Delaware | Delaware | | 04-3392453 | State or other jurisdiction of
incorporation or organization | | (I.R.S. Employer
Identification No.) |
| | | 25 Hendrix Road, Suite A
West Henrietta, New York | | 1458314586 | (Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (585) (585) 359-5900 Securities registered pursuant to Section 12(b) of the Act: | | | | | Title of each class: | | Trading Symbol(s) | | Name of each exchange on which registered: | Common Stock, par value $0.001 | | VUZI | | Nasdaq Capital Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. Yes x☒ No ¨ ☐ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x☒ No ¨ ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. | | | | | | Large accelerated filer¨ | ☐ | Accelerated filerx | ☐ | Non-accelerated filer¨ | ☒ | | | | | | | Smaller reporting company¨ | ☒ | Emerging growth company¨ | ☐ | (Do not check if a smaller reporting 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 is a shell company (as defined in rule 12b-2 of the Exchange Act). Yes ¨☐ No x ☒ As of NovemberMay 9, 2017,2024, there were 22,203,91164,726,092 shares of the registrant’s common stock outstanding. Vuzix Corporation INDEX INDEX
Part 1: FINANCIAL INFORMATION Item 1:Consolidated Financial Statements | Condensed Consolidated Financial Statements |
VUZIX CORPORATION CONSOLIDATED BALANCE SHEETS | | | | | | | | | (Unaudited) | | | | | | March 31, | | December 31, | | | 2024 | | 2023 | ASSETS | | | | | | | Current Assets | | | | | | | Cash and Cash Equivalents | | $ | 16,501,401 | | $ | 26,555,592 | Accounts Receivable, net of allowance for credit losses of $1,574,000 at March 31, 2024 and December 31, 2023. | | | 4,633,400 | | | 3,827,686 | Accrued Revenues in Excess of Billings | | | — | | | 165,771 | Utility Improvement Refund/Employee Retention Credit Receivable | | | 208,271 | | | 208,271 | Inventories, Net | | | 9,868,255 | | | 9,000,430 | Manufacturing Vendor Prepayments | | | 279,086 | | | 403,801 | Prepaid Expenses and Other Assets | | | 1,184,362 | | | 1,338,860 | | | | | | | | Total Current Assets | | | 32,674,775 | | | 41,500,411 | | | | | | | | Long-Term Assets | | | | | | | Fixed Assets, Net | | | 7,922,239 | | | 8,072,830 | Operating Lease Right-of-Use Asset | | | 874,851 | | | 301,185 | Patents and Trademarks, Net | | | 2,732,043 | | | 2,627,018 | Technology Licenses, Net | | | 26,024,067 | | | 26,851,001 | Cost Method Investment in Atomistic | | | 5,784,126 | | | 5,784,126 | Other Assets, Net | | | 969,443 | | | 1,011,111 | | | | | | | | Total Assets | | $ | 76,981,544 | | $ | 86,147,681 | | | | | | | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | Current Liabilities | | | | | | | Accounts Payable | | $ | 1,901,792 | | $ | 1,570,630 | Unearned Revenue | | | 157,771 | | | 18,839 | Accrued Expenses | | | 851,984 | | | 2,416,443 | Licensing Fees Commitment | | | — | | | 1,000,000 | Income and Other Taxes Payable | | | 55,926 | | | 46,727 | Operating Lease Right-of-Use Liability | | | 506,372 | | | 163,513 | | | | | | | | Total Current Liabilities | | | 3,473,845 | | | 5,216,152 | | | | | | | | Long-Term Liabilities | | | | | | | Operating Lease Right-of-Use Liability | | | 368,479 | | | 137,672 | | | | | | | | Total Liabilities | | | 3,842,324 | | | 5,353,824 | | | | | | | | Stockholders' Equity | | | | | | | Common Stock - $0.001 Par Value, 100,000,000 shares authorized; 65,304,780 shares issued and 64,725,108 shares outstanding as of March 31, 2024 and 65,304,780 shares issued and 64,725,108 shares outstanding as of December 31, 2023. | | | 65,304 | | | 65,304 | Additional Paid-in Capital | | | 379,582,792 | | | 377,189,847 | Accumulated Deficit | | | (304,032,375) | | | (293,984,793) | Treasury Stock, at cost, 579,672 shares as of March 31, 2024 and December 31, 2023. | | | (2,476,501) | | | (2,476,501) | | | | | | | | Total Stockholders' Equity | | | 73,139,220 | | | 80,793,857 | | | | | | | | Total Liabilities and Stockholders' Equity | | $ | 76,981,544 | | $ | 86,147,681 |
| | (Unaudited) September 30, | | | December 31, | | | | 2017 | | | 2016 | | ASSETS | | | | | | | | | Current Assets | | | | | | | | | Cash and Cash Equivalents | | $ | 8,677,341 | | | $ | 14,533,944 | | Accounts Receivable | | | 470,484 | | | | 103,314 | | Subscription Receivable from Officer | | | 61,000 | | | | — | | Accrued Project Revenue | | | 687,001 | | | | — | | Inventories, Net | | | 2,842,591 | | | | 2,651,218 | | Manufacturing Vendor Prepayments | | | 117,524 | | | | 144,168 | | Prepaid Expenses and Other Assets | | | 762,679 | | | | 797,409 | | | | | | | | | | | Total Current Assets | | | 13,618,620 | | | | 18,230,053 | | | | | | | | | | | Long-Term Assets | | | | | | | | | Fixed Assets, Net | | | 3,885,605 | | | | 3,364,908 | | Patents and Trademarks, Net | | | 632,740 | | | | 535,461 | | Software Development Costs, Net | | | 329,204 | | | | 214,838 | | | | | | | | | | | Total Assets | | $ | 18,466,169 | | | $ | 22,345,260 | | | | | | | | | | | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | Current Liabilities | | | | | | | | | Accounts Payable | | $ | 1,819,950 | | | $ | 1,085,472 | | Current Portion of Long-Term Debt, net of discount | | | — | | | | 1,416,480 | | Customer Deposits | | | 63,589 | | | | 66,162 | | Unearned Revenue | | | 117,330 | | | | 509,572 | | Accrued Expenses | | | 1,160,765 | | | | 1,331,983 | | Derivative Liability | | | 122,533 | | | | — | | Income and Other Taxes Payable | | | 6,665 | | | | 12,290 | | | | | | | | | | | Total Current Liabilities | | | 3,290,832 | | | | 4,421,959 | | | | | | | | | | | Long-Term Liabilities | | | | | | | | | Derivative Liability | | | — | | | | 173,131 | | Accrued Expenses | | | 20,832 | | | | 28,333 | | Total Long-Term Liabilities | | | 20,832 | | | | 201,464 | | | | | | | | | | | Total Liabilities | | | 3,311,664 | | | | 4,623,423 | | | | | | | | | | | Stockholders’ Equity | | | | | | | | | Preferred Stock — $.001 Par Value, 5,000,000 Shares Authorized; 49,626 Shares Issued and Outstanding September 30, 2017, and December 31, 2016 | | | 50 | | | | 50 | | Common Stock — $.001 Par Value, 100,000,000 Shares Authorized; 22,178,911 Shares Issued and Outstanding September 30, 2017 and 19,569,247 on December 31, 2016 | | | 22,178 | | | | 19,569 | | Additional Paid-in Capital | | | 105,725,265 | | | | 94,541,168 | | Accumulated Deficit | | | (90,592,988 | ) | | | (76,838,950 | ) | | | | | | | | | | Total Stockholders’ Equity | | | 15,154,505 | | | | 17,721,837 | | | | | | | | | | | Total Liabilities and Stockholders’ Equity | | $ | 18,466,169 | | | $ | 22,345,260 | |
The accompanying notes are an integral part of these condensed consolidated financial statements. VUZIX CORPORATION CONSOLIDATED STATEMENTSTATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited for nine months ended September 30, 2017)(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | Common Stock | | Additional | | Accumulated | | Treasury Stock | | | | | | Shares | | Amount | | Paid-In Capital | | Deficit | | Shares | | Amount | | Total | Balance - January 1, 2024 | | 65,304,780 | | $ | 65,304 | | $ | 377,189,847 | | $ | (293,984,793) | | (579,672) | | $ | (2,476,501) | | $ | 80,793,857 | Stock-Based Compensation Expense | | — | | | — | | | 2,392,945 | | | — | | — | | | — | | | 2,392,945 | Net Loss | | — | | | — | | | — | | | (10,047,582) | | — | | | — | | | (10,047,582) | Balance - March 31, 2024 | | 65,304,780 | | $ | 65,304 | | $ | 379,582,792 | | $ | (304,032,375) | | (579,672) | | $ | (2,476,501) | | $ | 73,139,220 |
| | Preferred Stock | | | Common Stock | | | Additional Paid-In | | | Accumulated | | | | | | | Shares | | | Amount | | | Shares | | | Amount | | | Capital | | | Deficit | | | Total | | | | | | | | | | | | | | | | | | | | | | | | Balance — December 31, 2016 | | | 49,626 | | | $ | 50 | | | | 19,569,247 | | | $ | 19,569 | | | $ | 94,541,168 | | | $ | (76,838,950 | ) | | $ | 17,721,837 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Conversion of Note Payable & Accrued Interest | | | | | | | | | | | 827,237 | | | | 827 | | | | 1,860,456 | | | | | | | | 1,861,283 | | Exercise of Warrants | | | | | | | | | | | 168,203 | | | | 168 | | | | (168 | ) | | | | | | | — | | Stock Based Compensation Expense | | | | | | | | | | | 10,420 | | | | 10 | | | | 912,092 | | | | | | | | 912,102 | | Exercise of Stock Options | | | | | | | | | | | 37,261 | | | | 37 | | | | (37 | ) | | | | | | | — | | Common Stock Issued for Services | | | | | | | | | | | 16,543 | | | | 17 | | | | 99,983 | | | | | | | | 100,000 | | Common Stock Awards to Directors | | | | | | | | | | | 50,000 | | | | 50 | | | | 334,950 | | | | | | | | 335,000 | | Proceeds from Common Stock Offerings | | | | | | | | | | | 1,500,000 | | | | 1,500 | | | | 8,627,000 | | | | | | | | 8,628,500 | | Direct Costs of Common Stock Offerings | | | | | | | | | | | | | | | | | | | (650,179 | ) | | | | | | | (650,179 | ) | Net Loss for the Nine Months Ended September 30, 2017 | | | | | | | | | | | | | | | | | | | | | | | (13,754,038 | ) | | | (13,754,038 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance — September 30, 2017 | | | 49,626 | | | $ | 50 | | | | 22,178,911 | | | $ | 22,178 | | | $ | 105,725,265 | | | $ | (90,592,988 | ) | | $ | 15,154,505 | |
| | | | | | | | | | | | | | | | | | | | | | Common Stock | | Additional | | Accumulated | | Treasury Stock | | | | | | Shares | | Amount | | Paid-In Capital | | Deficit | | Shares | | Amount | | Total | Balance - January 1, 2023 | | 63,783,779 | | $ | 63,783 | | $ | 362,507,715 | | $ | (243,835,716) | | (464,672) | | $ | (2,005,744) | | $ | 116,730,038 | Stock-Based Compensation Expense | | — | | | — | | | 3,360,772 | | | — | | — | | | — | | | 3,360,772 | Stock Option Exercises | | 4,079 | | | 4 | | | — | | | — | | — | | | — | | | 4 | Purchases of Treasury Stock | | — | | | — | | | — | | | — | | (115,000) | | | (470,757) | | | (470,757) | Net Loss | | — | | | — | | | — | | | (10,240,583) | | — | | | — | | | (10,240,583) | Balance - March 31, 2023 | | 63,787,858 | | $ | 63,787 | | $ | 365,868,487 | | $ | (254,076,299) | | (579,672) | | $ | (2,476,501) | | $ | 109,379,474 |
The accompanying notes are an integral part of these condensed consolidated financial statements. VUZIX CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) | | | | | | | | | | Three Months Ended March 31, | | | | | | | | | | | 2024 | | 2023 | | Sales: | | | | | | | | Sales of Products | | $ | 1,829,073 | | $ | 4,191,361 | | Sales of Engineering Services | | | 174,794 | | | — | | | | | | | | | | Total Sales | | | 2,003,867 | | | 4,191,361 | | | | | | | | | | Cost of Sales: | | | | | | | | Cost of Sales - Products Sold | | | 1,807,593 | | | 3,082,439 | | Cost of Sales - Depreciation and Amortization | | | 181,566 | | | 232,916 | | Cost of Sales - Engineering Services | | | 67,961 | | | — | | | | | | | | | | Total Cost of Sales | | | 2,057,120 | | | 3,315,355 | | | | | | | | | | Gross Profit (Loss) | | | (53,253) | | | 876,006 | | | | | | | | | | Operating Expenses: | | | | | | | | Research and Development | | | 2,738,449 | | | 3,069,797 | | Selling and Marketing | | | 2,220,782 | | | 2,539,659 | | General and Administrative | | | 4,098,257 | | | 5,131,824 | | Depreciation and Amortization | | | 970,377 | | | 964,265 | | Loss on Fixed Asset Disposal | | | 11,277 | | | — | | Impairment of Patents and Trademarks | | | — | | | 17,666 | | | | | | | | | | Total Operating Expenses | | | 10,039,142 | | | 11,723,211 | | | | | | | | | | Loss From Operations | | | (10,092,395) | | | (10,847,205) | | | | | | | | | | Other Income (Expense): | | | | | | | | Investment Income | | | 152,599 | | | 695,783 | | Income and Other Taxes | | | (282) | | | (87,795) | | Foreign Exchange Loss | | | (107,504) | | | (1,366) | | | | | | | | | | Total Other Income, Net | | | 44,813 | | | 606,622 | | | | | | | | | | Loss Before Provision for Income Taxes | | | (10,047,582) | | | (10,240,583) | | Provision for Income Taxes | | | — | | | — | | | | | | | | | | Net Loss | | | (10,047,582) | | | (10,240,583) | | | | | | | | | | Basic and Diluted Loss per Common Share | | $ | (0.16) | | $ | (0.16) | | Weighted-average Shares Outstanding - Basic and Diluted | | | 64,725,108 | | | 63,216,598 | |
| | For Three Months | | | For Nine Months | | | | Ended September 30, | | | Ended September 30, | | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | | | | | | | | | | | | | Sales of Products | | $ | 1,138,413 | | | $ | 582,549 | | | $ | 3,002,744 | | | $ | 1,367,766 | | Sales of Engineering Services | | | 266,687 | | | | — | | | | 938,281 | | | | 139,500 | | | | | | | | | | | | | | | | | | | Total Sales | | | 1,405,100 | | | | 582,549 | | | | 3,941,025 | | | | 1,507,266 | | | | | | | | | | | | | | | | | | | Cost of Sales — Products | | | 1,089,881 | | | | 819,116 | | | | 3,441,650 | | | | 2,069,964 | | Cost of Sales — Engineering Services | | | 407,220 | | | | — | | | | 872,137 | | | | 39,060 | | | | | | | | | | | | | | | | | | | Total Cost of Sales | | | 1,497,101 | | | | 819,116 | | | | 4,313,787 | | | | 2,109,024 | | Gross Loss (exclusive of depreciation shown separately below) | | | (92,001 | ) | | | (236,567 | ) | | | (372,762 | ) | | | (601,758 | ) | Operating Expenses: | | | | | | | | | | | | | | | | | Research and Development | | | 1,506,307 | | | | 2,177,957 | | | | 4,374,202 | | | | 5,121,713 | | Selling and Marketing | | | 908,797 | | | | 839,497 | | | | 2,739,978 | | | | 2,627,543 | | General and Administrative | | | 1,612,542 | | | | 1,274,698 | | | | 4,155,960 | | | | 3,350,441 | | Depreciation and Amortization | | | 251,366 | | | | 196,370 | | | | 734,175 | | | | 549,244 | | Loss on Inventory Revaluation | | | 1,151,482 | | | | — | | | | 1,151,482 | | | | — | | | | | | | | | | | | | | | | | | | Loss from Operations | | | (5,522,495 | ) | | | (4,725,089 | ) | | | (13,528,559 | ) | | | (12,250,699 | ) | | | | | | | | | | | | | | | | | | Other Income (Expense) | | | | | | | | | | | | | | | | | Investment Income | | | 12,956 | | | | 8,144 | | | | 45,800 | | | | 20,923 | | Other Taxes | | | (15,734 | ) | | | (19,124 | ) | | | (37,884 | ) | | | (53,749 | ) | Foreign Exchange Loss | | | (5,246 | ) | | | (13,781 | ) | | | (30,299 | ) | | | (21,267 | ) | Gain (Loss) on Derivative Valuation | | | 41,454 | | | | (59,120 | ) | | | 50,598 | | | | (57,133 | ) | Loss on Fixed Asset Disposal | | | (585 | ) | | | (25,890 | ) | | | (585 | ) | | | (25,890 | ) | Amortization of Senior Term Debt Discount | | | — | | | | (155,313 | ) | | | (155,760 | ) | | | (391,334 | ) | Amortization of Deferred Financing Costs | | | — | | | | (11,707 | ) | | | (19,500 | ) | | | (34,867 | ) | Interest Expense | | | (12,592 | ) | | | (33,981 | ) | | | (77,849 | ) | | | (101,075 | ) | | | | | | | | | | | | | | | | | | Total Other Income (Expense) | | | 20,253 | | | | (310,772 | ) | | | (225,479 | ) | | | (664,392 | ) | | | �� | | | | | | | | | | | | | | | Loss Before Income Taxes | | | (5,502,242 | ) | | | (5,035,861 | ) | | | (13,754,038 | ) | | | (12,915,091 | ) | Provision (Benefit) for Income Taxes | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | Net Loss | | | (5,502,242 | ) | | | (5,035,861 | ) | | | (13,754,038 | ) | | | (12,915,091 | ) | Preferred Stock Dividends | | | (435,321 | ) | | | (410,153 | ) | | | (1,273,029 | ) | | | (1,203,693 | ) | | | | | | | | | | | | | | | | | | Loss Attributable to Common Stockholders | | $ | (5,937,563 | ) | | $ | (5,446,014 | ) | | $ | (15,027,067 | ) | | $ | (14,118,784 | ) | | | | | | | | | | | | | | | | | | Loss per Share | | | | | | | | | | | | | | | | | Basic and Diluted Loss per Share | | $ | (0.28 | ) | | $ | (0.32 | ) | | $ | (0.73 | ) | | $ | (0.86 | ) | Weighted-average Shares Outstanding Basic and Diluted | | | 21,366,712 | | | | 17,216,374 | | | | 20,515,363 | | | | 16,489,522 | |
