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Vuzix Corp - Quarter Report: 2022 March (Form 10-Q)

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended March 31, 2022

OR

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

Commission file number 001-35955

VUZIX CORPORATION

(Exact name of registrant as specified in its charter)

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

    

14586

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (585359-5900

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      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).   Yes      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 filer

Non-accelerated filer

 

 

 

 

 

 

Smaller reporting company

Emerging growth company

 

 

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

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). Yes No 

As of May 10, 2022, there were 63,667,941 shares of the registrant’s common stock outstanding.

Table of Contents

Vuzix Corporation

INDEX

 

 

Page
No.

 

 

 

Part I – Financial Information

 

 

 

Item 1.

Consolidated Financial Statements (Unaudited):

3

 

 

 

Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021

3

 

 

 

Consolidated Statements of Changes in Stockholders’ Equity for the Three Months

Ended March 31, 2022 and 2021

4

 

 

 

Consolidated Statements of Operations for the Three Months Ended March 31, 2022 and 2021

5

 

 

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2022 and 2021

6

 

 

 

Notes to the Unaudited Consolidated Financial Statements

7

 

 

 

Item 2.

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

14

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

22

 

 

 

Item 4.

Controls and Procedures

22

 

 

 

Part II – Other Information

23

 

 

 

Item 1.

Legal Proceedings

23

 

 

Item 1A.

Risk Factors

23

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

24

 

 

 

Item 3.

Defaults Upon Senior Securities

24

 

 

 

Item 4.

Mine Safety Disclosure

24

 

 

 

Item 5.

Other Information

24

 

 

 

Item 6.

Exhibits

25

 

 

 

Signatures

26

2

Table of Contents

Part 1: FINANCIAL INFORMATION

Item 1: Consolidated Financial Statements

VUZIX CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited)

    

March 31, 

December 31, 

    

2022

    

2021

ASSETS

 

  

 

  

Current Assets

 

  

 

  

Cash and Cash Equivalents

$

113,329,734

$

120,203,873

Accounts Receivable

 

1,551,654

 

2,242,429

Inventories, Net

 

12,559,066

 

12,151,982

Manufacturing Vendor Prepayments

 

586,564

 

504,051

Prepaid Expenses and Other Assets

 

1,470,415

 

2,047,819

Total Current Assets

 

129,497,433

 

137,150,154

Long-Term Assets

 

  

 

  

Fixed Assets, Net

 

5,042,421

 

5,190,438

Operating Lease Right-of-Use Asset

968,269

1,117,022

Patents and Trademarks, Net

 

2,020,099

 

1,988,370

Licenses, Net

 

1,333,236

 

1,389,936

Intangible Asset, Net

 

42,821

 

147,548

Other Assets, Net

 

1,445,897

 

1,483,589

Total Assets

$

140,350,176

$

148,467,057

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

  

Current Liabilities

 

  

 

  

Accounts Payable

$

1,223,741

$

2,054,762

Unearned Revenue

 

29,623

 

27,797

Accrued Expenses

 

1,127,021

 

1,419,308

Income and Other Taxes Payable

 

45,692

 

120,242

Operating Lease Right-of-Use Liability

514,204

534,146

Total Current Liabilities

 

2,940,281

 

4,156,255

Long-Term Liabilities

Operating Lease Right-of-Use Liability

454,065

582,876

Total Liabilities

 

3,394,346

 

4,739,131

Stockholders' Equity

 

  

 

  

Common Stock - $0.001 Par Value, 100,000,000 Shares Authorized; 63,704,626 shares issued and 63,667,941 shares outstanding as of March 31, 2022 and 63,672,268 shares issued and outstanding as of December 31, 2021.

 

63,705

 

63,672

Additional Paid-in Capital

 

350,721,326

 

346,736,397

Accumulated Deficit

 

(213,578,144)

 

(203,072,143)

Treasury Stock, at cost, 36,685 shares as of March 31, 2022 and 0 shares as of December 31, 2021

 

(251,057)

 

Total Stockholders' Equity

 

136,955,830

 

143,727,926

Total Liabilities and Stockholders' Equity

$

140,350,176

$

148,467,057

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

3

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VUZIX CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

Preferred Stock

Common Stock

Additional

Accumulated

Treasury Stock

    

   Shares   

    

   Amount   

    

   Shares   

    

   Amount   

    

Paid-In Capital

    

Deficit

    

     Shares     

    

     Amount     

    

Total

Balance - January 1, 2022

$

 

63,672,268

$

63,672

$

346,736,397

$

(203,072,143)

$

$

143,727,926

Stock-Based Compensation Expense

 

 

 

 

 

3,955,738

 

 

 

 

3,955,738

Stock Option Exercises

 

 

 

32,358

 

33

 

29,191

 

 

 

 

29,224

Purchases of Treasury Stock

 

 

 

 

 

 

 

(36,685)

 

(251,057)

 

(251,057)

Net Loss

 

 

 

 

 

 

(10,506,001)

 

 

 

(10,506,001)

Balance - March 31, 2022

 

$

 

63,704,626

$

63,705

$

350,721,326

$

(213,578,144)

 

(36,685)

$

(251,057)

$

136,955,830

Preferred Stock

Common Stock

Additional

Accumulated

Treasury Stock

    

   Shares   

    

   Amount   

    

   Shares   

    

   Amount   

    

Paid-In Capital

    

Deficit

    

     Shares     

    

     Amount     

    

Total

Balance - January 1, 2021

49,626

$

50

 

45,645,166

$

45,645

$

210,952,473

$

(162,694,983)

$

$

48,303,185

Stock-Based Compensation Expense

 

 

 

 

 

2,047,378

 

 

 

 

2,047,378

Stock Option Exercises

 

 

 

230,968

 

231

 

196,597

 

 

 

 

196,828

Stock Warrant Exercises

 

 

 

7,241,028

 

7,241

 

34,561,297

 

 

 

 

34,568,538

Proceeds from Common Stock Offerings

 

 

 

4,146,342

 

4,146

 

84,995,865

 

 

 

 

85,000,011

Direct Costs of Common Stock Offerings

 

