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Vuzix Corp - Quarter Report: 2023 September (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 September 30, 2023

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 November 9, 2023, there were 63,327,608 shares of the registrant’s common stock outstanding.

Table of Contents

Vuzix Corporation

INDEX

 

Page
No.

 

 

Part I – Financial Information

3

 

 

Item 1.

Consolidated Financial Statements (Unaudited):

3

 

Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022

3

 

Consolidated Statements of Changes in Stockholders’ Equity for the Three and Nine Months Ended September 30, 2023 and 2022

4

 

Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2023 and 2022

5

 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2023 and 2022

6

 

Notes to the Unaudited Consolidated Financial Statements

7

 

Item 2.

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

15

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

26

 

Item 4.

Controls and Procedures

26

 

Part II – Other Information

27

 

Item 1.

Legal Proceedings

27

 

Item 1A.

Risk Factors

27

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

27

 

Item 3.

Defaults Upon Senior Securities

27

 

Item 4.

Mine Safety Disclosure

27

 

Item 5.

Other Information

27

 

Item 6.

Exhibits

28

 

 

Signatures

29

2

Table of Contents

Part 1: FINANCIAL INFORMATION

Item 1: Consolidated Financial Statements

VUZIX CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited)

    

September 30, 

December 31, 

    

2023

    

2022

ASSETS

 

  

 

  

Current Assets

 

  

 

  

Cash and Cash Equivalents

$

38,049,037

$

72,563,943

Accounts Receivable, Net

 

6,951,934

 

3,558,971

Accrued Revenues in Excess of Billings

 

437,275

 

269,129

Employee Retention Credit Receivable

466,705

Inventories, Net

 

11,301,878

 

11,267,969

Manufacturing Vendor Prepayments

 

621,029

 

998,671

Prepaid Expenses and Other Assets

 

2,249,102

 

2,115,853

Total Current Assets

 

59,610,255

 

91,241,241

Long-Term Assets

 

  

 

  

Fixed Assets, Net

 

7,049,729

 

3,878,505

Operating Lease Right-of-Use Asset

464,658

956,165

Patents and Trademarks, Net

 

2,531,267

 

2,220,094

Technology Licenses, Net

 

27,677,936

 

30,158,689

Intangible Asset, Net

 

570,523

 

675,313

Goodwill

 

1,601,400

 

1,601,400

Other Assets, Net

 

1,482,269

 

1,581,143

Total Assets

$

100,988,037

$

132,312,550

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

  

Current Liabilities

 

  

 

  

Accounts Payable

$

1,853,263

$

1,211,747

Unearned Revenue

 

102,149

 

29,064

Accrued Expenses

 

838,249

 

1,670,539

Licensing Fees Commitment

 

2,000,000

 

11,500,000

Income and Other Taxes Payable

 

54,061

 

214,997

Operating Lease Right-of-Use Liability

296,467

651,011

Total Current Liabilities

 

5,144,189

 

15,277,358

Long-Term Liabilities

Operating Lease Right-of-Use Liability

168,191

305,154

Total Liabilities

 

5,312,380

 

15,582,512

Stockholders' Equity

 

  

 

  

Common Stock - $0.001 Par Value, 100,000,000 shares authorized; 63,907,280 shares issued and 63,327,608 shares outstanding as of September 30, 2023 and 63,783,779 shares issued and 63,319,107 shares outstanding as of December 31, 2022.

 

63,907

 

63,783

Additional Paid-in Capital

 

372,192,478

 

362,507,715

Accumulated Deficit

 

(274,104,227)

 

(243,835,716)

Treasury Stock, at cost, 579,672 shares as of September 30, 2023 and 464,672 shares as of December 31, 2022.

 

(2,476,501)

 

(2,005,744)

Total Stockholders' Equity

 

95,675,657

 

116,730,038

Total Liabilities and Stockholders' Equity

$

100,988,037

$

132,312,550

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

3

Table of Contents

VUZIX CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

Common Stock

Additional

Accumulated

Treasury Stock

    

Shares

    

Amount

    

Paid-In Capital

    

Deficit

    

Shares

    

Amount

    

Total

Balance - July 1, 2023

 

63,898,889

$

63,899

$

369,072,625

$

(263,121,219)

(579,672)

$

(2,476,501)

$

103,538,804

Stock-Based Compensation Expense

 

 

 

3,113,211

 

 

 

 

3,113,211

Stock Option Exercises

 

8,391

 

8

 

6,642

 

 

 

 

6,650

Net Loss

 

 

 

 

(10,983,008)

 

 

 

(10,983,008)

Balance - September 30, 2023

 

63,907,280

$

63,907

$

372,192,478

$

(274,104,227)

 

(579,672)

$

(2,476,501)

$

95,675,657

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

 

96,525

 

97

 

9,663,593

 

 

 

 

9,663,690

Stock Option Exercises

 

26,976

 

27

 

21,170

 

 

 

 

21,197

Purchases of Treasury Stock

 

 

 

 

 

(115,000)

 

(470,757)

 

(470,757)

Net Loss

 

 

 

 

(30,268,511)

 

 

 

(30,268,511)

Balance - September 30, 2023

 

63,907,280

$

63,907

$

372,192,478

$

(274,104,227)

 

(579,672)

$

(2,476,501)

$

95,675,657

Common Stock

Additional

Accumulated

Treasury Stock

    

Shares

    

Amount

    

Paid-In Capital

    

Deficit

    

Shares

    

Amount

    

Total

Balance - July 1, 2022

 

64,025,640

$

64,026

$

355,322,990

$

(223,599,811)

(36,685)

$

(251,057)

$

131,536,148

Stock-Based Compensation Expense

 

(291,667)

 

(291)

 

3,549,683

 

 

 

 

3,549,392

Stock Option Exercises

 

42,362

 

42

 

(42)

 

 

 

 

Net Loss

 

 

 

 

(9,476,999)

 

 

 

(9,476,999)

Balance - September 30, 2022

 

63,776,335

$

63,777

$

358,872,631

$

(233,076,810)

 

(36,685)

$

(251,057)

$

125,608,541

Common Stock

Additional

Accumulated

Treasury Stock

    

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

 

(3,017)

 

(2)

 

12,087,836

 

