnings per share are the same for all periods. As a result of the net losses generated in 2017, 20162022, 2021 and 2015,2020, all outstanding instruments would be antidilutive.anti-dilutive. As of December 31, 2017, 20162022, 2021 and 2015,2020, there were 7,657,756, 7,227,7388,589,673, 8,606,062 and 7,475,623 respectively, of14,872,703 common stock share equivalents, respectively, that were potentially issuable under convertible debt agreements,stock options, conversion of preferred shares (excluding accrued dividends), and stock warrants that could potentially dilute basic earnings per share in the future.

F-12

VUZIX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Stock-Based Compensation Expense

The Company accounts for share-basedstock-based compensation to employees and directors in accordance with FASB ASC Topic 718 “Compensation - Stock Expense,Compensation,” which requires that compensation expense be recognized in the consolidated financial statements for share-basedstock-based awards based on the grant-dategrant date fair value. For stock option awards, the Black-Scholes-Merton option pricing model was used to estimate the fair value of share-based awards under FASB ASC Topic 718. The Black-Scholes-Merton option pricing model incorporates various and highly subjective assumptions, including expected term and share price volatility. The expected term of options granted was estimated to be the average of the vesting term, historical exercise and forfeiture rates, and the contractual life of the option. The share price volatility at the grant date is estimated using a Black-Scholes valuation modelhistorical stock prices based upon the expected term of the options granted. The risk-free interest rate assumption is determined using the rates for U.S. Treasury zero-coupon bonds with maturities similar to those awards. Theof the expected term of the award being valued.

For common stock awards, the Company uses the fair market value of our common stock on the date of each option grantstock-based award based on the market price of the Company’s common shares. Stock-based compensationshares and the expense includes estimates of forfeitures, option lives, and stock price volatility, andrelated to these awards is recognized over the requisite service period of the awards on a straight-line or graded vesting basis, which is generally commensurate with the vesting term. Stock-based compensation expense associated with stock awards and stock option grants for the years ended December 31, 2017, 20162022, 2021 and 20152020 was $ 1,355,522, $756,928$4,645,026, $4,047,444 and $568,848, respectively.$2,805,842, respectively, excluding awards under the Company’s Long-term Incentive Plan (LTIP). The Company issues new shares upon stock option exercises.

Derivative Liability and Fair Value Measurements

FASB ASC Topic 820, “Fair Value Measurements and Disclosures” definesFor stock options awarded under the Company's LTIP, options vest only upon the achievement of certain equity market conditions or performance-based milestones. The fair value establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. ASC 820 permits an entity to measure certain financial assets and financial liabilities at fair value with changes in fair value recognized in earnings each period. In accordance with ASC 815-10-25Derivatives and Hedging we measured the derivative liabilitiesof options granted under this program were calculated by using a Monte Carlo Options Latticesimulation for the equity market condition tranches and the Black-Scholes-Merton option pricing modelmethod on the performance-based tranches. Stock-based compensation expense associated with the Company's LTIP for the years ended December 31, 2022 and 2021 was $11,130,527 and $13,255,388, respectively, and nil for the year ended December 31, 2020.

Leases

The Company determines if an arrangement is a lease at their issuance dateinception. Our lease agreements generally contain lease and at each subsequent reporting date. Accordingly,non-lease components. Historically, non-lease components such as utilities have been immaterial. Payments under our lease arrangements are primarily fixed. Lease assets and liabilities are recognized at the end of each quarterly reporting date, the derivative fair market value is remeasured and adjusted to current market value. Derivatives that have more than one year remaining in their life are shown as long term.

Significant unobservable inputs are used in the fair value measurement of the Company’s derivative liability. The primary input factors driving the economic or fairpresent value of the derivative liabilities relatedfuture lease payments at the lease commencement date. The Company has made an accounting policy election to account for lease and non-lease components in its contracts as a single lease component for its real estate leases. The interest rate used to determine the warrants and convertible notes are the stock price of the Company’s shares, the price volatility of the shares, reset events, and exercise behavior. An important valuation input factor used in determining fair value was the expected volatility of observed share prices and the probability of projected resets in warrant exercise and note conversion prices from financing events before each security’s maturity. For exercise behavior, the Company assumed that without a target price of 2 times the projected reset price or higher, the holders of the warrants and convertible notes would hold to maturity. In determining the fairpresent value of the derivativesfuture lease payments is our incremental borrowing rate, because the interest rate implicit in our leases is not readily determinable. Our incremental borrowing rate is estimated to approximate the

F-15

interest rate on a collateralized basis with similar terms and payments, and in economic environments where the leased asset is located. Our lease terms include periods under options to extend or terminate the lease when it was assumedis reasonably certain that the Company’s business would be conducted as a going concernwe will exercise that option.

As of December 31, 2022, all of our leases are considered operating leases. Operating lease right-of-use assets and that holding to maturity was reasonable. Further, theliabilities were included on our Consolidated Balance Sheets beginning January 2, 2015 Series A Preferred financing reduced the expected probability to near zero for price resets from financing events.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value.1, 2019. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:

oLevel 1, defined as observable inputs such as quoted prices for identical instruments in active markets;
oLevel 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and
oLevel 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

F-13

VUZIX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Recent Accounting Pronouncements

In July 2017, the FASB issued ASU 2017-11,Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815).This ASU requires that when determining whether certain financial instruments should be classified as liabilities or equity instruments, an entity should not consider the down round feature. The ASU also recharacterizes as a scope exception the indefinite deferral available to private companies with mandatorily redeemable financial instrument and certain noncontrolling interests, whichCompany does not have an accounting effect but addresses navigational concerns within the FASBany finance leases as of December 31, 2022.

Recent Accounting Standards Codification. The provisions of the ASU related to down rounds are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. We do not expect the implementation of this standard to have a material effect on our financial statements.

Pronouncements

In May 2017, the Financial Accounting Standards Board (FASB) issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting, which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The new standard is effective for annual reporting periods, including interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. We do not expect the adoption of ASU 2017-09 to have a material impact on our consolidated financial statements and related disclosures because we do not anticipate any changes to our share-based payment plans.

In NovemberJune 2016, the Financial Accounting Standards Board (FASB)(the “FASB”) issued Accounting Standards Update 2016-18 (ASU 2016-18), Restricted Cash.ASU 2016-13, “Financial Instruments - Credit Losses” (Topic 326). ASU 2016-13 provides for a new impairment model which requires measurement and recognition of expected credit losses for most financial assets and certain other instruments, including but not limited to accounts receivable. ASU 2016-13 will become effective for the Company on January 1, 2023 and early adoption is permitted. The standard requires restricted cashCompany is currently evaluating the guidance and cash equivalents to be included with cash and cash equivalentsits impact on the statementfinancial statements.

Note 2 – Acquisition

On October 20, 2022, the Company acquired Moviynt®, a US-based SAP Certified ERP platform software solution provider, that supports handheld mobile phones and scanners used in logistics, warehousing and manufacturing applications. Moviynt, a boutique specialized software firm which was founded in 2018 by three principals, has developed a logistics mobility software platform (Mobilium®) which eliminates traditional middleware, and is device agnostic. With the acquisition, Moviynt becomes a wholly-owned subsidiary of Vuzix.

The Moviynt acquisition was completed pursuant to an agreement and plan of merger by and among the Company and Moviynt, Inc. (the Sellers), a Delaware corporation. Total purchase price consideration paid to the Sellers was $2,469,574, which included $2,300,000 in base merger consideration and $169,574 in net working capital adjustments, in exchange for all shares outstanding. The acquisition agreements contained customary terms and conditions including representations, warranties and indemnification provisions. A portion of the consideration paid to the Sellers was held in escrow for indemnification purposes, which was subsequently released to the Sellers upon the Company completing a 90-day post close review.

The Moviynt acquisition was accounted for in accordance with the accounting treatment of a business combination pursuant to FASB ASC Topic 805, Business Combinations (“ASC 805”).  Accordingly, the purchase price was allocated to the tangible and intangible assets acquired and the liabilities assumed based on their estimated fair values on the acquisition date.  The excess of the purchase price over the estimated fair value of the separately identifiable assets acquired and liabilities assumed was allocated to goodwill. Management is responsible for determining the acquisition date fair value of the assets acquired and liabilities assumed, which requires the use of various assumptions and judgments that are inherently subjective.  The purchase price allocation presented below reflects all known information about the fair value of the assets acquired and liabilities assumed as of the acquisition date. 

The following table represents the preliminary assets acquired and liabilities assumed on October 20, 2022:

Cash

    

$

132,233

Accounts Receivable

44,820

Goodwill

1,601,400

Other Intangible Assets

698,600

Accrued Expenses

(7,479)

Net Assets Acquired

$

2,469,574

The goodwill included in the Company’s purchase price allocation presented above represents the value of Moviynt’s assembled and trained workforce and the incremental value that Moviynt’s technology and deployment

F-16

efforts currently in place will add to the Company’s expected revenue growth. No amount of goodwill is considered deductible for tax purposes.

Intangible assets were valued using various income methods based upon management’s approved projections of future cash flows. The new standard is effectivefollowing table summarizes the estimated fair value and annual amortization for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The new guidance shall be applied using a retrospective approach. We do not expect the implementation of this standard to have a material effect on our financial statements.

In February 2016, the FASB issued Accounting Standards Update 2016-02 (ASU 2016-02), Leases (Topic 842). ASU 2016-02 requires lessees to recognize a right-of-use asset and lease liability in the balance sheet for all leases, including operating leases, with terms of more than twelve months. Recognition, measurement and presentation of expenses and cash flows from a lease by a lessee have not significantly changed from previous guidance. The amendments also require qualitative disclosures along with specific quantitative disclosures. The new guidance will be effective for fiscal years beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. The amendments must be applied on a modified retrospective basis. We anticipate the adoption of this standard will have a material impact on our financial statements. While we are continuing to assess all the potential impactseach of the standard, we currently believe the most significant impact relates to our accounting for our office lease. Under the new guidance, the net present value of the obligation for our office lease will appear on the balance sheet. Currently, it is classified as an operating lease and payments are expensed in the periods incurred.identifiable intangible assets acquired:

Estimated Fair

Amortization Period

Annual Amortization

    

Value

    

(Years)

    

Year 1

    

Year 2

    

Year 3

    

Year 4

    

Year 5

Tradename-Trademark

$

92,600

5

$

18,520

$

18,520

$

18,520

$

18,520

$

15,433

IP-Technology-License

 

415,400

5

 

83,080

 

83,080

 

83,080

 

83,080

 

69,233

Customer Base

 

153,400

5

 

30,680

 

30,680

 

30,680

 

30,680

 

25,567

Non-Competes

 

37,200

5

 

7,440

 

7,440

 

7,440

 

7,440

 

6,200

Total definite-lived intangible assets

$

698,600

$

139,720

$

139,720

$

139,720

$

139,720

$

116,433

In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (Topic 606) "Revenue from Contracts with Customers." Topic 606 supersedes the revenue recognition requirements in Topic 605 “Revenue Recognition” (Topic 605), and requires entities to recognize revenues when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. We adopted Topic 606 as of January 1, 2018 using the modified retrospective transition method. Results for reporting periods beginning after January 1, 2018 will be presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting treatment under Topic 605. We recorded a net increase to opening retained earnings of less than $100,000, net of tax, as of January 1, 2018 due to the cumulative impact of adopting Topic 606, with the impact primarily related to our post contract support (PCS deferred revenue).