 

 

 

 

(5,396,139)

 

 

 

 

(5,396,139)

Shared Redeemed to Cover Employee Tax Withholdings

 

 

 

(83,164)

 

(83)

 

(1,144,283)

 

 

 

 

(1,144,366)

Preferred Stock Converted & Preferred Dividend Settlement

 

(49,626)

 

(50)

 

4,962,600

 

4,962

 

(10,004,912)

 

 

 

 

(10,000,000)

Net Loss (as Restated)

 

 

 

 

 

 

(9,151,370)

 

 

 

(9,151,370)

Balance - March 31, 2021 (as Restated)

 

$

 

62,142,940

$

62,142

$

316,208,276

$

(171,846,353)

 

$

$

144,424,065

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

4

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VUZIX CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

Three Months Ended March 31, 

(as Restated)

    

2022

    

2021

Sales:

 

  

 

  

Sales of Products

$

2,503,051

$

3,805,170

Sales of Engineering Services

 

 

110,219

Total Sales

 

2,503,051

 

3,915,389

Cost of Sales:

 

  

 

  

Cost of Sales - Products Sold

 

1,863,697

 

2,819,971

Cost of Sales - Engineering Services

 

 

15,827

Total Cost of Sales

 

1,863,697

 

2,835,798

Gross Profit (exclusive of depreciation shown separately below)

 

639,354

 

1,079,591

Operating Expenses:

 

  

 

  

Research and Development

 

3,103,444

 

2,205,318

Selling and Marketing

 

2,023,435

 

1,303,430

General and Administrative

 

5,453,833

 

6,027,757

Depreciation and Amortization

 

422,931

 

517,412

Loss on Fixed Asset Disposal

 

 

83,908

Impairment of Patents and Trademarks

 

49,603

 

27,731

Total Operating Expenses

 

11,053,246

 

10,165,556

Loss From Operations

 

(10,413,892)

 

(9,085,965)

Other Income (Expense):

 

  

 

  

Investment Income

 

6,280

 

7,838

Income and Other Taxes

 

(47,632)

 

(19,725)

Foreign Exchange Loss

 

(50,757)

 

(53,518)

Total Other Expense, Net

 

(92,109)

 

(65,405)

Loss Before Provision for Income Taxes

 

(10,506,001)

 

(9,151,370)

Provision for Income Taxes

 

 

Net Loss

 

(10,506,001)

 

(9,151,370)

Basic and Diluted Loss per Common Share

$

(0.16)

$

(0.17)

Weighted-average Shares Outstanding - Basic and Diluted

 

63,695,127

 

54,141,761

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

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VUZIX CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Three Months Ended March 31, 

(as Restated)

    

2022

    

2021

Cash Flows from Operating Activities

 

  

 

  

Net Loss

$

(10,506,001)

$

(9,151,370)

Non-Cash Adjustments

 

  

 

  

Depreciation and Amortization

 

422,931

 

517,412

Amortization of Software Development Costs and Prepaid Licenses in Cost of Sales - Products

 

60,099

 

60,099

Stock-Based Compensation

 

4,319,748

 

4,618,213

Impairment of Patents and Trademarks

 

49,603

 

27,731

Loss on Fixed Asset Disposal

 

 

83,908

(Increase) Decrease in Operating Assets

 

  

 

  

Accounts Receivable

 

690,775

 

91,973

Revenues in Excess of Billings

(40,856)

Inventories

 

(407,084)

 

(857,695)

Manufacturing Vendor Prepayments

 

(82,513)

 

(1,785,763)

Prepaid Expenses and Other Assets

 

213,394

 

142,685

Increase (Decrease) in Operating Liabilities

 

  

 

  

Accounts Payable

 

(831,021)

 

(191,028)

Accrued Expenses

 

(292,286)

 

646,048

Unearned Revenue

 

1,825

 

(17,698)

Income and Other Taxes

 

(74,549)

 

(65,288)

Net Cash Flows Used in Operating Activities

 

(6,435,079)

 

(5,921,629)

Cash Flows from Investing Activities

 

  

 

  

Purchases of Fixed Assets

 

(57,758)

 

(314,981)

Investments in Patents and Trademarks

 

(34,469)

 

(135,674)

Investments in Licenses, Intangible and Other Assets

 

(125,000)

 

(200,000)

Net Cash Flows Used in Investing Activities

 

(217,227)

 

(650,655)

Cash Flows from Financing Activities

 

  

 

  

Proceeds from Exercise of Warrants

 

 

34,568,538

Proceeds from Exercise of Stock Options

 

29,224

 

196,828

Proceeds from Common Stock Offering, Net

79,603,872

Purchases of Treasury Stock

(251,057)

Preferred Dividend Settlement Payment

 

 

(10,000,000)

Employee Tax Withholdings Payment

 

 

(1,144,366)

Net Cash Flows (Used in) Provided from Financing Activities

 

(221,833)

 

103,224,872

Net (Decrease) Increase in Cash and Cash Equivalents

 

(6,874,139)

 

96,652,588

Cash and Cash Equivalents - Beginning of Period

 

120,203,873

 

36,069,508

Cash and Cash Equivalents - End of Period

$

113,329,734

$

132,722,096

Supplemental Disclosures

 

  

 

  

Unamortized Common Stock Expense included in Prepaid Expenses and Other Assets

$

1,001,232

$

160,222

Stock-Based Compensation Expense - Expensed less Previously Issued

364,010

58,828

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

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VUZIX CORPORATION

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Basis of Presentation

The accompanying unaudited consolidated financial statements of Vuzix Corporation (“the Company”) 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 (the “SEC”). Accordingly, the unaudited consolidated financial statements do not include all 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. Certain re-classifications may have been made to prior periods to conform with current reporting. The results of the Company’s operations for the three months ended March 31, 2022 are not necessarily indicative of the results of the Company’s operations for the full fiscal year or any other period.

The accompanying interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto of the Company as of December 31, 2021, as reported in the Company’s Annual Report on Form 10-K filed with the SEC on March 2, 2022.