The accompanying notes are an integral part of these condensed consolidated financial statements. VUZIX CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) | | | | | | | | | Three Months Ended March 31, | | | | | | | | | 2024 | | 2023 | | | | | | | | Cash Flows From (Used In) Operating Activities | | | | | | | Net Loss | | $ | (10,047,582) | | $ | (10,240,583) | Non-Cash Adjustments | | | | | | | Depreciation and Amortization | | | 1,151,943 | | | 1,197,181 | Stock-Based Compensation | | | 2,392,945 | | | 3,667,509 | Impairment of Patents and Trademarks | | | — | | | 17,666 | Loss on Fixed Asset Disposal | | | 11,277 | | | — | (Increase) Decrease in Operating Assets | | | | | | | Accounts Receivable | | | (805,714) | | | 499,815 | Accrued Revenues in Excess of Billings | | | 165,771 | | | 76,952 | Inventories | | | (867,825) | | | 406,290 | Manufacturing Vendor Prepayments | | | 124,715 | | | 524,636 | Prepaid Expenses and Other Assets | | | 154,498 | | | 218,520 | Increase (Decrease) in Operating Liabilities | | | | | | | Accounts Payable | | | 331,162 | | | 59,618 | Accrued Expenses | | | (1,564,459) | | | (412,566) | Unearned Revenue | | | 138,932 | | | 12,391 | Income and Other Taxes Payable | | | 9,199 | | | (192,156) | | | | | | | | Net Cash Flows Used in Operating Activities | | | (8,805,138) | | | (4,164,727) | | | | | | | | Cash Flows Used in Investing Activities | | | | | | | Purchases of Fixed Assets | | | (101,239) | | | (2,284,968) | Investments in Patents and Trademarks | | | (147,814) | | | (182,628) | Investments in Licenses | | | (1,000,000) | | | (2,000,000) | Investments in Software Development | | | — | | | (125,000) | Investments in Other Assets | | | — | | | (100,000) | | | | | | | | Net Cash Flows Used in Investing Activities | | | (1,249,053) | | | (4,692,596) | | | | | | | | Cash Flows Provided by (Used in) Financing Activities | | | | | | | Purchases of Treasury Stock | | | — | | | (470,757) | | | | | | | | Net Cash Flows Provided by (Used in) Financing Activities | | | — | | | (470,757) | | | | | | | | Net Increase (Decrease) in Cash and Cash Equivalents | | | (10,054,191) | | | (9,328,080) | Cash and Cash Equivalents - Beginning of Period | | | 26,555,592 | | | 72,563,943 | | | | | | | | Cash and Cash Equivalents - End of Period | | $ | 16,501,401 | | $ | 63,235,863 | | | | | | | | Supplemental Disclosures | | | | | | | Stock-Based Compensation Expense - Expensed less Previously Issued | | $ | — | | $ | 306,737 |
| | For the Nine Months Ended | | | | September 30, | | | | 2017 | | | 2016 | | | | | | | | | Cash Flows from Operating Activities | | | | | | | | | Net Loss | | $ | (13,754,038 | ) | | $ | (12,915,091 | ) | Non-Cash Adjustments | | | | | | | | | Depreciation and Amortization | | | 734,175 | | | | 549,244 | | Amortization of Software Development Costs in cost of sales products | | | 214,838 | | | | 214,836 | | Stock Based Option Compensation Expense | | | 912,102 | | | | 540,843 | | Common Stock Awards Compensation Expense | | | 83,750 | | | | 174,025 | | Loss on Disposal of Fixed Assets | | | 585 | | | | 25,890 | | Amortization of Term Debt Discount | | | 155,760 | | | | 391,334 | | Amortization of Debt Issuance Costs | | | 19,500 | | | | 34,867 | | Common Stock Issued for Services | | | 100,000 | | | | 241,300 | | (Gain) Loss on Derivative Valuation | | | (50,598 | ) | | | 57,133 | | Loss on Inventory Valuation | | | 1,151,482 | | | | — | | (Increase) Decrease in Operating Assets | | | | | | | | | Accounts Receivable | | | (367,170 | ) | | | 206,409 | | Accrued Revenue | | | (687,001 | ) | | | — | | Inventories | | | (1,342,855 | ) | | | (623,445 | ) | Vendor Prepayments | | | 26,644 | | | | 163,471 | | Prepaid Expenses and Other Assets | | | 285,980 | | | | (223,135 | ) | Increase (Decrease) in Operating Liabilities | | | | | | | | | Accounts Payable | | | 734,478 | | | | 622,119 | | Accrued Expense | | | 253,398 | | | | 311,291 | | Customer Deposits | | | (2,573 | ) | | | 15,536 | | Unearned Revenue | | | (392,242 | ) | | | 300,796 | | Income and Other Taxes Payable | | | (5,626 | ) | | | 16,764 | | Accrued Compensation | | | (240,110 | ) | | | — | | Accrued Interest | | | 77,537 | | | | (142,347 | ) | | | | | | | | | | Net Cash Flows Used in Operating Activities | | | (12,091,984 | ) | | | (10,038,160 | ) | | | | | | | | | | Cash Flows from Investing Activities | | | | | | | | | Purchases of Fixed Assets | | | (1,197,452 | ) | | | (1,551,141 | ) | Investments in Patents and Trademarks | | | (155,284 | ) | | | (103,375 | ) | Investments in Software Development | | | (329,204 | ) | | | — | | | | | | | | | | | Net Cash Used in Investing Activities | | | (1,681,940 | ) | | | (1,654,516 | ) | | | | | | | | | | Cash Flows from Financing Activities | | | | | | | | | Proceeds from Exercise of Warrants | | | — | | | | 45,000 | | Repayment of Long-Term Debt and Notes Payable | | | — | | | | (52,416 | ) | Proceeds from Common Stock Offerings | | | 8,567,500 | | | | 6,612,500 | | Direct Costs from Common Stock Offerings | | | (650,179 | ) | | | (847,805 | ) | Net Cash Flows Provided by Financing Activities | | | 7,917,321 | | | | 5,757,279 | | | | | | | | | | | Net Decrease in Cash and Cash Equivalents | | | (5,856,603 | ) | | | (5,935,397 | ) | Cash and Cash Equivalents — Beginning of Period | | | 14,533,944 | | | | 11,877,058 | | | | | | | | | | | Cash and Cash Equivalents — End of Period | | $ | 8,677,341 | | | $ | 5,941,661 | | Supplemental Disclosures | | | | | | | | | Interest Paid in Cash | | $ | 310 | | | $ | 7,860 | | Conversion of Debt and Accrued Interest | | $ | 1,861,283 | | | $ | 342,034 | | Subscription Receivable from Officer | | $ | 61,000 | | | $ | — | |
The accompanying notes are an integral part of these condensed consolidated financial statements. VUZIX CORPORATION AND SUBSIDIARIES NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1 — – Basis of Presentation The accompanying unaudited Condensed Consolidated Financial Statementsconsolidated financial statements of Vuzix Corporation and Subsidiaries (“the Company"Company” or “Vuzix”) have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Regulation S-X of the Securities and Exchange Commission.Commission (the “SEC”). Accordingly, the unaudited Condensed Consolidated Financial Statementsconsolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. The condensed consolidated balance sheet as of December 31, 2016 was derived from the audited Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 (the “Annual Report”). The accompanying Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements of the Company as of December 31, 2016, as reported in the Company’s Annual Report.
The results of the Company’s operations for any interim periodthe Three Months ended March 31, 2024, are not necessarily indicative of the results of the Company’s operations for the full fiscal year or any other period.
The accompanying interim period orconsolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto of the Company as of and for a full fiscal year.the year ended December 31, 2023, as reported in the Company’s Annual Report on Form 10-K filed with the SEC on April 15, 2024. Customer Concentrations For the ninethree months ended September 30, 2017, Toshiba JapanMarch 31, 2024, one customer represented substantially all60% of total product revenue and two customers represented 68% and 31% of engineering revenues and 24%services revenue. For the three months ended March 31, 2023, one customer represented 74% of total revenues as compared to 0% in the same 2016 period. product revenue. As of September 30, 2017March 31, 2024, three customers represented 37%, 23%, and 2016, Toshiba Japan accounted for 59% and 0%18% of accounts receivablesreceivable. As of December 31, 2023, two customers represented 47% and 26% of accounts receivable. Fair Value of Financial Instruments The Company’s financial instruments primarily consist of cash and cash equivalents, accounts receivable, accounts payable, unearned revenue, accrued project revenue, respectively.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 the short maturities of these instruments. Going Concern The accompanying Condensed Consolidated Financial Statementsconsolidated financial statements have been prepared assuming that wethe Company will continue as a going concern. This basis of accounting contemplates the recovery of our assets and the satisfaction of liabilities in the normal course of business. These Condensed Consolidated Financial Statementsconsolidated financial statements do not include any adjustments to the specific amounts and classifications of assets and liabilities, which might be necessary should we be unable to continue as a going concern. The Company incurred a net losslosses for the ninethree months ended September 30, 2017March 31, 2024 of $13,754,038.$10,047,582; $50,149,077 for the year ended December 31, 2023; and $40,763,573 for the year ended December 31, 2022. The Company has incurred ahad net loss consistently over recent years. Thecash outflows from operations of $8,805,138 for the three months ended March 31, 2024; $26,277,824 for the year ended December 31, 2023; and $24,521,082 for the year ended December 31, 2022. As of March 31, 2024, the Company incurred annual net losses of $19,250,082 in 2016 and $13,427,478 in 2015, and hashad an accumulated deficit of $90,592,988$304,032,375. The Company’s cash outflows for investing activities were $1,249,053 for the three months ended March 31, 2024; $19,280,966 for the year ended December 31, 2023; and $21,170,816 for the year ended December 31, 2022. These factors initially raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans to alleviate the conditions that raise substantial doubt include the implementation of September 30, 2017.operational improvements and the curtailment of certain development programs, both of which the Company expects will preserve cash. Management estimates the Company will have sufficient liquidity to fund operations at least through the second quarter of 2025. The Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. (ASU) 2014- 15, Presentation of Financial Statements — Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. As a result, management is primarily responsible for assessing if there is a going concern issue when issuing an entity’s financial statements. The going concern assumption underlies all GAAP financial reporting and therefore requires and assumes that the financial statements have been prepared on a going concern basis. It presumes that a Company will continue normal business operations into the future. Additional disclosure is required when there is substantial doubt about business continuity or substantial doubt that has not been alleviated by management’s mitigation plans. As required under applicable accounting standards, management has concluded that substantial doubt may exist surrounding the Company's ability to meet its obligations within one year of the release of the financial statements. The Company’s cash requirements going forward are primarily for funding operating losses, research and development, working capital, expenditureslicense investments, and working capital. Historically,capital expenditures. The higher cash outflows for investments in the years ending December 31, 2023 and 2022 were mainly for the Company’s exclusive technology license and equity investment in microLED technology via Atomistic (see Notes 6 and 7). The Company has met these cash needs by borrowings under notes, salespaid $30,000,000 to Atomistic in the last two fiscal years. The Company currently is negotiating an extension to its existing license with Atomistic, however, there can be no assurance a definitive agreement will be reached or the dollar amount of convertible debt, and the sales of equity. In 2016, we received total net proceeds from public equity offerings of $19,238,015, after underwriting discounts and commissions and other offering expenses. On August 14, 2017 the Company closed on the sale of 1,490,000 shares of its common stock to investors in a public offering at an offering price of $5.75 per share. As part of the same offering, we sold an additional 10,000 shares of common stock to an executive officer at the closing market price of $6.10 per share, to comply with certain Nasdaq rules. As of September 30, 2017, there was a subscription receivable of $61,000 related to the above offering due from that executive officer. The total balance of that subscription receivable was paid in-full on October 3, 2017. The Company’s net proceeds after commissions and expenses were $7,978,321.any such renewal. Our cash requirements related to funding operating losses depend upon numerous factors, including new product development activities, our ability to commercialize our products, our products’ timely market acceptance, selling prices and gross margins, and other factors. In order for us to achieve positiveHistorically, the Company has met its cash flow from operations, our product sales will need to significantly increase.needs primarily through the sale of equity securities. The Company’s management intends to take actions necessary to continue as a going concern, as discussed herein. The Company will need to grow its business significantly to become profitable and self-sustaining on a cash flow basis.basis or it will be required to cut its operating costs significantly or raise new equity and/or debt capital. Management’s plans concerning these matters and managing our liquidity include, among other things: | ● | · | the commencement of full and higher volume manufacturing of the new M300 Smart Glasses with assembly offshore in the summer of 2017, on a turnkey basis, which should result in further product margin improvements and supply chain investments, as demonstratedReductions in our third quarter;cash annual operating expenses by approximately $8,000,000 for 2024 across all operating areas, representing a reduction of at least 20% as compared to 2023 levels, including the areas of Research and Development, Sales and Marketing and General and Administrative; |
| ● | · | the awardImplementation of a Smart Glasses developmentvoluntary Company-wide payroll reduction program for all individuals with Toshiba, which we expectoptional salary reductions of 10% to 50% depending upon the respective base salary level for the period running from May 1, 2024 to April 30, 2025. The expected cash savings will be completed by end of 2017approximately $1,600,000 and represents approximately a further $221,000 in revenues, which thereafter should move into volume production in early 2018 with a proposed supply and purchase agreement that we expect will result in the issuance of stock awards or stock options, at a minimumrate of $5,000,000 in new revenues for150% or 200%, respectively, of the Company in the 12 month period following the commencement of volume deliveries;net cash wage reductions; |
| ● | · | tighter controlFurther reductions of operating costs and reduction in spending growth rates wherever possible; |
| · | slowing of planned new product development based on new technologies as well as reduced discretionary and non-essential capital expenditures not related to select near-term new products; |
| · | reducing the rate of research and development spending on new technologies, particularly the use of costly external contractors,contractors. |
| ● | We do not intend to increase our levels of investing activities for our upcoming smart glasses models2024 fiscal year as compared to 2023, now that will first be manufactured at our Rochesterwaveguide plant rather than at external contractors, where we incur high start-up costsexpansion has been completed and the requirement for bigger production commitments that consume working capital;license fees payments under the Atomistic License have been substantially made; |
| ● | Right-sizing of operations across all areas of the Company, including head-count hiring freezes or head-count reductions; |
| ● | The expected margin contribution upon the commencement of volume manufacturing and sales of waveguides from our new waveguide plant in 2024, particularly to OEM customers; |
| ● | ·Continued pursuit of licensing and strategic opportunities around our waveguide technologies with potential OEMs, which would include the receipt of upfront licensing fees and on-going supply agreements; |
| ● | better leveraging our productDelayed or curtailed discretionary and technology base and creatingnon-essential capital expenditures not related to near-term new products; |
| ● | Reduction in the rate of new product models that are derivatives (rather than completely new)introductions and which therefore are less costlyfurther leveraging of existing platforms to developreduce new product development and introduce to the marketplace; andengineering costs; |
8 | · | attempting to utilize conventional bank operating loan financing to help grow our working capital base to support our investments in accounts receivable and inventory as sales revenues grow. |
However, if these actions are not successfulThe Company has in the near term, wepast sold equity securities and in early 2024 entered into a sales agreement with an investment banking firm for the issuance and sale of up to $50,000,000 of our common stock that may be issued and sold from time to time in an “at the market” offering. Management monitors the capital markets on an ongoing basis and may consider raising capital if favorable market conditions develop. If the Company’s actual results are less than projected or the Company needs to raise capital for additional liquidity, the Company may be required to pursue additional equity financings, further curtail expenses, or enter into one of more strategic transactions. However, management can make no assurance that the Company will havebe able to successfully complete any of the forementioned pursuits on terms acceptable to the Company, or at all.
