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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 June 30, 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 August 9, 2022, there were 63,990,955 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 June 30, 2022 and December 31, 2021

3

 

Consolidated Statements of Changes in Stockholders’ Equity for the Three and Six Months Ended June 30, 2022 and 2021

4

 

Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2022 and 2021

5

 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 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

15

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

28

 

Item 4.

Controls and Procedures

28

 

Part II – Other Information

29

 

Item 1.

Legal Proceedings

29

 

Item 1A.

Risk Factors

29

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

29

 

Item 3.

Defaults Upon Senior Securities

29

 

Item 4.

Mine Safety Disclosure

29

 

Item 5.

Other Information

29

 

Item 6.

Exhibits

30

 

 

Signatures

31

2

Table of Contents

Part 1: FINANCIAL INFORMATION

Item 1: Consolidated Financial Statements

VUZIX CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited)

    

June 30, 

December 31, 

    

2022

    

2021

ASSETS

 

  

 

  

Current Assets

 

  

 

  

Cash and Cash Equivalents

$

100,581,795

$

120,203,873

Accounts Receivable

 

1,563,906

 

2,242,429

Accrued Revenues in Excess of Billings

 

108,866

 

Inventories, Net

 

11,792,089

 

12,151,982

Manufacturing Vendor Prepayments

 

1,158,620

 

504,051

Prepaid Expenses and Other Assets

 

1,735,955

 

2,047,819

Total Current Assets

 

116,941,231

 

137,150,154

Long-Term Assets

 

  

 

  

Fixed Assets, Net

 

8,051,264

 

5,190,438

Operating Lease Right-of-Use Asset

837,920

1,117,022

Patents and Trademarks, Net

 

2,136,585

 

1,988,370

Technology Licenses, Net

 

16,089,035

 

1,389,936

Intangible Asset, Net

 

 

147,548

Other Assets, Net

 

1,839,047

 

1,483,589

Total Assets

$

145,895,082

$

148,467,057

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

  

Current Liabilities

 

  

 

  

Accounts Payable

$

1,321,949

$

2,054,762

Unearned Revenue

 

40,626

 

27,797

Accrued Expenses

 

1,614,583

 

1,419,308

Licensing Fees Commitment

 

4,250,000

 

Income and Other Taxes Payable

 

43,856

 

120,242

Operating Lease Right-of-Use Liability

520,009

534,146

Total Current Liabilities

 

7,791,023

 

4,156,255

Long-Term Liabilities

Operating Lease Right-of-Use Liability

317,911

582,876

Licensing Fees Commitment

6,250,000

Total Long-Term Liabilities

6,567,911

582,876

Total Liabilities

 

14,358,934

 

4,739,131

Stockholders' Equity

 

  

 

  

Common Stock - $0.001 Par Value, 100,000,000 shares authorized; 64,025,640 shares issued and 63,988,955 shares outstanding as of June 30, 2022 and 63,672,268 shares issued and outstanding as of December 31, 2021.

 

64,026

 

63,672

Additional Paid-in Capital

 

355,322,990

 

346,736,397

Accumulated Deficit

 

(223,599,811)

 

(203,072,143)

Treasury Stock, at cost, 36,685 shares as of June 30, 2022 and 0 shares as of December 31, 2021

 

(251,057)

 

Total Stockholders' Equity

 

131,536,148

 

143,727,926

Total Liabilities and Stockholders' Equity

$

145,895,082

$

148,467,057

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)

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

 

 

 

288,650

 

289

 

8,538,153

 

 

 

 

8,538,441

Stock Option Exercises

 

 

 

64,722

 

65

 

48,440

 

 

 

 

48,506

Purchases of Treasury Stock

 

 

 

 

 

 

 

(36,685)

 

(251,057)

 

(251,057)

Net Loss

 

 

 

 

 

 

(20,527,668)

 

 

 

(20,527,668)

Balance - June 30, 2022

 

$

 

64,025,640

$

64,026

$

355,322,990

$

(223,599,811)

 

(36,685)

$

(251,057)

$

131,536,148

Preferred Stock

Common Stock

Additional

Accumulated

Treasury Stock

    

Shares

    

Amount

    

Shares

    

Amount

    

Paid-In Capital

    

Deficit

    

Shares

    

Amount

    

Total

Balance - April 1, 2022

$

 

63,704,626

$

63,705

$

350,721,326

$

(213,578,143)

(36,685)

$

(251,057)

$

136,955,831

Stock-Based Compensation Expense

 

 

 

288,650

 

289

 

4,582,414

 

 

 

 

4,582,703

Stock Option Exercises

 

 

 

32,364

 

32

 

19,250

 

 

 

 

19,282

Net Loss

 

 

 

 

 

 

(10,021,668)

 

 

 

(10,021,668)

Balance - June 30, 2022

 

$

 

64,025,640

$

64,026

$

355,322,990

$

(223,599,811)

 

(36,685)

$

(251,057)

$

131,536,148

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 (as Restated)

 

 

 

68,047

 

68

 

8,544,078

 

 

 

 

8,544,146

Stock Option Exercises

 

 

 

567,826

 

568

 

673,191

 

 

 

 

673,759

Stock Warrant Exercises

 

 

 

7,274,328

 

7,274

 

34,697,794

 

 

 

 

34,705,068

Proceeds from Common Stock Offering

 

 

 

4,768,293

 

4,768

 

97,784,270

 

 

 

 

97,789,038

Direct Costs of Common Stock Offering

 

 

 

 

 

(6,136,420)

 

 

 

 

(6,136,420)

Shares Redeemed to Cover Employee Tax Withholdings

 

 

 

(83,164)

 