Restatement

As described in additional detail in Note 14 to the financial statements included in its 2021 Form 10-K, the Company restated its previous unaudited quarterly results in the Form 10-K for the year ended December 31, 2021. Previously filed 2021 quarterly reports on Form 10-Q for the periods affected by the restatement were not amended. See Note 14, Long-Term Incentive Plan and Note 19, Quarterly Financial Information (Unaudited) of the Notes to the consolidated financial statements in the 2021 Form 10-K for the impact of these adjustments on each of the quarterly periods in fiscal year 2021.

The effect of these changes on non-cash stock-based compensation expense included in 2021 unaudited quarterly operating results was as follows:

    

Q1-2021

Additional Paid-in Capital

 

Increase of $2,512,007

Research and Development Expense

Increase of $125,391

Sales and Marketing

 

Increase of $62,696

General and Administrative

Increase of $2,323,920

Net Loss

 

Increase of $2,512,007

Loss per Share

Increase of $0.05

Customer Concentrations

For the three months ended March 31, 2022, one customer represented 11% of total product revenue. For the three months ended March 31, 2021, one customer represented 11% of total product revenue and one customer represented 100% of engineering services revenue.

As of March 31, 2022, three customers represented 22%, 14% and 13% of accounts receivable. As of December 31, 2021, three customers represented 27%, 20% and 10% of accounts receivable.

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Treasury Stock

Treasury stock purchases are accounted for under the cost method whereby the entire cost of the acquired stock is recorded as treasury stock. Gains and losses on the subsequent reissuance of shares will be credited or charged to paid-in capital in excess of par value using the average-cost method.

Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). ASU 2016-13 provides for a new impairment model which requires measurement and recognition of expected credit losses for most financial assets and certain other instruments, including but not limited to accounts receivable. ASU 2016-13 will become effective for the Company on January 1, 2023 and early adoption is permitted. The Company does not anticipate that the adoption of this standard will have a material impact on our consolidated financial statements.

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, 

    

2022

    

2021

Revenues

 

  

 

  

Smart Glasses Sales

$

2,503,051

$

3,805,170

Engineering Services

 

 

110,219

Total Revenue

$

2,503,051

$

3,915,389

Significant Judgments

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

Performance Obligations

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

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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 date of billing, subject to an agreed upon customer acceptance period.

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, 2022:

    

% of Total Net Sales

2022

 

2021

 

Point-in-Time

 

100

%  

97

%

Over Time – Input Method

 

-

%

3

%

Total

 

100

%

100

%

Remaining Performance Obligations

As of March 31, 2022, the Company had no outstanding performance obligations for its engineering services and waveguide development projects. In addition, 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 convertible preferred shares. During periods of net loss, all common stock equivalents are excluded from the diluted EPS calculation because they are anti-dilutive. Since the Company reported a net loss for the three months ended March 31, 2022 and 2021, 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. At March 31, 2022 and 2021, there were 8,611,365 and 8,983,727 common stock share equivalents, respectively, potentially exercisable or issuable under conversion or exercise of stock options that could dilute basic earnings per share in the future.

Note 4 – Inventories, Net

Inventories are stated at the lower of cost and net realizable value, and consisted of the following:

March 31, 

December 31, 

    

2022

    

2021

Purchased Parts and Components

$

11,461,309

$

11,580,766

Work-in-Process

 

265,757

 

226,126

Finished Goods

 

1,959,141

 

1,472,534

Less: Reserve for Obsolescence

 

(1,127,141)

 

(1,127,444)

Inventories, Net

$

12,559,066

$

12,151,982

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Note 5 – Licenses, Net

March 31, 

December 31, 

    

2022

    

2021

Licenses

$

2,443,356

$

1,038,606

Additions

 

 

1,404,750

Less: Accumulated Amortization

 

(1,110,120)

 

(1,053,420)

Licenses, Net

$

1,333,236

$

1,389,936

The Company acquired two licenses in 2017. The first related to the renegotiation of an existing license at a cost of $114,967, which resulted in lower royalty rates being paid by the Company over the next ten years. This license went into effect as of January 1, 2018. The second license was a result of the Company entering into a Technology Purchase and Royalty Agreement where it acquired all the seller’s right, title and interest in certain Transferred Intellectual Property (IP). Pursuant to the agreement, the Company paid approximately $75,702 as reimbursement of related patent application costs incurred by the seller to date, which are included in Patents and Trademarks. The Company also issued 25,000 shares of common stock, valued at $128,750, upon the original closing in October 2017 and agreed to certain further share issuances of 75,000 shares based upon the achievement of certain development milestones as well as per unit royalties once the technology was commercialized for the life of the related patents. In June 2021, the Company assumed or purchased outright the obligations for ongoing royalties under the original license agreement and certain other intellectual property rights in connection with consulting services by the original seller in exchange for the issuance of 75,000 shares with an assigned market value of $18.73 per share, or a total of $1,404,750. The underlying technology is not yet ready for commercialization, but the Company intends to proceed with further research and development work relating to such underlying technology.

Note 6 – Intangible Asset, Net

    

March 31, 

    

December 31, 

2022

2021

Intangible Asset

$

1,500,000

$

1,500,000

Less: Accumulated Amortization

 

(1,457,179)

 

(1,352,452)

Intangible Asset, Net

$

42,821

$

147,548

On October 4, 2018, the Company entered into amendment No. 1 to agreements (the “TDG Amendment”) with TDG Acquisition Company, LLC (“TDG”), aka Six15 Technologies, LLC. The TDG Amendment amends certain provisions of prior agreements between Vuzix and TDG, including an asset purchase agreement dated June 15, 2012, and an authorized reseller agreement dated June 15, 2012.

Pursuant to the TDG Amendment, the Company is permitted to engage in sales of heads-up display components or subsystems (and any services to support such sale) for incorporation into a finished good or system for sale to military organizations, subject to certain conditions. The Company is also permitted to sell its products to defense and security organizations that include business customers and governmental entity customers that primarily provide security and defense services, including police, fire fighters, EMTs, other first responders, and homeland and border security. The Company will owe TDG commissions with respect to all such sales until June 15, 2022, when the amendment and original non-compete agreements expire, after which the Company will be permitted to sell any product to any customer world-wide without owing any commission to TDG.