While there can be no assurance the Company will be able to successfully reduce operating expenses or raise additional capital, to maintain operations and/or materially reduce our operatingmanagement believes its historical success in managing cash flows and new product development costs. Ifobtaining capital will continue into the foreseeable future. However, as a result of this uncertainty, doubt about the Company raises additional funds by selling equity, the ownership interest of existing stockholders may be diluted. The amount of such dilution could increase further due to the issuance of securities with new warrants or convertibility features with other dilutive characteristics, such as anti-dilution clauses or price resets.
Based upon our current amount of cash on hand, management’s historical ability to raise capital, and our ability to manage our cost structure and adjust operating plans if and as required, we have concluded that substantial doubt of our ability to continuecontinuing as a going concern has not been alleviated.fully alleviated to the satisfaction of its external auditors as noted in their audit report included with to the Company’s 10-K filed with the SEC on April 15, 2024.
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-end and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. 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 the obligation to absorb 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. At 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, Atomistic, in which we are not the primary beneficiary. This VIE includes a private company investment, described further in Notes 6 and 7. 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 are not included in our consolidated financial statements. We account for this investment as a technology license and an equity investment. The maximum exposure of this unconsolidated VIE is generally based on the current 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 this unconsolidated VIE was $31.8 million as of March 31, 2024. Recent Accounting Pronouncements Not Yet Adopted In December 2023, the FASB issued ASU 2023-09 "Income Taxes (Topics 740): Improvements to Income Tax Disclosures" to expand the disclosure requirements for income taxes, specifically related to the rate reconciliation and income taxes paid. ASU 2023-09 is effective for our annual periods beginning January 1, 2025, with early adoption permitted. We are currently evaluating the potential effect that the updated standard will have on our financial statement disclosures. Note 2 – Revenue Recognition and Contracts with Customers Disaggregated Revenue The Company’s total revenue was comprised of two major product lines: Smart Glasses Sales and Engineering Services. The following table summarizes the revenue recognized by major product line: | | | | | | | | | | Three Months Ended | | | | March 31, | | | | 2024 | | 2023 | | Revenues | | | | | | | | Products Sales | | $ | 1,829,073 | | $ | 4,191,361 | | Engineering Services | | | 174,794 | | | — | | | | | | | | | | Total Revenue | | $ | 2,003,867 | | $ | 4,191,361 | |
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. 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 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 March 31, 2024 and 2023, there were no outstanding performance obligations remaining for extended warranties. The following table presents a summary of the Company’s sales by revenue recognition method as a percentage of total net sales for the three months ended March 31: | | | | | | | | % of Total Net Sales | | | 2024 | | 2023 | | Point-in-Time | | 91 | % | 100 | % | Over Time – Input Method | | 9 | % | 0 | % | | | | | | | Total | | 100 | % | 100 | % |
Remaining Performance Obligations As March 31, 2024, the Company had $2,825,915 of remaining performance obligations under two current waveguide development projects, which represents the remainder of transaction prices totaling $3,565,000 under these development agreements, which commenced in 2023, less revenue recognized under percentage of completion to date. The Company expects to recognize the remaining revenue related to these projects, based upon expected due dates, of 58% in 2024 and 42% in 2025. Revenues earned less amounts invoiced at March 31, 2024 was nil and $165,771 at December 31, 2023. As of March 31, 2023, the Company had approximately $165,000 of remaining performance obligations under a current waveguide development project, which represents the remainder of the total transaction price of approximately $800,000 under this development agreement, less revenue recognized under percentage of completion to date. The Company did recognize the remaining revenue related to this project in the second quarter of 2023. As of March 31, 2024, the Company had no material outstanding performance obligations related to product sales, other than its standard product warranty. Note 3 – Loss Per Share Basic loss per share is computed by dividing the loss attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution from the assumed exercise of stock options and warrants, and the conversion of any convertible debt and convertible preferred shares.options. During periods of net loss, all common stock equivalents are excluded from the diluted EPS calculation because they are antidilutive.anti-dilutive. Since the Company reported a net loss for the three and nine months ended September 30, 2017March 31, 2024 and 2016,2023, the calculation for basic and diluted earnings per share is considered to be the same, as the impact of potential common shares is anti-dilutive. As of September 30, 2017March 31, 2024 and December 31, 2016,2023, there were 6,532,2598,369,154 and 7,227,7388,603,308 common stock share equivalents, for the three months then ended, respectively, potentially issuable under conversionfrom the exercise of preferred shares,stock options and warrants that could dilute basic earnings per share in the future. Note 3 —4 – Inventories, Net Inventories are stated at the lower of cost and net realizable value, and consisted of the following: | | | | | | | | | March 31, | | December 31, | | | 2024 | | 2023 | | | | | | | | Purchased Parts and Components | | $ | 10,358,291 | | $ | 9,500,415 | Work-in-Process | | | 346,759 | | | 394,923 | Finished Goods | | | 4,921,804 | | | 4,880,643 | Less: Reserve for Obsolescence | | | (5,758,599) | | | (5,775,551) | | | | | | | | Inventories, Net | | $ | 9,868,255 | | $ | 9,000,430 |
| | September 30, 2017 | | | December 31, 2016 | | | | | | Purchased Parts and Components | | $ | 2,069,378 | | | $ | 1,990,026 | | Work in Process | | | 212,444 | | | | 454,120 | | Finished Goods | | | 1,217,700 | | | | 831,069 | | Less: Reserve for Obsolescence | | | (656,931 | ) | | | (623,997 | ) | Net | | $ | 2,842,591 | | | $ | 2,651,218 | |
Note 5 – Fixed Assets Fixed Assets consisted of the following: | | | | | | | | | March 31, | | December 31, | | | 2024 | | 2023 | Tooling and Manufacturing Equipment | | $ | 8,783,670 | | $ | 8,793,192 | Leaseholds | | | 2,863,207 | | | 3,162,695 | Computers and Purchased Software | | | 679,138 | | | 833,794 | Furniture and Equipment | | | 2,431,846 | | | 2,580,904 | | | | 14,757,861 | | | 15,370,585 | Less: Accumulated Depreciation | | | (6,835,622) | | | (7,297,755) | Fixed Assets, Net | | $ | 7,922,239 | | $ | 8,072,830 |
December 31, 2023 asset groupings have been reclassified to conform with March 31, 2024 presentation. Total depreciation expense for fixed assets for the three months ended March 31, 2024 and 2023 was $290,820 and $285,997, respectively. Note 6 – Technology Licenses, Net The changes in the Company’s Technology Licenses for the three months ended March 31, 2024, were as follows: | | | | | | | | | March 31, | | December 31, | | | 2024 | | 2023 | | | | | | | | Licenses | | $ | 32,443,356 | | $ | 32,443,356 | Additions | | | — | | | — | Less: Accumulated Amortization | | | (6,419,289) | | | (5,592,355) | Licenses, Net | | $ | 26,024,067 | | $ | 26,851,001 |
Total amortization expense related to technology licenses for the three months ended March 31, 2024, and 2023 was $818,334 and $867,153, respectively. These intangible technology license assets are being amortized over a ten-year period, which began on May 12, 2022 and, as modified, on December 16, 2022. The Atomistic technology license represents $30,000,000 of the total licenses on-hand. The remaining funding commitment of $1,000,000 associated with this license was paid in January 2024. Until such time as the Company owns a controlling interest in Atomistic following by the issuance of Vuzix shares (see Note 12) for the completion of all development milestones, or is permitted to waive them and accelerate the share issuances for 100% ownership of Atomistic, the Company and Atomistic must negotiate every 12 to 24 months new license fee commitments for the extension of the Company’s exclusive license. If such amounts cannot be agreed this would result in the termination of Vuzix’s existing license to the Atomistic technologies. Note 7 – Investment in Atomistic In addition toNovember 2023, Atomistic successfully reached six of ten technological milestones under its normal Reserve for Obsolescence provision,technology license agreement (Note 6) with the Company wrote-downexecuted on December 16, 2022. As a result of these achievements, the Company issued to net realizablethe Atomistic Founders 1,397,500 shares of the Company's common stock and paid them $2,500,000 in exchange for 13,682 shares of Series A Preferred stock of Atomistic. The fair market value all of the common shares when issued was $2.35 per share or a total of $3,284,126. The stock of Atomistic does not have a readily determinable fair value, as it’s a private company; therefore, under ASC 321, the investment in Atomistic stock is accounted for at cost, unless a transaction occurs, indicating a known fair value or if indications of an impairment of the investment are known. The Company reviewed its componentinvestment in Atomistic for impairment and finished goodsno indicators of impairment have occurred on or before March 31, 2024. Note 8 - Other Assets The Company’s Other Assets, were as follows: | | | | | | | | | March 31, | | December 31, | | | 2024 | | 2023 | Private Corporation Investments | | $ | 650,000 | | $ | 450,000 | Additions | | | — | | | 200,000 | Total Private Corporation Investments (at cost) | | | 650,000 | | | 650,000 | | | | | | | | Software Development Costs | | | 1,000,000 | | | 875,000 | Additions | | | — | | | 125,000 | Less: Accumulated Amortization | | | (680,557) | | | (638,889) | Software Development Costs, Net | | | 319,443 | | | 361,111 | | | | | | | | Total Other Assets | | $ | 969,443 | | $ | 1,011,111 |
During the year ended December 31, 2021, the Company acquired, for a purchase price of $200,000, an ownership interest of 3%, in the form of preferred stock, in a private corporation developing smart glasses software for use by retailers in the stockkeeping of inventory, amongst other uses. In the year ended December 31, 2023, the Company purchased an additional $100,000 of preferred stock in this corporation to retain a 2% ownership interest. In June 2023, the Company purchased $100,000 of preferred stock, along with warrants, in a UK-based public company developing new semiconductor materials for displays. The investment represents less than a 1% ownership interest. Total amortization expense 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 reduce the suggested retail selling price to a price below the cost. The loss totaled $1,151,482 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. This provision has beensoftware updates, included in Operating Expenses oncost of sales, for the Consolidated Statement of Operations.three months ended March 31, 2024, and 2023 were $41,668 and $55,556, respectively. Note 4 —9 – Accrued Expenses Accrued expenses consisted of the following: | | September 30, 2017 | | | December 31, 2016 | | | | | | | | | | | | | | | | | | | March 31, | | December 31, | | | | 2024 | | 2023 | | | | | | | | | Accrued Wages and Related Costs | | $ | 169,047 | | | $ | 119,472 | | | $ | 468,458 | | $ | 1,711,707 | Accrued Officer Compensation | | | 408,609 | | | | 648,720 | | | Accrued Professional Services | | | 275,500 | | | | 137,099 | | | | 160,425 | | | 362,100 | Accrued Warranty Obligations | | | 114,056 | | | | 41,132 | | | | 133,780 | | | 188,249 | Accrued Interest | | | 183,553 | | | | 375,560 | | | Other Accrued Expenses | | | 10,000 | | | | 10,000 | | | | 89,321 | | | 154,387 | | | | | | | | | | | | | | | | | | | Total | | $ | 1,160,765 | | | $ | 1,331,983 | | | $ | 851,984 | | $ | 2,416,443 |
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 $183,553 and $141,645, respectively, at September 30, 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 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. The changes in the Company’s accrued warranty obligations for the ninethree months ended September 30, 2017 and the balance as of DecemberMarch 31, 20162024, were as follows: Accrued Warranty Obligations at December 31, 2016 | | $ | 41,132 | | | | | | | | Accrued Warranty Obligations at December 31, 2023 | | | $ | 188,249 | Reductions for Settling Warranties | | | (102,260 | ) | | | (109,341) | Warranties Issued During Period | | | 175,184 | | | | 54,872 | | | | | | | Accrued Warranty Obligations at September 30, 2017 | | $ | 114,056 | | | | | | | | Accrued Warranty Obligations at March 31, 2024 | | | $ | 133,780 |
Note 510 – 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 FASB ASC 815-10-25, we measured the derivative liability using a Monte Carlo Options Lattice pricing model at their 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 of September 30, 2017 and December 31, 2016 a total of 38,100 warrants were outstanding that contained a full-ratchet anti-dilution provision. In connection with the closing of our sale of shares of Series A Preferred Stock on January 2, 2015 (the “Series A Private Placement”), 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 Nil 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 FASB 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 Liabilities section of the balance sheet. Accordingly, at the end of each quarterly reporting date the derivative fair market value is remeasured and adjusted to current market value.