(83)

 

(1,144,282)

 

 

 

 

(1,144,365)

Stock Issued for Technology License Purchase

 

 

 

75,000

 

75

 

1,404,675

 

 

 

 

1,404,750

Preferred Stock Converted & Preferred Dividend Settlement

(49,626)

(50)

4,962,600

4,963

(10,004,913)

(10,000,000)

Net Loss (as Restated)

 

 

 

 

 

 

(18,396,842)

 

 

 

(18,396,842)

Balance - June 30, 2021 (as Restated)

 

$

 

63,278,096

$

63,278

$

336,770,866

$

(181,091,825)

 

$

$

155,742,319

Preferred Stock

Common Stock

Additional

Accumulated

Treasury Stock

    

Shares

    

Amount

    

Shares

    

Amount

    

Paid-In Capital

    

Deficit

    

Shares

    

Amount

    

Total

Balance - April 1, 2021

$

 

62,142,940

$

62,143

$

318,720,283

$

(171,846,353)

$

$

146,936,073

Stock-Based Compensation Expense (as Restated)

 

 

 

68,047

 

68

 

3,984,694

 

 

 

 

3,984,762

Stock Option Exercises

 

 

 

336,858

 

337

 

476,593

 

 

 

 

476,930

Stock Warrant Exercises

 

 

 

33,300

 

33

 

136,497

 

 

 

 

136,530

Proceeds from Common Stock Offerings

 

 

 

621,951

 

622

 

12,748,752

 

 

 

 

12,749,374

Direct Costs of Common Stock Offerings

 

 

 

 

 

(700,628)

 

 

 

 

(700,628)

Stock Issued for Technology License Purchase

75,000

75

1,404,675

1,404,750

Net Loss (as Restated)

 

 

 

 

 

 

(9,245,472)

 

 

 

(9,245,472)

Balance - June 30, 2021 (as Restated)

 

$

 

63,278,096

$

63,278

$

336,770,866

$

(181,091,825)

 

$

$

155,742,319

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

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VUZIX CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

Three Months Ended June 30, 

Six Months Ended June 30, 

(as Restated)

(as Restated)

    

2022

    

2021

    

2022

    

2021

Sales:

 

  

 

  

 

  

 

  

Sales of Products

$

2,898,892

$

2,833,644

$

5,401,944

$

6,638,814

Sales of Engineering Services

 

108,866

 

82,894

 

108,866

 

193,113

Total Sales

 

3,007,758

 

2,916,538

 

5,510,810

 

6,831,927

Cost of Sales:

 

  

 

  

 

  

 

  

Cost of Sales - Products Sold

 

2,522,674

 

2,323,324

 

4,386,371

 

5,143,295

Cost of Sales - Engineering Services

 

59,296

 

13,842

 

59,296

 

29,669

Total Cost of Sales

 

2,581,970

 

2,337,166

 

4,445,667

 

5,172,964

Gross Profit (exclusive of depreciation shown separately below)

 

425,788

 

579,372

 

1,065,143

 

1,658,963

Operating Expenses:

 

  

 

  

 

  

 

  

Research and Development

 

2,996,144

 

2,723,994

 

6,099,588

 

4,929,312

Selling and Marketing

 

1,850,595

 

1,349,189

 

3,914,584

 

2,652,619

General and Administrative

 

5,039,949

 

5,181,042

 

10,453,228

 

11,208,799

Depreciation and Amortization

 

540,081

 

501,678

 

963,012

 

1,019,090

Loss on Fixed Asset Disposal

 

 

 

 

83,908

Impairment of Patents and Trademarks

 

 

30,765

 

49,602

 

58,496

Total Operating Expenses

 

10,426,769

 

9,786,668

 

21,480,014

 

19,952,224

Loss From Operations

 

(10,000,981)

 

(9,207,296)

 

(20,414,871)

 

(18,293,261)

Other Income (Expense):

 

  

 

  

 

  

 

  

Investment Income

 

111,027

 

7,767

 

117,307

 

15,605

Income and Other Taxes

 

(31,326)

 

(12,783)

 

(78,959)

 

(32,508)

Foreign Exchange Loss

 

(100,388)

 

(33,160)

 

(151,145)

 

(86,678)

Total Other Expense, Net

 

(20,687)

 

(38,176)

 

(112,797)

 

(103,581)

Loss Before Provision for Income Taxes

 

(10,021,668)

 

(9,245,472)

 

(20,527,668)

 

(18,396,842)

Provision for Income Taxes

 

 

 

 

Net Loss

 

(10,021,668)

 

(9,245,472)

 

(20,527,668)

 

(18,396,842)

Basic and Diluted Loss per Common Share

$

(0.16)

$

(0.15)

$

(0.32)

$

(0.31)

Weighted-average Shares Outstanding - Basic and Diluted

 

63,739,863

 

63,071,061

 

63,717,618

 

58,631,078

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

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VUZIX CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Six Months Ended June 30, 

(as Restated)

    

2022

    

2021

Cash Flows from Operating Activities

 

  

 

  

Net Loss

$

(20,527,668)

$

(18,396,842)

Non-Cash Adjustments

 

  

 

  

Depreciation and Amortization

 

963,012

 

1,019,090

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

 

130,883

 

120,197

Stock-Based Compensation

 

8,200,774

 

8,661,613

Impairment of Patents and Trademarks

 

49,602

 

58,496

Loss on Fixed Asset Disposal

 

 

83,908

(Increase) Decrease in Operating Assets

 

  

 

  

Accounts Receivable

 

678,523

 

289,567

Accrued Revenues in Excess of Billings

(108,866)

Inventories

 

359,893

 

(1,783,539)