F-14

VUZIX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 

Recently Adopted Accounting Pronouncements

In March 2016, the FASB issued ASU No. 2016-09Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting which amends the current stock compensation guidance. The amendments simplify the accounting for the taxes related to stock based compensation, including adjustments to how excess tax benefits and a company's payments for tax withholdings should be classified. Under this new guidance, entities must elect whether to account for forfeitures of share-based payments by (1) recognizing forfeitures of awards as they occur or (2) apply an estimated forfeiture rate, as is currently required. The standard is effective for fiscal periods beginning after December 15, 2016. We have adopted this standard forDuring the year ended December 31, 20172022,the Company incurred acquisition-related costs and have electedother non-recurring expenses of $74,723 directly attributable to accountthe acquisition, including one-time accounting, legal and due diligence services, which amounts were expensed as incurred.

In 2022, since the acquisition date, Moviynt generated $76,952 in engineering revenue which was applied against $24,819 related to Cost of Sales, generating a gross margin of $52,133. Revenues and earnings for forfeituresMoviynt prior to the acquisition date are not presented here as they occur. were considered non-material to the Company’s Consolidated Statement of Operations.

Note 3 – Revenue Recognition and Contracts with Customers

Disaggregated Revenue

The adoptionCompany’s total revenue was comprised of two major product lines: Products Sales (which include Smart Glasses, OEM Product Sales, and Waveguide and Display Engine Sales) and Engineering Services. The following table summarizes the revenue recognized by product line:

For the Years Ended December 31, 

2022

    

2021

    

2020

Revenues

  

 

  

 

  

Products Sales

$

10,505,763

$

12,784,600

$

10,081,209

Engineering Services

 

1,330,119

 

380,333

 

1,500,287

Total Revenue

$

11,835,882

$

13,164,933

$

11,581,496

Significant Judgments

Under Topic 606 “Revenue from Contracts with Customers”, we use judgments that could potentially impact both the timing of our satisfaction of performance obligations and our determination of transaction prices used in determining revenue recognized by major product line. Such judgments include considerations in determining our transaction prices and when our performance obligations are satisfied for our standard product sales that include an end-user 30-day right to return if not satisfied with product and general payment terms that are between Net 30 and 60 days. For our Engineering Services, performance obligations are recognized over time using the input method and the estimated costs to complete each project are considered significant judgments.

Performance Obligations

Revenues from our performance obligations are typically satisfied at a point-in-time for Smart Glasses, Waveguides and Display Engines, and our OEM Products, which are recognized when the customer obtains control and

F-17

ownership, which is generally upon shipment. The Company considers shipping and handling activities performed to be fulfillment activities and not a separate performance obligation. The Company also records revenue for performance obligations relating to our Engineering Services over time by using the input method measuring progress toward satisfying the performance obligations. Satisfaction of our performance obligations related to our Engineering Services is measured by the Company’s costs incurred as a percentage of total expected costs to project completion as the inputs of actual costs incurred by the Company are directly correlated with progress toward completing the contract. As such, the Company believes that our methodologies for recognizing revenue over time for our Engineering Services correlate directly with the transfer of control of the underlying assets to our customers.

Our standard product sales include a twelve (12) month assurance-type product warranty. In the case of certain of our OEM products and waveguide sales, some include a standard product warranty of up to eighteen (18) months to allow distribution channels to offer the end customer a full twelve (12) months of coverage. We offer extended warranties to customers, which extend the standard product warranty on product sales for an additional twelve (12) month period. All revenue related to extended product warranty sales is deferred and recognized over the extended warranty period. Our Engineering Services contracts vary from contract to contract but typically include payment terms of Net 30 days from the date of billing, subject to an agreed upon customer acceptance period.

As of December 31, 2022 and 2021, there were no outstanding performance obligations remaining for extended warranties.

The following table presents a summary of the Company’s net sales by revenue recognition method as a percentage of total net sales:

    

% of Total Net Sales

 

2022

 

2021

 

2020

Point-in-Time

 

89

%

97

%

87

%

Over Time – Input Method

 

11

%

3

%

13

%

Total

 

100

%

100

%

100

%

Remaining Performance Obligations

As of December 31, 2022, the Company had approximately $187,000 of remaining performance obligations under a current waveguide development project, which represents the remainder of the total transaction price of approximately $896,000 under this standard did not have a material impact on our consolidated financial statements.

development agreement, less revenue recognized under percentage of completion to date. The Company expects to recognize the remaining revenue related to this project in the first quarter of 2023. Revenues earned less amounts invoiced at December 31, 2022 in the amount of $269,129 are reflected as Accrued Revenues in Excess of Billings in the accompanying Consolidated Balance Sheet.

In November 2015,addition, the FASB issued Accounting Standards Update (“ASU”) No. 2015-17, Income Taxes (Topic 740):Balance Sheet ClassificationCompany had no material outstanding performance obligations related to product sales, other than its standard product warranty.

F-18

Note 4 — Inventories, Net

Inventories consisted of the presentation of deferred income taxes by requiring that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The standard is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods and may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. We have adopted this standard forfollowing:

December 31, 

December 31, 

    

2022

    

2021

Purchased Parts and Components

$

10,399,527

$

11,580,766

Work-in-Process

 

344,242

 

226,126

Finished Goods

 

1,941,689

 

1,472,534

Less: Reserve for Obsolescence

 

(1,417,489)

 

(1,127,444)

Inventories, Net

$

11,267,969

$

12,151,982

For the year ended December 31, 2017 on a prospective basis; therefore, all deferred tax assets and liabilities have been classified as noncurrent in the accompanying Consolidated Balance Sheets. Noncurrent deferred tax assets and noncurrent deferred tax liabilities are included in other assets and other long-term liabilities, respectively, in the accompanying Consolidated Balance Sheets.  As of December 31, 2017,2022, the Company had a full valuation allowance against all net deferred tax assets, as such the adoption of this standard did not have a material impact on our consolidated financial statements.

There are no other recent accounting pronouncements that are expected to have a material impact on the consolidated financial statements.

Note 2 — Inventories, Net

Inventories consisted of the following: 

  December 31,
2017
  December 31,
2016
 
       
Purchased Parts and Components $1,669,209  $1,990,026 
Work in Process  25,090   454,120 
Finished Goods  2,994,342   831,069 
Less: Reserve for Obsolescence  (836,324)  (623,997)
         
Net $3,852,317  $2,651,218 

In addition toincreased its normalgeneral Reserve for Obsolescence provision the Company wrote-downby $290,405 related to net realizable value allsome of its componentaccessories. The total write-down and obsolescence provision for finished goods inventory related to its iWear Video Headphones, as well as accrued all related contractual obligations, resulting from the decision in the third quarter of 2017 to further reduce the suggested retail selling price to a price below the cost. The loss totaled $1,151,482and components recorded for the yearyears ended December 31, 20172021 and reduced the carrying value of such inventory to its estimated net realizable value, net of the costs of completion of components2020 was $519,950 and work in progress. As of December 31, 2016, the Company wrote-down to net realizable value all of its component and finished goods inventory related to its iWear Video Headphones resulting from the decision in early 2017 to reduce the suggested retail selling price to a price below the cost. The write down for that 2016 period totaled $1,124,401 and reduced the carrying value of such inventory to its estimated net realizable value, net of the costs of completion of components and work in progress. These provisions have been included in Operating Expenses on the Consolidated Statement of Operations.$1,273,835, respectively.

F-15

VUZIX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 35 — Fixed Assets, Net

Fixed Assets consisted of the following:

 December 31,
2017
  December 31,
2016
 
     

December 31, 

December 31, 

    

2022

    

2021

Tooling and Manufacturing Equipment $3,965,251  $2,702,468 

$

6,065,445

$

6,612,811

Leaseholds  443,332   403,737 

 

826,329

 

797,059

Computers and Purchased Software  646,272   585,795 

 

760,256

 

980,561

Furniture and Equipment  1,322,405   1,359,522 

 

2,487,650

 

2,661,346

        
  6,377,260   5,051,522 

 

10,139,680

 

11,051,777

Less: Accumulated Depreciation  (2,252,794)  (1,686,614)

 

(6,261,175)

 

(5,861,339)

        
Fixed Assets, Net $4,124,466  $3,364,908 

$

3,878,505

$

5,190,438

Total depreciation expense for fixed assets for the years ended December 31, 2017, 20162022, 2021 and 20152020 was $921,113, $663,934$869,502, $1,306,479 and $294,363,$1,904,282, respectively.

On May 12, 2022, the Company signed a series of agreements with Atomistic SAS, which provided for an exclusive license by the Company of key micro LED technology and for the custom design of a backplane, for cash commitments totaling $30 million along with equity issuance commitments to be made by the Company relating to the certain deliverables and the achievement of milestones by Atomistic. $15 million of the consideration was for the design and construction of the backplane, all of which is custom to the Company. On December 16, 2022, the Company signed new agreements with Atomistic (the “Atomistic Agreements”) that superseded the prior May 12, 2022 agreements, whereby the scope for the construction of a backplane was modified and the Company obtained an additional license in an alternative self-emissive micro LED technology.  As a result, $5,529,120 that was previously recorded to construction-in-process, as of September 30, 2022, is now recognized as a technology license asset at December 16, 2022. This was considered a non-monetary exchange and the Company recorded no gain or loss.

Note 46 — Patents and Trademarks, Net

 December 31,
2017
  December 31,
2016
 
     

December 31, 

December 31, 

    

2022

    

2021

Patents and Trademarks $1,325,905  $970,178 

$

3,153,358

$

2,854,521

Less: Accumulated Amortization  (512,131)  (434,717)

 

(933,264)

 

(866,151)

        
Patents and Trademarks, Net $813,774  $535,461 

$

2,220,094

$

1,988,370

F-19

Total amortization expense for patents and trademarks for the years ended December 31, 2017, 20162022, 2021 and 20152020 was $77,415, $106,734$149,700, $145,072 and $86,478,$130,656, respectively. The estimated aggregate annual amortization expense for each of the nextfivefiscalyears is approximately $88,000. We$210,000. For the years ended December 31, 2022, 2021 and 2020, we recorded $97,675, $80,163 and $73,532, respectively, in patent impairment charges.

Note 7 — Technology Licenses, Net

December 31, 

December 31, 

    

2022

    

2021

Licenses

$

2,443,356

$

1,038,606

Additions

 

30,000,000

 

1,404,750

Less: Accumulated Amortization

 

(2,284,667)

 

(1,053,420)

Licenses, Net

$

30,158,689

$

1,389,936

Total amortization expense related to technology licenses in the years ended December 31, 2022, 2021 and 2020 was $1,231,197, $480,945, and $393,174, respectively.

As noted above in Note 5, on May 12, 2022, the Company signed a series of agreements with Atomistic SAS, which provided for an exclusive license of key micro LED technology and for the custom design and construction of a backplane chip for cash commitments totaling $30 million along with equity issuance commitments to be made by the Company relating to the certain deliverables and the achievement of milestones by Atomistic. $15 million of the consideration was for the exclusive license of technology and know-how and developed technologies related to next generation micro LEDs and micro-displays. On December 16, 2022, the Company entered into the Atomistic Agreements expanding upon the original license to include certain alternative self-emissive micro LED technology in addition to the previously licensed technology. The Company recorded this additionally licensed technology asset at $15,000,000, which included a reclassification of $5,529,120 from fixed assets construction-in-progress, as of September 30, 2022, which was the result of the non-monetary exchange described in Note 5, and recorded an impairment chargeaccrued liability of $20,506 representing cost$9,470,880 at December 16, 2022. This was in addition to the $15,000,000 recorded under the terms of $44,371, less accumulatedthe original agreements with Atomistic.

These intangible technology license assets are to be amortized over a ten-year period, which began on May 12, 2022 and, as modified on, December 16, 2022. During the year ended December 31, 2022, the Company paid $18,500,000 towards this commitment and recorded a total of $1,231,197 in amortization relating to these intangible assets and other licenses. Total amortization expense related to licenses in the years ending December 31, 2021 and 2020 was $480,945 and $393,174, respectively. The remaining funding commitment of $23,865$11,500,000 associated with these licenses is to be paid over the next twelve months.