The Company has adopted FASB ASC Topic 820 for financial instruments measured at fair value on a recurring basis. FASB ASC Topic 820 defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States and expands disclosures about fair value measurements.
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. FASB ASC Topic 820 establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. 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:
- Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;
- Level 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
- Level 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.
The carrying amount of cash, accounts receivable, accounts payable, and accrued expenses approximates their fair value due to their short maturity. The carrying amount of notes payable approximates fair value because stated or implied interest rates approximate current interest rates that are available for debt with similar terms.
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 September 30, 2017:
| | Total | | | Level 1 | | | Level 2 | | | Level 3 | | | | | | | | | | | | | | | Derivative Liability | | $ | 122,533 | | | $ | — | | | $ | — | | | $ | 122,533 | | Total liabilities measured at fair value (Current liabilities) | | $ | 122,533 | | | $ | — | | | $ | — | | | $ | 122,533 | |
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, 2016:
| | Total | | | Level 1 | | | Level 2 | | | Level 3 | | | | | | | | | | | | | | | Derivative Liability | | $ | 173,131 | | | $ | — | | | $ | — | | | $ | 173,131 | | Total liabilities measured at fair value (Long-Term) | | $ | 173,131 | | | $ | — | | | $ | — | | | $ | 173,131 | |
Fair value – December 31, 2016 | | $ | 173,131 | | | | | | | Change in fair value for the period of warrant derivative liability | | | (50,598 | ) | | | | | | Fair value – September 30, 2017 | | $ | 122,533 | |
The Monte Carlo Options Lattice pricing model was used to estimate the fair value of the warrants outstanding:
| | September 30, 2017 | | | December 31, 2016 | | | | | | | | | Assumptions for Pricing Model: | | | | | | | | | Expected term in years | | | 0.85 | | | | 1.22 | | Volatility range for years | | | 61 | % | | | 100 | % | Risk-free interest rate | | | 1.31 | % | | | 1.47 | % | Expected annual dividends | | | None | | | | None | | | | | | | | | | | Value of warrants outstanding: | | | | | | | | | Fair value of warrants | | $ | 122,533 | | | $ | 173,131 | |
Note 6 — Long-Term Debt
Long-term debt consisted of the following:
| | September 30, 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 was 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 nine months ended September 30, 2017 and $269,543 of accrued interest on these Notes were converted into 119,797 shares of common stock during the nine months ended September 30, 2017.
Note 7 — Income Taxes
The Company’s effective income tax rate is a combination of federal, state and foreign tax rates and differs from the U.S. statutory rate due to taxes on foreign income, permanent differences including tax-exempt interest, and the resolution of tax uncertainties, offset by a valuation allowance against U.S. deferred income tax assets. Note 8 —11 – Capital Stock
Preferred stock The Company may issue shares of undesignated preferred stock in one or more series. The Board of Directors is authorized to establish and designate the different series of preferred stock and to fix and determine their voting powers and other special rights and qualifications.terms. A total of 5,000,000 shares of preferred stock with a par value of $0.001 are authorized as of September 30, 2017March 31, 2024, and December 31, 2016,2023. Of this total, 49,626 of whichshares are designated as Series A Preferred Stock. There were 49,626nil shares of Series A Preferred Stock issued and outstanding on September 30, 2017March 31, 2024, and December 31, 2016.2023.
On January 2, 2015 the Company closed a sale of Series A Preferred Stock to Intel Corporation (the “Series A Purchaser”), pursuant to which we issued and sold an aggregate of 49,626 shares 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. Each share of Series A Preferred Stock is convertible, at the option of the Series A holder, 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.
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 September 30, 2017, total accrued and unpaid preferred dividends were $4,407,158. As of December 31, 2016, total accrued and unpaid preferred dividends were $3,134,129. There were no declared preferred dividends owed as of September 30, 2017 or December 31, 2016.
The Series A Purchaser has the right, but not the obligation, to participate in any proposed issuance by the Company of its securities, subject to certain exceptions and 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.
In connection with the Series A Private Placement, the Company entered into an investor’s rights agreement with the Series A Purchaser, pursuant to which the Company agreed to file a “resale” registration statement with the Securities and Exchange Commission (the “SEC”) covering all the resale of shares of common stock issuable upon conversion of the Series A Preferred Stock. The Company’s registration statement covering the resale of these shares was declared effective by the SEC on February 17, 2015.
Common Stock The Company’s authorized common stock consists of 100,000,000 shares, par value of $0.001$0.001. There were 65,304,780 shares issued and 64,725,108 shares outstanding as of September 30, 2017March 31, 2024 and December 31, 2016. There were 22,178,911 and 19,569,2472023. In connection with the Atomistic Technology Licenses discussed in Note 6, on November 20, 2023, the Company issued a total of 1,397,500 shares of common stock issued and outstanding asto the Founders of September 30, 2017 and December 31, 2016, respectively. On August 14, 2017,Atomistic SAS (“Atomistic”) for the achievement of certain technological milestones under a license agreement entered into between the Company, closedAtomistic and the Founders, along with cash consideration in exchange for equity in Atomistic (see Note 7). Pursuant to the Stock Purchase Agreement with Atomistic and its public offeringFounders, the Company will, contingent upon completion of 1,500,000certain deliverables and the achievement of further milestones contained in the Atomistic Agreements, be committed to issue, depending on the Company’s share price at the time of their issuance, a further minimum of approximately 890,000 up to a maximum of 1,446,250 common shares to the Founders of Atomistic (as consideration for certain shares of Atomistic) which would result in Vuzix owning Series A Preferred shares in Atomistic that would be converted into ordinary shares of Atomistic and Vuzix ultimately owning nearly 100% of Atomistic, with Atomistic becoming a subsidiary of the Company. Within five years of the commencement of the 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 market valuation exceeds $3.5 billion. This could result in the issuance of an additional 291,346 to 473,438 shares of the Company’s common stock when that valuation target is exceeded. None of these share commitments have been issued to date. Treasury Stock 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 was in effect for one year and expired on March 2, 2023.During the three months ended March 31, 2023, the Company repurchased 115,000 shares of our common stock at a public offering pricean average cost of $5.75$4.06, before commission of $0.03 per share, for net proceeds after commissions and expensesshare. As of $7,978,321. As partMarch 31, 2024, 579,672 shares of this offering, the Company’s COO purchase 10,000 shares, but at the market price of $6.10 per share that reflected the Company’s closing market trading price the date of the transaction to comply with certain Nasdaq rules.our common stock were held in treasury. Note 9 — Stock Warrants A summary of the various changes in warrants during the nine month period ended September 30, 2017 is as follows:
| | Number of
Warrants | | | | | | Warrants Outstanding at December 31, 2016 | | | 401,859 | | Exercised During the Period | | | (250,009 | ) | Issued During the Period | | | — | | Expired During the Period | | | — | | | | | | | Warrants Outstanding, September 30, 2017 | | | 151,850 | |
The outstanding warrants as of September 30, 2017 expire from November 3, 2017 to August 5, 2018. The weighted average remaining term of the warrants is 0.7 years. The weighted average exercise price is $2.66 per share.
Note 10 — Stock Based12 – Stock-Based Compensation Plans
A summary of stock option activity related to the Company’s standard employee incentive plan (excluding options awarded under the Long-Term Incentive Plan (LTIP) – Note 13) for the ninethree months ended September 30, 2017March 31, 2024, is as follows: | | Number of Options | | | Weighted Average Exercise Price | | | | | | | | Outstanding at December 31, 2016 | | | 1,084,298 | | | $ | 4.76 | | | | | | | | | | | | | | | | | Weighted | | Average | | | | Number of | | Average | | Remaining Life | | | | Options | | Exercise Price | | (years) | Outstanding at December 31, 2023 | | | 2,911,308 | | $ | 7.60 | | 6.30 | Granted | | | 427,500 | | | | 6.00 | | | — | | | — | | | Exercised | | | (63,187 | ) | | | 2.89 | | | — | | | — | | | Expired or Forfeited | | | (30,802 | ) | | | 9.35 | | | (276,654) | | | 7.10 | | | | | | | | | | | | | Outstanding at September 30, 2017 | | | 1,417,809 | | | $ | 5.00 | | | | | | | | | | | | Outstanding at March 31, 2024 | | | 2,634,654 | | $ | 7.65 | | 5.79 |
The weighted average remaining contractual term for all options as of September 30, 2017March 31, 2024, and December 31, 20162023, was 7.75.79 years and 7.66.30 years, respectively. As of September 30, 2017,March 31, 2024, there were 716,0462,093,850 options that were fully vested and exercisable at a weighted average exercise price of $4.63$7.22 per share. The weighted average remaining contractual term onof the vested options is 6.75.2 years. As of September 30, 2017,March 31, 2024, there were 701,763540,804 unvested options exercisable at a weighted average exercise price of $5.41$9.35 per share. The weighted average remaining contractual term onof the unvested options is 8.78.0 years. For the nine months ended September 30, 2017, all options exercised were on a cashless basis.
The weighted average fair value of option grants was calculated using the Black-Scholes-Merton option pricing method. At September 30, 2017,As of March 31, 2024, the Company had approximately $3,512,000$3,426,239 of unrecognized stock compensation expense, which will be recognized over a weighted average period of approximately 3.01.6 years. During the nine months ended September 30, 2017, the Company issued 100,000 shares of non-vested stock to a new executive officer which vest over four years. The fair market value on the date of grant of the non-vested stock issued during the nine months ended September 30, 2017 was $5.90, resulting in an aggregate fair value of $590,000. As of September 30, 2017, there was $531,000 of unrecognized compensation cost related to unvested stock awards. This amount is expected to be recognized over a weighted-average period of 3.6 years.
For the three months ended September 30, 2017March 31, 2024, and 2016,2023, the Company recorded total stock-based compensation expense, including stock awards but excluding stock option awards under the Company’s LTIP, of $983,650 and $1,129,566, respectively. Note 13 – Long-Term Incentive Plan On March 17, 2021, the Company granted options to purchase a total of 5,784,000 shares of common stock to its officers and certain other members 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 three months ended March 31, 2024, and 2023, the Company recorded non-cash stock-based compensation expense of approximately $425,000$1,409,294 and $192,000, respectively. For$2,537,944, respectively, for options that vested or are probable to vest. These expenses are presented in the nine months ended September 30, 2017same financial statement line items in the Statements of Operations as the cash-based compensation expenses for the same employees. The fair value of option grants was calculated using a Monte Carlo simulation for the equity market capitalization tranches and 2016,the Black-Scholes-Merton option pricing method for the operational milestone tranches. As of March 31, 2024, we had $7,384,031 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 are being 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 recorded total stockprior to the completion of the requisite service period for market capitalization milestone or performance award vesting of a performance award no longer determined to be probable. If such milestones are 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 approximately $912,000Directors. As of March 31, 2024, and $541,000, respectively.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 million in non-cash stock-based compensation expense at such time. The 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 5,359,500 unvested options outstanding as of March 31, 2024, there are 2,679,750 options unvested for the achievement of Equity Market Capitalization targets, 1,875,825 unvested options for the achievement of annual revenue targets, and 803,925 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 Target | | | | | | | | | | | | | 680,500 | $ 2,000,000,000 | $ 25,000,000 | 0.0% | 680,500 | 3,000,000,000 | 50,000,000 | 2.0% | 680,500 | 4,000,000,000 | 100,000,000 | 4.0% | 680,500 | 5,000,000,000 | 200,000,000 | 6.0% | 580,500 | 6,000,000,000 | 300,000,000 | 8.0% | 580,500 | 7,000,000,000 | 450,000,000 | 10.0% | 555,500 | 8,000,000,000 | 675,000,000 | 12.0% | 485,500 | 9,000,000,000 | 1,000,000,000 | 14.0% | 435,500 | 10,000,000,000 | 1,500,000,000 | 16.0% | 5,359,500 | | | |
Note 11 —14 – Litigation We are not currently involved in any actual or pending legal proceedingproceedings or litigation we consider to be material, and we are not aware of any such material proceedings contemplated by or against us or involving our property.property. Note 15 – Right-of-Use Assets and Liabilities Note 12 — Contractual ObligationsFuture lease payments under operating leases as of March 31, 2024, were as follows:
| | | | 2024 | | $ | 418,892 | 2025 | | | 511,980 | Total Future Lease Payments | | | 930,872 | Less: Imputed Interest | | | (56,021) | Total Lease Liability Balance | | $ | 874,851 |
The Company is party to severalhas signed lease agreements, with the largest being for its office and manufacturing facility in the West Henrietta, New York area under an operating lease that commenced October 3, 2015, and expireswas set to expire on October 3, 2020. The Company also leases small office spaces in England under a two-yearThis lease and under a one-year lease arrangement in Japan. Future minimum payments required under operating lease obligations as of September 30, 2017 are as follows:
| | Total Minimum Lease Payments | | 2017 (3 months remaining) | | $ | 93,053 | | 2018 | | $ | 348,900 | | 2019 | | $ | 341,990 | | 2020 | | $ | 307,311 | | 2021 | | | — | | Total | | $ | 1,091,254 | |
Under the lease agreements described above,had an original five-year term with an option by the Company is required to payrenew for two additional three-year terms at pre-agreed to lease rates. On June 25, 2020, the pro rata shareCompany exercised the first of two renewal terms, extending the real property taxes and assessments, expenses and other charges associated with these facilities.
Rent expense forcurrent lease term to January 31, 2024. On January 16, 2024, the nine months ended September 30, 2017 and 2016 totaled $344,227 and $371,239, respectively.Company exercised the second renewal
Note 13 — Recent Accounting Pronouncements
In May 2014,extending the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which supersedescurrent lease term to November 30, 2025. As a result, the revenue recognition requirements in “Revenue Recognition (Topic 605),”Company recorded an additional Right-of-Use asset and requires an entity to recognize revenue in a way that depictsRight-of-Use liability of $700,770 on the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company has the option to apply the provisions of ASU 2014-09 either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the new guidance recognized at the date of initial application (the modified retrospective transition method). We are currently evaluating the alternative methods of adoption and the effect of adopting ASU 2014-09 on our financial statements and related disclosures. We anticipate electing to adopt the standard using the modified retrospective transition methodConsolidated Balance Sheets as of January 1, 2018. However, this election may change as we finalize our analysis of16, 2024.