Manufacturing Vendor Prepayments

 

(654,569)

 

(2,565,073)

Prepaid Expenses and Other Assets

 

492,599

 

(522,084)

Increase (Decrease) in Operating Liabilities

 

  

 

  

Accounts Payable

 

(732,813)

 

(92,188)

Accrued Expenses

 

195,276

 

75,055

Unearned Revenue

 

12,829

 

(27,453)

Income and Other Taxes

 

(76,384)

 

(29,450)

Net Cash Flows Used in Operating Activities

 

(11,016,909)

 

(13,108,703)

Cash Flows from Investing Activities

 

  

 

  

Purchases of Fixed Assets

 

(3,504,931)

 

(719,164)

Investments in Patents and Trademarks

 

(272,686)

 

(214,450)

Investments in Licenses, Intangible and Other Assets

 

(4,625,000)

 

(305,158)

Net Cash Flows Used in Investing Activities

 

(8,402,617)

 

(1,238,772)

Cash Flows from Financing Activities

 

  

 

  

Proceeds from Exercise of Warrants

 

 

34,705,068

Proceeds from Exercise of Stock Options

 

48,505

 

673,759

Proceeds from Common Stock Offering, Net

91,647,850

Purchases of Treasury Stock

(251,057)

Preferred Dividend Settlement Payment

 

 

(10,000,000)

Employee Tax Withholdings Payment

 

 

(1,144,365)

Net Cash Flows (Used in) Provided from Financing Activities

 

(202,552)

 

115,882,312

Net (Decrease) Increase in Cash and Cash Equivalents

 

(19,622,078)

 

101,534,837

Cash and Cash Equivalents - Beginning of Period

 

120,203,873

 

36,069,508

Cash and Cash Equivalents - End of Period

$

100,581,795

$

137,604,345

Supplemental Disclosures

 

  

 

  

Unamortized Common Stock Expense included in Prepaid Expenses and Other Assets

$

1,223,691

$

101,517

Non-Cash Investment in Licenses

10,500,000

1,404,750

Stock-Based Compensation Expense - Expensed less Previously Issued

(337,379)

117,467

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” 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. 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 and six months ended June 30, 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 and for the year ended 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:

    

Three Months Ended
June 30, 2021

    

Six Months Ended
June 30, 2021

Additional Paid-in Capital

Increase of $466,015

Increase of $2,978,022

Research and Development Expense

Increase of $23,262

Increase of $148,653

Sales and Marketing

Increase of $11,631

Increase of $74,327

General and Administrative

Increase of $431,122

Increase of $2,755,042

Net Loss

Increase of $466,015

Increase of $2,978,022

Loss per Share

Increase of $0.01

Increase of $0.06

Customer Concentrations

For the three months ended June 30, 2022, one customer represented 45% of total product revenue and one customer represented 100% of engineering services revenue. For the three months ended June 30, 2021, no one customer represented more than 10% of total product revenue and one customer represented 100% of engineering services revenue.

For the six months ended June 30, 2022, one customer represented 24% of total product revenue and one customer represented 100% of engineering services revenue. For the six months ended June 30, 2021, no one customer represented more than 10% of total product revenue and two customers represented 100% of engineering services revenue.

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As of June 30, 2022, three customers represented 42%, 15% and 15% of accounts receivable. As of December 31, 2021, three customers represented 27%, 20% and 10% 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 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

Six Months Ended

June 30, 

June 30, 

    

2022

    

2021

    

2022

    

2021

Revenues

 

  

 

  

 

  

 

  

Smart Glasses Sales

$

2,898,892

$

2,833,644

$

5,401,944

$

6,638,814

Engineering Services

 

108,866

 

82,894

 

108,866

 

193,113

Total Revenue

$

3,007,758

$

2,916,538

$

5,510,810

$

6,831,927

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 to measure the 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

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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 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 six months ended June 30, 2022:

    

% of Total Net Sales

2022

 

2021

 

Point-in-Time

 

98

%

97

%

Over Time – Input Method

 

2

%

3

%

Total

 

100

%

100

%

Remaining Performance Obligations

As of June 30, 2022, the Company had $691,134 of remaining performance obligations under a current waveguide development project, which represents the remainder of the total transaction price of an $800,000 development agreement, less revenue recognized under percentage of completion to date. The Company currently expects to recognize the remaining revenue relating to this existing performance obligation of $691,134 before the end of 2022. Revenues earned less amounts invoiced at June 30, 2022 in the amount of $108,866 are reflected as Accrued Revenues in Excess of Billings in the accompanying Consolidated Balance Sheets.

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 and six months ended June 30, 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 June 30, 2022 and 2021, there were 8,528,668 and 8,584,030 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.

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Note 4 – Inventories, Net

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

June 30, 

December 31, 

    

2022

    

2021

Purchased Parts and Components

$

10,414,139

$

11,580,766

Work-in-Process

 

285,481

 

226,126

Finished Goods

 

2,095,643

 

1,472,534

Less: Reserve for Obsolescence

 

(1,003,174)

 

(1,127,444)

Inventories, Net

$

11,792,089

$

12,151,982

Note 5 – Fixed Assets

Fixed Assets consisted of the following:

June 30, 

December 31, 

    

2022

    

2021

Tooling and Manufacturing Equipment

$

9,930,222

$

6,612,811

Leaseholds

 

826,329

 

797,059

Computers and Purchased Software

 

1,035,358

 

980,561

Furniture and Equipment

 

2,673,787

 

2,661,346

 

14,465,696

 

11,051,777

Less: Accumulated Depreciation

 

(6,414,432)

 

(5,861,339)

Fixed Assets, Net

$

8,051,264

$

5,190,438

On April 27, 2022, the Company signed a purchase order for new manufacturing equipment upgrades to further our waveguide production capabilities. The purchase order totaled $2,162,481 and the Company made a down payment of $1,050,748 at that time and this deposit has been included in construction in progress in Tooling and Manufacturing Equipment until the assets are placed into service. The Company expects to take delivery of this new waveguide equipment by the end of 2022.