F-20

Note 8 — Intangible Asset, Net

Goodwill

Changes in the carrying amount of goodwill acquired with the Company’s acquisition of Moviynt for the year ended December 31, 2016. We recorded an impairment charge2022 were as follows:

Goodwill at December 31, 2021

$

Acquisitions

 

1,601,400

Goodwill at December 31, 2022

$

1,601,400

Intangible Asset, Net

Information regarding purchased intangible assets acquired with the Company’s acquisition of $13,222 representing cost of $21,954, less accumulated amortization of $8,732Moviynt for the year ended December 31, 2015 regarding our abandoned patents2022 was as follows:

As of December 31, 2022

    

Gross

    

    

Carrying

Accumulated

Net Carrying

Amount

Amortization

Value

Tradename-Trademark

$

92,600

$

(3,087)

$

89,513

IP-Technology-License

 

415,400

 

(13,847)

 

401,553

Customer Base

 

153,400

 

(5,113)

 

148,287

Non-Competes

 

37,200

 

(1,240)

 

35,960

Total definite-lived intangible assets

$

698,600

$

(23,287)

$

675,313

For all intangible assets acquired and trademarks. We recorded no patent impairment chargespurchased during the year ended December 31, 2022, Tradename, IP-Technology License, Customer Base and Non-Competes have expectedusefullives of 5 years.

Amortization expense relating to purchased intangible assets was $23,287 for the year ended December 31, 2017.2022. As of December 31, 2022, expected amortization expense relating to purchased intangible assets for each of the next five years and thereafter was as follows:

F-16

2023

    

$

139,720

2024

 

139,720

2025

 

139,720

2026

 

139,720

2027

 

116,433

$

675,313

F-21

Table of Contents

VUZIX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 5 — Software Development Costs, Net9 – Other Assets

The Company’s other assets consists of the following:

  December 31,
2017
  December 31,
2016
 
       
Software Development Costs $859,351  $859,351 
Less: Accumulated Amortization  (859,351)  (644,513)
Additions  408,723    
         
Software Development Costs, Net $408,723  $214,838 

December 31,

December 31, 

    

2022

    

2021

Private Corporation Investments (at cost)

$

450,000

$

450,000

Software Development Costs

750,000

500,000

Additions

125,000

250,000

Less: Accumulated Amortization

(375,000)

(208,334)

Software Development Costs, Net

500,000

541,666

Unamortized Common Stock Expense included in Long-Term Prepaid Expenses

631,143

491,923

Total Other Assets

$

1,581,143

$

1,483,589

During 2020, the Company invested $500,000 in Android operating systems upgrades for its CPU platform used on its M400 and M4000 products. This upgrade was finished and placed into service in the beginning of the fourth quarter of 2020.  This capitalized asset will be amortized on a straight-line over its expected product life cycle of 36 months, which began on October 1, 2020. In October 2021, the Company invested $250,000 for further Android operating systems version upgrades to the CPU platform it uses on its M400 and M4000 products. This development work has not yet been completed and will ultimately be amortized once placed into service which is expected in the first quarter of 2023.

Total amortization expense for capitalized software development costs for the years ended December 31, 2017, 20162022, 2021 and 20152020 was $214,838, $286,450$166,667, $240,395 and $286,450, respectively. These costs$183,328, respectively, and are being amortized over 3 years and have been included in Cost of Sales – Products in the Consolidated StatementStatements of Operations. The software development was completed in September 2014 and was fully amortized as of September 30, 2017. During the year ended December 31, 2017 new software development related costs totaling $408,723 were capitalized.

Note 6 — Licenses, Net

  December 31,
2017
  December 31,
2016
 
       
Licenses $243,717  $             — 
Less: Accumulated Amortization  -  
         
Licenses, Net $243,717  $ 

The Company acquired two licenses in 2017. The first related to the renegotiation of an existing license at a cost of $114,967, which will result in lower royalty rates being paid by the Company over the next 10 years.  This license will take effect as of January 1, 2018.

The Company entered into Technology Acquisition Agreement where it acquired all the seller's right, title and interest in certain Transferred Intellectual Property (IP). Pursuant to the agreement, the Company paid approximately $75,702 as reimbursement of related patent application costs incurred by the seller to date, which are included in Patents and Trademarks. The Company also issued 25,000 shares, valued at $128,750, upon the closing and will issue (i) a further 25,000 shares after the Company has successfully developed a working demonstrator system utilizing the IP; and (ii) 50,000 shares once the Company completes the successful commercialization of products containing the IP for sale in the marketplace. The Company estimates that it will take up to 24 months and approximately $200,000 in new R&D spending to achieve the first development milestone of a functional demonstrator model.

There was no amortization expense related to licenses in the years ended December 31, 2017, 2016 and 2015.

Note 7 — Accrued Expenses

Accrued expenses consisted of the following:

 December 31,
2017
  December 31,
2016
 

December 31, 

December 31, 

    

2022

    

2021

Accrued Wages and Related Costs $163,305  $119,472 

$

843,537

$

683,044

Accrued Compensation  327,469   648,720 
Accrued Professional Services  531,728   137,099 

 

263,800

 

551,220

Accrued Warranty Obligations  167,503   41,132 

 

159,927

 

185,044

Accrued Interest  171,435   375,560 
Other Accrued Expenses  10,000   10,000 

 

403,275

 

        

Total $1,371,440  $1,331,983 

$

1,670,539

$

1,419,308

F-17

VUZIX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Included in the above accrued compensation are amounts owed to officers of the Company for services rendered that remain outstanding primarily for 2016 and prior years. The amounts are not subject to a fixed repayment schedule and they bear interest at a rate of 8% per year, compounding monthly. The related interest amounts on the unpaid accrued officer compensation included in Accrued Interest were $171,435 and $141,645, respectively, at December 31, 2017 and December 31, 2016.

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 yearstwelve (12) months, unless the customer purchases an extended warranty for some of our products.an additional twelve (12) months. 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 onupon product-based historical performance rates and related costs to repair. Included in Other Accrued Expenses as of December 31, 2022, were $318,320 in accrued vendor expenses.

F-22

The changes in the Company’s accrued warranty obligations for the years ended December 31, 2017, 20162022, 2021 and 20152020 were as follows:

Accrued Warranty Obligations at December 31, 2014 $39,624 

Accrued Warranty Obligations at December 31, 2019

    

$

98,893

Reductions for Settling Warranties  (67,858)

 

(193,503)

Warranty Issued During Year  92,236 

 

238,508

    
Accrued Warranty Obligations at December 31, 2015  64,002 

Accrued Warranty Obligations at December 31, 2020

 

143,898

Reductions for Settling Warranties  (103,265)

 

(342,392)

Warranty Issued During Year  80,395 

 

383,538

    
Accrued Warranty Obligations at December 31, 2016  41,132 

Accrued Warranty Obligations at December 31, 2021

$

185,044

Reductions for Settling Warranties  (157,035)

 

(408,655)

Warranty Issued During Year  283,406 
Accrued Warranty Obligations at December 31, 2017 $167,503 

Warranties Issued During Year

 

383,538

Accrued Warranty Obligations at December 31, 2022

$

159,927

Note 8 — Derivative Liability and Fair Value Measurements

The Company recognized a derivative liability for the warrants to purchase shares of its common stock issued in connection with the equity offering and related debt conversions on August 5, 2013. These warrants have a cashless exercise provision and an exercise price that is subject to adjustment in the event of subsequent equity sales at a lower purchase price (subject to certain exceptions) along with full-ratchet anti-dilution provisions. In accordance with ASC 815-10-25Derivatives and Hedging we measured the derivative liability using a Monte Carlo Options Lattice pricing model at the warrants’ life/ maturity issuance date and subsequently remeasured the liability on each reporting date.

Accordingly, at the end of each quarterly reporting date the derivative fair market value is remeasured and adjusted to current market value. As at December 31, 2017 and 2016 a total of 38,100 warrants were outstanding that contained a full-ratchet anti-dilution provision. In connection with the Series A Private Placement on January 2, 2015 (see Note 11), holders of approximately 86% of outstanding warrants issued by the Company in its public offering and in connection with the conversion by certain holders of the Company’s outstanding debt in connection with the Company’s public offering (collectively, the “Public Offering Warrants”) agreed to irrevocably waive their rights to anti-dilution protection under Section 2(b) of the Public Offering Warrants in the event the Company issues additional securities at a per share price lower than the exercise price of the Public Offering Warrants (the “Public Offering Warrant Waiver”). As a result, the related derivative liability was reversed to zero and reclassified into stockholders’ equity under Additional Paid-In Capital.

The Company recognized a derivative liability during the year ended December 31, 2014 for the $3,000,000 of senior convertible notes with a conversion price that is subject to adjustment in the event of subsequent equity sales at a lower purchase price (subject to certain exceptions). In accordance with ASC 815-10-25, we measured the derivative liability of this embedded conversion option using a Monte Carlo Options Lattice pricing model at the June 3, 2014 issuance date as $1,938,988. The value of the derivative liability at issuance was recorded as a discount against the notes in the Long-Term Debt section of the balance sheet. Accordingly, at the end of each quarterly reporting date, the derivative fair market value was remeasured and adjusted to current market value.

In connection with the Series A Private Placement on January 2, 2015, each of the holders of notes issued by the Company on June 3, 2014 (the “June 2014 Notes”) agreed to irrevocably waive their rights to anti-dilution protection under Section 5(b) of the June 2014 Notes in the event the Company issues additional securities at a per share price lower than the conversion price of the June 2014 Notes (the “June 2014 Note Waiver”). As a result this derivative liability was reversed to zero and reclassified into stockholders’ equity under Additional Paid-In Capital.

F-18

VUZIX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

We measure certain financial instruments at fair value on a recurring basis. Assets and liabilities measured at fair value on a recurring basis are as follows at December 31, 2017 and 2016:

2017: Total  Level 1  Level 2  Level 3 
Warrant Liability $152,927  $  $  $152,927 
Total liabilities measured at fair value (Current Liabilities) $152,927  $  $  $152,927 

2016: Total  Level 1  Level 2  Level 3 
Warrant Liability $173,131  $  $  $173,131 
Total liabilities measured at fair value (Long-Term) $173,131  $  $  $173,131 

Changes in the fair value of the warrant liability were as follows:

Fair value – December 31, 2014 $13,541,138 
     
Reclassification of warrant exercises to Additional Paid-in Capital  (2,855,463)
Change in fair value for the period of warrant derivative liability  1,098,465 
Reclassification of embedded debt conversion price adjustment provision liability to Additional Paid-in Capital upon waiver of certain anti-dilutive provisions  (2,806,942)
Reclassification of warrant exercise price adjustment provision liability to Additional Paid-in Capital upon waiver of certain anti-dilutive provisions  (8,736,412)
     
Fair value – December 31, 2015  240,786 
     
Reclassification of warrant exercises to Additional Paid-in Capital  (32,911)
Change in fair value for the period of warrant derivative liability  (34,744)
     
Fair value – December 31, 2016  173,131 
     
Reclassification of warrant exercises to Additional Paid-in Capital   
Change in fair value for the period of warrant derivative liability  (20,204)
 Fair value – December 31, 2017 $152,927 

The Monte Carlo Options Lattice pricing model was used to estimate the fair value of warrants outstanding and reflected the following assumptions:

  December 31,
2017
  December 31,
2016
  

December 31,
2015

 
Assumptions for Pricing Model:            
Expected term in years  0.59   1.22   2.60 
Volatility range for years  143%  100%  103%
Risk-free interest rate  1.76%  1.47%  1.06%
Expected annual dividends  None   None   None 
             
Value of warrants outstanding:            
Fair value of warrants $152,927  $173,131  $240,786 

F-19

VUZIX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 9 — Long-Term Debt

Long-term debt consisted of the following:

  December 31,
2017
  December 31,
2016
 
    
Convertible, Senior Secured Notes payable. The principal was due June 3, 2017 and no payments were required prior to maturity. The notes carried a 5% annual interest rate, payable upon the notes’ maturity. Both the principal plus accrued interest were convertible into shares of the Company’s common stock at $2.25, subject to normal adjustments. The notes were secured by a first security position in all the assets of the Company. $  $1,591,740 
Convertible, Senior Secured Notes Debt Issuance Costs of $139,340, net of accumulated amortization.     (19,500)
Unamortized debt discount related to derivative liability associated with above notes’ conversion price that is subject to adjustment in the event of subsequent equity sales at a lower purchase price (subject to certain exceptions). Upon issuance on June 3, 2014, the discount was $1,938,988.     (155,760)
         
    1,416,480)
Less: Amount Due Within One Year     (1,416,480)
         
Amount Due After One Year $  $ 

All of the $1,591,740 in Convertible Senior Secured Notes outstanding as of December 31, 2016, were converted into 707,440 shares of common stock during the year ended December 31, 2017 and $269,543 of accrued interest on these Notes was converted into 119,797 shares of common stock during the year ended December 31, 2017.