Operating lease costs under the impact of the provisions of ASU 2014-09 on the Company. We are also in the process of assessing which of our operating revenue streams will be impacted by the adoption of the new standard and its impact on the consolidated financial statements. In February 2016, the FASB issued Accounting Standards Update ASU 2016-02Leases (Topic 842). Current US generally accepted accounting principles (GAAP) requires lessees and lessors to classify leases as either capital leases or operating leases where lessees recognize assetstotaled $191,505 and liabilities for capital leases but not for operating leases. ASU 2016-02 requires lessees to recognize assets and liabilities for all leases (with an exception for short-term leases). The new FASB guidance will be effective for fiscal years beginning after December 15, 2018, and interim periods thereafter. The Company is currently evaluating the impact the adoption of this standard will have on the consolidated financial statements.
Accounting Pronouncements Adopted in Q1 2017
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$203,339 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 quarterthree months ended March 31, 20172024, 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.2023, respectively.
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 quarter ended March 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 March 31, 2017,2024, the weighted average discount rate was 8.3% and the weighted average remaining lease term was 1.7 years.
Note 16 – Subsequent Events On May 6, 2024, the Company hadimplemented a full valuation allowance againstvoluntary Company-wide payroll reduction program for all individuals with optional salary reductions of 10% to 50% depending upon the respective base salary level for the period running from May 1, 2024 to April 30, 2025. The expected cash savings will be approximately $1,600,000 and will result in the issuance of stock awards or stock options, at a rate of 150% or 200%, respectively, of the net deferred tax assets, as such the adoptioncash wage reductions. The fair market value of this standard did not have a material impact on our consolidated financial statements. There are no other recent accounting pronouncements that we expect to have a material impact on the consolidated financial statements.
Note 14 — Subsequent Events
Subsequent to September 30, 2017, the Company entered into Technology Acquisition Agreement where it acquired all the seller's right, titlethese stock awards and interest in certain Transferred Intellectual Property (IP). Pursuant to the agreement, the Company will pay approximately $75,702 as reimbursement of related patent applications to date. Further the Company will issue up tostock option awards has been determined at $1.33 and $0.99, respectively, and a total of 100,000 restricted shares of common585,345 stock as follows (i) 25,000 shares shall be issued upon the closing; (ii) a further 25,000 shares after the Company has successfully developed a working demonstrator system utilizing the IP;awards and (iii) 50,000 shares once the Company completes the successful commercialization of products containing the IP for sale in the marketplace. Management of the Company estimates that it will take up2,150,008 stock option awards were issued. These awards are subject to 24 monthsvesting and approximately $200,000 in new R&D spending to achieve the first development milestone of a functional demonstrator model. In addition to cash and equity payments, the Company will be required to pay a currency based royalty per product when the IP is commercially sold and incorporated into products.resale rules.
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
You should read the following discussion and analysis of financial condition and results of operations in conjunction with the financial statements and related notes appearing elsewhere in this quarterly report and in our annual reportAnnual Report on Form 10-K for the year ended December 31, 2016. 2023. As used in this report, unless otherwise indicated, the terms “Company,” “Vuzix”, “management,” “we,” “our,” and “us” refer to Vuzix Corporation and its subsidiary.Corporation. Critical Accounting Policies and Significant Developments and Estimates The discussion and analysis of our financial condition and results of operations areis based onupon our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this quarterly report. The preparation of these statements in conformity with generally accepted accounting principlesGAAP 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 financial statements, including those related to revenue recognition, bad debts,allowance for credit losses, inventories, warranty reserves, product warranty, carrying value of long-lived assets, fair value measurement of financial instruments, and embedded derivatives, valuation of stock compensation awards, achievement of equity market capitalization and probability of operational milestones being achieved under our LTIP, and income taxes. We base our estimates on historical experience and on various other assumptions that we 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 future events and their impact cannot be determined with certainty, the actual results will inevitably differ from our estimates. Such differences could be material to the 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.dictate. Historically, we have found our application of accounting policies to be appropriate, and actual results have not differed materially from those determined using such necessary estimates. Management believes certain factors and trends are important in understanding our financial performance. The critical accounting policies, judgments and estimates that we believe have the most significant effect on our consolidated financial statements are: | ● | • | valuationValuation of inventories; |
| ● | carryingVariable Interest Entities; |
| ● | Carrying value of long-lived assets; |
| ● | • | softwareSoftware development costs; |
| ● | revenue recognition;Product warranty; |
| ● | • | product warranty; | | • | fair value measurement of financial instruments and embedded derivatives; | | • | stock-basedStock-based compensation; and | | • | income taxes. |
Our accounting policies are more fully described in the notes to our condensed consolidated financial statements included in this quarterly report and in our annual reportAnnual Report on Form 10-K for the year ended December 31, 2016.2023. There have been no significant changes in our accounting policies for the nine month periodthree months ended September 30, 2017.March 31, 2024. Off BalanceOff-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, an effect on our financial condition, financial statements, revenues or expenses. Business Matters 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 Smart Glasses and Augmented Reality (AR) glasses, Video Headphonesglasses. Our 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 are referredintegrate micro-display technology with our advanced optics to as Video Eyewear, head mounted wearable displays, video glasses, personal viewers, near-eyeproduce compact high-resolution display engines, less than half an inch diagonally, which when viewed through our Smart Glasses products 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, defense, 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 spacemarkets 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 and position in the marketplace give us a leadership position in AR and Smart Glasses products, waveguide optics, microLEDs and display engine technology. All of the mobile displays and wearable and mobile electronics markets in which we compete, including mobile and wearable displays and electronics, have been and continue to be subject to consistent and rapid technological change, with ever greater capabilities and performance, including mobile devices with larger screen sizes and improved display resolutions as well as, in many cases, reductions in pricing for mobile devices. As a result, we must continue to improve our products’ performance and lower our costs. We believe our intellectual property portfolio gives us a leadership position in microdisplaythe design and manufacturing of micro-display projection engines, waveguides, mechanical packaging, ergonomics, packaging, and optical systems. Recent Accounting Pronouncements In May 2014,See Note 1 to the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605),” and requires an entity to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company has the option to apply the provisions of ASU 2014-09 either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the new guidance recognized at the date of initial application (the modified retrospective transition method). We are currently evaluating the alternative methods of adoption and the effect of adopting ASU 2014-09 on our financial statements and related disclosures. We anticipate electing to adopt the standard using the modified retrospective transition method as of January 1, 2018. However, this election may change as we finalize our analysis of the impact of the provisions of ASU 2014-09 on the Company. We are also in the process of assessing which of our operating revenue streams will be impacted by the adoption of the new standard and its impact on the consolidated financial statements.Unaudited Consolidated Financial Statements.
In February 2016, the FASB issued Accounting Standards Update ASU 2016-02Leases (Topic 842). Current US generally accepted accounting principles (GAAP) requires lessees and lessors to classify leases as either capital leases or operating leases, where lessees recognize assets and liabilities for capital leases but not for operating leases. ASU 2016-02 requires lessees to recognize assets and liabilities for all leases (with an exception for short-term leases). The new FASB guidance will be effective for fiscal years beginning after December 15, 2018, and interim periods thereafter. The Company is currently evaluating the impact the adoption of this standard will have on the consolidated financial statements.
Accounting Pronouncements Adopted in Q1 2017
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 forfeituresTable 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 quarter ended March 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.Contents
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 quarter ended March 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 March 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 we expect to have a material impact on the consolidated financial statements.
Results of Operations
Comparison of Three Months Ended September 30, 2017March 31, 2024 and September 30, 2016 2023 The following table compares the Company’s consolidated statements of operations data for the three months ended September 30, 2017March 31, 2024 and 2016.2023: | | | | | | | | | | | | | | | Three Months Ended March 31, | | | | | | | | | | Dollar | | % Increase | | | | 2024 | | 2023 | | Change | | (Decrease) | | | | | | | | | | | | | | | Sales: | | | | | | | | | | | | | Sales of Products | | $ | 1,829,073 | | $ | 4,191,361 | | $ | (2,362,288) | | (56) | % | Sales of Engineering Services | | | 174,794 | | | — | | | 174,794 | | NM | | | | | | | | | | | | | | | Total Sales | | | 2,003,867 | | | 4,191,361 | | | (2,187,494) | | (52) | % | | | | | | | | | | | | | | Cost of Sales: | | | | | | | | | | | | | Cost of Sales - Products | | | 1,807,593 | | | 3,082,439 | | | (1,274,846) | | (41) | % | Cost of Sales - Depreciation and Amortization | | | 181,566 | | | 232,916 | | | (51,350) | | (22) | % | Cost of Sales - Engineering Services | | | 67,961 | | | — | | | 67,961 | | NM | | | | | | | | | | | | | | | Total Cost of Sales | | | 2,057,120 | | | 3,315,355 | | | (1,258,235) | | (38) | % | | | | | | | | | | | | | | Gross Profit (Loss) | | | (53,253) | | | 876,006 | | | (929,259) | | (106) | % | Gross Profit (Loss)% | | | (3) | % | | 21 | % | | | | | | | | | | | | | | | | | | | Operating Expenses: | | | | | | | | | | | | | Research and Development | | | 2,738,449 | | | 3,069,797 | | | (331,348) | | (11) | % | Selling and Marketing | | | 2,220,782 | | | 2,539,659 | | | (318,877) | | (13) | % | General and Administrative | | | 4,098,257 | | | 5,131,824 | | | (1,033,567) | | (20) | % | Depreciation and Amortization | | | 970,377 | | | 964,265 | | | 6,112 | | 1 | % | Loss on Fixed Asset Disposal | | | 11,277 | | | — | | | 11,277 | | NM | | Impairment of Patents and Trademarks | | | — | | | 17,666 | | | (17,666) | | (100) | % | | | | | | | | | | | | | | Loss from Operations | | | (10,092,395) | | | (10,847,205) | | | 754,810 | | (7) | % | | | | | | | | | | | | | | Other Income (Expense): | | | | | | | | | | | | | Investment Income | | | 152,599 | | | 695,783 | | | (543,184) | | (78) | % | Income and Other Taxes | | | (282) | | | (87,795) | | | 87,513 | | (100) | % | Foreign Exchange Loss | | | (107,504) | | | (1,366) | | | (106,138) | | 7,770 | % | | | | | | | | | | | | | | Total Other Income, Net | | | 44,813 | | | 606,622 | | | (561,809) | | (93) | % | | | | | | | | | | | | | | Loss Before Provision for Income Taxes | | | (10,047,582) | | | (10,240,583) | | | 193,001 | | (2) | % | Provision for Income Taxes | | | — | | | — | | | — | | — | % | | | | | | | | | | | | | | Net Loss | | $ | (10,047,582) | | $ | (10,240,583) | | $ | 193,001 | | (2) | % |
| | 3 Months Ended September 30, | | | | 2017 | | | 2016 | | | Dollar Change | | | % Increase (Decrease) | | | | | | | | | | | | | | | Sales of Products | | $ | 1,138,413 | | | $ | 582,549 | | | $ | 555,864 | | | | 95 | % | Sales of Engineering Services | | | 266,687 | | | | — | | | | 266,687 | | | | 100 | % | | | | | | | | | | | | | | | | | | Total Sales | | | 1,405,100 | | | | 582,549 | | | | 822,551 | | | | 141 | % | | | | | | | | | | | | | | | | | | Cost of Sales — Products | | | 1,089,881 | | | | 819,116 | | | | 270,765 | | | | 33 | % | Cost of Sales — Engineering Services | | | 407,220 | | | | — | | | | 407,220 | | | | 100 | % | | | | | | | | | | | | | | | | | | Total Cost of Sales | | | 1,497,101 | | | | 819,116 | | | | 677,985 | | | | 83 | % | | | | | | | | | | | | | | | | | | Gross Loss (exclusive of depreciation shown separately below) | | | (92,001 | ) | | | (236,567 | ) | | | 144,566 | | | | 61 | % | Gross Loss % | | | (7 | )% | | | (41 | )% | | | | | | | | | | | | | | | | | | | | | | | | | | Operating Expenses: | | | | | | | | | | | | | | | | | Research and Development | | | 1,506,307 | | | | 2,177,957 | | | | (671,650 | ) | | | (31 | )% | Selling and Marketing | | | 908,797 | | | | 839,497 | | | | 69,300 | | | | 8 | % | General and Administrative | | | 1,612,542 | | | | 1,274,698 | | | | 337,844 | | | | 27 | % | Depreciation and Amortization | | | 251,366 | | | | 196,370 | | | | 54,996 | | | | 28 | % | Loss on Inventory Revaluation | | | 1,151,482 | | | | — | | | | 1,151,482 | | | | 100 | % | | | | | | | | | | | | | | | | | | Loss from Operations | | | (5,522,495 | ) | | | (4,725,089 | ) | | | (797,406 | ) | | | 17 | % | | | | | | | | | | | | | | | | | | Other Income (Expense) | | | | | | | | | | | | | | | | | Investment Income | | | 12,956 | | | | 8,144 | | | | 4,812 | | | | 59 | % | Other Taxes | | | (15,734 | ) | | | (19,124 | ) | | | 3,390 | | | | (18 | )% | Foreign Exchange Loss | | | (5,246 | ) | | | (13,781 | ) | | | 8,535 | | | | (62 | )% | Gain (Loss) on Derivative Valuation | | | 41,454 | | | | (59,120 | ) | | | 100,574 | | | | (170 | )% | Loss on Fixed Asset Disposal | | | (585 | ) | | | (25,890 | ) | | | 25,305 | | | | (98 | )% | Amortization of Senior Term Debt Discount | | | — | | | | (155,313 | ) | | | 155,313 | | | | (100 | )% | Amortization of Deferred Financing Costs | | | — | | | | (11,707 | ) | | | 11,707 | | | | (100 | )% | Interest Expense | | | (12,592 | ) | | | (33,981 | ) | | | 21,389 | | | | (63 | )% | | | | | | | | | | | | | | | | | | Total Other Income (Expense) | | | 20,253 | | | | (310,772 | ) | | | 331,025 | | | | (107 | )% | | | | | | | | | | | | | | | | | | Loss Before Income Taxes | | | (5,502,242 | ) | | | (5,035,861 | ) | | | (466,381 | ) | | | 9 | % | Provision for Income Taxes | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | Net Loss | | $ | (5,502,242 | ) | | $ | (5,035,861 | ) | | $ | (466,381 | ) | | | 9 | % |
Sales. There was an overall increasea decrease in total sales for the quarterthree months ended September 30, 2017 overMarch 31, 2024, compared to the same period in 20162023 of $822,551$2,187,494, or 141%52%. The following table reflects the major components of our sales: | | Quarter Ended September 30, 2017 | | | % of Sales | | | Quarter Ended September 30, 2016 | | | % of Sales | | | Dollar Change | | | % Increase (Decrease) | | | | | | | | | | | | | | | | | | | | | Sales of Smart Glasses | | $ | 1,027,397 | | | | 73 | % | | $ | 379,053 | | | | 65 | % | | $ | 648,344 | | | | 171 | % | Sales of Video Eyewear | | | 50,892 | | | | 4 | % | | | 167,377 | | | | 29 | % | | | (116,485 | ) | | | (70 | )% | Sales of Waveguides | | | 45,000 | | | | 3 | % | | | 23,000 | | | | 4 | % | | | 22,000 | | | | 96 | % | Sales Freight out | | | 15,124 | | | | 1 | % | | | 13,119 | | | | 2 | % | | | 2,005 | | | | 15 | % | Sales of Engineering Services | | | 266,687 | | | | 19 | % | | | — | | | | 0 | % | | | 266,687 | | | | 100 | % | Total Sales | | $ | 1,405,100 | | | | 100 | % | | $ | 582,549 | | | | 100 | % | | $ | 822,551 | | | | 141 | % |
| | | | | | | | | | | | | | | | | | | Three Months Ended | | % of | | Three Months Ended | | % of | | Dollar | | % Increase | | | | March 31, 2024 | | Total Sales | | March 31, 2023 | | Total Sales | | Change | | (Decrease) | | Sales of Products | | $ | 1,829,073 | | 91 | % | $ | 4,191,361 | | 100 | % | $ | (2,362,288) | | (56) | % | Sales of Engineering Services | | | 174,794 | | 9 | % | | — | | 0 | % | | 174,794 | | NM | | Total Sales | | $ | 2,003,867 | | 100 | % | $ | 4,191,361 | | 100 | % | $ | (2,187,494) | | (52) | % |
The increase in Smart Glasses sales was the result of increased M300 shipments in the third quarter of 2017 which were up 462%, despite production limitations related to plastics at our Chinese vendor, as compared to the corresponding third quarter of 2016, a period when the M300 was not available for full commercial sale and only available to paying customers on a limited basis. Sales of our original M100 Smart Glassesproducts decreased by 55% in the third quarter of 2017 over the 2016 quarterly period, reflecting the growing sales strength of the new M300. Our iWear Video Headphones sales decreased by 70%56% for the third quarter of 2017 asthree months ended March 31, 2024, compared to the same period in 2016, primarily2023. Lack of smart glasses revenue was the resultprimary driver of this decrease as unit sales of our drop in the retail price of the iWear to $299 from its 2016 price of $499, and growing competitive market conditions. As a result, we have again revalued our expected iWear selling prices going forward and made a further provision as discussed below to a lower expected net iWear inventory recovery. Sales of Waveguide systems in the third quarter of 2017 increased due to purchases for three ongoing development programs with tier-1 consumer electronics firms, asM400 product decreased compared to the 2016 comparative period when only one Waveguide related program took place. previous year’s comparable period.