On May 12, 2022, the Company signed a series of agreements with Atomistic SAS, which provided for an exclusive license by the Company of key mLED technology and for the custom design of a backplane chip (the “Atomistic Agreements”), for cash commitments totaling $30 million along with equity issuance commitments to be made by the Company relating exclusively to the achievement of performance milestones by Atomistic (See Note 10 – Capital Stock for further details). $15 million of these cash commitments are for the design of the backplane chip, which consists of a specific design and delivery of a mask set and other elements required for production of a silicon chip with (a) pixel driving circuitry, (b) one or more driver circuits for providing voltages and currents to mLEDs or mLasers; and (c) a controller circuit for relaying image data to the driver circuits to which the main circuit boards of a computer may be connected, and which provides connections between them; all of which is custom to the Company.

During the three months ended June 30, 2022, the Company made an additional progress payment of $1,890,000 towards this custom chip tooling asset, in addition to the $2,139,120 down payment that was made in 2021. These payments, totaling $4,029,120 are included in construction in progress in Tooling and Manufacturing Equipment until the asset is placed into service in the next 18 to 24 months. The remaining $10,970,880 commitment towards this custom backplane is expected to be paid over the same period as referenced above.

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Note 6 – Technology Licenses, Net

June 30, 

December 31, 

    

2022

    

2021

Licenses

$

2,443,356

$

1,038,606

Additions

 

15,000,000

 

1,404,750

Less: Accumulated Amortization

 

(1,354,321)

 

(1,053,420)

Licenses, Net

$

16,089,035

$

1,389,936

As noted above in Note 5, on May 12, 2022, the Company signed a series of agreements with Atomistic SAS (the “Atomistic Agreements”), which provided for an exclusive license of key mLED technology and for the custom design of a backplane chip for cash commitments totaling $30 million along with equity issuance commitments to be made by the Company relating exclusively to the achievement of performance milestones by Atomistic (See Note 10 – Capital Stock for further details). $15 million of these agreements are for the exclusive technology license for the existing know-how and existing developed technologies related to next generation mLEDs and micro-displays with pixelated epitaxial semiconductor material structures that emit red, green and blue wavelengths of visible light for light emitting diodes with a pixel pitch equal to or less than three microns.

As of the effective date of the Atomistic Agreements, the Company recorded an intangible technology license asset of $15,000,000 and an accrued liability (short-term and long-term), Licensing Fees Commitment, of $15,000,000. This intangible asset is to be amortized over a ten-year period, which began on May 12, 2022. During the three months ended June 30, 2022, the Company paid $4,500,000 towards this commitment and recorded a total of $187,500 in amortization relating to this intangible asset. The remaining $10,500,000 balance of this contractual obligation is to be paid over the next 18 to 24 months.

Note 7 - Other Assets

June 30,

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

(291,667)

(208,334)

Software Development Costs, Net

583,333

541,666

Unamortized Common Stock Expense included in Long-Term Prepaid Expenses

805,714

491,923

Total Other Assets

$

1,839,047

$

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 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 on its M400 and M4000 products. This development work, which has not yet been completed, will ultimately be amortized once placed into service which is expected to occur by early 2023.

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Note 8 – Accrued Expenses

Accrued expenses consisted of the following:

June 30, 

December 31, 

    

2022

    

2021

Accrued Wages and Related Costs

$

518,967

$

683,044

Accrued Professional Services

 

320,807

 

551,220

Accrued Warranty Obligations

 

178,229

 

185,044

Other Accrued Expenses

 

596,580

 

Total

$

1,614,583

$

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. Included in Other Accrued Expenses is $331,000 for external development work related to our Next Generation Smart Glasses which was completed through June 30, 2022 but not yet invoiced.

The changes in the Company’s accrued warranty obligations for the six months ended June 30, 2022 were as follows:

Accrued Warranty Obligations at December 31, 2021

$

185,044

Reductions for Settling Warranties

 

(168,873)

Warranties Issued During Year

 

162,058

Accrued Warranty Obligations at June 30, 2022

$

178,229

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 June 30, 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 June 30, 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 64,025,640 shares issued and 63,988,955 shares outstanding as of June 30, 2022 and 63,672,268 shares issued and outstanding as of December 31, 2021.

In connection with the Atomistic Agreements, the Company will, upon the achievement or waiver of performance milestones contained in the Atomistic Agreements, be committed to pay $2,500,000 and to issue a

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minimum of 1,750,000 common shares of Vuzix to Atomistic owners/founders (as a portion of the consideration for certain shares of Atomistic) which would result in Vuzix obtaining Series A Convertible Preferred shares in Atomistic that could ultimately be converted into common shares of Atomistic, with Atomistic becoming a subsidiary of the Company, and Vuzix ultimately owning 100% of Atomistic. The share issuances by the Company may not commence any earlier than April 2023 and are expected to be issued over the next 24 months unless waived and accelerated by the Company. In the event the fair market value, which is determined based upon the trailing 10-day VWAP, of the Company’s common shares issued is between a floor of $8 and ceiling of $13, Vuzix may opt to pay any fair market value valuation shortfall with up to 1,093,750 Vuzix common shares or cash to Atomistic owners/founders. Within five years of the commencement of the Atomistic Agreements, the Company has agreed to issue up to a 15% equity bonus of the previously issued common shares to Atomistic stockholders, if; (i) the Company engages in a change of control transaction for an implied equity value of at least $3.5 billion or (ii) the Company’s market valuation exceeds $3.5 billion, if it is determined that fifty percent (50%) of such implied equity value or market capitalization is directly attributable to any technology developed by Atomistic. This could result in the issuance of an additional 262,500 to 426,563 common shares of the Company’s common stock when that valuation target is exceeded. None of these share commitments have been issued to date.