F-20

VUZIX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 1011 — Income Taxes

The Company files U.S. federal and various state and foreign tax returns.

Pre-tax earnings consisted of the following for the years ended:

 December 31, December 31, December 31, 
 2017  2016  2015 
       
Pre-Tax (Loss)            

December 31, 

December 31, 

December 31, 

    

2022

    

2021

    

2020

Pre-Tax Income (Loss)

 

  

 

  

 

  

U.S. $(19,680,720) $(19,263,625) $(13,425,887)

$

(41,356,619)

$

(39,906,101)

$

(18,238,773)

Outside the U.S.  47,218   43,543   (1,591)

 

593,046

 

(471,059)

 

286,601

Total Pre-Tax (Loss) $(19,633,502) $(19,250,082) $(13,427,478)

Total Pre-Tax Income (Loss)

$

(40,763,573)

$

(40,377,160)

$

(17,952,172)

The provision expense/(benefit) for income taxes for the years ended December 31, 2017, 20162022, 2021 and 20152020 was as follows:

 2017  2016  2015 
       

    

2022

    

2021

    

2020

U.S. Income Taxes:            

 

  

 

  

 

  

Current Provision $  $  $ 

$

$

$

Deferred Provision  3,639,752   (5,963,589)  (3,730,342)

 

(2,957,991)

 

(8,924,947)

 

(3,897,293)

Valuation Allowance  (3,639,752)  5,963,589   3,730,342 

 

2,957,991

 

8,924,947

 

3,897,293

Income Taxes Outside the U.S.:            

 

 

 

Current Provision         

 

 

 

Deferred Provision  215,745   (197,907)   

 

109,107

 

(341,181)

 

7,916

Valuation Allowance  (215,745)  197,907    

 

(109,107)

 

341,181

 

(7,916)

State Income Taxes:            

 

 

 

  

Current Provision         

 

 

 

Deferred Provision  (59,530)  (75,442)  (128,572)

 

271,248

 

(636,401)

 

(94,324)

Valuation Allowance  59,530   75,442   128,572 

 

(271,248)

 

636,401

 

94,324

            
Total Provision $  $  $ 

$

$

$

F-23

A reconciliation of the statutory U.S. federal income tax rate to the effective rates for the years ended December 31, 2017, 20162022, 2021 and 20152020 is as follows:

 2017
%
  2016
%
  2015
%
 

    

2022

    

2021

    

2020

%  

%  

%

Federal Income Tax at Statutory Rate  34.0   34.0   34.0 

 

21.0

 

21.0

 

21.0

State Tax Provision, Net of Federal Benefit  0.3   0.3   0.3 

 

(0.5)

 

1.6

 

0.3

Foreign Income Taxed at Other Than 34%     (0.7)   
Change in Corporate Tax Rates from 34% to 21%  (52.9)      
Loss on Derivative Valuation        (6.3)

Permanent Differences

 

(0.4)

 

 

(0.4)

Forgiveness of PPP Loan

1.8

Federal Tax Credits

 

(0.1)

 

0.2

 

1.1

Stock Compensation

(13.2)

1.5

(2.1)

Foreign Tax Provision

0.1

0.6

0.3

Expiration of NOL, Credits, Charitable Contribution

(0.8)

(0.7)

0.1

Other  (0.7)  0.5   0.7 

 

0.2

 

0.3

 

0.1

            
Effective Tax Rate  (19.3)  34.1   28.7 

 

6.3

 

24.5

 

22.2

Change in Valuation Allowance  19.3   (34.1)  (28.7)

 

(6.3)

 

(24.5)

 

(22.2)

            
Net Effective Tax Rate         

 

 

 

F-21

VUZIX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Significant components of the Company’s deferred tax assets and liabilities at year end are as follows:

 December 31, December 31, December 31, 
 2017  2016  2015 
       

December 31, 

December 31, 

December 31, 

    

2022

    

2021

    

2020

Deferred Tax Assets:            

 

  

 

  

 

  

Net Operating Loss Carry-forwards $16,167,791  $19,752,311  $15,027,603 

$

38,655,757

$

36,705,377

$

29,264,829

Tax Credit Carry-forwards  2,404,490   2,398,817   1,823,661 

 

4,048,872

 

3,924,660

 

3,778,001

Inventory Valuation Adjustment  675,830   622,168   161,944 

 

350,165

 

290,713

 

847,441

Officer’s Compensation  86,670   271,095   141,491 
Loss from Foreign Operations     197,907    

Stock-Based Compensation

 

890,169

 

2,989,427

 

208,803

Lease Obligation Liability

204,141

240,741

323,186

Capitalized R&D

2,265,857

Other  108,734   44,372   89,783 

 

702,540

 

425,737

 

368,243

Total Deferred Tax Assets  19,443,515   23,286,670   17,244,482 

 

47,117,501

 

44,576,655

 

34,790,503

            

Deferred Tax Liabilities:           

 

  

 

  

 

  

Income from Foreign Operations  17,838         

10,727

Lease Right of Use Asset

204,141

240,741

323,186

Moviynt Intangibles

3,867

Other  11,789         

 

 

4,057

 

27,262

Total Deferred Tax Liabilities  29,627   76,815   271,565 

 

208,008

 

244,798

 

361,175

            

Net Deferred Tax Assets Before Valuation Allowance $19,413,888  $23,209,855  $16,972,917 

$

46,909,493

$

44,331,857

$

34,429,328

Valuation Allowance  (19,413,888)  (23,209,855)  (16,972,917)

 

(46,909,493)

 

(44,331,857)

 

(34,429,328)

            

Net Deferred Tax Assets $  $  $ 

$

$

$

As of December 31, 2017,2022, the Company has approximately $76$178 million in US federal net operating loss (NOL) carry-forwards and $2.2 million of Japanese NOL carry-forwards. The federal NOL carry-forwards generated in tax years prior to 2018 began to expire in 2020. The federal NOL carry-forwards created in 2018 - 2022 have no expiration. The Company has state NOL carry-forwards of approximately $2.4$8.4 million available in various jurisdictions in which it files that will begin to expire in 2034. The Company also has approximately $4.0 million of federal and state credit carry-forwards. The federal and state credit carry-forwards which will beginbegan to expire in 2018 if not utilized.during 2018. Utilization of the NOL carry-forwards may be subject to an annual limitation in the case of sufficient equity ownership changes under Section 382 of the tax law or the NOL’scarry-forwards may expire unutilized.

F-24

As a result of the assessment of the FASB ASC 740-10 (Prior Authoritative Literature: FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109), the Company has no unrecognized tax benefits. By statute,

The Company’s U.S. federal and state tax returns for the years 2013-2017 are open2018 through 2021 remain subject to examination by the major taxing jurisdictions to which the Company is subject.

respective tax authorities.

FASB ASC 740 “Accounting(Prior Authoritative Literature: SFAS No. 109, Accounting for Income Taxes”Taxes), requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on differing treatment of items for financial reporting and income tax reporting purposes. The deferred tax balances are adjusted to reflect tax rates by tax jurisdiction, based on currently enacted tax laws, which will be in effect in the years in which the temporary differences are expected to reverse. In light of the historic losses of the Company, a 100% valuation allowance has been recorded to fully offset any benefit associated with the net deferred tax assets, for which realization is not considered more likely than not to occur.

The Tax Cuts and Jobs Act (the “Tax Act”) enacted on December 22, 2017 significantly lowered the corporate income tax rate to a flat 21% effective January 1, 2018. There was no impact on the income tax provision for the lowering of the corporate tax rate because the change in the net deferred tax asset resulting from the lower rate was fully offset by the corresponding change in the Company’s valuation allowance.

Note 1112 — Capital Stock

Preferred stock

The Board of Directors isare authorized to establish and designate different series of preferred stock and to fix and determine thetheir voting powers and other special rights and qualifications of such series.terms. A total of 5,000,000 shares of preferred stock with a par value of $0.001 are authorized as of December 31, 20172022 and December 31, 2016.2021. Of this total, 49,626 shares are designated as Series A Preferred Stock. There were 49,626no shares of Series A Preferred Stock issued and outstanding on December 31, 20172022 and December 31, 2016. There were no declared preferred dividends owed as of December 31, 2017 or 2016.

2021.

On January 2, 2015 (the “Series A Closing Date”), we entered into and closed a Series A Preferred Stock Purchase Agreement (the “Series A Purchase Agreement”) with28, 2021, Intel Corporation (the “Series A Purchaser”(“Intel”), pursuant to which we issued and sold to (which was the Series A Purchaser, an aggregateholder of 49,626 sharesall of the Company’s Series A Preferred Stock, at a purchase price of $500 per share, for an aggregate purchase price of $24,813,000 (the “Series A Private Placement”). Each shareoutstanding shares of Series A Preferred Stock is convertible, at the optionStock) converted all of the Series A Purchaser, into 100 shares of the Company’s common stock (determined by dividing the Series A Original Issue Price of $500 by the Series A Conversion Price. The Series A Conversion Price is $5.00, subject to adjustment in the event of stock splits, dividends or other combinations).

F-22

VUZIX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Each share of Series A Preferred Stock is entitled to receive dividends at a rate of 6% per year, compounded quarterly and payable in cash or in kind, at the Company’s sole discretion. As of December 31, 2017, total accrued and unpaid preferred dividends were $4,849,063. In the event of the liquidation, dissolution or winding up of the Company, each share of Series A Preferred Stock is entitled to a liquidation preference equal to one times (1x) the Series A Purchaser’s original per share purchase price, plus a right to receive an additional liquidation distribution together with the common stock holders pro rata on an as converted basis, but not in excess of $1,000 per share in the aggregate (subject to adjustment for accrued but unpaid dividends and in the event of stock splits, dividends or other combinations). Each share of Series A Preferred Stock is entitled to vote with the holders of the Company’s common stock on matters presented to its stockholders, and is entitled to cast such number of votes equal to the whole number of shares of common stock into which such49,626 shares of Series A Preferred Stock are convertible. The holdersinto 4,962,600 shares of record ofcommon stock and the Series A Preferred Stock are entitled to nominate and elect 2 directors to the Company’s Board of Directors (the “Board Election Right”), at least one of whom is required to qualify as an “independent” director, as that term is used in applicable exchange listing rules. The Board Election Right with respect to the independent director will terminate on such date as the number of shares of Series A Preferred Stock then outstanding is less than 40% of the original amount purchased by the Series A Purchaser. The Board Election Right with respect to the second director shall terminate on such date as the number of shares of Series A Preferred Stock then outstanding is less than 20% of the original amount purchased by the Series A Purchaser. The Company also granted the Series A Purchaser the right to have a board observer at meetings of the Company’s Board of Directorsbeen retired and committees thereof. To date, the Series A Purchaser has not exercised such director election or meeting observation rights.