 

 

 

12,087,834

Stock Option Exercises

 

107,084

 

107

 

48,398

 

 

 

 

48,505

Purchases of Treasury Stock

 

 

 

 

 

(36,685)

 

(251,057)

 

(251,057)

Net Loss

 

 

 

 

(30,004,667)

 

 

 

(30,004,667)

Balance - September 30, 2022

 

63,776,335

$

63,777

$

358,872,631

$

(233,076,810)

 

(36,685)

$

(251,057)

$

125,608,541

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

4

Table of Contents

VUZIX CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

Three Months Ended September 30, 

Nine Months Ended September 30, 

    

2023

    

2022

    

2023

    

2022

Sales:

 

  

 

  

 

  

 

  

Sales of Products

$

1,371,851

$

2,537,539

$

9,988,374

$

7,939,483

Sales of Engineering Services

 

808,156

 

889,284

 

1,073,829

 

998,150

Total Sales

 

2,180,007

 

3,426,823

 

11,062,203

 

8,937,633

Cost of Sales:

 

  

 

  

 

  

 

  

Cost of Sales - Products Sold

 

1,884,239

 

2,034,123

 

8,270,658

 

6,289,612

Cost of Sales - Depreciation and Amortization

232,891

221,772

723,745

676,720

Cost of Sales - Engineering Services

 

300,421

 

302,707

 

456,953

 

362,003

Total Cost of Sales

 

2,417,551

 

2,558,602

 

9,451,356

 

7,328,335

Gross Profit (Loss)

 

(237,544)

 

868,221

 

1,610,847

 

1,609,298

Operating Expenses:

 

  

 

  

 

  

 

  

Research and Development

 

2,912,562

 

3,440,685

 

8,818,911

 

9,540,272

Selling and Marketing

 

2,832,031

 

1,980,748

 

7,881,612

 

5,895,332

General and Administrative

 

4,466,850

 

4,854,014

 

13,858,996

 

15,307,242

Depreciation and Amortization

 

959,353

 

510,099

 

2,896,840

 

1,149,046

Impairment of Patents and Trademarks

 

24,204

 

48,075

 

41,869

 

97,676

Total Operating Expenses

 

11,195,000

 

10,833,621

 

33,498,228

 

31,989,568

Loss From Operations

 

(11,432,544)

 

(9,965,400)

 

(31,887,381)

 

(30,380,270)

Other Income (Expense):

 

  

 

  

 

  

 

  

Investment Income

 

500,067

 

572,721

 

1,824,773

 

690,028

Income and Other Taxes

 

(21,715)

 

(19,768)

 

(144,930)

 

(98,727)

Foreign Exchange Loss

 

(28,816)

 

(64,552)

 

(60,973)

 

(215,698)

Total Other Income, Net

 

449,536

 

488,401

 

1,618,870

 

375,603

Loss Before Provision for Income Taxes

 

(10,983,008)

 

(9,476,999)

 

(30,268,511)

 

(30,004,667)

Provision for Income Taxes

 

 

 

 

Net Loss

 

(10,983,008)

 

(9,476,999)

 

(30,268,511)

 

(30,004,667)

Basic and Diluted Loss per Common Share

$

(0.17)

$

(0.15)

$

(0.48)

$

(0.47)

Weighted-average Shares Outstanding - Basic and Diluted

 

63,324,942

 

63,776,154

 

63,257,863

 

63,724,982

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

5

Table of Contents

VUZIX CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Nine Months Ended September 30, 

    

2023

    

2022

Cash Flows From (Used In) Operating Activities

 

  

 

  

Net Loss

$

(30,268,511)

$

(30,004,667)

Non-Cash Adjustments

 

  

 

  

Depreciation and Amortization

 

3,620,585

 

1,825,766

Stock-Based Compensation

 

9,797,274

 

12,016,334

Impairment of Patents and Trademarks

 

41,869

 

97,676

Change in Inventory Reserve for Obsolescence

485,183

(Increase) Decrease in Operating Assets

 

  

 

  

Accounts Receivable

 

(3,392,963)

 

(875,607)

Accrued Revenues in Excess of Billings

 

(168,146)

 

(393,250)

Employee Retention Credit Receivable

466,705

Inventories

 

(519,092)

 

(77,490)

Manufacturing Vendor Prepayments

 

377,642

 

73,330

Prepaid Expenses and Other Assets

 

(295,566)

 

(417,298)

Increase (Decrease) in Operating Liabilities

 

  

 

  

Accounts Payable

 

641,516

 

141,828

Accrued Expenses

 

(832,290)

 

(244,935)

Unearned Revenue

 

73,086

 

(3,425)

Income and Other Taxes Payable

 

(160,935)

 

(73,637)

Net Cash Flows Used in Operating Activities

 

(20,133,643)

 

(17,935,375)

Cash Flows From (Used In) Investing Activities

 

  

 

  

Purchases of Fixed Assets

 

(3,608,801)

 

(5,203,562)

Investments in Patents and Trademarks

 

(497,901)

 

(362,981)

Investments in Licenses, Intangibles and Other Assets

 

(9,500,000)

 

(6,125,000)

Investments in Software Development

(125,000)

Investments in Other Assets

 

(200,000)

 

Net Cash Flows Used in Investing Activities

 

(13,931,702)

 

(11,691,543)

Cash Flows From (Used In) Financing Activities

 

  

 

  

Proceeds from Exercise of Stock Options

 

21,196

 

48,505

Purchases of Treasury Stock

(470,757)

(251,057)

Net Cash Flows Used in Financing Activities

 

(449,561)

 

(202,552)

Net Decrease in Cash and Cash Equivalents

 

(34,514,906)

 

(29,829,470)

Cash and Cash Equivalents - Beginning of Period

 

72,563,943

 

120,203,873

Cash and Cash Equivalents - End of Period

$

38,049,037

$

90,374,403

Supplemental Disclosures

 

  

 

  

Unamortized Common Stock Expense included in Prepaid Expenses and Other Assets

$

1,126,777

$

1,204,942

Non-Cash Investment in Licenses

2,000,000

9,000,000

Stock-Based Compensation Expense - Expensed less Previously Issued

133,584

(71,502)

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

6

Table of Contents

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” 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 (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. The results of the Company’s operations for the three and nine months ended September 30, 2023, 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 and for the year ended December 31, 2022, as reported in the Company’s Annual Report on Form 10-K filed with the SEC on March 1, 2023.