Treasury Stock

On March 2, 2022, our Board of Directors approved the repurchase by the Company of up to an aggregate of $25 million of our common stock by open market or privately negotiated transactions under the Share Buyback Program.  This program 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 six months ended June 30, 2022, the Company repurchased 36,685 shares of our common stock at an average cost of $6.84. As of June 30, 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) – Note 12) for the six months ended June 30, 2022 is as follows:

Weighted

Number of

Average

    

Options

    

Exercise Price

Outstanding at December 31, 2021

 

2,823,634

$

7.67

Granted

 

117,500

 

5.83

Exercised

 

(85,452)

 

2.66

Expired or Forfeited

 

(111,014)

 

8.19

Outstanding at June 30, 2022

 

2,744,668

$

7.75

The weighted average remaining contractual term for all options as of June 30, 2022 and December 31, 2021 was 7.57 years and 7.95 years, respectively.

As of June 30, 2022, there were 1,303,168 options that were fully-vested and exercisable at a weighted average exercise price of $6.36 per share. The weighted average remaining contractual term of the vested options is 6.5 years.

As of June 30, 2022, there were 1,441,500 unvested options exercisable at a weighted average exercise price of $9.73 per share. The weighted average remaining contractual term of the unvested options is 8.5 years.

The weighted average fair value of option grants was calculated using the Black-Scholes-Merton option pricing method. At June 30, 2022, the Company had $7,815,902 of unrecognized stock compensation expense, which will be recognized over a weighted average period of 2.8 years.

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During the three months ended June 30, 2022, the Company issued 88,650 shares of common stock to its independent board members as part of their annual retainer for services covering the period of July 2022 to June 2023. The fair market value on the date of award of the stock issued was $5.64, resulting in an aggregate fair value of approximately $500,000. The fair market value of these awards is expensed over twelve (12) months, beginning on July 1, 2022.

During the three months ended June 30, 2022, the Company issued 200,000 shares of common stock to its recently appointed Chief Operating Officer. The fair market value on the date of award of the stock issued was $5.64, resulting in an aggregate fair value of approximately $1,128,000. The fair market value of this award is expensed over a forty-two (42) month vesting period, beginning on June 15, 2022.

For the three months ended June 30, 2022 and 2021, the Company recorded total stock-based compensation expense, including stock awards but excluding awards under the Company’s LTIP, of $1,222,733 and $1,012,094, respectively. For the six months ended June 30, 2022 and 2021, the Company recorded total stock-based compensation expense, including stock awards but excluding awards under the Company’s LTIP, of $2,573,343 and $1,468,838, 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 June 30, 2022 and 2021, the Company recorded non-cash stock-based compensation expense of $2,658,294 and $2,115,476, respectively, for options that vested or are probable to vest. For the six months ended June 30, 2022 and 2021, the Company recorded non-cash stock-based compensation expense of $5,627,432 and $7,192,775, 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 June 30, 2022, we had $22,713,026 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 June 30, 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 June 30, 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 proceedings 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 June 30, 2022 were as follows:

2022

$

277,067

2023

 

546,916

2024

 

45,576

Total Future Lease Payments

 

869,559

Less: Imputed Interest

 

(31,639)

Total Lease Liability Balance

$

837,920

Operating lease costs under the operating leases totaled $163,277 and $164,205 for the three months ended June 30, 2022 and 2021, respectively. Operating lease costs under the operating leases totaled $325,642 and $288,420 for the six months ended June 30, 2022 and 2021, respectively.

As of June 30, 2022, the weighted average discount rate was 4.5% and the weighted average remaining lease term was 1.6 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.

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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 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 June 30, 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

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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 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 June 30, 2022 and 2021

The following table compares the Company’s consolidated statements of operations data for the three months ended June 30, 2022 and 2021:

Three Months Ended June 30, 

 

    

    

    

Dollar

    

% Increase

 

2022

2021

Change

(Decrease)

 

(as Restated)

Sales:

 

  

 

  

 

  

 

  

Sales of Products

$

2,898,892

 

$

2,833,644

 

$

65,248

 

2

%

Sales of Engineering Services

 

108,866

 

82,894

 

25,972

 

31

%

 

  

 

  

 

  

 

  

Total Sales

 

3,007,758

 

2,916,538

 

91,220

 

3

%

 

  

 

  

 

  

 

  

Cost of Sales:

 

  

 

  

 

  

 

  

Cost of Sales - Products

 

2,522,674

 

2,323,324

 

199,350

 

9

%

Cost of Sales - Engineering Services

 

59,296

 

13,842

 

45,454

 

328

%

 

  

 

  

 

  

 

  

Total Cost of Sales

 

2,581,970

 

2,337,166

 

244,804

 

10

%

 

  

 

  

 

  

 

  

Gross Profit (exclusive of depreciation shown separately below)

 

425,788

 

579,372

 

(153,584)

 

(27)

%

Gross Profit %

 

14

%  

20

%  

  

 

  

 

  

 

  

 

  

 

  

Operating Expenses:

 

  

 

  

 

  

 

  

Research and Development

 

2,996,144

 

2,723,994

 

272,150

 