For as long as at least 25% (or 12,406 shares) of the Series A Preferred Stock is outstanding, the Company may not, without the consent of holders of at least 60% of the then outstanding shares of Series A Preferred Stock, take certain actions, including but not limited to: (i) liquidate, dissolve, or wind up the business and affairs of the Company; (ii) amend, alter or repeal any provision of its charter or bylaws in a manner that adversely effects the rights of the Series A Preferred Stock; (iii) create or issue any capital stock that is equal to or senior to the Series A Preferred Stock with respect to preferences; (iv) create or issue any debt security, subject to certain exceptions; (v) pay off any debt obligation prior to its stated maturity date; or (vi) enter into any stockholders rights plan or similar arrangement or take other actions that may limit actions that holders of a majority of the Series A Preferred Stock can take under Section 203 of the Delaware General Corporation Law, as well as such other customary provisions protecting the rights of the holder of the Series A Preferred Stock, as are outlined in the Certificate of Designation.

The Series A Purchaser has the right to participate in any proposed issuance by the Company of its securities, subject to certain exceptions (the “Participation Right”). In the event the Series A Purchaser is not afforded the opportunity to exercise its Participation Right, the Series A Purchaser will have the right, but not the obligation, up to two times per calendar year, to acquire additional securities from the Company in such amount as is sufficient to maintain the Series A Purchaser’s ownership percentage in the Company, calculated immediately prior to such applicable financing, at a purchase price equal to the per share price of the Company’s securities in such applicable financing.

cannot be reissued. In connection with the Series A Private Placement,foregoing, Intel and the Company entered into an investor’s rights agreement with the Series A Purchaser, pursuant to which the CompanyIntel agreed to file a “resale” registration statement with the Securities and Exchange Commission (the “SEC”) coveringaccept $10,000,000 in full payment of all shares of common stock issuable upon conversion of theaccrued Series A Preferred Stock solddividends in the Series A Private Placement on or before February 14, 2015. The Company filed the registration statement on February 12, 2015 and the registration statement was declared effective by the SEC on February 17, 2015.approximate amount of $10,800,000.

Common Stock

The Company’s authorized common stock consists of 100,000,000 shares, par value of $0.001 as of December 31, 20172022, and December 31, 2016.2021. There were 24,276,275 and 19,569,24763,783,779 shares of common stock issued and 63,319,107 shares of common stock outstanding as of December 31, 20172022 and December 31, 2016, respectively. On August 14, 2017, the Company closed a public offering of 1,500,00063,672,268 shares of common stockissued and outstanding as of December 31, 2021.

On March 2, 2022, our Board of Directors approved the repurchase by the Company of up to an aggregate of $25 million of our common stock by open market or privately negotiated transactions under the Share Buyback Program.  This program is in effect for one year, does not obligate the Company to acquire any particular amount of common stock and  may be suspended or discontinued at any time at the Company’s sole discretion. During the year ended December 31, 2022, the Company repurchased 464,672 shares of our common stock at an average cost of $4.32 per share. As of December 31, 2022, 464,672 shares of our common stock were held in treasury.

On March 25, 2021, the Company entered into an underwriting agreement with BTIG, LLC for the sale of the Company’s common stock in an underwritten public offering at a public offering price of $5.75$20.50 per share, resulting inshare. The Company closed on this public offering (including the full exercise of the over-allotment option granted to the underwriters), receiving total gross proceeds of $97,750,007 from the sale of 4,768,293 shares. The Company received net proceeds after commissionsthe underwriting discount and issuance costs and expenses of $7,978,321. As part$91,613,587.

In connection with the Atomistic Agreements, the Company will, upon certain deliverables and the achievement of this offering,milestones contained in the Atomistic Agreements, be committed to pay $2,500,000 and to issue a

F-25

minimum of 1,750,000 common shares of Vuzix to the stockholders of Atomistic (as a portion of the consideration for certain shares of Atomistic) which would result in Vuzix owning Series A Preferred shares in Atomistic that could ultimately be converted into ordinary shares of Atomistic, with Atomistic becoming a subsidiary of the Company, and Vuzix ultimately owning 100% of Atomistic. The share issuances by the Company are expected to be issued over the next 6 to 24 months. In the event the fair market value of Vuzix stock, which is determined based upon the trailing 10-day VWAP of the Company’s COO purchased 10,000common shares, butis between a floor of $8.00 and a ceiling of $13.00, Vuzix may opt, at its sole discretion, to pay any fair market valuation shortfall with up to 1,093,754 additional Vuzix common shares or cash to Atomistic shareholders. Within five years of the market pricecommencement of $6.10 per share that reflectedthe Atomistic Agreements, the Company has agreed to issue up to a 15% equity bonus of the previously issued common shares to Atomistic stockholders, if: (i) the Company engages in a change-of-control transaction for an implied equity value of at least $3.5 billion or (ii) the Company’s closing market trading price onvaluation exceeds $3.5 billion. This could result in the dateissuance of an additional 291,346 to 473,438 shares of the transaction to comply with certain Nasdaq rules.

On December 19, 2017, the Company closed a public offering of 2,066,116 shares ofCompany’s common stock at an offering pricewhen that valuation target is exceeded. None of $6.05 perthese share resulting in net proceeds after commissions and expenses of $11,532,502. The Company alsocommitments have been issued to investors in this offering three-year warrants to purchase an aggregate 1,033,058 shares of its common stock at $7.00 per share, which will be exercisable for a period of three years commencing six months from issuance.date.

On July 11, 2016, the Company closed its public offering of 1,150,000 shares of common stock, at a public offering price of $5.75 per share, for gross proceeds of $6,612,500. On December 2, 2016, the Company closed its public offering of 2,000,000 shares of common stock, at a public offering price of $7.25 per share, for gross proceed of $14,500,000. Total net proceeds from these public offering was $19,238,015.

F-23

VUZIX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 1213 — Stock Warrants

The following table shows the various changes in warrants for the years ended:

  December 31,
2017
  December 31,
2016
  

December 31,
2015

 
          
Warrants Outstanding, Beginning of Year  401,859   535,091   5,236,660 
Exercised During the Year  (250,009)  (133,232)  (4,746,755)
Issued During the Year  1,033,062   -   60,000 
Forfeited During the Year  -   -   (14,814)
             
Warrants Outstanding, End of Year  1,184,912   401,859   535,091 

December 31, 

December 31, 

December 31, 

    

2022

    

2021

    

2020

Warrants Outstanding at:

 

 

7,276,928

 

6,512,516

Exercised During the Period

 

 

(7,276,928)

 

(2,882,647)

Issued During the Period

 

 

 

3,647,059

Warrants Outstanding at:

 

 

 

7,276,928

The outstanding warrants as of December 31, 2017 expire from March 21, 2018 to June 18, 2021. The weighted average remaining term of the warrants is 3.1 years. The weighted average exercise price is $6.44 per share. The outstanding warrants as of December 31, 2016 expire from March 21, 2018 to August 5, 2018. The weighted average remaining term of the warrants was 1.3 years. The weighted average exercise price was $2.41 per share. The outstanding warrants as of December 31, 2015 expire from March 21, 2018 to August 5, 2018. The weighted average remaining term of the warrants was 2.3 years. The weighted average exercise price was $2.43 per share.

During the year ended December 31, 20172021, a total of 250,0097,276,928 warrants were exercised on a cashlesscash basis resulting in the issuance of 168,000 shares.7,276,928 shares of common stock and proceeds of $34,715,728. During the year ended December 31, 20162020, a total of 111,2322,882,647 warrants were exercised on a cashlesscash basis resulting in the issuance of 74,6212,882,647 shares of common stock and an additional 22,000 warrants were exercised for cash resulting in proceeds of $60,750. During the year ending$14,128,527.

As of December 31, 2015 a total of 4,178,2672022, there were no outstanding warrants were exercised on a cashless basis resulting in the issuance of 3,559,783 shares. During the year ending December 31, 2015 a total of 568,488 warrants were exercised for cash resulting in proceeds of $1,272,627.

Management completed a derivative analysis on the 1,033,062 warrants issued in conjunction with our public offering which closed on December 19, 2017 to determine whether or not they met the criteria under ASC 815-10-15-83 to trigger treatment as a derivative instrument. Management concluded that these warrants did not meet the criteria to be treated as a derivative instrument.

remaining.

Note 1314 — Stock Option Plans

Stock-Based Compensation

The Company has the following Stock Option Plans (“Plans”) that allow for the granting of both incentive stock options or ISOs, which can result in potentially favorable tax treatment to the participant, and non-statutory stock options. The Company’s 2014 Equity Incentive Plan (the “2014 Plan”) was approved by the stockholders of the Company on June 26, 2014. The Company will no longer issueissues any options under the 2007 andits prior 2009 Plans.Plan. The 2014 Plan has an “evergreen provision”, under which the maximum number of shares of common stock that may be issued under the 2014 Plan was initially 1,000,000 and automatically increases each timeapproved by the Company issues additional shares of common stock so thatCompany’s stockholders to increase the total number of shares issuableavailable for issuance thereunder at all times equals 10%to 20% of the then outstanding shares of common stock, unless in any case the Board of Directors adopts a resolution providing that the number of shares issuable under the 2014 Plan not be so increased.stock. As of December 31, 2017,2022, the authorized shares of common stock under the 2014 Plan, totaled 2,427,628.

as amended, were 12,663,821.

The exercise price per share subject to an option is determined by the administrator, but in the case of an ISO must not be less than the fair market value of a share of our common stock on the date of grant and in the case of a non-statutory stock option must not be less than 100% of the fair market value of a share of our common stock on the date of grant.

Under the 2014 Plan, the Company may grant stock options, stock appreciation rights, performance awards of stock and/or cash, and stock awards of restricted stock.

F-24

F-26

Table of Contents

VUZIX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Options issued or outstanding under the Stock Options Plans are as follows:

 2007
Plan
  2009
Plan
  2014
Plan
  Total 
Outstanding as of December 31, 2015  37,447   120,842   864,500   1,022,789 

2009

2014

    

Plan

    

Plan

    

Total

Outstanding or Exercised as of December 31, 2020

 

85,498

 

2,547,677

 

2,633,175

Available for future issuance under plan  -   -   744,295   744,295 

 

 

6,583,033

 

6,583,033

Total authorized by plan  37,447   120,842   1,608,795   1,767,084 

 

85,498

 

9,130,710

 

9,216,208

                
Outstanding as of December 31, 2016  21,977   132,771   929,550   1,084,298 

Outstanding or Exercised as of December 31, 2021

 

 

11,184,450

 

11,184,450

Available for future issuance under plan        1,027,375   1,027,375 

 

 

1,550,004

 

1,550,004

Totals authorized by plan  21,977   132,771   1,956,925   2,111,673 

 

 

12,734,454

 

12,734,454

                
Outstanding as of December 31, 2017  10,665   117,094   1,382,485   1,510,244 

Outstanding or Exercised as of December 31, 2022

 

 

11,168,061

 

11,168,061

Available for future issuance under plan        1,045,143   1,045,143 

 

 

1,495,760

 

1,495,760

Totals authorized by plan  10,665   117,094   2,427,628   2,555,387 

 

 

12,663,821

 

12,663,821

The 2014 Plan gives the Board of Directors of the Company the ability to determine vesting periods for all stock incentives granted under the 2014 Plan and allows option terms to be up to ten years from the original grant date. Employees’ incentive stock options musttypically vest at a minimum rate of 20%25% per year over a five-yearfour-year period, commencing on the date of grant. Most vest ratably over four years commencing on the date of the option grant. In the case of directors, such options are granted annually and expire ten years after the date of their grant and vest ratably, on a monthly basis, over the next 12 months. Non-employee directors have vesting of 50% immediately on grant and the balance vest ratably, on a monthly basis, over the next 12 months. Advisors or consultants can have vesting range from 100% of the option grants vesting immediately to ratably, on a monthly basis, up to 48 months.