Sales of engineering services for the period increased over the nil amount in 2016, entirely due to our ongoing work on the Toshiba smart glasses development program announced in February 2017. The amount recorded for the three months ending September 30, 2017, represents accrued billings recognized on a percentage of completion basis. ended March 31, 2024, was $174,794, compared to nil in the comparable 2023 period. Cost of Sales and Gross Loss.Profit (Loss). Cost of product revenues and engineering services are comprised of materials, components, labor, warranty costs, freight costs, manufacturing overhead, software royalties, the depreciation for our tooling and the non-cashmanufacturing 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: | | | | | | | | | | | | | | | | | | | Three Months Ended | | As % Related | | Three Months Ended | | As % Related | | Dollar | | % Increase | | | | March 31, 2024 | | Total Sales | | March 31, 2023 | | Total Sales | | Change | | (Decrease) | | Product Cost of Sales | | $ | 1,317,345 | | 66 | % | $ | 2,546,951 | | 61 | % | $ | (1,229,606) | | (48) | % | Manufacturing Overhead - Unapplied | | | 490,248 | | 25 | % | | 535,488 | | 13 | % | | (45,240) | | (8) | % | Depreciation and Amortization | | | 181,566 | | 9 | % | | 232,916 | | 6 | % | | (51,350) | | (22) | % | Engineering Services Costs Sales | | | 67,961 | | 3 | % | | — | | — | % | | 67,961 | | NM | | | | | | | | | | | | | | | | | | | Total Cost of Sales | | $ | 2,057,120 | | 103 | % | $ | 3,315,355 | | 79 | % | $ | (1,258,235) | | (38) | % | | | | | | | | | | | | | | | | | | Gross Profit (Loss) | | $ | (53,253) | | (3) | % | $ | 876,006 | | 21 | % | $ | (929,259) | | (106) | % |
Component of Cost of Sales | | Quarter Ended September 30, 2017 | | | As % Related Product Sales | | | Quarter Ended September 30, 2016 | | | As % of Related Product Sales | | | Dollar Change | | | % Increase (Decrease) | | | | | | | | | | | | | | | | | | | | | Product Cost of Sales | | $ | 526,040 | | | | 46 | % | | $ | 297,240 | | | | 51 | % | | $ | 228,800 | | | | 77 | % | Freight Costs | | | 151,650 | | | | 13 | % | | | 141,011 | | | | 24 | % | | | 10,639 | | | | 8 | % | Manufacturing Overhead | | | 219,834 | | | | 19 | % | | | 226,034 | | | | 39 | % | | | (6,200 | ) | | | (3 | )% | Warranty Costs | | | 82,995 | | | | 7 | % | | | 26,662 | | | | 5 | % | | | 56,333 | | | | 211 | % | Amortization of Software Costs | | | 71,613 | | | | 6 | % | | | 71,613 | | | | 12 | % | | | — | | | | 0 | % | Software Royalties | | | 37,749 | | | | 3 | % | | | 56,556 | | | | 10 | % | | | (18,807 | ) | | | (33 | )% | | | | | | | | | | | | | | | | | | | | | | | | | | Total Cost of Sales – Products | | $ | 1,089,881 | | | | 96 | % | | $ | 819,116 | | | | 141 | % | | $ | 270,765 | | | | 33 | % | | | | | | | | | | | | | | | | | | | | | | | | | | Gross Profit ( Loss) – Product Sales | | $ | 48,532 | | | | 4 | % | | $ | (236,567 | ) | | | (41 | )% | | $ | 285,099 | | | | 121 | % |
For the third quarterthree months ended September 30, 2017 we reportedMarch 31, 2024, there was a gross loss from total sales of $53,253 or 3% as compared to a gross profit from product sales as compared toof $876,006 or 21% in the prior year’scomparable period when we reported a gross loss. On a directin 2023. Unapplied manufacturing overhead costs, not already added in product cost of sales, basis only, product direct costs decreased to 46% of sales versus 51% in the prior year’s period, reflecting our reduced manufacturing costs of the M300 product achieved in the quarter and improved selling prices. We expect the overall M300 manufacturing costs will decrease now that issues regarding molding and the strength of plastics at our Chinese supplier have recently been corrected, which both negatively impacted our costs and our ability to meet demand. As a result of those plastics issues, we have increased our provision rate for possible future warranty costs to 7% versus 5% in the same period in 2016. Further negatively impacting product direct costs was the fact that we are now selling our iWear Headphones at their written down net realizable value. Costs for engineering services accruedby $45,240 or 8% for the three months ended September 30, 2017 represent direct projectMarch 31, 2024, over the 2023 comparable period. Such costs, as well as the reclassification of internal research and development wage costs related to the Toshiba engineering program, plus accruals for the expected overall program’s completion costshowever, increased as a percentage of accrued expenses. For the quarter, we increased our total estimated costssales to complete this fixed price project by approximately $280,000 and25% as a result incurred a negative gross margin for this third quarter. These increasescompared to 13% in costs were primarily2023 due to design modifications to support newlower quarterly product features, and processrevenue. The decrease in the net dollar amount of these unapplied overhead costs in the current period versus the prior period was primarily driven by improvements for higher yields in mass production.actual versus originally planned production levels during the period.
Research and Development. Our research and development expenses consist primarily of compensation costs for personnel, related stockincluding non-cash stock-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 are not capitalized and are included in research and development costs.expenses. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended | | % of | | Three Months Ended | | % of | | Dollar | | % Increase | | | | March 31, 2024 | | Total Sales | | March 31, 2023 | | Total Sales | | Change | | (Decrease) | | Research and Development | | $ | 2,738,449 | | 137 | % | $ | 3,069,797 | | 73 | % | $ | (331,348) | | (11) | % |
| | Quarter Ended September 30, 2017 | | | % of Sales | | | Quarter Ended September 30, 2016 | | | % of Sales | | | Dollar Change | | | % Increase (Decrease) | | | | | | | | | | | | | | | | | | | | | | | | | | | Research and Development | | $ | 1,506,307 | | | | 107 | % | | $ | 2,177,957 | | | | 374 | % | | $ | (671,650 | ) | | | (31 | )% |
Comparing the major net reductions in our researchResearch and development costsexpenses for the quarterthree months ended September 30, 2017 versus the same period in 2016, there was an increase in 2017 salary, benefits and stock compensation expenses of $167,922, primarily the result of additional R&D staff versus the same period in 2016; that was offsetMarch 31, 2024 decreased by a $152,231 reclass of internal salary costs to cost of sales for engineering services related to the Toshiba engineering services project; a decrease in project development and research costs of $839,002 as$331,348 or 11%, compared to the 2016comparable period when the M300 Smart Glasses were still in 2023. This decrease was largely due to a $281,116 decrease in salary and benefits related expenses and a $58,595 reduction in external development internally and with our outside contractors which assisted in the development work; an increase of $122,594 in consultant advisors on our research programs; and an increase of $18,817 in hiring placement fees.
expenses. Selling and Marketing. Selling and marketing costsexpenses consist of trade show costs, advertising, sales samples, travel costs, sales staff compensation costs including stocknon-cash stock-based compensation expense, consulting fees, public relations agency fees, website costs, and sales commissions paid to full-time staff and outside consultants. | | Quarter Ended September 30, 2017 | | | % of Sales | | | Quarter Ended September 30, 2016 | | | % of Sales | | | Dollar Change | | | % Increase (Decrease) | | | | | | | | | | | | | | | | | | | | | | | | | | | Selling and Marketing | | $ | 908,797 | | | | 65 | % | | $ | 839,497 | | | | 144 | % | | $ | 69,300 | | | | 8 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended | | % of | | Three Months Ended | | % of | | Dollar | | % Increase | | | | March 31, 2024 | | Total Sales | | March 31, 2023 | | Total Sales | | Change | | (Decrease) | | Selling and Marketing | | $ | 2,220,782 | | 111 | % | $ | 2,539,659 | | 61 | % | $ | (318,877) | | (13) | % |
These costs increased overallSelling and marketing expenses for the three months ended March 31, 2024 decreased by $318,877 or 13%, compared to the comparable period in 2023. This decrease was largely due to the following factors:a $155,707 decrease in salary and benefits related expenses driven by headcount decreases; a decrease of $195,217 in advertising and tradeshow expenses; and a decrease of $41,137 in travel related expenses; partially offset by an increase of $129,616$53,936 in product sales samples and developer units reflecting a special marketing push on our new M300; a $31,284 decrease in salary, commissions, benefits and stock compensation expenses as compared to the same period in 2016; an increase of $19,672 in our app store and website related costs; an increase of $8,020 for computer software subscriptions; offset by a reduction of $81,960 in trade show costs; a decrease in marketing firm fees of $54,986; and an $11,460 decrease in travel costs.
consulting fees. General and Administrative. General and administrative costsexpenses include professional fees, investor relations (IR) costs, including shares and warrants issued for IR services, salaries and related stocknon-cash stock-based compensation, travel costs, and office and rental costs. | | Quarter Ended September 30, 2017 | | | % of Sales | | | Quarter Ended September 30, 2016 | | | % of Sales | | | Dollar Change | | | % Increase (Decrease) | | | | | | | | | | | | | | | | | | | | | | | | | | | General and Administrative | | $ | 1,612,542 | | | | 115 | % | | $ | 1,274,698 | | | | 219 | % | | $ | 337,844 | | | | 27 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended | | % of | | Three Months Ended | | % of | | Dollar | | % Increase | | | | March 31, 2024 | | Total Sales | | March 31, 2023 | | Total Sales | | Change | | (Decrease) | | General and Administrative | | $ | 4,098,257 | | 205 | % | $ | 5,131,824 | | 122 | % | $ | (1,033,567) | | (20) | % |
General and administrative costs rose by 27% or $337,845expenses for the third quarterthree months ended March 31, 2024, decreased by $1,033,567 or 20%, compared to the comparable period in 2023. This decrease was largely due to a decrease of 2017 versus the 2016 period primarily because of: increased$915,307 in salary and stock compensation costsbenefits related expenses, which was primarily driven by a decrease in non-cash stock-based compensation; a decrease of $531,124 due to the hiring of new accounting and internal IR personnel and the Company’s new COO; a reduction of $91,142 for Sarbanes-Oxley Section 404 consultants retained$308,884 in 2016 to assist management in designing and implementing improvements in our financial reporting controls;investor relations expenses; and a reduced spendingdecrease of $103,811 on IR activities. $48,057 in insurance premiums; partially offset by an increase of $263,637 in legal expenses. Depreciation and Amortization. Depreciation and amortization expense, not included in cost of sales, for the three months ended September 30, 2017March 31, 2024, was $251,366 as$970,377, compared to $196,370$964,265 in the samecomparable period in 2016, an increase2023 or relatively flat. Other Income, (Expense)Net. Total other income was $20,253$44,813 for the three months ended September 30, 2017 asMarch 31, 2024, compared to an expenseother income of $310,772$606,622 in the samecomparable period in 2016,2023, a decrease of $331,025.$561,809. The overall decrease in these other expensesincome was primarily the result of a gain on the derivative valuation for the three months ended September 30, 2017decrease of $41,454 as compared to a loss of $59,120$543,184 in the same period in 2016, a net reduction of $100,574; andinvestment income due to the conversionslower excess cash on-hand to invest; an increase of $106,138 in foreign exchange losses; partially offset by a decrease in Income and maturityOther Taxes of the debt on June 3, 2017, there were zero costs for the amortization of senior term debt discounts and deferred financing costs for the three months ended September 30, 2017 as compared to an expense of $167,020 and a related reduction in interest expense of $21,389. $87,513. Provision for Income Taxes. There was not a provision for income taxes in the three month periodrespective three-month periods ending September 30, 2017 or 2016.March 31, 2024, and 2023. Comparison of Nine Months Ended September 30, 2017 and September 30, 2016
The following table compares the Company’s consolidated statements of operations data for the nine months ended September 30, 2017 and 2016.