10

%

Selling and Marketing

 

1,850,595

 

1,349,189

 

501,406

 

37

%

General and Administrative

 

5,039,949

 

5,181,042

 

(141,093)

 

(3)

%

Depreciation and Amortization

 

540,081

 

501,678

 

38,403

 

8

%

Impairment of Patents and Trademarks

 

 

30,765

 

(30,765)

 

(100)

%

 

  

 

  

 

  

 

  

Loss from Operations

 

(10,000,981)

 

(9,207,296)

 

(793,685)

 

9

%

 

  

 

  

 

  

 

Other Income (Expense):

 

  

 

  

 

  

 

  

Investment Income

 

111,027

 

7,767

 

103,260

 

1,329

%

Income and Other Taxes

 

(31,326)

 

(12,783)

 

(18,543)

 

145

%

Foreign Exchange Loss

 

(100,388)

 

(33,160)

 

(67,228)

 

203

%

 

  

 

  

 

  

 

  

Total Other Expense, Net

 

(20,687)

 

(38,176)

 

17,489

 

(46)

%

 

  

 

  

 

  

 

  

Loss Before Provision for Income Taxes

 

(10,021,668)

 

(9,245,472)

 

(776,196)

 

8

%

Provision for Income Taxes

 

 

 

 

%

 

  

 

  

 

  

 

  

Net Loss

$

(10,021,668)

$

(9,245,472)

$

(776,196)

 

8

%

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Sales.   There was an increase in total sales for the three months ended June 30, 2022 compared to the same period in 2021 of $91,220 or 3%. The following table reflects the major components of our sales:

 

Three Months Ended

% of

Three Months Ended

% of

Dollar

% Increase

 

June 30, 2022

Total Sales

June 30, 2021

Total Sales

Change

(Decrease)

Sales of Smart Glasses

$

2,782,006

 

92

%  

2,798,549

 

96

%  

$

(16,543)

 

(1)

%

Sales of Waveguides & Display Engines

 

105,000

 

3

%  

 

 

0

%  

 

105,000

 

NM

Sales Freight Out

 

11,886

 

0

%  

 

35,095

 

1

%  

 

(23,209)

 

(66)

%

Sales of Engineering Services

 

108,866

 

4

%  

 

82,894

 

3

%  

 

25,972

 

31

%

Total Sales

$

3,007,758

 

100

%  

$

2,916,538

 

100

%  

$

91,220

 

3

%

Sales of Smart Glasses products decreased by 1% for the three months ended June 30, 2022 compared to the three months ended June 30, 2021. While unit sales of smart glasses were up in the current quarter as compared to the 2021 quarter, foreign exchange reductions and higher customer volume discounts, reduced the top line revenue amount.

Sales of engineering services for the three months ended June 30, 2022 were $108,866 as compared to $82,894 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

June 30, 2022

Product Sales

June 30, 2021

Product Sales

Change

(Decrease)

Product Cost of Sales

    

$

1,807,485

    

62

%  

$

1,344,381

    

47

%  

$

463,104

    

34

%

Freight Costs

 

165,681

 

6

%  

172,608

 

6

%  

(6,927)

 

(4)

%

Manufacturing Overhead - Unapplied

 

337,751

 

12

%  

707,489

 

25

%  

(369,738)

 

(52)

%

Warranty Costs

 

22,037

 

1

%  

2,974

 

0

%  

19,063

 

641

%

Inventory Reserve for Obsolescence

 

120,000

 

4

%  

 

%  

120,000

 

NM

Amortization of Software Development Costs

 

65,002

 

2

%  

59,231

 

2

%  

5,771

 

10

%

Software Royalties

 

4,718

 

0

%  

36,641

 

1

%  

(31,923)

 

(87)

%

 

  

 

  

 

  

 

  

 

  

 

  

Total Cost of Sales - Products

$

2,522,674

 

87

%  

$

2,323,324

 

82

%  

$

199,350

 

9

%

 

  

 

  

 

  

 

  

 

  

 

  

Gross Profit - Product Sales

$

376,218

 

13

%  

$

510,320

 

18

%  

$

(134,102)

 

(26)

%

For the three months ended June 30, 2022, we reported an overall gross profit from product sales of $376,218 or 13% as compared to $510,320 or 18% in the same period in 2021. On a product cost of sales basis only, product direct costs were 62% of sales in the 2022 period as compared to 47% in 2021, primarily driven by: (i) a higher level of sales discounts on high volume units sales, (ii) the negative impact of foreign exchange in the 2022 period on non-US dollar denominated sales, and (iii) higher allocations of applied manufacturing overhead costs included in Product Cost of Sales.

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Manufacturing overhead costs, not already added in Product Cost of Sales, decreased by $369,738 or 52% for the three months ended June 30, 2022 over the 2021 comparable period to 12% as a percentage of total product sales as compared to 25% 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 directly to Product Cost of Sales and inventory.

Costs for engineering services for the three months ended June 30, 2022 were $59,296 as compared to $13,842 in 2021. Gross profit from engineering services for the three months ended June 30, 2022 was $49,570 versus $69,052 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

June 30, 2022

Total Sales

June 30, 2021

Total Sales

Change

(Decrease)

Research and Development

$

2,996,144

 

100

%  

$

2,723,994

 

93

%  

$

272,150

 

10

%

Research and development expenses for the three months ended June 30, 2022 increased by $272,150 or 10%, as compared to the same period in 2021. This increase was largely due to an increase of $172,383 in external development expenses related to our Next Generation Smart Glasses (Shield); a $170,013 increase in salary and benefits expenses; and partially offset by a decrease of $68,318 in supplies and consumables.