The following table summarizes stock option activity related to the Company’s standard employee incentive plan, excluding options awarded under the Long-term Incentive Plan (LTIP), for the years ended December 31, 2017, 20162022, 2021 and 2015:2020:

    Weighted Weighted
Average
 
 Number of
Options
  Average
Exercise Price
  Remaining Life
(years)
 
       
Outstanding at December 31, 2014  720,551  $4.46   8.56 

Weighted

Average

Number of

Average

Remaining Life

    

Options

    

Exercise Price

    

(years)

Outstanding at December 31, 2019

 

1,383,591

$

4.77

 

6.25

Granted  374,000   5.67     

 

1,481,000

 

1.66

 

  

Exercised  (15,833)  2.60     

 

(82,083)

 

4.67

 

  

Expired or Forfeited  (55,929)  8.12     

 

(149,333)

 

3.68

 

  

            
Outstanding at December 31, 2015  1,022,789  $4.59   7.56 

Outstanding at December 31, 2020

 

2,633,175

$

3.09

 

6.53

Granted  116,750   6.60     

 

1,100,500

 

17.23

 

  

Exercised  (10,450)  3.46     

 

(739,956)

 

3.36

 

  

Expired or Forfeited  (44,791)  3.87     

 

(170,085)

 

8.58

 

  

            
Outstanding at December 31, 2016  1,084,298  $4.76   7.57 

Outstanding at December 31, 2021

 

2,823,634

$

7.67

 

7.95

Granted  534,500   5.74     

 

442,000

 

5.45

 

  

Exercised  (63,187)  2.89     

 

(145,185)

 

2.56

 

  

Expired or Forfeited  (45,367)  8.30     

 

(314,776)

 

9.27

 

  

Outstanding at December 31, 2017  1,510,244  $5.04   7.58 

Outstanding at December 31, 2022

 

2,805,673

$

7.80

 

7.28

As of December 31, 2017,2022, there were 797,8611,493,707 options that were fully vestedfully-vested and exercisable at a weighted average exercise price of $4.65$6.88 per share. The weighted average remaining contractual term on the vested options is 6.46.3 years. The unvested balance of 712,3831,311,966 options as of December 31, 20172022, are exercisable at a weighted average exercise price of $5.48$8.83 per share. The weighted average remaining contractual term on the unvested options is 8.78.4 years.

As of December 31, 2016,2021, there were 613,6651,069,639 options that were fully vestedfully-vested and exercisable at a weighted average exercise price of $4.83$5.70 per share. The weighted average remaining contractual term on the vested options is 6.6 years. The unvested balance of 1,753,995 options as of December 31, 2021, are exercisable at a weighted average exercise price of $9.62 per share. The weighted average remaining contractual term on the unvested options is 8.8 years.

F-27

As of December 31, 2020, there were 1,251,241 options that were fully-vested and exercisable at a weighted average exercise price of $4.17 per share. The weighted average remaining contractual term on the vested options is 4.5 years. The unvested balance of 1,381,934 options as of December 31, 2020 were exercisable at a weighted average exercise price of $2.16 per share. The weighted average remaining contractual term on the vested options was 7.09.3 years.

The unvested balanceaggregate intrinsic value of 470,633the options as ofexercised during the year ended December 31, 2016 were exercisable at a weighted average exercise price of $4.67 per share. The weighted average remaining contractual term on the vested options2022, 2021 and 2020 was 8.4 years.

As of December 31, 2015, there were 424,688 options that were fully vestedapproximately $14,732,088, $13,697,906 and exercisable at weighted average exercise price of $5.34 per share. The weighted average remaining contractual term on the vested options is 7.4 years. The unvested balance of 598,101 options as of December 31, 2015 were exercisable at a weighted average exercise price of $4.05 per share. The weighted average remaining contractual term on the vested options was 7.4 years.

$869,177, respectively.

The aggregate intrinsic value of the options outstanding as of December 31, 2017, 20162022, 2021 and 20152020 was approximately $3,517,878, $2,776,068$2,093,164, $9,314,887 and $3,449,805,16,444,695, respectively.

F-25

VUZIX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Black-Scholes-Merton option pricing model was used to estimate the fair value of share-based awards under FASB ASC Topic 718. The Black-Scholes-Merton option pricing model incorporates various and highly subjective assumptions, including expected term and share price volatility. For valuation purposes, stock option awards were categorized into two groups, stock option grants to employees and stock option grants to members of the Board of Directors.

The expected term of options granted was estimated to be the average of the vesting term, historical exercise and forfeiture rates, and the contractual life of the option. The share price volatility at the grant date is estimated using historical stock prices based upon the expected term of the options granted. The risk-free interest rate assumption is determined using the rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the award being valued. Cash dividendsWe have never been paid cash dividends on our common stock and aredo not anticipated to be paidanticipate paying cash dividends on our common stock in the foreseeable future. Therefore, the assumed expected dividend yield is zero.

The following summary table shows the assumptions used to compute the fair value of stock options granted, excluding LTIP, during 2017, 20162022, 2021 and 20152020 and their estimated value:

December 31, 

    

2022

    

2021

    

2020

 

Assumptions for Black-Scholes:

 

  

 

  

 

  

Expected term in years

 

6.1

 

6.1 to 6.5

 

6.2 to 6.6

Volatility

 

85.44% to 87.09

%

82.8% to 86.0

%  

73.3% to 76.8

%

Risk-free interest rate

 

2.18% to 3.95

%

0.96% to 1.25

%  

0.41% to 0.55

%

Expected annual dividends

 

None

 

None

 

None

Value of options granted:

 

  

 

  

 

  

Number of options granted

 

442,000

 

1,100,500

 

1,481,000

Weighted average fair value per share

 

$

4.04

 

$

12.40

 

$

1.08

Fair value of options granted

 

$

1,783,710

 

$

13,642,976

 

$

1,602,267

December 31, 2017  2016  2015 
Assumptions for Black-Scholes:            
Expected term in years  6.5 to 6.8   7.9   6.0 to 7.9 
Volatility  122.8% to 133%   103.6% to 109.7%   114.4% to 113.5% 
Risk-free interest rate  1.98% to 2.30%   1.27% to 1.68%   1.74% to 2.02% 
Expected annual dividends  None   None   None 
             
Value of options granted:            
Number of options granted  534,500   116,750   374,000 
Weighted average fair value per share $5.24  $5.73  $4.50 
Fair value of options granted $2,803,329  $669,435  $1,684,179 

Under FASB ASC Topic 718, requires pre-vesting option“Compensation – Stock Compensation”, the Company has elected to account for forfeitures at the time of grant to be estimated and periodically revised in subsequent periods if actual forfeitures differ from those estimates. Stock-based compensation expense is recorded only for those awards expected to vest using an estimated forfeiture rate based on historical pre-vesting forfeiture data.

as they occur.

Unrecognized stock-based compensation expense was $3,517,878$8,295,237 as of December 31, 2017,2022, relating to a total of 712,3831,311,966 unvested stock options under the Company’s stock option plans. This stock-based compensation expense is expected to be recognized over a weighted average period of approximately 32.5 years.

F-26

VUZIX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 14 — Commitments

Purchase commitments

AtDuring the year ended December 31, 2017, we have2022, the Company issued 88,650 shares of common stock to its independent board members as part of their annual retainer for services covering the period of July 2022 to June 2023. The fair market value on the date of award of the stock issued was $5.64, resulting in an aggregate fair value of approximately $7 million$500,000. The unamortized portion is included in open purchase obligations that represent commitmentsPrepaid Expenses and Other Assets on our consolidated balance sheet. The fair market value of these awards is expensed over twelve (12) months, beginning on July 1, 2022.

During the year ended December 31, 2022, the Company issued 200,000 shares of common stock to its Chief Operating Officer. The fair market value on the date of award of the stock issued was $5.64, resulting in an aggregate fair value of approximately $1,128,000. The fair market value of this award is expensed over a forty-two (42) month vesting period, which began June 15, 2022.

F-28

For the years ended December 31, 2022, 2021 and 2020, the Company recorded total stock-based compensation expense, including stock awards but excluding awards under the Company’s LTIP, of $4,645,026, $4,047,444, and $2,805,842, respectively.

Note 15 – Long-term Incentive Plan

On March 17, 2021, the Company granted options to purchase inventory, materials, capital equipment,a total of 5,784,000 shares of common stock to its officers and certain other goods usedmembers of its management team. The options were granted under the Company’s existing 2014 Incentive Stock Plan. The options have an exercise price of $19.00, with 375,000 options vesting immediately and the remaining portion vesting upon the achievement of certain equity market capitalization milestones, and revenue and EBITDA operational milestones. For the years ended December 31, 2022 and 2021, the Company recorded non-cash stock-based compensation expense of $11,130,527 and $13,255,388, respectively, for options that vested or are probable to vest. There was no stock-based compensation expense related to the Company’s LTIP in the normal operationyear ended December 31, 2020.

The fair value of our business.

Adverse purchase commitments

We have periodically entered into noncancelable purchase contracts in order to ensureoption grants was calculated using a Monte Carlo simulation for the availability of materials to support production of our products. We continuously assess our outstanding commitmentsequity market capitalization tranches and recognize a loss on purchase commitments, when required, if such commitments are in excess of our product needs or the costs are not expected to be recoverable.Black-Scholes-Merton option pricing method for the operational milestone tranches. As of December 31, 2017,2022, we had $17,209,931 of total unrecognized stock-based compensation expense for the portion of options tied to equity market capitalization milestones and the portion of options tied to operational milestones that were considered probable of achievement, all of which will be recognized over a service period of up to three to four years. The probabilities of the milestone achievements are subject to catch-up adjustments in each instance where an equity market capitalization milestone is achieved or when an operational milestone becomes probable to be achieved or is achieved. Compensation costs could be reversed in subsequent periods if an awardee leaves the Company prior to the expiration of the option life for market capitalization milestone or performance award vesting of a performance award no longer determined to be probable. If such commitmentsmilestones are immaterial.achieved earlier in their expected service periods, the remaining unrecognized compensation expense related to that particular milestone would be accelerated and recognized in full during the period where that achievement is affirmed by the Board of Directors. As of December 31, 2022, and going forward, should all of the operational milestones which are currently not yet deemed probable of achievement become probable of achievement or are achieved, then the Company could ultimately recognize up to an additional $34.1 million in non-cash stock-based compensation expense at such time.

Lease commitmentsThe unvested remaining equity market and operational milestones under the LTIP with their total related option grants and criteria achievement weightings of the options available for meeting a target are shown in the following table. Of the total 5,409,000 unvested options outstanding as of December 31, 2022, there are 2,704,500 options unvested for the achievement of Equity Market Capitalization targets, 1,893,150 unvested options for the achievement of annual Revenue targets, and 811,350 unvested options for the achievement of annual EBITDA Margins Before Non-Cash Charges targets.

Award Potential

Criteria Achievement Weighting

50% of Options Available

35% of Options Available

15% of Options Available

Options Available
(Subject to Vesting)

Equity Market
Capitalization
Target

Last Twelve Months Revenue
Target

Last Twelve Months EBITDA
Margin before
Non-Cash
Charges Target

686,000

$ 2,000,000,000

$ 25,000,000

0.0%

686,000

3,000,000,000

50,000,000

2.0%

686,000

4,000,000,000

100,000,000

4.0%

686,000

5,000,000,000

200,000,000

6.0%

586,000

6,000,000,000

300,000,000

8.0%

586,000

7,000,000,000

450,000,000

10.0%

561,000

8,000,000,000

675,000,000

12.0%

491,000

9,000,000,000

1,000,000,000

14.0%

441,000

10,000,000,000

1,500,000,000

16.0%

5,409,000

F-29

Note 16 — Right-of-Use Assets and Liabilities

The Company has signed several lease agreements, with the largest being for its new office and manufacturing spacefacility in the West Henrietta, New York area under an operating lease that commenced October 3, 2015, that expiresand was set to expire on October 3, 2020. The base rent contractual payment obligations under this operating lease will be $335,248 per year. TheThis lease has an original five-year term with an option by the Company to renew for two additional three-year terms at pre-agreed to lease rates. The Company also leases small office spaces in England under a two-year lease and under a one-year lease arrangements in Japan.