Total commissions expense under this agreement for the three months ended March 31, 2022 and 2021 was $25,794 and $52,655. All commissions expense related to this agreement is included in Selling and Marketing expense.

Total amortization expense for this intangible asset for the three months ended March 31, 2022 and 2021 was $104,727 and $104,727, respectively. $42,821 of remaining amortization expense will be recognized in the second quarter of 2022, as the non-compete agreement with TDG expires on June 15, 2022.

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Note 7 - Other Assets

March 31,

December 31, 

    

2022

    

2021

Private Corporation Investments (at cost)

$

450,000

$

450,000

Software Development Costs

750,000

500,000

Additions

125,000

250,000

Less: Accumulated Amortization

(250,000)

(208,334)

Software Development Costs, Net

625,000

541,666

Unamortized Common Stock Expense included in Long-Term Prepaid Expenses

370,897

491,923

Total Other Assets

$

1,445,897

$

1,483,589

During 2020, the Company invested $500,000 in Android operating systems upgrades for its CPU platform used on its M400 and M4000 products. This upgrade was finished and placed into service in the beginning of the fourth quarter of 2020.  This capitalized asset is being amortized on a straight-line over its expected product life cycle of 36 months, which began on October 1, 2020. In October 2021, the Company invested $250,000 and in the first quarter of 2022 the Company invested an additional $125,000 for further Android operating systems version upgrades to the CPU platform it uses on its M400 and M4000 products. This development work has not yet been completed and will ultimately be amortized once placed into service which the Company expects to occur by early 2023.

Note 8 – Accrued Expenses

Accrued expenses consisted of the following:

March 31, 

December 31, 

    

2022

    

2021

Accrued Wages and Related Costs

$

484,980

$

683,044

Accrued Professional Services

 

318,231

 

551,220

Accrued Warranty Obligations

 

156,192

 

185,044

Other Accrued Expenses

 

167,618

 

Total

$

1,127,021

$

1,419,308

The Company has warranty obligations in connection with the sale of certain of its products. The warranty period for its products is generally twelve (12) months. The costs incurred to provide for these warranty obligations are estimated and recorded as an accrued expense at the time of sale. The Company estimates its future warranty costs based upon product-based historical performance rates and related costs to repair.

The changes in the Company’s accrued warranty obligations for the three months ended March 31, 2022 and the balance as of December 31, 2021 were as follows:

Accrued Warranty Obligations at December 31, 2021

$

185,044

Reductions for Settling Warranties

 

(103,943)

Warranties Issued During Year

 

75,091

Accrued Warranty Obligations at March 31, 2022

$

156,192

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Note 9 – Income Taxes

The Company’s effective income tax rate is a combination of federal, state and foreign tax rates and differs from the U.S. statutory rate due to taxes on foreign income, permanent differences including tax-exempt interest, and the resolution of tax uncertainties, offset by a valuation allowance against U.S. deferred income tax assets.

Note 10 – Capital Stock

Preferred stock

The Board of Directors is authorized to establish and designate different series of preferred stock and to fix and determine their voting powers and other rights and terms. A total of 5,000,000 shares of preferred stock with a par value of $0.001 are authorized as of March 31, 2022 and December 31, 2021. Of this total, 49,626 shares are designated as Series A Preferred Stock. There were nil shares of Series A Preferred Stock issued and outstanding on March 31, 2022 and December 31, 2021, respectively.

Common Stock

The Company’s authorized common stock consists of 100,000,000 shares, par value of $0.001. There were 63,704,626 shares issued and 63,667,941 shares outstanding as of March 31, 2022 and 63,672,268 shares issued and outstanding as of December 31, 2021.

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 is in effect for one year, does not obligate the Company to acquire any particular amount of common stock and  may be suspended or discontinued at any time at the Company’s sole discretion. During the three months ended March 31, 2022, the Company repurchased 36,685 shares of our common stock at an average cost of $6.84. As of March 31, 2022, 36,685 shares of our common stock were held in treasury.

Note 11 – Stock-Based Compensation

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), for the three months ended March 31, 2022 is as follows:

Weighted

Number of

Average

    

Options

    

Exercise Price

Outstanding at December 31, 2021

 

2,823,634

$

7.67

Granted

 

98,500

 

5.78

Exercised

 

(43,040)

 

3.94

Expired or Forfeited

 

(51,729)

 

8.60

Outstanding at March 31, 2022

 

2,827,365

$

7.74

The weighted average remaining contractual term for all options as of March 31, 2022 and December 31, 2021 was 7.74 years and 7.95 years, respectively.

As of March 31, 2022, there were 1,183,727 options that were fully-vested and exercisable at a weighted average exercise price of $6.04 per share. The weighted average remaining contractual term of the vested options is 6.6 years.

As of March 31, 2022, there were 1,643,638 unvested options exercisable at a weighted average exercise price of $9.83 per share. The weighted average remaining contractual term of the unvested options is 8.6 years.

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The weighted average fair value of option grants was calculated using the Black-Scholes-Merton option pricing method. At March 31, 2022, the Company had $8,353,781 of unrecognized stock compensation expense, which will be recognized over a weighted average period of 3.0 years.

For the three months ended March 31, 2022 and 2021, the Company recorded total stock-based compensation expense, including stock awards but excluding awards under the Company’s LTIP, of $1,350,610 and $456,745, respectively.

Note 12 – 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, 2022 and 2021, the Company recorded non-cash stock-based compensation expense of $2,969,138 and $4,161,468, respectively, for options that vested or are probable to vest.