| | 9 Months Ended September 30, | | | | 2017 | | | 2016 | | | Dollar Change | | | % Increase (Decrease) | | | | | | | | | | | | | | | Sales of Products | | $ | 3,002,744 | | | $ | 1,367,766 | | | $ | 1,634,978 | | | | 120 | % | Sales of Engineering Services | | | 938,281 | | | | 139,500 | | | | 798,781 | | | | 573 | % | | | | | | | | | | | | | | | | | | Total Sales | | | 3,941,025 | | | | 1,507,266 | | | | 2,433,759 | | | | 161 | % | | | | | | | | | | | | | | | | | | Cost of Sales — Products | | | 3,441,650 | | | | 2,069,964 | | | | 1,371,686 | | | | 66 | % | Cost of Sales — Engineering Services | | | 872,137 | | | | 39,060 | | | | 833,077 | | | | 2,133 | % | | | | | | | | | | | | | | | | | | Total Cost of Sales | | | 4,313,787 | | | | 2,109,024 | | | | 2,204,763 | | | | 105 | % | | | | | | | | | | | | | | | | | | Gross Loss (exclusive of depreciation shown separately below) | | | (372,762 | ) | | | (601,758 | ) | | | 228,996 | | | | (38 | )% | Gross Loss % | | | (10 | )% | | | (40 | )% | | | | | | | | | | | | | | | | | | | | | | | | | | Operating Expenses: | | | | | | | | | | | | | | | | | Research and Development | | | 4,374,202 | | | | 5,121,713 | | | | (747,511 | ) | | | (15 | )% | Selling and Marketing | | | 2,739,978 | | | | 2,627,543 | | | | 112,435 | | | | 4 | % | General and Administrative | | | 4,155,960 | | | | 3,350,441 | | | | 805,519 | | | | 24 | % | Depreciation and Amortization | | | 734,175 | | | | 549,244 | | | | 184,931 | | | | 34 | % | Loss on Inventory Revaluation | | | 1,151,482 | | | | — | | | | 1,151,482 | | | | 100 | % | | | | | | | | | | | | | | | | | | Loss from Operations | | | (13,528,559 | ) | | | (12,250,699 | ) | | | (1,277,860 | ) | | | 10 | % | | | | | | | | | | | | | | | | | | Other Income (Expense) | | | | | | | | | | | | | | | | | Investment Income | | | 45,800 | | | | 20,923 | | | | 24,877 | | | | 119 | % | Other Taxes | | | (37,884 | ) | | | (53,749 | ) | | | 15,865 | | | | (30 | )% | Foreign Exchange Loss | | | (30,299 | ) | | | (21,267 | ) | | | (9,032 | ) | | | 42 | % | Gain (Loss) on Derivative Valuation | | | 50,598 | | | | (57,133 | ) | | | 107,731 | | | | (189 | )% | (Loss) Gain on Fixed Asset Disposal | | | (585 | ) | | | (25,890 | ) | | | 25,305 | | | | (98 | )% | Amortization of Senior Term Debt Discount | | | (155,760 | ) | | | (391,334 | ) | | | 235,574 | | | | (60 | )% | Amortization of Deferred Financing Costs | | | (19,500 | ) | | | (34,867 | ) | | | 15,367 | | | | (44 | )% | Interest Expense | | | (77,849 | ) | | | (101,075 | ) | | | 23,226 | | | | (23 | )% | | | | | | | | | | | | | | | | | | Total Other Expense | | | (225,479 | ) | | | (664,392 | ) | | | 438,913 | | | | (66 | )% | | | | | | | | | | | | | | | | | | Loss Before Income Taxes | | | (13,754,038 | ) | | | (12,915,091 | ) | | | (838,947 | ) | | | 6 | % | Provision for Income Taxes | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | Net Loss | | $ | (13,754,038 | ) | | $ | (12,915,091 | ) | | $ | (838,947 | ) | | | 6 | % |
Sales. There was an overall increase in total revenue for the nine months ended September 30, 2017 over the same period in 2016 of $2,433,759 or 161%. The following table reflects the major components of our sales:
| | 9 Months Ended September 30, 2017 | | | % of Sales | | | 9 Months Ended September 30, 2016 | | | % of Sales | | | Dollar Change | | | % Increase (Decrease) | | | | | | | | | | | | | | | | | | | | | Sales of Smart Glasses | | $ | 2,636,749 | | | | 67 | % | | $ | 978,150 | | | | 65 | % | | $ | 1,658,599 | | | | 170 | % | Sales of Video Eyewear | | | 168,216 | | | | 4 | % | | | 263,771 | | | | 17 | % | | | (95,555 | ) | | | (36 | )% | Sales of Waveguides | | | 161,305 | | | | 4 | % | | | 87,755 | | | | 6 | % | | | 73,550 | | | | 84 | % | Sales Freight out | | | 36,474 | | | | 1 | % | | | 38,090 | | | | 3 | % | | | (1,616 | ) | | | (4 | )% | Sales of Engineering Services | | | 938,281 | | | | 24 | % | | | 139,500 | | | | 9 | % | | | 798,781 | | | | 573 | % | Total Sales | | $ | 3,941,025 | | | | 100 | % | | $ | 1,507,266 | | | | 100 | % | | $ | 2,433,759 | | | | 161 | % |
The increase in Smart Glasses sales was primarily the result of the volume production release and commencement of sales of the M300 Smart Glasses. M300 sales increased 519% for the nine months ended September 30, 2017 as compared to the prior period when the M300 was just commencing its early developer sales. Sales of our original M100 Smart Glasses, which represented 22% of Smart Glasses revenues, decreased by 9% in 2017 over the same nine month 2016 period in 2016 as more customers are moving to the M300. Our iWear Video Headphones sales were down 36% for the nine months ended September 30, 2017 as compared to the same period in 2016. This overall revenue decrease was primarily the result of lower selling prices for the nine months ended September 30, 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 zero programs in the comparable 2016 period. Sales of engineering services for the period increased to $938,281 from $139,500 in 2016, entirely due to work on the Toshiba smart glasses development program commenced in February 2017.The amount recorded for the nine months ending September 30, 2017, represents accrued billings recognized on a percentage of completion basis.
Cost of Sales and Gross Loss. Cost of product revenues and engineering services is comprised of materials, components, labor, warranty costs, freight costs, manufacturing overhead, software royalties, and the non-cash amortization of software development costs related to the production of our products and the rendering of engineering services. The following table reflects the components of our cost of goods sold for products:
Component of Cost of Sales | | 9 Months Ended September 30, 2017 | | | As % Related Product Sales | | | 9 Months Ended September 30, 2016 | | | As % of Related Product Sales | | | Dollar Change | | | % Increase (Decrease) | | | | | | | | | | | | | | | | | | | | | Product Cost of Sales | | $ | 1,928,053 | | | | 64 | % | | $ | 795,616 | | | | 58 | % | | $ | 1,132,437 | | | | 142 | % | Freight Costs | | | 381,394 | | | | 13 | % | | | 355,965 | | | | 26 | % | | | 25,429 | | | | 7 | % | Manufacturing Overhead | | | 653,471 | | | | 22 | % | | | 542,072 | | | | 40 | % | | | 111,399 | | | | 21 | % | Warranty Costs | | | 175,184 | | | | 6 | % | | | 49,829 | | | | 4 | % | | | 125,355 | | | | 252 | % | Amortization of Software Costs | | | 214,838 | | | | 7 | % | | | 214,838 | | | | 16 | % | | | — | | | | — | | Software Royalties | | | 88,710 | | | | 3 | % | | | 111,644 | | | | 8 | % | | | (22,934 | ) | | | (21 | )% | | | | | | | | | | | | | | | | | | | | | | | | | | Total Cost of Sales – Products | | $ | 3,441,650 | | | | 115 | % | | $ | 2,069,964 | | | | 151 | % | | $ | 1,371,686 | | | | 66 | % | | | | | | | | | | | | | | | | | | | | | | | | | | Gross Loss – Product Sales | | $ | (438,906 | ) | | | (15 | )% | | $ | (702,198 | ) | | | (51 | )% | | $ | 263,293 | | | | (37 | %) |
For the nine months ended September 30, 2017, we reported a reduced gross loss from product sales as compared to the prior year’s period. On a direct product cost of sales only basis, product direct costs rose to 64% of sales for the first nine months of 2017 versus 58% for the same period in 2016. These costs 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; (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 result 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 these factors occurred in the first 6 months of 2017. As a result, we have increased our provisions for possible future warranty costs to 6% versus 4% of products sales in the same period of 2016. Manufacturing Overhead costs rose as a result of additional staff in the QA and purchasing areas over the 2016 period.
Costs for engineering services accrued for the nine months ended September 30, 2017 represent direct project costs as well as the reclassification of internal research and development wage costs related to the Toshiba engineering program, plus accruals for the expected overall program’s completion costs as a percentage of accrued expenses. For the overall Toshiba project we increased our accrual of costs to complete this fixed price project which has reduced by approximately $280,000 the expected overall margin to be earned on this project. These increases in costs were primarily due to design modifications to support new product features, and process improvements for higher yields in mass production.
Research and Development. Our research and development expenses consist primarily of compensation costs for personnel, related stock compensation expenses, third party services, purchase of research supplies and materials, and consulting fees related to research and development costs. Software development expenses to determine technical feasibility before final development and ongoing maintenance are not capitalized and are included in research and development costs.
| | 9 Months Ended September 30, 2017 | | | % of Sales | | | 9 Months Ended September 30, 2016 | | | % of Sales | | | Dollar Change | | | % Increase (Decrease) | | | | | | | | | | | | | | | | | | | | | | | | | | | Research and Development | | $ | 4,374,202 | | | | 111 | % | | $ | 5,121,713 | | | | 340 | % | | $ | (747,511 | ) | | | (15 | )% |
Comparing the overall decrease in research and development costs for the nine months ended September 30, 2017 versus the same period in 2016: there was an increase in 2017 salary, benefits and stock compensation expenses of $411,659, primarily the result of additional R&D staff versus the same period in 2016 and after the reclassification of $330,500 to cost of sales for engineering services related to the Toshiba engineering services project; a decrease in project development and research costs of $1,029,230 primarily related to reduced M300 Smart Glasses, M3000, and iWear development work year-over-year offset by increased development work on waveguide products and related technology; an increase of $220,065 in consultant advisors on our research programs; a decrease of $49,529 in travel costs related to our outside production contractor and development contractors; and an increase in R&D software subscriptions and maintenance of $38,323.
Selling and Marketing. Selling and marketing costs consist of trade show costs, advertising, travel costs, sales staff compensation costs including stock compensation expense, consulting fees, public relations agency fees, website costs and sales commissions paid to full-time staff and outside consultants.
| | 9 Months Ended September 30, 2017 | | | % of Sales | | | 9 Months Ended September 30, 2016 | | | % of Sales | | | Dollar Change | | | % Increase (Decrease) | | | | | | | | | | | | | | | | | | | | | | | | | | | Selling and Marketing | | $ | 2,739,978 | | | | 70 | % | | $ | 2,627,543 | | | | 174 | % | | $ | 112,435 | | | | 4 | % |
These costs increased overall due to the following factors: an increase of $341,278 in product sales samples and developer units reflecting a special marketing push on our new M300; a $62,621 increase in salary and consultant fees, commissions, benefits and stock compensation expenses related to new staff and full-time consultant additions in Europe as compared to the same period in 2016; an increase of $52,366 in advertising costs due to our third quarter M300 TV commercial; an increase of $38,369 for computer software subscriptions; offset by a reduction of $118,676 in website and webstore related costs; a reduction of $30,398 in travel costs; and a reduction of $158,825 in marketing firm services.
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.
| | 9 Months Ended September 30, 2017 | | | % of Sales | | | 9 Months Ended September 30, 2016 | | | % of Sales | | | Dollar Change | | | % Increase (Decrease) | | | | | | | | | | | | | | | | | | | | | | | | | | | General and Administrative | | $ | 4,155,960 | | | | 105 | % | | $ | 3,350,441 | | | | 222 | % | | $ | 805,519 | | | | 24 | % |
General and administrative costs rose for the nine months ended September 30, 2017 versus the same period in 2016 primarily because of: increased salary and stock compensation costs of $800,671 due to the hiring of new accounting and internal IR personnel and the Company’s new COO; an increase of $38,431 in hiring expenses for new accounting staff; an increase of $98,283 in board and stock compensation costs; a $30,096 increase in IT consulting fees; a $85,261 increase in auditor fees; and an increase of $38,671 for Sarbanes-Oxley Section 404 consultants retained to assist management in designing and implementing improvements in our financial reporting; partially offset by reductions of $47,301 in legal costs; and reduced spending of $260,674 for IR and communications activities.
Depreciation and Amortization. Depreciation and amortization expense for the nine months ended September 30, 2017 was $734,175 as compared to $549,244 in the same period in 2016, an increase of $184,931. The increase in depreciation and amortization expense is due to new investments in depreciable assets made during 2016 and the first nine months of 2017 and new depreciable assets added in the latter portion of 2016.
Other Income (Expense). Total other expense was $225,479 for the nine months ended September 30, 2017 compared to an expense of $664,392 in the same period in 2016, a decrease of $438,913. The overall decrease in these other expenses was primarily the result of a gain on the derivative valuation for the nine months ended September 30, 2017 of $50,598 as compared to a loss of $57,133 in the same period in 2016, a overall reduction of $107,731; and due to the conversions of the debt and their maturity on June 3, 2017, reduced costs for the amortization of senior term debt discounts and deferred financing costs for the nine months ended September 30, 2017 of $250,941 as compared to 2016 period, and a related reduction in interest expense of $23,226.
Provision for Income Taxes. There was not a provision for income taxes in the nine month period ending September 30, 2017 or 2016.
Liquidity and Capital Resources Capital Resources: As of September 30, 2017,March 31, 2024, we had cash and cash equivalents of $8,677,341,$16,501,401, a decrease of $5,856,603$10,054,191 from $14,533,944$26,555,592 as of December 31, 2016.2023. At September 30, 2017,As of March 31, 2024, we had current assets of $13,618,620$32,674,775 compared to current liabilities of $3,290,832$3,473,845 which resulted in a positive working capital position of $10,327,788. At$29,200,930. As of December 31, 2016,2023, we had a working capital position of $13,808,094.$36,284,259. 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. WeSummary of Cash Flows:
The following table summarizes our select cash flows for the three months ended: | | March 31, | | March 31, | | | 2024 | | 2023 | Net Cash Provided by (used in) | | | | | | | Operating Activities | | $ | (8,805,138) | | | $ (4,164,727) | Investing Activities | | | (1,249,053) | | | (4,692,596) | Financing Activities | | | - | | | (470,757) |
During the three months ended March 31, 2024 we used $12,091,984$8,805,138 of cash for operating activitiesactivities. Net changes in working capital items were $2,313,721 for the nine months ending September 30, 2017 and $10,038,160 in the same period in 2016. The major operating items for the ninethree months ended September 30, 2017 resultedMarch 31, 2024, with the largest factors resulting from a $10,432,444 loss from operations after non-cash adjustments,$1,564,459 decrease in accrued expenses; a $743,110 increase in inventory and vendor prepayments; and a $687,001$639,943 increase in accrued revenue,trade accounts and other receivables. For the three months ended March, 2023 we used a $1,342,855 increasetotal of $4,164,727 in net inventory, a $367,170 increase in accounts receivable, a $734,478 increase in accounts payable, a $392,242 reduction in unearned revenue, a $240,110 reduction in accrued compensation, and a $253,398 increase in accrued expenses. Wecash for operating activities. During the three months ended March 31, 2024 we used $10,038,160$1,249,053 of cash for operating activities for the nine months ending September 30, 2016. The major changes in operating assets and liabilities for 2016 resulted from a $623,445 increase in inventories, a $223,135 increase in prepaid expenses, a $206,409 decrease in accounts receivable and a $622,119 increase in accounts payable. Investing Activities. Cash used in investing activities, was $1,681,940 forwhich included $1,000,000 in payments made towards our technology license fee commitment with Atomistic, as discussed in Note 6, and $147,814 in patent and trademark expenditures. For the ninethree months ended September 30, 2017 as compared to $1,654,516 in the same period in 2016. During the first nine months of 2017, $1,197,452 wasMarch 31, 2023, we used primarily for the purchase of manufacturing equipment, product mold tooling, and computer equipment as compared to spending of $1,551,141 for the same period in 2016 when the new M300 was tooled. During the nine months ending September 30, 2017, a total of $329,204$4,692,596 in software development costs related to our new smart glasses application product was capitalized, versus $0cash for investing activities.