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

    

June 30, 2022

    

Total Sales

June 30, 2021

    

Total Sales

Change

    

(Decrease)

Selling and Marketing

$

1,850,595

62

%  

$

1,349,189

46

%  

$

501,406

37

%

Selling and marketing expenses for the three months ended June 30, 2022 increased by $501,406 or 37%, as compared to the same period in 2021. This increase was largely due to a $343,762 increase in salary and salary benefits related expense; an increase of $99,781 in travel related expenses; an increase of $73,422 in sales commissions largely due an increase in commissions payable to TDG Acquisition Company, LLC for defense related sales under our former agreement which expired on June 15, 2022; an increase of $42,927 in trade show expenses; and partially offset by a decrease of $69,657 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, office and rental costs.

(as Restated)

Three Months Ended

% of

Three Months Ended

% of

Dollar

% Increase

June 30, 2022

Total Sales

June 30, 2021

Total Sales

Change

(Decrease)

General and Administrative

$

5,039,949

 

168

%  

$

5,181,042

 

178

%  

$

(141,093)

 

(3)

%

General and administrative expenses for the three months ended June 30, 2022 decreased by $141,093 or 3%, as compared to the same period in 2021. This decrease was largely due to a decrease of $221,443 in shareholder and IR related expenses; a $102,353 decrease in recruitment and hiring expenses; and partially offset by increases of $79,838 in consulting fees, $61,541 in insurance premiums and $19,781 in travel related expenses.

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Depreciation and Amortization.  Depreciation and amortization expense for the three months ended June 30, 2022 was $540,081, as compared to $501,678 in the same period in 2021, an increase of $38,403. The increase in depreciation expense is primarily due to the amortization of our technology license related to the Atomistic Agreements which began on May 12, 2022; and is mostly offset by a decrease in depreciation expense related to certain fixed assets associated with machinery and tooling that became fully depreciated in 2021.

Other Expense, Net. Total other expense was $20,687 for the three months ended June 30, 2022, as compared to $38,176 in the same period in 2021, a decrease of $17,489. The overall decrease in other expenses was primarily the result of an increase of $18,543 in income and other taxes; and an increase of $67,228 in foreign exchange losses, offset by an increase of $103,260 in investment income resulting from the recent rise in interest rates.

Provision for Income Taxes. There was not a provision for income taxes in the respective three month periods ending June 30, 2022 and 2021.

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Comparison of Six Months Ended June 30, 2022 and 2021

The following table compares the Company’s consolidated statements of operations data for the six months ended June 30, 2022 and 2021:

Six Months Ended June 30, 

    

    

    

Dollar

    

% Increase

 

2022

2021

Change

(Decrease)

 

(as Restated)

Sales:

 

  

 

  

 

  

 

  

Sales of Products

$

5,401,944

$

6,638,814

$

(1,236,870)

 

(19)

%

Sales of Engineering Services

 

108,866

 

193,113

 

(84,247)

 

(44)

%

Total Sales

 

5,510,810

 

6,831,927

 

(1,321,117)

 

(19)

%

Cost of Sales:

 

  

 

  

 

  

 

  

Cost of Sales - Products Sold

 

4,386,371

 

5,143,295

 

(756,924)

 

(15)

%

Cost of Sales - Engineering Services

 

59,296

 

29,669

 

29,627

 

100

%

Total Cost of Sales

 

4,445,667

 

5,172,964

 

(727,297)

 

(14)

%

Gross Profit (exclusive of depreciation shown separately below)

 

1,065,143

 

1,658,963

 

(593,820)

 

(36)

%

Gross Profit %

 

19

%  

 

24

%  

 

  

 

  

Operating Expenses:

 

  

 

  

 

  

 

  

Research and Development

 

6,099,588

 

4,929,312

 

1,170,276

 

24

%

Selling and Marketing

 

3,914,584

 

2,652,619

 

1,261,965

 

48

%

General and Administrative

 

10,453,228

 

11,208,799

 

(755,571)

 

(7)

%

Depreciation and Amortization

 

963,012

 

1,019,090

 

(56,078)

 

(6)

%

Impairment of Patents and Trademarks

 

49,602

 

58,496

 

(8,894)

 

(15)

%

Loss on Fixed Asset Disposal

 

 

83,908

 

(83,908)

 

(100)

%

Loss from Operations

 

(20,414,871)

 

(18,293,261)

 

(2,121,610)

 

12

%

Other Income (Expense):

 

  

 

  

 

  

 

  

Investment Income

 

117,307

 

15,605

 

101,702

 

652

%

Income and Other Taxes

 

(78,959)

 

(32,508)

 

(46,451)

 

143

%

Foreign Exchange Loss

 

(151,145)

 

(86,678)

 

(64,467)

 

74

%

Total Other Expense, Net

 

(112,797)

 

(103,581)

 

(9,216)

 

9

%

Net Loss

$

(20,527,668)

$

(18,396,842)

$

(2,130,826)

 

12

%

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Sales.   There was a decrease in total sales for the six months ended June 30, 2022 compared to the same period in 2021 of $1,321,117 or 19%. The following table reflects the major components of our sales:

Six Months Ended

% of

Six Months Ended

% of

Dollar

% Increase

June 30, 2022

Total Sales

June 30, 2021

Total Sales

Change

(Decrease)

Sales of Smart Glasses

$

5,161,405

 

94

%  

$

6,571,030

 

96

%  

$

(1,409,625)

 

(21)

%

Sales of Waveguides & Display Engines

 

213,250

 

4

%  

 

 

%  

 

213,250

 

N/M

Sales Freight Out

 

27,289

 

0

%  

 

67,784

 

1

%  

 

(40,495)

 

(60)

%

Sales of Engineering Services

 

108,866

 

2

%  

 

193,113

 

3

%  

 

(84,247)

 

(44)

%

Total Sales

$

5,510,810

 

100

%  

$

6,831,927

 

100

%  

$

(1,321,117)

 

(19)

%

Sales of Smart Glasses products decreased by 21% or $1,409,625 in the six months ended June 30, 2022, as compared to the six months ended June 30, 2021.