The fair value of option grants was calculated using a Monte Carlo simulation on the equity market capitalization tranches and the Black-Scholes-Merton option pricing method on the operational milestone tranches. As of March 31, 2022, we had $25,371,320 of total unrecognized stock-based compensation expense for the portion of options tied to equity market capitalization milestones and the portion of options tied to operational milestones that were considered probable of achievement, all of which will be recognized over a service period of up to six years. The probabilities of the milestone achievements are subject to catch-adjustments in each instance where an equity market capitalization milestone is achieved or when an operational milestone becomes probable to be achieved or is achieved. Compensation costs could be reversed in subsequent periods if an awardee leaves the Company prior to the expiration of the option life for market capitalization milestone or the performance awards are 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 Directors. As of March 31, 2022, and going forward, should all of the operational milestones which are currently not yet deemed probable of achievement become probable of achievement or are achieved, then the Company could ultimately recognize up to an additional $34.1 million in non-cash stock-based compensation expense at such time.

The unvested remaining equity market capitalization and operational milestones under the LTIP with their total related option grants and criteria achievement weightings of the options available for meeting a target are shown in the following table. Of the total 5,409,000 unvested options outstanding as of March 31, 2022 and December 31, 2021, there are 2,704,500 options unvested for the achievement of equity market capitalization targets, 1,893,150 unvested options

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for the achievement of annual revenue targets, and 811,350 unvested options for the achievement of annual EBITDA margins before non-cash charges targets.

Award Potential

Criteria Achievement Weighting

50% of Options Available

35% of Options Available

15% of Options Available

Options Available
(Subject to Vesting)

Equity Market
Capitalization
Target

Last Twelve Months Revenue
Target

Last Twelve Months EBITDA
Margin before
Non-Cash
Charges Target

686,000

$ 2,000,000,000

$ 25,000,000

0.0%

686,000

3,000,000,000

50,000,000

2.0%

686,000

4,000,000,000

100,000,000

4.0%

686,000

5,000,000,000

200,000,000

6.0%

586,000

6,000,000,000

300,000,000

8.0%

586,000

7,000,000,000

450,000,000

10.0%

561,000

8,000,000,000

675,000,000

12.0%

491,000

9,000,000,000

1,000,000,000

14.0%

441,000

10,000,000,000

1,500,000,000

16.0%

5,409,000

Note 13 – Litigation

We are not currently involved in any actual or pending legal proceeding or litigation and we are not aware of any such material proceedings contemplated by or against us or involving our property.

Note 14 – Right-of-Use Assets and Liabilities

Future lease payments under operating leases as of March 31, 2022 were as follows:

2022

$

417,750

2023

 

546,916

2024

 

45,576

Total Future Lease Payments

 

1,010,242

Less: Imputed Interest

 

(41,973)

Total Lease Liability Balance

$

968,269

Operating lease costs under the operating leases totaled $162,365 and $124,215 for the three months ended March 31, 2022 and 2021, respectively.

As of March 31, 2022, the weighted average discount rate was 4.5% and the weighted average remaining lease term was 1.8 years.

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of financial condition and results of operations in conjunction with the financial statements and related notes appearing elsewhere in this quarterly report and in our Annual Report on Form 10-K for the year ended December 31, 2021.

As used in this report, unless otherwise indicated, the terms “Company,” “Vuzix”, “management,” “we,” “our,” and “us” refer to Vuzix Corporation.

Critical Accounting Policies and Significant Developments and Estimates

The discussion and analysis of our financial condition and results of operations is based on our unaudited consolidated financial statements and related notes appearing elsewhere in this quarterly report. The preparation of these

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statements in conformity with GAAP 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, inventories, warranty reserves, product warranty, carrying value of long-lived assets, fair value measurement of financial instruments, 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 re-evaluate these accounting policies and estimates and make adjustments when facts and circumstances dictate a change. Historically, we have found our application of accounting policies to be appropriate, and actual results have not differed materially from those determined using necessary estimates.

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:

Valuation of inventories;
Carrying value of long-lived assets;
Software development costs;
Revenue recognition;
Product warranty;
Stock-based compensation; and
Income taxes.

Our accounting policies are more fully described in the notes to our consolidated financial statements included in this quarterly report and in our Annual Report on Form 10-K for the year ended December 31, 2021. There have been no significant changes in our accounting policies for the three months ended March 31, 2022.

Off-Balance Sheet Arrangements

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

Business Matters

We are engaged in the design, manufacture, marketing and sale of wearable computing devices and augmented reality wearable display devices, also referred to as head mounted displays (or HMDs), heads-up displays (HUDs) or near-eye displays, in the form of Smart Glasses and Augmented Reality (AR) glasses. Our wearable display devices are worn like eyeglasses or attach to a head-worn mount. These devices typically include cameras, sensors, and a computer that enable the user to view, record and interact with video and digital content, such as computer data, the Internet, social media or entertainment applications. Our wearable display products integrate display technology with our advanced optics to produce compact high-resolution display engines, less than half an inch diagonally, which when viewed

15

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through our Smart Glasses products create virtual images that appear comparable in size to that of a computer monitor or a large-screen television.

With respect to our Smart Glasses and AR products, we are focused on the enterprise, industrial, commercial, security, first responder, medical markets, and, to a lesser degree, defense markets. We also provide custom solutions and engineering services to third parties, including OEMs, of waveguides to enable fully integrated wearable display systems, including HMDs to commercial, industrial and defense customers. We do not offer “work for hire” services per se but rather offer our engineering services for projects that we expect could result in advancing our technology and potentially lead to long-term supply or OEM relationships.

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, declining prices on 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 the design and manufacturing of micro-display projection engines, waveguides, mechanical packaging, ergonomics, and optical systems.

Recent Accounting Pronouncements

See Note 1 to the consolidated financial statements.