Customer Concentrations

For the three months ended September 30, 2023, one customer represented 21% of total product revenue and three customers represented 54%, 18% and 14% of engineering services revenue. For the three months ended September 30, 2022, one customer represented 21% of total product revenue and two customers represented 100% of engineering services revenue.

For the nine months ended September 30, 2023, two customers represented 34% and 30% of total product revenue and four customers represented 41%, 14%, 12%, and 11% of engineering services revenue. For the nine months ended September 30, 2022, one customer represented 20% of total product revenue and two customers represented 100% of engineering services revenue.

As of September 30, 2023, two customers represented 54% and 22% of accounts receivable. As of December 31, 2022, one customer represented 26% of accounts receivable.

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 re-issuance 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. The Company adopted ASU 2016-13 effective on January 1, 2023. The adoption of this standard did not have a material impact on our consolidated financial statements.

7

Table of Contents

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

Nine Months Ended

September 30, 

September 30, 

    

2023

    

2022

    

2023

    

2022

Revenues

 

  

 

  

 

  

 

  

Products Sales

$

1,371,851

$

2,537,539

$

9,988,374

$

7,939,483

Engineering Services

 

808,156

 

889,284

 

1,073,829

 

998,150

Total Revenue

$

2,180,007

$

3,426,823

$

11,062,203

$

8,937,633

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 our product and general payment terms that are between Net 30 and Net 60 days. For our engineering services, we must develop estimates and assumptions that require judgment to determine the underlying stand-alone selling price for each performance obligation, which determines how the transaction price is allocated among the performance obligations. The Company allocated the transaction price to each distinct performance obligation using the expected cost-plus margin approach to estimate the standalone selling price. Assumptions used in this method include the projected costs of each distinct performance obligation. 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.

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The following table presents a summary of the Company’s sales by revenue recognition method as a percentage of total net sales for the nine months ended September 30:

    

% of Total Net Sales

2023

 

2022

 

Point-in-Time

 

90

%

89

%

Over Time – Input Method

 

10

%

11

%

Total

 

100

%

100

%

Remaining Performance Obligations

As of September 30, 2023, the Company had approximately $3,200,000 of remaining performance obligations under four current waveguide development projects, which represents the remainder of transaction prices totaling approximately $4,400,000 under these development agreements, which commenced in 2022 and 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, at 18% in the fourth quarter, 58% in 2024 and 24% in 2025. Revenues earned less amounts invoiced at September 30, 2023, in the amount of $437,275 are reflected as Accrued Revenues in Excess of Billings in the accompanying Consolidated Balance Sheet.

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. 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 and nine months ended September 30, 2023 and 2022, 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, 2023 and 2022, there were 8,695,308 and 8,532,349 common stock share equivalents, for the three and nine months then ended, respectively, potentially issuable from the 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:

September 30, 

December 31, 

    

2023

    

2022

Purchased Parts and Components

$

8,471,998

$

10,399,527

Work-in-Process

 

530,558

 

344,242

Finished Goods

 

4,201,994

 

1,941,689

Less: Reserve for Obsolescence

 

(1,902,672)

 

(1,417,489)

Inventories, Net

$

11,301,878

$

11,267,969

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Note 5 – Fixed Assets

Fixed Assets consisted of the following:

September 30, 

December 31, 

    

2023

    

2022

Tooling and Manufacturing Equipment

$

8,966,430

$

6,065,445

Leaseholds

 

1,764,946

 

826,329

Computers and Purchased Software

 

817,207

 

760,256

Furniture and Equipment

 

2,580,907

 

2,487,650

 

14,129,490

 

10,139,680

Less: Accumulated Depreciation

 

(7,079,761)

 

(6,261,175)

Fixed Assets, Net

$

7,049,729

$

3,878,505

During the nine months ended September 30, 2023, the Company invested $3,608,801 in tooling and manufacturing equipment and leasehold improvements, mostly attributable to the Company’s new waveguide expansion project. Construction on the Company’s new facility began late in December 2022 and the Company expects the construction to be completed by the end of November 2023.

Total depreciation expense for fixed assets, not included in cost of sales, for the three months ended September 30, 2023, and 2022 was $102,677 and $97,449, respectively. Total depreciation expense for fixed assets, not included in cost of sales, for the nine months ended September 30, 2023, and 2022 was $317,061 and $326,480, respectively.

Note 6 – Technology Licenses, Net

The changes in the Company’s Technology Licenses for the nine months ended September 30, 2023, were as follows:

September 30, 

December 31, 

    

2023

    

2022

Licenses

$

32,443,356

$

2,443,356

Additions

 

 

30,000,000

Less: Accumulated Amortization

 

(4,765,420)

 

(2,284,667)

Licenses, Net

$

27,677,936

$

30,158,689

Total amortization expense related to technology licenses, not included in cost of sales, for the three months ended September 30, 2023, and 2022 was $776,667 and $375,000, respectively. Total amortization expense related to technology licenses for the nine months ended September 30, 2023, and 2022 was $2,480,753 and $562,500, respectively.

The Company signed a series of agreements with Atomistic SAS in 2022, which provided for an exclusive license of key micro-LED technology for cash commitments totaling $30 million along with performance-based cash and equity issuance commitments to be made by the Company relating to certain deliverables and the achievement of milestones by Atomistic, as further discussed in Note 10 – Capital Stock.

These intangible technology license assets are to be amortized over a ten-year period. As of September 30, 2023, there is a remaining funding commitment of $2,000,000 associated with these licenses, which will be paid over the next three months.

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Note 7 - Other Assets

The changes in the Company’s Other Assets for the nine months ended September 30, 2023, were as follows:

September 30,

December 31, 

    

2023

    

2022

Private Corporation Investments

$

450,000

$

450,000

Additions

200,000

Total Private Corporation Investments (at cost)

650,000

450,000

Software Development Costs

875,000

750,000

Additions

125,000

125,000

Less: Accumulated Amortization

(597,222)

(375,000)

Software Development Costs, Net

402,778

500,000

Unamortized Common Stock Expense included in Long-Term Prepaid Expenses

429,491

631,143

Total Other Assets

$

1,482,269

$

1,581,143

In 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 stock keeping of inventory, amongst other uses. In the nine months ended September 30, 2023, the Company purchased an additional $100,000 of preferred stock in this corporation through a subsequent round of funding in order 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.