Future minimum payments required under operating lease obligations as of December 31, 2017 are as follows:

  Total
Minimum
 
Year Ending
Dec 31,
 Lease
Payments
 
    
2018 $411,135 
2019  403,730 
2020  363,881 
2021  - 
2022  - 
Total $1,178,746 

For the lease agreements described above,On June 25, 2020, the Company is requiredexercised the first of two renewal terms, extending our current lease term to payJanuary 31, 2024.

In October 2022, we leased an additional 12,000 square feet for our new waveguide manufacturing facility adjacent to our existing facility in West Henrietta, New York. This lease has an original three-year term, expiring on November 30, 2025, with an option by the pro rata shareCompany to renew for two additional one-year terms at pre-agreed to lease rates. This lease commenced on December 1, 2022, and monthly base rent lease payments are $9,503 plus additional rent of the real property taxes$2,587.

Operating lease costs under our operating leases totaled $659,045, $630,085 and assessments, expenses and other charges associated with these facilities.

Rent expense$559,975 for the years ended December 31, 2017, 20162022, 2021 and 2015 totaled $461,246, $482,1472020, respectively.

Certain leases provide for increases in future minimum annual rental payments as defined in the lease agreements. The leases generally also include real estate taxes and $186,471, respectively.common area maintenance charges in the annual rental payments. Short-term leases are leases having a term of twelve (12) months or less. The Company recognizes short-term leases on an as-incurred basis and does not record a related lease asset or liability for such leases.

As none of our leases provide an implicit interest rate, we use our incremental borrowing rate to determine our discount rate at lease inception based upon the information available at commencement in determining the present value of lease payments. As of December 31, 2022, the weighted average discount rate was 7.1% and the weighted average remaining lease term was 1.8 years.

Future lease payments under operating leases as of December 31, 2022 were as follows:

2023

$

697,651

2024

 

191,120

2025

 

132,982

Total Future Lease Payments

 

1,021,753

Less: Imputed Interest

 

(65,588)

Total Lease Liability Balance

$

956,165

Note 1517 — Employee Benefit Plans

The Company has a Section 401(k) Savings Plan which covers employees who meet certain age and length of service requirements. To dateEffective July 1, 2018, the planCompany’s Plan was amended to include a 100% match by the Company on all eligible employee salary deferrals. The Company’s matching contribution is comprisedlimited to 3% of 100% employee deferrals.covered employee’s annual salary. Total 401(k) matching expense for the years ended December 31, 2022, 2021 and 2020 totaled $262,726, $280,660 and $148,131, respectively.

F-30

Note 1618 — Litigation

The Company isWe are not currently not involved in any actual or pending legal proceedingproceedings or litigation that we consider to be material, and we are not aware of any such material proceedings contemplated by or against us or involving our property.

F-27

VUZIX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 1719 — Geographic and Other Financial Information (Unaudited)

Geographic Financial Information (Unaudited)

Geographical revenue information, based on ship-to destination of the customers for the three years ended December 31, 2017, 20162022, 2021 and 2015 was based on the location of the customers2020 is as follows (in thousands):

By Continent and Region:

Fiscal Year

 

2022

2021

2020

 

    

Revenue

    

% of Total

    

Revenue

    

% of Total

    

Revenue

    

% of Total

 

North America

$

4,738

 

40

%  

$

5,003

 

38

%  

$

4,531

 

40

%

Europe

 

3,532

 

30

%  

 

4,683

 

36

%  

 

3,290

 

28

%

Asia-Pacific

 

3,411

 

29

%  

 

2,960

 

22

%  

 

3,383

 

29

%

Others

 

155

 

1

%  

 

519

 

4

%  

 

377

 

3

%

Total Revenues

$

11,836

 

100

%  

$

13,165

 

100

%  

$

11,581

 

100

%

  Fiscal Year 
  2017  2016  2015 
  Revenue  % of Total  Revenue  % of Total  Revenue  % of Total 
Asia-Pacific $1,927   35% $493   23% $250   9%
Europe  1,892   34%  649   31%  334   12%
North America  1,687   30%  981   46%  2,161   79%
Others  32   1%  4   0%  5   0%
Total Revenues $5,538   100% $2,127   100% $2,750   100%

By Country:

Fiscal Year

 

2022

2021

2020

 

    

Revenue

    

% of Total

    

Revenue

    

% of Total

    

Revenue

    

% of Total

 

US

$

4,592

 

39

%  

$

4,767

 

36

%  

$

4,364

 

38

%

Japan

1,735

15

%

2,078

16

%  

2,502

22

%  

Netherlands

 

1,508

 

13

%  

 

1,052

 

8

%  

 

631

 

5

%

Others

 

4,001

 

33

%  

 

5,268

 

40

%  

 

4,084

 

34

%

Total Revenues

$

11,836

 

100

%  

$

13,165

 

100

%  

$

11,581

 

100

%

  Fiscal Year 
  2017  2016  2015 
  Revenue  % of Total  Revenue  % of Total  Revenue  % of Total 
US $1,618   29% $962   45% $2,147   78%
France  429   8%  211   10%  44   2%
Germany  526   9%  263   12%  129   5%
Japan  1,340   24%  288   14%  217   8%
United Kingdom  529   10%  46   2%  32   1%
Others  1,096   20%  357   17%  181   6%
Total Revenues $5,538   100% $2,127   100% $2,750   100%

Countries listed in the above table were those with revenues greater than 10% for the year ended December 31, 2022. The Company does not maintain significant amounts of long-lived assets outside of the United States.

Customer Concentrations

Toshiba Client Solutions Co. Ltd. (Toshiba) of Japan represented 18% of our revenues in 2017. No single customer represented more that 10% of revenues in 2016. One customer, a stockholder whom is the sole holder of our Series A Preferred Stock, represented 18% of revenues in 2015.

Toshiba represented 25% of accounts receivable and 100% of accrued project revenues at December 31, 2017. No single customer represented more than 10% of accounts receivable at December 31, 2016. One customer represented 89% of accounts receivable at December 31, 2015.

Note 1820 — Quarterly Financial Information (Unaudited)

The following table summarizes our unaudited quarterly financial information for the periods shown below (in thousands, except per share data):

Fiscal Year 2022

    

December 31, 

    

September 30, 

    

June 30, 

    

March 31, 

Revenue

$

2,898

$

3,427

$

3,008

$

2,503

Gross profit (loss)

 

(126)

 

868

 

262

 

479

Net loss

 

(10,759)

 

(9,477)

 

(10,022)

 

(10,506)

Net loss per share, basic and diluted

 

(0.17)

 

(0.15)

 

(0.16)

 

(0.16)

Net loss attributable to common stockholders

 

(10,759)

 

(9,477)

 

(10,022)

 

(10,506)

  Fiscal Year 2017 
  December 31,  September 30,  June 30,  March 31, 
Revenue $1,597  $1,405  $1,325  $1,211 
Gross profit (loss)  (304)  (92)  (429)  149 
Net loss  (5,879)  (5,502)  (4,070)  (4,182)
Net loss per share, basic and diluted  (0.29)  (0.28)  (0.22)  (0.23)
Net loss attributable to common stockholders  (6,321)  (5,938)  (4,494)  (4,595)

F-31

  Fiscal Year 2016 
  December 31,  September 30,  June 30,  March 31, 
Revenue $620  $583  $561  $364 
Gross profit (loss)  (562)  (237)  (126)  (239)
Net loss  (6,335)  (5,036)  (4,103)  (3,776)
Net loss per share, basic and diluted  (0.37)  (0.32)  (0.28)  (0.26)
Net loss attributable to common stockholders  (6,751)  (5,446)  (4,503)  (4,170)

Fiscal Year 2021

    

December 31, 

    

September 30, 

    

June 30, 

    

March 31, 

Revenue

$

3,314

$

3,019

$

2,917

$

3,915

Gross profit

 

(12)

 

363

 

359

 

860

Net loss

 

(11,493)

 

(10,488)

 

(9,245)

 

(9,151)

Net loss per share, basic and diluted

 

(0.17)

 

(0.17)

 

(0.15)

 

(0.17)

Net loss attributable to common stockholders

 

(11,493)

 

(10,488)

 

(9,245)

 

(9,151)

Fiscal Year 2020

    

December 31, 

    

September 30, 

    

June 30, 

    

March 31, 

Revenue

$

4,233

$

2,779

$

3,037

$

1,532

Gross profit

 

371

 

16

 

464

 

(252)

Net loss

 

(3,590)

 

(4,761)

 

(4,239)

 

(5,362)

Net loss per share, basic and diluted

 

(0.09)

 

(0.13)

 

(0.13)

 

(0.18)

Net loss attributable to common stockholders

 

(4,120)

 

(5,281)

 

(4,746)

 

(5,861)

F-32

VUZIX CORPORATION

Schedule II — Valuation and Qualifying Accounts (in thousands)

    

Balance at

    

    

    

Beginning of

Charged to

Balance at End

Description

Period

Expenses

Deductions

of Period

For the Year Ended December 31, 2020

 

  

 

  

 

  

 

  

Allowances deducted from assets

 

  

 

  

 

  

 

  

Doubtful Accounts

$

$

$

$

Inventory

 

4,788

 

1,274

 

(2,176)

(a)

 

3,886

Total allowances deducted from assets

$

4,788

$

1,274

$

(2,176)

$

3,886

For the Year Ended December 31, 2021

 

  

 

  

 

  

 

  

Allowances deducted from assets

 

  

 

  

 

  

 

  

Doubtful Accounts

$

$

$

$

Inventory

 

3,886

 

520

 

(3,279)

(b)

 

1,127

Total allowances deducted from assets

$

3,886

$

520

$

(3,279)

$

1,127

For the Year Ended December 31, 2022

 

  

 

  

 

  

 

  

Allowances deducted from assets

 

  

 

  

 

  

 

  

Doubtful Accounts

$

$

$

$

Inventory

 

1,127

 

290

 

 

1,417

Total allowances deducted from assets

$

1,127

$

290

$

$

1,417

(a)F-28Deductions in 2020 primarily related to the disposal of raw components related to the discontinuance of production of our original M300, all of which was fully provisioned for as of December 31, 2019.
(b)Deductions in 2021 primarily related to the disposal of finished goods related to the discontinuance of sales and marketing activities related to our M300 series products, which had been previously provisioned for.

57

Exhibit Index

*

3.1(1)

Amended and Restated Certificate of Incorporation

3.2(11)

Amended and Restated Bylaws

3.3(2)

Amendment to Amended and Restated Certificate of Incorporation

3.4(3)

Amendment to Amended and Restated Certificate of Incorporation

3.5(4)

Certificate of Designation of Series A Preferred Stock

4.1 (9)

Description of the Registrant’s Securities

10.1(5)**

Form of Indemnification Agreement by and between the registrant and each director and executive officer

10.2(5)**

Employment Agreement dated as of August 1, 2007 by and between the registrant and Paul Travers

10.3(5)**

Employment Agreement dated as of August 1, 2007 by and between the registrant and Grant Russell

10.4(6)

Shared Services Agreement, dated as of June 15, 2012, by and between Vuzix Corporation and TDG Acquisition Company LLC

10.5(6)

Reseller Agreement, dated as June 15, 2012, by and between Vuzix Corporation and TDG Acquisition Company LLC.