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Results of Operations

Comparison of Three Months Ended March 31, 2022 and 2021

The following table compares the Company’s consolidated statements of operations data for the three months ended March 31, 2022 and 2021:

Three Months Ended March 31, 

    

    

    

Dollar

    

% Increase

 

2022

2021

Change

(Decrease)

 

(as Restated)

Sales:

 

  

 

  

 

  

 

  

Sales of Products

$

2,503,051

$

3,805,170

$

(1,302,119)

 

(34)

%

Sales of Engineering Services

 

 

110,219

 

(110,219)

 

(100)

%

Total Sales

 

2,503,051

 

3,915,389

 

(1,412,338)

 

(36)

%

Cost of Sales:

 

  

 

  

 

  

 

  

Cost of Sales - Products Sold

 

1,863,697

 

2,819,971

 

(956,274)

 

(34)

%

Cost of Sales - Engineering Services

 

 

15,827

 

(15,827)

 

(100)

%

Total Cost of Sales

 

1,863,697

 

2,835,798

 

(972,101)

 

(34)

%

Gross Profit (exclusive of depreciation shown separately below)

 

639,354

 

1,079,591

 

(440,237)

 

(41)

%

Gross Profit %

 

26

%  

 

28

%  

 

  

 

  

Operating Expenses:

 

  

 

  

 

  

 

  

Research and Development

 

3,103,444

 

2,205,318

 

898,126

 

41

%

Selling and Marketing

 

2,023,435

 

1,303,430

 

720,005

 

55

%

General and Administrative

 

5,453,833

 

6,027,757

 

(573,924)

 

(10)

%

Depreciation and Amortization

 

422,931

 

517,412

 

(94,481)

 

(18)

%

Impairment of Patents and Trademarks

 

49,603

 

27,731

 

21,872

 

79

%

Loss on Fixed Asset Disposal

 

 

83,908

 

(83,908)

 

(100)

%

Loss from Operations

 

(10,413,892)

 

(9,085,965)

 

(1,327,927)

 

15

%

Other Income (Expense):

 

  

 

  

 

  

 

  

Investment Income

 

6,280

 

7,838

 

(1,558)

 

(20)

%

Income and Other Taxes

 

(47,632)

 

(19,725)

 

(27,907)

 

141

%

Foreign Exchange Loss

 

(50,757)

 

(53,518)

 

2,761

 

(5)

%

Total Other Expense, Net

 

(92,109)

 

(65,405)

 

(26,704)

 

41

%

Net Loss

$

(10,506,001)

$

(9,151,370)

$

(1,354,631)

 

15

%

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Sales.   There was a decrease in total sales for the three months ended March 31, 2022 compared to the same period in 2021 of $1,412,338 or 36%. The following table reflects the major components of our sales:

Three Months Ended

% of

Three Months Ended

% of

Dollar

% Increase

   

March 31, 2022

   

Total Sales

March 31, 2021

   

Total Sales

Change

   

(Decrease)

Sales of Smart Glasses

$

2,379,398

 

95

%  

$

3,772,481

 

96

%  

$

(1,393,083)

 

(37)

%

Sales of Waveguides & Display Engines

 

108,250

 

4

%  

 

 

%  

 

108,250

 

N/M

Sales Freight out

 

15,403

 

1

%  

 

32,689

 

1

%  

 

(17,286)

 

(53)

%

Sales of Engineering Services

 

 

%  

 

110,219

 

3

%  

 

(110,219)

 

(100)

%

Total Sales

$

2,503,051

 

100

%  

$

3,915,389

 

100

%  

$

(1,412,338)

 

(36)

%

Sales of Smart Glasses products decreased by 37% or $1,393,083 in the three months ended March 31, 2022 compared to the three months ended March 31, 2021. Historically, product revenues in the 1st quarter of each fiscal year have been noticeably lower than that of the previous three quarters in the prior fiscal year. Product revenues of $2,503,051 in the first quarter of 2022 were significantly higher than comparable periods, with the exception of 2021, which reflected abnormally higher growth over most first quarter comparable periods.

Sales of engineering services for the three months ended March 31, 2022 were nil as compared to $110,219 in the 2021 period.

Cost of Sales and Gross Profit. Cost of product sales and engineering services are 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 rendering of engineering services. The following table reflects the components of our cost of goods sold for products:

Three Months Ended

As % Related

Three Months Ended

As % Related

Dollar

% Increase

   

March 31, 2022

   

Product Sales

March 31, 2021

   

Product Sales

Change

   

(Decrease)

Product Cost of Sales

$

1,215,736

 

49

%  

$

1,998,514

 

53

%  

$

(782,778)

 

(39)

%

Freight Costs

 

208,280

 

8

%  

 

190,345

 

5

%  

 

17,935

 

9

%

Manufacturing Overhead

 

396,853

 

16

%  

 

546,673

 

14

%  

 

(149,820)

 

(27)

%

Warranty Costs

 

(28,852)

 

(1)

%  

 

(32,848)

 

(1)

%  

 

3,996

 

(12)

%

Amortization of Software Development Costs

 

65,880

 

3

%  

 

64,999

 

2

%  

 

881

 

1

%

Software Royalties

 

5,800

 

0

%  

 

52,288

 

1

%  

 

(46,488)

 

(89)

%

Total Cost of Sales - Products

1,863,697

 

74

%  

2,819,971

 

74

%  

(956,274)

 

(34)

%

Gross Profit - Product Sales

$

639,354

26

%

$

985,199

 

26

%

$

(345,845)

 

(35)

%

For the three months ended March 31, 2022, we reported an overall gross profit from product sales of $639,354 or 26% as compared to $985,199 or 26% in the same period in 2021. On a product cost of sales basis only, product direct costs were 49% of sales in the 2022 period as compared to 53% in 2021.

Manufacturing overhead costs, while decreasing by $149,820 or 27% for the three months ended March 31, 2022 over the 2021 comparable period, increased to 16% as a percentage of total product sales as compared to 14% in 2021. The decrease in the dollar amount of these overhead costs in the current period versus the prior period is primarily due to more absorption of fixed costs being allocated to inventory as a result of improved efficiencies in our manufacturing processes.

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Costs for engineering services for the three months ended March 31, 2022 were nil as compared to $15,827 in 2021. There was no gross profit from engineering services for the three months ended March 31, 2022 versus $94,392 in the same period in 2021.

Research and Development.  Our research and development expenses consist primarily of compensation costs for personnel, related non-cash stock-based compensation expenses, third-party services, purchase of research supplies and materials, and consulting fees related to research and 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.