During 2020, the Company invested $500,000 in Android operating systems upgrades for its CPU platform used in its M400 and M4000 products. This upgrade was completed and placed into service in the beginning of the fourth quarter of 2020.  This capitalized asset is being amortized on a straight-line basis over its expected product life span of thirty-six (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 in its M400 and M4000 products. In the nine months ended September 30, 2023, the Company made a final investment of $125,000 to these system upgrades, which were placed into service during the second quarter. These additional upgrades of $500,000 are being amortized on a straight-line basis over thirty-six (36) months.

Total amortization expense related to all software updates, included in cost of sales, for the three months ended September 30, 2023, and 2022 were $83,333 and $63,868, respectively. Total amortization expense related to all software updates for the nine months ended September 30, 2023, and 2022 were $222,222 and $194,751, respectively.

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Note 8 – Accrued Expenses

Accrued expenses consisted of the following:

September 30, 

December 31, 

    

2023

    

2022

Accrued Wages and Related Costs

$

398,768

$

843,537

Accrued Professional Services

 

216,475

 

263,800

Accrued Warranty Obligations

 

215,888

 

159,927

Other Accrued Expenses

 

7,118

 

403,275

Total

$

838,249

$

1,670,539

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 nine months ended September 30, 2023, were as follows:

Accrued Warranty Obligations at December 31, 2022

$

159,927

Reductions for Settling Warranties

 

(243,690)

Warranties Issued During Year

 

299,651

Accrued Warranty Obligations at September 30, 2023

$

215,888

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 September 30, 2023, and December 31, 2022. 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 September 30, 2023, and December 31, 2022.

Common Stock

The Company’s authorized common stock consists of 100,000,000 shares, par value of $0.001. There were 63,907,280 shares issued and 63,327,608 shares outstanding as of September 30, 2023, and 63,783,779 shares issued and 63,319,107 shares outstanding as of December 31, 2022.

In connection with the Atomistic Technology Licenses discussed in Note 6, the Company will, upon completion of certain deliverables and the achievement of milestones contained in the Atomistic Agreements, be committed to pay $2,500,000 and to issue, depending on the Company’s share price within a $13.00 to $8.00 range at the time of their issuance, a minimum of 1,750,000 up to a maximum of 2,874,754 common shares to the stockholders of Atomistic (as a

12

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portion of the consideration for certain shares of Atomistic) which would result in Vuzix owning Series A Preferred shares in Atomistic that could ultimately be converted into ordinary shares of Atomistic and Vuzix ultimately owning 100% of Atomistic. The share issuances by the Company are expected to be issued over the next three to fifteen months.

Treasury Stock

On March 2, 2022, our Board of Directors approved the Company to repurchase 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 an average cost of $4.06, before commission of $0.03 per share. As of September 30, 2023, 579,672 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) – Note 12) for the nine months ended September 30, 2023, is as follows:

Weighted

Average

Number of

Average

Remaining Life

    

Options

    

Exercise Price

    

(years)

Outstanding at December 31, 2022

 

2,805,673

$

7.80

 

7.28

Granted

 

180,000

 

4.43

 

  

Exercised

 

(28,240)

 

1.33

 

  

Expired or Forfeited

 

(46,125)

 

11.33

 

  

Outstanding at September 30, 2023

 

2,911,308

$

7.60

 

6.75

The weighted average remaining contractual term for all options as of September 30, 2023, and December 31, 2022, was 6.75 years and 7.28 years, respectively.

As of September 30, 2023, there were 1,913,522 options that were fully vested and exercisable at a weighted average exercise price of $7.10 per share. The weighted average remaining contractual term of the vested options is 6.0 years.

As of September 30, 2023, there were 997,786 unvested options exercisable at a weighted average exercise price of $8.53 per share. The weighted average remaining contractual term of the unvested options is 8.2 years.

The weighted average fair value of option grants was calculated using the Black-Scholes-Merton option pricing method. As of September 30, 2023, the Company had $6,071,652 of unrecognized stock compensation expense, which will be recognized over a weighted average period of 2.0 years.

During the nine months ended September 30, 2023, the Company issued 96,525 shares of common stock to its five independent board members as part of their annual retainer for services covering the period of July 2023 to June 2024. The fair market value on the date of those awards of the stock issued was $5.18, resulting in an aggregate fair value of approximately $500,000. The fair market value of these awards is expensed over twelve (12) months, beginning on July 1, 2023.

For the three months ended September 30, 2023, and 2022, the Company recorded total stock-based compensation expense, including stock awards but excluding stock option awards under the Company’s LTIP, of $1,110,331 and $1,157,556, respectively. For the nine months ended September 30, 2023, and 2022, the Company recorded total stock-based compensation expense, including stock awards but excluding stock option awards under the Company’s LTIP, of $3,322,961 and $3,730,899, respectively.

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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 September 30, 2023, and 2022, the Company recorded non-cash stock-based compensation expense of $2,186,682 and $2,658,294, respectively, for options that vested or are probable to vest. For the nine months ended September 30, 2023, and 2022, the Company recorded non-cash stock-based compensation expense of $6,474,313 and $8,285,435, respectively, for options that vested or are probable to vest. These expenses are presented in the same 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 the Black-Scholes-Merton option pricing method for the operational milestone tranches. As of September 30, 2023, we had $10,735,619 of total unrecognized stock-based compensation expense for the portion of options tied to equity market capitalization milestones and the portion of options tied to operational milestones that were considered probable of achievement, all of which will be recognized over a service period of up to three to four years. The probabilities of the milestone achievements are subject to catch-up adjustments in each instance where an equity market capitalization milestone is achieved or when an operational milestone becomes probable to be achieved or is achieved. Compensation costs could be reversed in subsequent periods if an awardee leaves the Company prior to the 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 Directors. As of September 30, 2023, 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 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 September 30, 2023, there are 2,704,500 options unvested for the achievement of Equity Market Capitalization targets, 1,893,150 unvested options for the achievement of annual revenue targets, and 811,350 unvested options for the achievement of annual EBITDA Margins Before Non-Cash Charges targets.