During the same period in 2016 when no amounts were capitalized. The costs of registering our intellectual property rights, included in the investing activities totals described above, were $155,284 in the nine month period ending September 30, 2017 and $103,375 in the same period in 2016. Financing Activities. We generated $7,917,321 of cash from financing activities for the ninethree months ending September 30, 2017 as compared to $5,757,279 in the same period in 2016.March 31, 2024, we used nil net cash for financing activities. For the 2017 period, financing activities consisted of a public offering of 1,500,000 shares of common stock in August 2017, resulting in proceeds after offering expenses of $7,917,321. In the same period in 2016, financing activities consisted of a public offering of 1,150,000 shares of common stock, resulting in proceeds after offering expenses of $5,764,695, repayment of $52,416 in notes payable and the receipt of $45,000 from cash warrant exercises.
Capital Resources. As of September 30, 2017, we had a cash balance of $8,677,341.
We incurred a net loss for the ninethree months ended SeptemberMarch 31, 2023, we used $470,757 in net cash for financing activities.
In connection with the Atomistic Technology License discussed in Note 6 and as of the date of this 10-Q report, the Company is in active negotiations with Atomistic for an extension of our exclusive license to its technology, which currently expires on June 30, 20172024. There can be no assurance a definitive agreement will be reached. The Company’s cash requirements are primarily for funding operating losses, working capital, research and development, capital expenditures, and license fee commitments. Our operations have historically been financed primarily through net proceeds from the sale of $13,754,038.our equity securities. The Company incurred annual net losses for the three months ended March 31, 2024 of $19,250,082 in 2016$10,047,582; $50,149,077 for the year ended December 31, 2023; and $13,427,478 in 2015,$40,763,573 for the year ended December 31, 2022. The Company had net cash outflows from operations of $8,805,138 for the three months ended March 31, 2024; $26,277,824 for the year ended December 31, 2023; and has$24,521,082 for the year ended December 31, 2022, respectively. As of March 31, 2024 the Company had an accumulated deficit of $90,592,988$304,032,375. The Company’s cash outflows for investing activities were $1,249,053 for the three months ended March 31, 2024; $19,280,966 for the year ended December 31, 2023; and $21,170,816 for the year ended December 31, 2022. As of March 31, 2024, our principal sources of liquidity consisted of cash and cash equivalents of $16,501,401. The factors above raise substantial doubt about the Company’s ability to continue as of September 30, 2017.a going concern. The Company’s management intends to take actions necessary to continue as a going concern, as discussed below. The Company needswill need to grow its business significantly to become profitable and self-sustaining on a cash flow basis or it will be required to raise new equity and/or debt capital. Management’s plans concerning these matters and managing our liquidity include, among other things: | ● | Reductions in our cash annual operating expenses by approximately $8,000,000 for 2024 across all operating areas, representing a reduction of at least 20% as compared to 2023 levels, including the areas of Research and Development, Sales and Marketing and General and Administrative; |
| ● | Implementation of a voluntary Company-wide payroll reduction program for all individuals with optional salary reductions of 10% to 50% depending upon the respective base salary level for the period running from May 1, 2024 to April 30, 2025. The expected cash savings will be approximately $1,600,000 and will result in the issuance of stock awards or stock options, at a rate of 150% or 200%, respectively, of the net cash wage reductions; |
| ● | Further reductions of the rate of research and development spending on new technologies, particularly the use of external contractors. |
| ● | We do not intend to increase our levels of investing activities for our 2024 fiscal year as compared to 2023, now that our waveguide plant expansion has been completed and the license fees payments under the Atomistic License have been substantially made; |
| ● | Right-sizing of operations across all areas of the Company, including head-count hiring freezes or head-count reductions; |
| ● | The expected margin contribution upon the commencement of volume manufacturing and sales of waveguides from our new waveguide plant in 2024, particularly to OEM customers; |
| ● | Continued pursuit of licensing and strategic opportunities around our waveguide technologies with potential OEMs, which would include the receipt of upfront licensing fees and on-going supply agreements; |
| ● | Delayed or curtailed discretionary and non-essential capital expenditures not related to near-term new products; |
| ● | Reduction in the rate of new product introductions and further leveraging of existing platforms to reduce new product development and engineering costs; |
The Company’s management intendsCompany has in the past sold equity securities and in early 2024 entered into a sales agreement with an investment banking firm for the issuance and sale of up to take actions necessary to continue as a going concern, and accordingly our condensed consolidated financial statements included in this report have been prepared assuming that we will continue as a going concern. This basis of accounting contemplates the recovery$50,000,000 of our assetscommon stock that may be issued and sold from time to time in an “at the satisfaction of liabilities inmarket” offering. Management monitors the normal course of business. These condensed consolidated financial statements do not include any adjustments tocapital markets on an ongoing basis and may consider raising capital if favorable market conditions develop. If the specific amounts and classifications of assets and liabilities, which might be necessary should we be unable to continue as a going concern. The Company’s cash requirements related to funding operating losses depend on numerous factors, including new product development activities, our ability to commercialize our products, their timely market acceptance, selling prices and gross margins, and other factors. In order for us to achieve positive cash flow from operations, our product sales will need to increase significantly. Late in the first half of 2017,actual results are less than projected or the Company began volume production and commercial shipments of its new M300 Smart Glasses, after a longer and more costly than planned development, expanding its product offerings from the prior 2016 period, when the M300 was announced but not ready for sale. The Company plans to introduce new products in the first half of 2018 and along with stronger expected M300 Smart Glasses sales and the expectation that the Toshiba smart glasses program will move to volume production in early 2018, management believes there will be a substantial increase in sales and reduced losses. However, if these products and others in development are not successful within a reasonably short time period after their commercial releases, we will haveneeds to raise capital for additional capital to maintain operations and/or materially reduce our operating and new product development costs.
Historically,liquidity, the Company has met its cash needs by the sales of equity and convertible debt, and borrowings under notes. If the Company raises additional funds by these methods, the ownership interest of existing shareholders may be diluted. The amount of such dilution could increase duerequired to the issuance of new warrantspursue additional equity financings, further curtail expenses, or securities with other dilutive characteristics, such as anti-dilution clausesenter into one or price resets. The Company saw all of its senior debt converted into common stock, prior to its maturity June 3, 2017. As of September 30, 2017, the Company has no secured debts outstanding.
On August 9, 2017, the Company entered into agreements to sell 1,500,000 shares of common stock, which resulted in total net proceeds from the offering, after commissions and offering expenses, of $7,978,321.
We believe our existing cash and cash equivalent balances with near term achievement of cash flow from future operations should, if management’s operating plan is met, be sufficient to meet our working capital and capital expenditure needs for the foreseeable future even with continued, but reduced operating losses for the next two quarters. Theremore strategic transactions. However, management can however, bemake no assurance that wethe Company will be able to meet our operating plan forsuccessfully complete any of the next 12 months and that we will be ableforementioned pursuits on terms acceptable to generate positive cash flows from operations in the future thereafter. If we are unable to achieve managements operating plan we will have to raise additional capital to maintain operations and/Company, or materially reduce our operating and new product development costs over the next 12 months.at all.
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 plan. To the extent that we are unable to raise sufficient additional capital, we will be required to substantially modify our business plan and our plans for operations, which could have a material adverse effect on us and our financial condition.
Forward-Looking Statements Forward Looking Statements
This quarterly report includes forward-looking statements within the meaning of the safe harborSafe 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. Forward-looking statements 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; |
| ● | Our cash needsthe effect of competitors and financing plans;competition in our markets; |
| ● | ·our wearable smart glasses products and their market acceptance and future potential; |
| ● | Our possible or assumed future results of operations; | | · | Our business strategies; | | · | Ourour ability to attractdevelop, timely introduce, and retain customers; | | · | Our ability to sell additionaleffectively manage the introduction of new products and services to customers;or improve our existing products and services; |
| ● | · | Our competitive position; | | · | Our industry environment; | | · | Our potential growth opportunities; | | · | Expectedexpected technological advances by us or by third parties and our ability to leverage them; |
| ● | ·our ability to attract and retain customers; |
| ● | The effectsour ability to accurately forecast consumer demand and adequately manage our 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, contract manufacturers and 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 regulation; and | | · | The effects of competition.regulations; |
| ● | 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 twelve (12) months; and |
| ● | general market, political, economic, business and public health conditions. |
All statements in this quarterly report that are not historical facts are forward-looking statements. We may, in some cases, use terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would” or similar expressions that convey uncertainty of future events or outcomes to identify forward-looking statements. The outcome of the events described in theseAll such forward-looking statements are subject to knowncertain risks and unknown risks, uncertainties and othershould be evaluated in light of important risk factors that may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements.
All such forward-looking statements are subject to certain risks and uncertainties and should be evaluated in light of important risk factors. These risk factors include, but are not limited to, those that are described in “Risk Factors” in this report and under Item 1A and elsewhere in our 2016 annual reportAnnual Report on Form 10-K for the year ended December 31, 2023, and other filings we make with the Securities and Exchange Commission and the following: business and economic conditions, rapid technological changes accompanied by frequent new product introductions, competitive pressures, dependence on key customers, inability to gauge order flows from customers, fluctuations in quarterly and annual results, the reliance on a limited
number of third partythird-party suppliers, limitations of our manufacturing capacity and arrangements, the protection of our proprietary technology, the effects of pending or threatened litigation, the dependence on key personnel, changes in critical accounting estimates, potential impairments related to investments, foreign regulations, liquidity issues, and potential material weaknesses in internal control over financial reporting. Further, during weak or uncertain economic periods, customers’customers may delay the placement of their orders. These factors often result in a substantial portion of our revenue being derived from orders placed within a quarter and shipped in the final month of the same quarter. Any of these factors could cause our actual results to differ materially from our anticipated results. We caution readers to carefully consider such factors. Many of these factors are beyond our control. In addition, any forward-looking statements represent our estimates only as of the date they are made and should not be relied upon as representing our estimates as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, except as may be required under applicable securities laws, we specifically disclaim any obligation to do so, even if our estimates change.so.
Item 3.Quantitative and Qualitative Disclosures about Market Risk | Quantitative and Qualitative Disclosures about Market Risk |
We invest our excess cash in high-quality short-term corporate debt instruments, 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 unrealized gain or loss on interest rate securities.securities purchased at a discount. We are exposed to changes in foreign currency exchange rates primarily through transaction gains and losses as a result of non U.S.non-U.S. dollar denominated cash flows related to business activities in Japan and Europe. 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 4. | Controls and Procedures | |
Item 4.Controls and Procedures Evaluation of Disclosure Controls and Procedures Management, with the participation of the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), has performed an evaluation of the effectiveness of our disclosure controls and procedures that are defined in Rule 13a-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this report. This evaluation included consideration of the controls, processes, and procedures that are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is properly recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our management, including our CEO and CFO, concluded that as of September 30, 2017, our disclosure controls and procedures were effective. ineffective at March 31, 2024 due to the material weakness disclosed in the Company’s Form 10-K for the year ending December 31, 2023 filed on April 15, 2024. Changes in Internal Control over Financial Reporting As reportedThere have not been any changes in our assessment of the effectiveness of ourCompany’s internal control over financial reporting as of December 31, 2016, included(as defined in “Item 9A. Controls13a-15(f) and Procedures” of our Annual Report on Form 10-K for15d-15(f) promulgated under the year ended December 31, 2016, ourExchange Act) that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over monitoring of subsidiaries were considered ineffective as of that date as a result of certain material weaknesses. As stated on our Form 10-K, even though we designed and implemented new monitoring controls related to our European subsidiary and Japanese branch sales office, these new procedures were not in place for a sufficient number of periods to demonstrate operating effectiveness.
In the nine months ended September 30, 2017, the controls that were implemented in Q4 2016 to improve upon our monitoring of subsidiaries continued to operate effectively. In the first six months of 2017, additional monitoring controls were implemented including, (i) the addition of a separate accounting database for our UK Subsidiary and (ii) certain management review controlscontrol over financial reporting were expanded to our new UK database to include areas such as inventory, cost of goods sold, warranty, deferred revenue and our journal entry review process.reporting.
Management has tested the controls described above and found them to be operating effectively for the nine months ended September 30, 2017. Accordingly, management has concluded that, as of September 30, 2017, this material weaknesses has been remediated.
Part II. OTHER INFORMATION Item 1.Legal Proceedings | Legal Proceedings |
We are not currently involved in any actual or pending legal proceedingproceedings or litigation we consider to be material, and we are not aware of any such proceedings contemplated by or against us or involving our property. property. Item 1A.Risk Factors In addition to the other information set forth in this report you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our annual reportAnnual Report on Form 10-K for the year ended December 31, 2016.2023. There have been no material changes from those risk factors. The risks discussed in our 2016 annual report2023 Annual Report could materially affect our business, financial condition and future results. Item 2.Unregistered Sales of Equity Securities and Use of Proceeds | Unregistered Sales of Equity Securities and Use of Proceeds |
Sale of Unregistered Securities –- none | - | During the three months ended September 30, 2017, we issued 13,479 shares of common stock upon the exercise of stock options. |
In connection with the foregoing, we relied upon the exemption from registration provided by Section 4(a)(2) under the Securities Act of 1933, as amended, for transactions not involving a public offering.
Purchase of Equity Securities –Securities: - none Item 3.Defaults Upon Senior Securities | Defaults Upon Senior Securities |
None Item 4. | Item 4.Mine Safety Disclosures |
Not Applicable Item 5.Other Information | Other Information |
NoneDuring the fiscal quarter ended March 31, 2024, no Section 16 director or officer adopted, modified, or terminated a “Rule 10b5-1 trading arrangement” (as defined in Item 408 of Regulation S-K of the Exchange Act).
There were no “non-Rule 10b5-1 trading arrangements” (as defined in Item 408 of Regulation S-K of the Exchange Act) adopted, modified or terminated during the fiscal quarter ended March 31, 2024 by our directors and Section 16 officers. Item 6.Exhibits 31
* Filed herewith. ** Furnished herewith . SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. | VUZIX CORPORATION | | | | VUZIX CORPORATION | | | | Date: NovemberMay 9, 20172024 | By: | /s/ Paul J. Travers | | | Paul J. Travers | | | President, Chief Executive Officer | | | (Principal Executive Officer) | | | | Date: NovemberMay 9, 20172024 | By: | /s/ Grant Russell | | | Grant Russell | | | Executive Vice President and Chief Financial Officer | | | Officer | | | (Principal Financial and Accounting Officer) |
|