(as Restated)

Three Months Ended

% of

Three Months Ended

% of

Dollar

% Increase

   

March 31, 2022

   

Total Sales

   

March 31, 2021

   

Total Sales

Change

   

(Decrease)

Research and Development

$

3,103,444

124

%

$

2,205,318

56

%

$

898,126

41

%

Research and development expenses for the three months ended March 31, 2022 increased by $898,126, or 41% as compared to the same period in 2021. This increase was largely due to an increase of $435,356 in external development expenses related to our Next Generation Smart Glasses (Shield); a $358,797 increase in salary and benefits expenses, of which $137,399 was related to non-cash stock-based compensation; and an increase of $52,167 in recruitment and hiring fees.

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

(as Restated)

Three Months Ended

% of

Three Months Ended

% of

Dollar

% Increase

   

March 31, 2022

   

Total Sales

   

March 31, 2021

   

Total Sales

Change

   

(Decrease)

Selling and Marketing

$

2,023,435

81

%

$

1,303,430

33

%

$

720,005

55

%

Selling and marketing expenses for the three months ended March 31, 2022 increased by $720,005 or 55% as compared to the same period in 2021. This increase was largely due to a $470,857 increase in salary and salary benefits related expense, of which $93,631 was related to non-cash stock-based compensation; an increase of $278,897 in trade show expenses, which was a direct result of attending tradeshows post COVID-19 lockdowns that had benn enforced in 2021; a $100,455 increase in advertising costs; an increase of $27,292 in travel related expenses; partially offset by decreases of $141,829 in website development and maintenance costs and $30,987 in commissions largely due to a reduction in commissions payable to TDG (as described in Note 6 of the financial statements) for defense related engineering services.

General and Administrative.  General and administrative expenses include professional fees, investor relations (IR) costs, salaries and related non-cash stock-based compensation, travel costs, office and rental costs.

(as Restated)

Three Months Ended

% of

Three Months Ended

% of

Dollar

% Increase

   

March 31, 2022

   

Total Sales

   

March 31, 2021

   

Total Sales

Change

   

(Decrease)

General and Administrative

$

5,453,833

218

%

$

6,027,757

154

%

$

(573,924)

(10)

%

General and administrative expenses for the three months ended March 31, 2022 decreased by $573,924 or 10% as compared to the same period in 2021. This decrease was largely due to a $594,460 decrease in salary and benefits expenses, related primarily to non-cash stock-based compensation which was significantly higher the first quarter of 2021 due to the vesting of equity market capitalization milestones under the LTIP; a decrease of $101,388 in shareholder related expenses, a $70,111 decrease in recruitment and hiring expenses; a $31,770 decrease in regulatory filings fees; and a $30,384 decrease in legal expenses; partially offset by increases of $177,159 in audit and tax advisory fees and $118,297 in insurance premiums.

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Depreciation and Amortization.  Depreciation and amortization expense for the three months ended March 31, 2022 was $422,931 as compared to $517,412 in the same period in 2021, a decrease of $94,481. The decrease in depreciation expense is primarily due to certain fixed assets related to machinery and tooling that became fully depreciated in 2021.

Other Expense. Total other expense was $92,109 for the three months ended March 31, 2022 as compared to $65,405 in the same period in 2021, an increase of $26,704. The overall increase in other expenses was primarily the result of an increase of $27,907 in income and other taxes.

Provision for Income Taxes. There was not a provision for income taxes in the respective three month periods ending March 31, 2022 and 2021.

Liquidity and Capital Resources

Capital Resources: As of March 31, 2022, we had cash and cash equivalents of $113,329,734, a decrease of $6,874,139 from $120,203,873 as of December 31, 2021.

As of March 31, 2022, we had current assets of $129,497,433 as compared to current liabilities of $2,940,319 which resulted in a positive working capital position of $126,557,114. As of December 31, 2021, we had a working capital position of $132,993,899. Our current liabilities are comprised principally of accounts payable, accrued expenses and operating lease right-of-use liabilities.

Summary of Cash Flow:

The following table summarizes our select cash flows for the three months ended:

March 31, 

March 31, 

    

2022

    

2021

Net Cash Provided by (used in)

 

  

 

  

Net Loss less Non-Cash Operating Expenses

$

(5,653,620)

$

(3,844,007)

Operating Activities

$

(6,435,079)

$

(5,921,629)

Investing Activities

 

(217,227)

 

(650,655)

Financing Activities

 

(221,833)

 

103,224,872

During the three months ended March 31, 2022, we used $6,435,042 of cash for operating activities as compared to $5,921,629 for the comparable period in 2021. For the three months ended March 31, 2022, we incurred a net loss of $10,506,001, which, after adding back non-cash operating expenses of $4,852,381, resulted in a net cash loss of $5,653,620 before changes in working capital. For the three months ended March 31, 2021, we incurred a net loss of $9,151,370, which, after adding back non-cash operating expenses of $5,307,363, resulted in a net cash loss of $3,844,007 before changes in working capital. Net changes in working capital items were $781,422 for the three months ended March 31, 2022 with the largest factor resulting from a $1,123,307 reduction in trade accounts payables and other accrued expenses, a $489,597 of investments in inventory and vendor prepayments; partially offset by decreases in accounts receivable of $690,775 and other prepaid expenses of $213,394.

During the three months ended March 31, 2022, we used $217,227 of cash for investing activities, which included $57,758 for purchases of manufacturing equipment and product mold tooling; $34,469 in patent and trademark expenditures; and a further investment of $125,000 in the purchase of software operating license upgrades for our smart glasses platform. For the three months ended March 31, 2021, we used a total of $650,655 in cash for investing activities.

During the three months ended March 31, 2022, we used $221,833 in net cash from financing activities, which included $251,057 of share repurchases under our Share Buyback Program that was announced on March 2, 2022; partially offset by $29,224 in proceeds from the exercise of stock options. For the three months ended March 31, 2021, we received $103,224,872 in proceeds from financing activities, primarily from sales of our equity securities.

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As of March 31, 2022, the Company does not have any current or long-term debt obligations outstanding.