Award Potential

Criteria Achievement Weighting

50% of Options Available

35% of Options Available

15% of Options Available

Options Available
(Subject to Vesting)

Equity Market
Capitalization
Target

Last Twelve Months Revenue
Target

Last Twelve Months EBITDA 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 proceedings 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.

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Note 14 – Right-of-Use Assets and Liabilities

Future lease payments under operating leases as of September 30, 2023, were as follows:

2023 (3 months remaining)

$

174,413

2024

 

191,120

2025

 

132,982

Total Future Lease Payments

 

498,515

Less: Imputed Interest

 

(33,857)

Total Lease Liability Balance

$

464,658

Operating lease costs under the operating leases totaled $209,475 and $160,767 for the three months ended September 30, 2023, and 2022, respectively. Operating lease costs under the operating leases totaled $620,166 and $486,409 for the nine months ended September 30, 2023, and 2022, respectively.

As of September 30, 2023, the weighted average discount rate was 8.3% and the weighted average remaining lease term was 1.5 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, 2022.

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 upon our unaudited consolidated financial statements and related notes appearing elsewhere in this quarterly report. The preparation of these 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, allowance for credit losses, 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. 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.

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Management believes certain factors and trends are important in understanding our financial performance. The critical accounting policies, judgments and estimates we believe have the most significant effect on our consolidated financial statements are:

Valuation of inventories;
Variable Interest Entities;
Business combinations;
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, 2022. There have been no significant changes in our accounting policies for the three months ended September 30, 2023.

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 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, and 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, reductions in pricing for mobile devices. As a result, we must continue to

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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 Unaudited Consolidated Financial Statements.

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Results of Operations

Comparison of Three Months Ended September 30, 2023 and 2022

The following table compares the Company’s consolidated statements of operations data for the three months ended September 30, 2023 and 2022:

Three Months Ended September 30, 

 

    

    

    

Dollar

    

% Increase

 

2023

2022

Change

(Decrease)

 

Sales:

 

  

 

  

 

  

 

  

Sales of Products

$

1,371,851

 

$

2,537,539

 

$

(1,165,688)

 

(46)

%

Sales of Engineering Services

 

808,156

 

889,284

 

(81,128)

 

(9)

%

 

  

 

  

 

  

 

  

Total Sales

 

2,180,007

 

3,426,823

 

(1,246,816)

 

(36)

%

 

  

 

  

 

  

 

  

Cost of Sales:

 

  

 

  

 

  

 

  

Cost of Sales - Products

 

1,884,239

 

2,034,123

 

(149,884)

 

(7)

%

Cost of Sales - Depreciation and Amortization

 

232,891

 

221,772

 

11,119

 

5

%

Cost of Sales - Engineering Services

 

300,421

 

302,707

 

(2,286)

 

(1)

%

 

  

 

  

 

  

 

  

Total Cost of Sales

 

2,417,551

 

2,558,602

 

(141,051)

 

(6)

%

 

  

 

  

 

  

 

  

Gross Profit (Loss)

 

(237,544)

 

868,221

 

(1,105,765)

 

(127)

%

Gross Profit (Loss)%

 

(11)

%  

25

%  

  

 

  

 

  

 

  

 

  

 

  

Operating Expenses:

 

  

 

  

 

  

 

  

Research and Development

 

2,912,562

 

3,440,685

 

(528,123)

 

(15)

%

Selling and Marketing

 

2,832,031

 

1,980,748

 

851,283

 

43

%

General and Administrative

 

4,466,850

 

4,854,014

 

(387,164)

 

(8)

%

Depreciation and Amortization

 

959,353

 

510,099

 

449,254

 

88

%

Impairment of Patents and Trademarks

 

24,204

 

48,075

 

(23,871)

 

(50)

%

 

  

 

  

 

  

 

  

Loss from Operations

 

(11,432,544)

 

(9,965,400)

 

(1,467,144)

 

15

%

 

  

 

  

 

  

 

Other Income (Expense):

 

  

 

  

 

  

 

  

Investment Income

 

500,067

 

572,721

 

(72,654)

 

(13)

%

Income and Other Taxes

 

(21,715)

 

(19,768)

 

(1,947)

 

10

%

Foreign Exchange Loss

 

(28,816)

 

(64,552)

 

35,736

 

(55)

%

 

  

 

  

 

  

 

  

Total Other Income, Net

 

449,536

 

488,401

 

(38,865)

 

(8)

%

 

  

 

  

 

  

 

  

Loss Before Provision for Income Taxes

 

(10,983,008)

 

(9,476,999)

 

(1,506,009)

 

16

%

Provision for Income Taxes

 

 

 

 

%

 

  

 

  

 

  

 

  

Net Loss

$

(10,983,008)

$

(9,476,999)

$

(1,506,009)

 

16

%

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Sales.   There was a decrease in total sales for the three months ended September 30, 2023, compared to the same period in 2022 of $1,246,816 or 36%. The following table reflects the major components of our sales:

     

Three Months Ended

    

% of

    

Three Months Ended

    

% of

    

Dollar

    

% Increase

 

September 30, 2023

Total Sales

September 30, 2022

Total Sales

Change

(Decrease)

Sales of Products

$

1,371,851

 

63

%  

$

2,537,539

 

74

%  

$

(1,165,688)

 

(46)

%

Sales of Engineering Services

 

808,156

 

37

%  

 

889,284

 

26

%  

 

(81,128)

 

(9)

%

Total Sales

$

2,180,007

 

100

%  

$

3,426,823

 

100

%  

$

(1,246,816)

 

(36)

%

Sales of products decreased by 46% for the three months ended September 30, 2023, compared to the same period in 2022. Lack of smart glasses revenue was the primary driver of this decrease as unit sales of our M400 product decreased as compared to the previous year’s comparable period.

Sales of engineering services for the three months ended June 30, 2023, was $808,156, as compared to $889,284 in the comparable 2022 period.