10.6(6)

Restrictive Covenants Agreement, dated as June 15, 2012, by and between Paul Travers and TDG Acquisition Company LLC

10.7(7)

2014 Equity Incentive Plan

10.9 (10) †

Amendment No. 1 to agreements with TDG Acquisition Company, LLC

10.10* #

License Agreement, dated December 16, 2022

10.11* #

Stock Purchase Agreement, dated December 16 2022

10.12* #

Shareholders Agreement, dated December 16, 2022

14.1(8)

Code of Ethics

21.1*

Subsidiaries

23.1*

Consent of Freed Maxick, CPAs, P.C.

31.1*

Certification of CEO as required by Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002

31.2*

Certification of CFO as required by Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002

32.1***

Section 1350 CEO Certification

32.2***

Section 1350 CFO Certification

101*

The following materials, formatted in inline XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Cash Flows, and (iv) Notes to Consolidated Financial Statements, tagged as blocks of text

104

Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

†       Confidential treatment granted as to certain portion

*       Filed herewith.

**     Indicates management contract or compensatory arrangement.

***   Furnished herewith.

# Portions of this agreement have been omitted.

(1)Filed as an exhibit to Amendment No. 3 to the Registration Statement on Form S-1 filed October 16, 2009 and incorporated herein by reference.
(2)Filed as an exhibit to the Current Report on Form 8-K filed February 7, 2013 and incorporated herein by reference.
(3)Filed as an exhibit to the Current Report on Form 8-K filed June 30, 2014 and incorporated herein by reference.
(4)Filed as an exhibit to the Current Report on Form 8-K filed January 2, 2015 and incorporated herein by reference.
(5)Filed as an exhibit to the S-1 filed July 2, 2009 and incorporated herein by reference.

58

VUZIX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 19 — Related Party Transactions

The Company has accrued compensation owed to officersTable of the Company for services rendered that remain outstanding. These amounts are not subject to a fixed repayment schedule and they bear interest at a rate of 8% per year, compounding monthly. The amounts were $327,469 as December 31, 2017 and $648,720 as of December 31, 2016 and $358,719 as of December 31, 2015. The related interest amounts included in Accrued Interest were $171,435, $141,645 and $97,801 at December 31, 2017, 2016, and 2015, respectively. Interest expense related to the outstanding current accrued compensation in Accrued Expenses (Note 7) to officers was $52,221, $43,844 and $35,722 for the years ended December 31, 2017, 2016 and 2015, respectively.Contents

During the year ended December 31, 2016, $54,023 or 3% of total revenues, were derived from a major stockholder (15% on as-converted to common stock basis with respect to shares of Series A Preferred Stock held by such stockholder) of the Company who also represented $2,998 of the accounts receivable balance at December 31, 2016. Said stockholder comprised $481,920 or 18% of total revenues and represented $290,750 of the accounts receivable balance at December 31, 2015. Said stockholder comprised of $0 of total revenue in 2017.

Note 20 — Subsequent Events

Recent Warrant Exercises:

Since January 1, 2018, the Company has received cashless exercises of 10,000 warrants that resulted in the issuance of 7,428 shares of common stock and the exercise for cash of 17,500 warrants for total cash proceeds of 39,375.

Sale of Common Stock:

On January 24, 2018, the Company entered into a securities purchase agreement with the purchasers set forth on the signature pages thereto for the purchase and sale of an aggregate of 3,000,000 shares of the Company’s common stock, and warrants to purchase an aggregate of up to 1,200,000 shares of common stock, in a registered direct offering at a combined purchase price of $10.00 per share and 0.4 of a warrant, for an aggregate purchase price of $30,000,000. The warrants have a term of one year from issuance and an exercise price of $10.00 per share. The purchase agreement closed on January 29, 2018.

F-29(6)Filed as an exhibit to the Current Report on Form 8-K filed June 21, 2012 and incorporated herein by reference.
(7)Filed with Definitive Proxy Statement on April 30, 2014 and incorporated herein by reference.
(8)Filed as exhibit to 10-K filed March 30, 2016 and incorporated herein by reference.
(9)Filed as exhibit to Form 10-K filed March 16, 2020 and incorporated herein by reference.
(10)Filed as exhibit to Form 8-K filed October 10, 2018 and incorporated herein by reference.
(11)Filed as exhibit to Form 8-K filed April 30, 2021 and incorporated herein by reference.

59

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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, on the 161thst day of March, 2018.

2023.

VUZIX CORPORATION  

/s/ Paul J. Travers 

Paul J. Travers 

Chief Executive Officer 

60

POWER OF ATTORNEY

KNOW BY ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints jointly and severally, Paul J. Travers and Grant Russell, and each one of them, his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:

Signature
Title
Date

Signature

Title

Date

/s/ Paul J. Travers

President, Chief Executive Officer

March 16, 20181, 2023

Paul J. Travers

and Director

 (Principal Executive Officer)

/s/ Grant Russell

Chief Financial Officer,

March 16, 20181, 2023

Grant Russell

Executive Vice-PresidentVice-President and Director

(Principal Financial and

Accounting Officer)

/s/ Paul BorisChief Operating Officer, DirectorMarch 16, 2018
Paul Boris
/s/ Alexander RuckdaeschelDirectorMarch 16, 2018
Alexander Ruckdaeschel

/s/ Edward Kay

Director

March 16, 20181, 2023

Edward Kay

/s/ Timothy Harned

Director

March 16, 2018

Timothy Harned
/s/ Michael ScottDirectorMarch 16, 20181, 2023

Michael Scott


VUZIX CORPORATION

Schedule II — Valuation and Qualifying Accounts (in thousands)

Description 

Balance at

Beginning of

Period

  

Charged to

Expenses

  Deductions  

Balance at End

of Period

 
For the Year Ended December 31, 2015                
Allowances deducted from assets                
Doubtful Accounts $-  $-  $-  $- 
Inventory  666   (179)(a)  -   487 
Total allowances deducted from assets $666  $(179) $-  $487 
                 
For the Year Ended December 31, 2016                
Allowances deducted from assets                
Doubtful Accounts $-  $-  $-  $- 
Inventory  487   137(a)  -   624 
Total allowances deducted from assets $487  $137  $-  $624 
                 
For the Year Ended December 31, 2017                
Allowances deducted from assets                
Doubtful Accounts $-  $29  $-  $29 
Inventory  624   212(a)  -   836 
Total allowances deducted from assets $624  $241  $-  $865 

(a)Net change in inventory allowance, excluding iWear net realizable value writedown.


Exhibit Index

3.1(1)Amended and Restated Certificate of Incorporation
3.2(1)Amended and Restated Bylaws
3.3(2)Amendment to Amended and Restated Certificate of Incorporation
3.4(3)Amendment to Amended and Restated Certificate of Incorporation
3.5(4)Certificate of Designation of Series A Preferred Stock
4.1(5)Form of Warrant
10.1(6)2007 Amended and Restated Stock Option Plan
10.2(6)2009 Stock Option Plan
10.3(1)Form of Option Agreement under 2009 Stock Plan
10.4(6)Form of Indemnification Agreement by and between the registrant and each director and executive officer
10.5(6)Employment Agreement dated as of August 1, 2007 by and between the registrant and Paul J. Travers
10.6(6)Employment Agreement dated as of August 1, 2007 by and between the registrant and Grant Russell
10.7(7)Revolving Line of Trade Credit Agreement dated as of May 21, 2010 by and between the registrant and Kopin Corporation
10.8(7)Security Agreement dated as of May 21, 2010 by and between the Company and Kopin Corporation
10.9(8)Amendment to Revolving Line of Trade Credit Agreement dated as of October 8, 2010 by and between the registrant and Kopin Corporation
10.10(9)Warrant issued by the registrant to Kopin Corporation
10.11(10)Shared Services Agreement, dated as of June 15, 2012, by and between Vuzix Corporation and TDG Acquisition Company LLC
10.12(10)Reseller Agreement, dated as June 15, 2012, by and between Vuzix Corporation and TDG Acquisition Company LLC.
10.13(10)Restrictive Covenants Agreement, dated as June 15, 2012, by and between Paul Travers and TDG Acquisition Company LLC
10.14(11)Securities Purchase Agreement, dated July 15, 2013
10.15(11)16% Senior Secured Convertible Debenture due March 21, 2018
10.16(11)Common Stock Warrant, dated July 15, 2013
10.17(12)2014 Equity Incentive Plan
10.18(13)Letter Agreement with Chardan Capital Markets, LLC
10.19(14)Series A Preferred Stock Purchase Agreement dated January 2, 2015
10.20(14)Series A Preferred Stock Investor’s Rights Agreement, dated January 2, 2015
10.21(14)Form of Waiver and Consent (June Notes)
10.22(14)Form of Waiver and Consent (July 2013 Warrants)
10.23 (17)Form of Securities Purchase Agreement dated August 9, 2017
10.24 (17)Placement Agent Agreement, dated August 8, 2017
10.25 (18)Form of Securities Purchase Agreement, dated December 14, 2017
10.26 (18)Form of Warrant
10.27 (18)Engagement Agreement, dated December 13, 2017
10.28 (19)Form of Securities Purchase Agreement, dated January 24, 2018
10.29 (19)Form of Warrant
10.30 (19)Engagement Agreement, dated January 24, 2018
14.1(15)Code of Ethics
21.1(16)Subsidiaries
23.1*Consent of Freed Maxick, CPAs, P.C.
31.1*Certification of CEO as required by Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002
31.2*Certification of CFO as required by Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002
32.1*Section 1350 CEO Certification
32.2*Section 1350 CFO Certification
101*The following materials, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Cash Flows, and (iv) Notes to Consolidated Financial Statements, tagged as blocks of text

Confidential treatment granted as to certain portion

*Filed herewith.

(1)Filed as an exhibit to Amendment No. 3 to the Registration Statement on Form S-1 filed October 16, 2009 and incorporated herein by reference.

(2)Filed as an exhibit to the Current Report on Form 8-K filed February 7, 2013 and incorporated herein by reference.

(3)Filed as an exhibit to the Current Report on Form 8-K filed June 30, 2014 and incorporated herein by reference.

(4)Filed as an exhibit to the Current Report on Form 8-K filed January 2, 2015 and incorporated herein by reference.

(5)Filed as an exhibit to the S-1/A filed July 29, 2013 and incorporated herein by reference.

(6)Filed as an exhibit to the S-1 filed July 2, 2009 and incorporated herein by reference.

(7)Filed as an exhibit to the Current Report on Form 8-K filed June 2, 2010 and incorporated herein by reference.

(8)Filed as an exhibit to the Current Report on Form 8-K filed October 27, 2010 and incorporated herein by reference.

(9)Filed as an exhibit to the S-1 filed December 21, 2012 and incorporated herein by reference.

(10)Filed as an exhibit to the Current Report on Form 8-K filed June 21, 2012 and incorporated herein by reference.

(11)Filed as an exhibit to the Current Report on Form 8-K filed July 16, 2013 and incorporated herein by reference.

(12)Filed with Definitive Proxy Statement on April 30, 2014 and incorporated herein by reference.

(13)Filed as an exhibit to 8-K filed January 2, 2015 and incorporated herein by reference.

(14)Filed as exhibit to 10-K filed March 30, 2016 and incorporated herein by reference.

(15)Filed as exhibit to 8-K filed October 9, 2014 and incorporated herein by reference.

(16)Filed as exhibit to S-1/A filed June 10, 2013 and incorporated herein by reference.

(17)Timothy Harned

Filed as exhibit to Form 8-K filed August 8, 2017 and incorporated herein by reference.

(18)

/s/ Azita Arvani

Filed as exhibit to Form 8-K filed December 15, 2017 and incorporated herein by reference.

Director

March 1, 2023

Azita Arvani

(19)

Filed as exhibit to Form 8-K filed January 26, 2018 and incorporated herein by reference.

/s/ Emily Nagle Green

Director

March 1, 2023

Emily Nagle Green

/s/ Raj Rajgopal

Director

March 1, 2023

Raj Rajgopal


61