The Company’s cash requirements are primarily for funding operating losses, working capital, research and development, and capital expenditures. We incurred a net loss for the three months ended March 31, 2022 of $10,506,001 and annual net losses of $40,377,160 (of which $17,302,833 was related to non-cash stock-based compensation, primarily due to our LTIP) in 2021 and $17,952,172 in 2020. The Company has an accumulated deficit of $213,578,144 as of March 31, 2022.

On March 2, 2022, our Board of Directors approved the repurchase by the Company of up to an aggregate of $25 million of our common stock by open market or privately negotiated transactions under the Share Buyback Program. This program is in effect for one year, does not obligate the Company to acquire any particular amount of common stock, and may be suspended or discontinued at any time at the Company’s sole discrestion. During the three months ended March 31, 2022, the Company repurchased 36,685 shares of our common stock at an average cost of $6.84. As of March 31, 2022, 36,685 shares of our common stock were held in treasury.

Our operations are financed primarily through the net proceeds from the sale of our equity securities. As of March 31, 2022, our principal sources of liquidity consisted of cash and cash equivalents of $113,329,734.

Forward Looking Statements

This quarterly report includes forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on our management’s beliefs and assumptions and on information currently available to our management. 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;
the effect of competitors and competition in our markets;
our wearable smart glasses products and their market acceptance and future potential;
our ability to develop, timely introduce, and effectively manage the introduction of new products and services or improve our existing products and services;
expected technological advances by us or by third parties and our ability to leverage them;
our ability to attract and retain customers;
our 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;

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the impact of foreign currency exchange rates;
the effect of future 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.

All such forward-looking statements are subject to certain risks and uncertainties and should 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. 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 Annual Report on Form 10-K for the year ended December 31, 2021 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-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 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.

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.

Item 3.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 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. We are exposed to changes in foreign currency exchange rates primarily through transaction gains and losses as a result of 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

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

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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 CEO and CFO have concluded that our disclosure controls and procedures were not effective because of the material weakness in internal control over financial reporting described below and disclosed on the 2021 Form 10-K.

Changes in Internal Control over Financial Reporting

As reported in our assessment of the effectiveness of our internal control over financial reporting as of December 31, 2021, included in “Item 9A. Controls and Procedures” of our Annual Report on Form 10-K for the year ended December 31, 2021, our internal control over financial reporting was considered ineffective as of that date as a result of a material weakness. The material weakness that existed at that time was over the Company’s internal control over financial reporting related to the methodology utilized by the Company to calculate the fair market value of the LTIP stock options issued in March 2021 for the achievement of certain equity market capitalization milestones, and the Company’s subsequent identification and correction of an error in that calculation.

 

In the first quarter of 2022, we designed and, to the extent possible, implemented control improvements to remediate the material weakness stated above, which include; (i) a more robust and comprehensive review by management each period to identify unusual and non-routine transactions, (ii) a process to identify and engage resources, including third-party resources, with the technical accounting expertise needed to timely address any complex technical accounting issues that affect our consolidated financial statements, and (iii) a more robust process for the selection of third-party specialists and management review of their work.  As of March 31, 2022, not enough time has passed from the implementation of these new procedures to allow for successful control testing that would evidence that this control weakness has been fully remediated.  Management expects to show full remediation of this material weakness in 2022.

Part II. OTHER INFORMATION

Item 1.Legal Proceedings

We are not currently involved in any actual or pending legal proceeding or litigation and we are not aware of any such proceedings contemplated by or against us or involving our 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 Report on Form 10-K for the year ended December 31, 2021. There have been no material changes from those risk factors. The risks discussed in our 2021 Annual Report could materially affect our business, financial condition and future results.

Impact of COVID-19 and Geo-political Actions

The implications of COVID-19 and Geo-political actions on our results from operations going forward remain uncertain. These have the ongoing potential to cause adverse effects to our customers, suppliers or business partners in locations that have or will experience more pronounced disruptions, which could result in a reduction to future revenue and manufacturing output as well as delays in our new product development activities. Recent increases in demand for certain chips within various technology sectors and other industries has been one of the ripple effects of the COVID-19 crisis and Geo-political actions that are causing shortages of certain chips and negatively impacting many companies’ supply chains and their ability to maintain or increase their production to meet market demands. At this time, we are operating successfully with our existing products but are seeing longer component lead times which is increasing risk in our supply chain as well as the need to carry more component inventories and make earlier purchase commitments for components, which could have an impact on future products.

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Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

Sale of Unregistered Securities – none

Purchase of Equity Securities:

Period

    

Total number
of shares
purchased (1)

    

Average
price paid
per share (1)

    

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

    

Maximum dollar value
that may yet be
purchased (1)

March 1 - 31, 2022

36,685

$

6.84

36,685

$

24,748,906

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

Item 3.Defaults Upon Senior Securities

None

Item 4.Mine Safety Disclosures

Not Applicable

Item 5.Other Information

None

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Item 6.Exhibits

Exhibit No.

    

Description

 

31.1

Certification of the Chief Executive Officer of the Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

 

 

31.2

Certification of the Chief Financial Officer of the Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

 

 

32.1

Certification of the Chief Executive Officer of the Registrant pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

 

 

32.2

Certification of the Chief Financial Officer of the Registrant pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

 

 

101.INS

Inline XBRL Instance Document

 

 

101.SCH

Inline XBRL Taxonomy Extension Schema Document

 

 

101.CAL

Inline XBRL Taxonomy Extension Calculation Link base Document

 

 

101.DEF

Inline XBRL Taxonomy Extension Definition Link base

 

 

101.LAB

Inline XBRL Taxonomy Extension Label Link base Document

 

 

101.PRE

Inline XBRL Taxonomy Extension Presentation Link base Document

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)*

* Filed herewith.

** Furnished herewith

.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

VUZIX CORPORATION

 

 

 

Date: May 10, 2022

By:

/s/ Paul Travers

 

 

Paul Travers

 

 

President, Chief Executive Officer

 

 

(Principal Executive Officer)

 

 

 

Date: May 10, 2022

By:

/s/ Grant Russell

 

 

Grant Russell

 

 

Executive Vice President and Chief Financial

 

 

Officer

 

 

(Principal Financial and Accounting Officer)

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