Cost of Sales and Gross 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 manufacturing equipment, and amortization of software development costs related to the production of our products and rendering of engineering services. The following table reflects the components of our cost of goods sold:

    

Three Months Ended

    

As % Related

    

Three Months Ended

    

As % Related

    

Dollar

    

% Increase

September 30, 2023

Total Sales

September 30, 2022

Total Sales

Change

(Decrease)

Product Cost of Sales

$

1,558,813

72

%  

$

1,679,067

49

%  

$

(120,254)

(7)

%

Manufacturing Overhead - Unapplied

 

325,426

 

15

%  

355,056

 

10

%  

(29,630)

 

(8)

%

Depreciation and Amortization

232,891

11

%  

221,772

6

%  

11,119

5

%

Engineering Services Costs Sales

 

300,421

 

14

%  

302,707

 

9

%  

(2,286)

 

(1)

%

 

  

 

  

 

  

 

  

 

  

 

  

%

Total Cost of Sales

$

2,417,551

 

111

%  

$

2,558,602

 

75

%  

$

(141,051)

 

(6)

%

 

  

 

  

 

  

 

  

 

  

 

  

%

Gross Profit (Loss)

$

(237,544)

 

(11)

%  

$

868,221

 

25

%  

$

(1,105,765)

 

(127)

%

For the three months ended September 30, 2023, there was a gross loss from total sales of $237,544 or 11% as compared to a gross profit of $868,221 or 25% in the comparable period in 2022.

Unapplied manufacturing overhead costs, not already added in product cost of sales, decreased by $29,630 or 8% for the three months ended September 30, 2023, over the 2022 comparable period. Such costs, however, increased as a percentage of total sales to 15% as compared to 10% in 2022 due to lower quarterly product revenue. 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 in actual versus originally planned production levels during the period.

Depreciation and amortization expense in cost of sales increased by $11,119 or 5% because new manufacturing equipment was brought online in the third quarter as compared to the comparable 2022 period, when such activity was classified as construction-in-progress.

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Research and Development.  Our research and development expenses consist primarily of compensation costs for personnel, including 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 expenses.

Three Months Ended

% of

Three Months Ended

% of

Dollar

% Increase

September 30, 2023

Total Sales

September 30, 2022

Total Sales

Change

(Decrease)

Research and Development

$

2,912,562

 

134

%  

$

3,440,685

 

100

%  

$

(528,123)

 

(15)

%

Research and development expenses for the three months ended September 30, 2023, decreased by $528,123 or 15%, as compared to the comparable period in 2022. This decrease was largely due to a $507,259 reduction in external development expenses and consultants related to our new products and a decrease of $23,127 in recruiting and hiring expenses.

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.

Three Months Ended

% of

Three Months Ended

% of

Dollar

% Increase

    

September 30, 2023

    

Total Sales

September 30, 2022

    

Total Sales

Change

    

(Decrease)

Selling and Marketing

$

2,832,031

130

%  

$

1,980,748

58

%  

$

851,283

43

%

Selling and marketing expenses for the three months ended September 30, 2023, increased by $851,282 or 43%, as compared to the comparable period in 2022. This increase was largely due to a $522,086 increase in salary and benefits related expenses driven by headcount increases; an increase of $241,322 in advertising and tradeshow expenses; and an increase of $131,384 in travel related expenses; partially offset by a decrease of $38,984 in recruiting and hiring expenses; and a decrease of $36,082 in website development and maintenance costs.

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

Three Months Ended

% of

Three Months Ended

% of

Dollar

% Increase

September 30, 2023

Total Sales

September 30, 2022

Total Sales

Change

(Decrease)

General and Administrative

$

4,466,850

 

205

%  

$

4,854,014

 

142

%  

$

(387,164)

 

(8)

%

General and administrative expenses for the three months ended September 30, 2023, decreased by $387,164 or 8%, compared to the comparable period in 2022. This decrease was largely due to a decrease of $218,801 in salary and benefits related expenses, which was primarily driven by a decrease in non-cash stock-based compensation; a decrease of $79,739 in shareholder and IR related expenses; a decrease of $64,128 in legal expenses and a decrease of $40,828 in accounting, auditing, advisory and tax services expenses; partially offset by an increase of $118,515 in insurance premiums.

Depreciation and Amortization.  Depreciation and amortization expense, not included in cost of sales, for the three months ended September 30, 2023, was $959,353, as compared to $510,099 in the comparable period in 2022, an increase of $449,254. The increase in this expense is primarily due to the amortization of our technology license related to the Atomistic Agreements, which began on May 12, 2022 and was amended on December 16, 2022, which increased the amount of amortization.

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Other Income, Net. Total other income was $449,536 for the three months ended September 30, 2023, compared to other income of $488,401 in the comparable period in 2022, a decrease of $38,865. The overall decrease in other income was primarily the result of a decrease of $72,654 in investment income due to lower excess cash on-hand to invest; partially offset by a decrease in foreign exchange losses of $35,736.

Provision for Income Taxes. There was not a provision for income taxes in the respective three-month periods ending September 30, 2023, and 2022.

Comparison of Nine Months Ended September 30, 2023 and 2022

The following table compares the Company’s consolidated statements of operations data for the nine months ended September 30, 2023 and 2022:

Nine Months Ended September 30, 

    

    

    

Dollar

    

% Increase

 

2023

2022

Change

(Decrease)

 

Sales:

 

  

 

  

 

  

 

  

Sales of Products

$

9,988,374

$

7,939,483

$

2,048,891

 

26

%

Sales of Engineering Services

 

1,073,829

 

998,150

 

75,679

 

8

%

Total Sales

 

11,062,203

 

8,937,633

 

2,124,570

 

24

%

Cost of Sales:

 

  

 

  

 

  

 

  

Cost of Sales - Products Sold

 

8,270,658

 

6,289,612

 

1,981,046

 

31

%

Cost of Sales - Depreciation and Amortization

 

723,745

 

676,720

 

47,025

 

7

%

Cost of Sales - Engineering Services

 

456,953

 

362,003

 

94,950

 

26

%

Total Cost of Sales

 

9,451,356

 

7,328,335

 

2,123,021

 

29

%

Gross Profit

 

1,610,847

 

1,609,298

 

1,549

 

0

%

Gross Profit %

 

15

%  

 

18

%  

 

  

 

  

Operating Expenses:

 

  

 

  

 

  

 

  

Research and Development

 

8,818,911

 

9,540,272

 

(721,361)

 

(8)

%

Selling and Marketing

 

7,881,612

 

5,895,332

 

1,986,280

 

34

%

General and Administrative

 

13,858,996

 

15,307,242

 

(1,448,246)

 

(9)

%

Depreciation and Amortization

 

2,896,840

 

1,149,046

 

1,747,794

 

152

%

Impairment of Patents and Trademarks

 

41,869

 

97,676

 

(55,807)

 

(57)

%

Loss from Operations

 

(31,887,381)

 

(30,380,270)

 

(1,507,111)

 

5

%

Other Income (Expense):

 

  

 

  

 

  

 

  

Investment Income

 

1,824,773

 

690,028

 

1,134,745

 

164

%

Income and Other Taxes

 

(144,930)

 

(98,727)

 

(46,203)

 

47

%

Foreign Exchange Loss

 

(60,973)

 

(215,698)

 

154,725

 

(72)

%

Total Other Income, Net

 

1,618,870

 

375,603

 

1,243,267

 

331

%

Net Loss

$

(30,268,511)

$

(30,004,667)

$

(263,844)

 

1

%

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Sales.   There was an increase in total sales for the nine months ended September 30, 2023, compared to the same period in 2022 of $2,124,570 or 24%. The following table reflects the major components of our sales:

    

Nine Months Ended

    

% of

    

Nine Months Ended

    

% of

    

Dollar

    

% Increase

September 30, 2023

Total Sales

September 30, 2022

Total Sales

Change

(Decrease)

Sales of Products

$

9,988,374

 

90

%  

$

7,939,483

 

89

%  

$

2,048,891

 

26

%

Sales of Engineering Services

 

1,073,829

 

10

%  

 

998,150

 

11

%  

 

75,679

 

8

%

Total Sales

$

11,062,203

 

100

%  

$

8,937,633

 

100

%  

$

2,124,570

 

24

%

Sales of products increased by 26% for the nine months ended September 30, 2023, compared to the same period in 2022. Smart glasses revenue was the primary driver of this increase as unit sales of our M400 product increased, partially offset by higher average sales discounts due to larger volume reseller sales compared to the comparable period in 2022.

Sales of engineering services for the nine months ended September 30, 2023, was $1,073,829, as compared to $998,150 in the comparable 2022 period.

Cost of Sales and Gross Profit. 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 manufacturing equipment, and amortization of software development costs related to the production of our products and rendering of engineering services. The following table reflects the components of our cost of goods sold:

Nine Months Ended

% of

Nine Months Ended

% of

Dollar

% Increase

    

September 30, 2023

    

Total Sales

    

September 30, 2022

    

Total Sales

    

Change

    

(Decrease)

Product Cost of Sales

$

7,046,018

 

64

%  

$

5,199,951

 

58

%  

$

1,846,067

 

36

%

Manufacturing Overhead - Unapplied

 

1,224,640

 

11

%  

 

1,089,661

 

12

%  

 

134,979

 

12

%

Depreciation and Amortization

 

723,745

 

7

%  

 

676,720

 

8

%  

 

47,025

 

7

%

Engineering Services Cost of Sales

 

456,953

 

4

%  

 

362,003

 

4

%  

 

94,950

 

26

%

Total Cost of Sales

9,451,356

 

85

%  

7,328,335

 

82

%  

2,123,021

 

29

%

Gross Profit

$

1,610,847

15

%

$

1,609,298

 

18

%

$

1,549

 

0

%

For the nine months ended September 30, 2023, gross profit from total sales was $1,610,847 or 15% compared to $1,609,298 or 18% in the comparable period in 2022.

Unapplied manufacturing overhead costs, not already added in product cost of sales, increased by $134,979 or 12% for the nine months ended September 30, 2023, over the 2022 comparable period, however, such costs decreased as a percentage of total sales to 11% as compared to 12% in 2022. The increase in the net dollar amount of these unapplied overhead costs in the current period versus the prior period was primarily driven by a supply chain issue that slowed some production in Q1 2023.

Depreciation and amortization expense in cost of sales increased by $47,025 or 7% because new manufacturing equipment was brought online in the first half of 2023 as compared to the prior period, when such activity was classified as construction-in-progress.

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Table of Contents

Research and Development.  Our research and development expenses consist primarily of compensation costs for personnel, including 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 expenses.

Nine Months Ended

% of

Nine Months Ended

% of

Dollar

% Increase

September 30, 2023

Total Sales

September 30, 2022

Total Sales

Change

(Decrease)

Research and Development

$

8,818,911

 

80

%  

$

9,540,272

 

107

%  

$

(721,361)

 

(8)

%

Research and development expenses for the nine months ended September 30, 2023, decreased by $721,361 or 8%, compared to the comparable period in 2022. This decrease was largely due to a $648,556 reduction in external development expenses and consultants related to our new products; and a decrease of $102,186 in recruiting and hiring expenses; partially offset by an increase of $69,988 in salary and benefits related expenses.

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.

Nine Months Ended

% of

Nine Months Ended

% of

Dollar

% Increase

September 30, 2023

Total Sales

September 30, 2022

Total Sales

Change

(Decrease)

Selling and Marketing

$

7,881,612

 

71

%  

$

5,895,332

 

66

%  

$

1,986,280

 

34

%

Selling and marketing expenses for the nine months ended September 30, 2023, increased by $1,986,280 or 34%, compared to the comparable period in 2022. This increase was largely due to a $1,538,095 increase in salary and benefits related expenses driven by headcount increases; an increase of $294,957 in advertising and tradeshow expenses; and an increase of $291,835 in travel related expenses; partially offset by a decrease of $113,970 in website development and maintenance costs; and a decrease of $50,657 in sales commissions, mostly attributable to a reduction in commissions paid to TDG for defense related engineering services under terms of an agreement, which expired on June 15, 2022.

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.

Nine Months Ended

% of

Nine Months Ended

% of

Dollar

% Increase

September 30, 2023

Total Sales

September 30, 2022

Total Sales

Change

(Decrease)

General and Administrative

$

13,858,996

 

125

%  

$

15,307,242

 

171

%  

$

(1,448,246)

 

(9)

%

General and administrative expenses for the nine months ended September 30, 2023, decreased by $1,448,246 or 9%, compared to the comparable period in 2022. This decrease was largely due to a decrease of $1,675,545 in salary and benefits related expenses, which was primarily driven by a decrease in non-cash stock-based compensation; a decrease of $148,717 in external audit, accounting, advisory and tax services expenses; and a $111,383 decrease in legal expenses; partially offset by an increase of $251,446 in various consulting fees; an increase of $167,539 in insurance premiums; an increase of $103,194 in shareholder and IR related expenses; and an increase of $93,663 in travel related expenses.

Depreciation and Amortization.  Depreciation and amortization expense, not included in cost of sales, for the nine months ended September 30, 2023, was $2,896,840, compared to $1,149,046 in the comparable period in 2022, an increase of $1,747,794. The increase in this expense is primarily due to the amortization of our technology license related to the Atomistic Agreements, which began on May 12, 2022.

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Table of Contents

Other Income, Net. Total other income was $1,618,870 for the nine months ended September 30, 2023, compared to other income of $375,603 in the comparable period in 2022, an increase of $1,243,267. The overall increase in other income was primarily the result of an increase of $1,134,745 in investment income due to higher interest rates earned on excess cash invested; and a decrease in foreign exchange losses of $154,725; partially offset by an increase of $46,203 in income and other taxes.

Provision for Income Taxes. There was not a provision for income taxes in the respective nine-month periods ending September 30, 2023, and 2022.

Liquidity and Capital Resources

Capital Resources: As of September 30, 2023, we had cash and cash equivalents of $38,049,037, a decrease of $34,514,906 from $72,563,943 as of December 31, 2022.

As of September 30, 2023, we had current assets of $59,610,255 compared to current liabilities of $5,144,189 which resulted in a positive working capital position of $54,466,066. As of December 31, 2022, we had a working capital position of $75,963,883. Our current liabilities are comprised principally of accounts payable, accrued expenses, licensing fee commitments, and operating lease right-of-use liabilities.

Summary of Cash Flow:

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

September 30, 

September 30, 

    

2023

    

2022

Net Cash Provided by (used in)

 

  

 

  

Operating Activities

$

(20,133,643)

$ (17,935,375)

Investing Activities

 

(13,931,702)

 

(11,691,543)

Financing Activities

 

(449,561)

 

(202,552)

During the nine months ended September 30, 2023, we used $20,133,643 of cash for operating activities. Net changes in working capital items were $3,810,043 for the nine months ended September 30, 2023, with the largest factors resulting from a $3,094,404 increase in trade accounts receivable and accrued revenue in excess of billings, partially offset by receipt of $466,705 for our Employee Retention Credit, which was filed with the IRS in November 2022; a $141,450 decrease in inventory and vendor prepayments; and a $190,744 decrease in trade accounts payable and accrued expenses. For the nine months ended September 30, 2022, we used a total of $17,935,375 in cash for operating activities.

During the nine months ended September 30, 2023, we used $13,931,702 of cash for investing activities, which included $9,500,000 in payments made towards our technology license fee commitment with Atomistic, as discussed in Note 6, $3,608,801 for purchases of manufacturing equipment and leasehold improvement expenditures primarily related to our waveguide expansion project; $497,901 in patent and trademark expenditures; a further investment of $125,000 in the purchase of software operating license upgrades for our smart glasses platform; and an additional $200,000 of investments in private corporations as discussed in Note 7. For the nine months ended September 30, 2022, we used a total of $11,691,543 in cash for investing activities.

During the nine months ending September 30, 2023, we used $449,561 in net cash for financing activities, which included $21,196 received for stock option exercises, which was offset by $470,757 expended for share repurchases under our Share Buyback Program that expired on March 2, 2023. For the nine months ended September 30, 2022, we used $202,552 in net cash for financing activities.

As of September 30, 2023, the Company does not have any current or long-term debt obligations outstanding other than licensing fee commitments totaling $2,000,000, which are all current.

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Table of Contents

The Company’s cash requirements are primarily for funding operating losses, working capital, research and development, capital expenditures, and licensing fee commitments. We incurred a net loss for the nine months ended September 30, 2023, of $30,268,511 (of which $9,797,274 was related to non-cash stock-based compensation) and for the years ended December 31, 2022, and 2021 of $40,763,573 (of which $15,775,553 was related to non-cash stock-based compensation) and $40,377,160 (of which $17,302,833 was related to non-cash stock-based compensation), respectively. The Company has an accumulated deficit of $274,104,227 as of September 30, 2023.

Our operations have historically been financed primarily through net proceeds from the sale of our equity securities. As of September 30, 2023, our principal sources of liquidity consisted of cash and cash equivalents of $38,049,037.

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;
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

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Table of Contents

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 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, 2022, 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 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 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. 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 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 our disclosure controls and procedures were effective at September 30, 2023.

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Table of Contents

Changes in Internal Control over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting (as defined in 13a-15(f) and 15d-15(f) promulgated under the Exchange 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 control over financial reporting.

Part II. OTHER INFORMATION

Item 1.Legal Proceedings

We are not currently involved in any actual or pending legal proceedings 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.

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, 2022. There have been no material changes from those risk factors. The risks discussed in our 2022 Annual Report could materially affect our business, financial condition and future results.

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

Sale of Unregistered Securities - none

Purchase of Equity Securities: - none

Item 3.Defaults Upon Senior Securities

None

Item 4.Mine Safety Disclosures

Not Applicable

Item 5.Other Information

None

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Table of Contents

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

Inline XBRL Document set for the financial statements and accompanying notes in Part I, Item 1, of this Quarterly Report on Form 10-Q.

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: November 9, 2023

By:

/s/ Paul Travers

 

 

Paul Travers

 

 

President, Chief Executive Officer

 

 

(Principal Executive Officer)

 

 

 

Date: November 9, 2023

By:

/s/ Grant Russell

 

 

Grant Russell

 

 

Executive Vice President and Chief Financial

 

 

Officer

 

 

(Principal Financial and Accounting Officer)

29