Sales of engineering services for the six months ended June 30, 2022 were $108,866, as compared to $193,113 in the same period of 2021.

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:

Six Months Ended

As % Related

Six Months Ended

As % Related

Dollar

% Increase

June 30, 2022

Product Sales

June 30, 2021

Product Sales

Change

(Decrease)

Product Cost of Sales

$

3,023,220

 

56

%  

$

3,342,895

 

50

%  

$

(319,675)

 

(10)

%

Freight Costs

 

373,962

 

7

%  

 

362,953

 

5

%  

 

11,009

 

3

%

Manufacturing Overhead - Unapplied

 

734,604

 

14

%  

 

1,254,162

 

19

%  

 

(519,558)

 

(41)

%

Warranty Costs

 

(6,815)

 

(0)

%  

 

(29,874)

 

(0)

%  

 

23,059

 

(77)

%

Inventory Reserve for Obsolescence

 

120,000

 

2

%  

 

-

 

%  

 

120,000

 

NM

Amortization of Software Development Costs

 

130,883

 

2

%  

 

124,230

 

2

%  

 

6,653

 

5

%

Software Royalties

 

10,517

 

0

%  

 

88,929

 

1

%  

 

(78,412)

 

(88)

%

Total Cost of Sales - Products

4,386,371

 

81

%  

5,143,295

 

77

%  

(756,924)

 

(15)

%

Gross Profit - Product Sales

$

1,015,573

19

%

$

1,495,519

 

23

%

$

(479,946)

 

(32)

%

For the six months ended June 30, 2022, we reported an overall gross profit from product sales of $1,015,573 or 19% as compared to $1,495,519 or 23% in the same period in 2021. On a product cost of sales basis only, product direct costs were 56% of sales in the 2022 period as compared to 50% in 2021, primarily driven by: (i) a higher level of sales discounts on high-volume unit sales, (ii) the negative impact of foreign exchange in the 2022 period on non-US dollar denominated sales, and (iii) higher allocations of applied manufacturing overheads costs included in Product Cost of Sales.

Manufacturing overhead costs, not already applied and added into Product Cost of Sales, decreased by $519,558 or 41% for the six months ended June 30, 2022 over the 2021 comparable period to 14% as a percentage of total product sales as compared to 19% 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 directly to Product Cost of Sales and to inventory.

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Costs for engineering services for the six months ended June 30, 2022 were $59,296, as compared to $29,669 in 2021. Gross profit from engineering services for the six months ended June 30, 2022 was $49,570 versus $163,444 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)

Six Months Ended

% of

Six Months Ended

% of

Dollar

% Increase

June 30, 2022

Total Sales

June 30, 2021

Total Sales

Change

(Decrease)

Research and Development

$

6,099,588

 

111

%  

$

4,929,312

 

72

%  

$

1,170,276

 

24

%

Research and development expenses for the six months ended June 30, 2022 increased by $1,170,276 or 24%, as compared to the same period in 2021. This increase was largely due to an increase of $607,980 in external development expenses related to our Next Generation Smart Glasses (Shield); a $505,548 increase in salary and benefits expenses; an increase of $78,920 in technology licensing fees; and an increase of $78,800 in recruitment and hiring fees; and partially offset by a decrease of $100,556 in supplies and consumables expense.

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)

Six Months Ended

% of

Six Months Ended

% of

Dollar

% Increase

June 30, 2022

Total Sales

June 30, 2021

Total Sales

Change

(Decrease)

Selling and Marketing

$

3,914,584

 

71

%  

$

2,652,619

 

39

%  

$

1,261,965

 

48

%

Selling and marketing expenses for the six months ended June 30, 2022 increased by $1,261,965 or 48%, as compared to the same period in 2021. This increase was largely due to a $819,327 increase in salary and salary benefits related expense; a $304,988 increase in advertising costs; an increase of $147,031 in travel related expenses; an increase of $101,657 in trade show expenses; and an increase of $56,627 in commissions expenses largely due to an increase in commissions payable to TDG for defense related sales; and partially offset by a decrease of $191,195 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, office and rental costs.

(as Restated)

Six Months Ended

% of

Six Months Ended

% of

Dollar

% Increase

June 30, 2022

Total Sales

June 30, 2021

Total Sales

Change

(Decrease)

General and Administrative

$

10,453,228

 

190

%  

$

11,208,799

 

164

%  

$

(755,571)

 

(7)

%

General and administrative expenses for the six months ended June 30, 2022 decreased by $755,571 or 7%, as compared to the same period in 2021. This decrease was largely due to a $601,973 decrease in salary and benefits expenses, related primarily to non-cash stock-based compensation which was significantly higher in the first quarter of 2021 due to the vesting of an achieved equity market capitalization milestone under the LTIP; a decrease of $322,831 in shareholder and IR related expenses, a $172,054 decrease in recruitment and hiring expenses; and a $36,221 decrease in legal expenses; and partially offset by increases of $179,838 in insurance premiums, $158,079 in audit and tax advisory fees and $39,781 in travel related expenses.

Depreciation and Amortization.  Depreciation and amortization expense for the six months ended June 30, 2022 was $963,012 as compared to $1,019,090 in the same period in 2021, a decrease of $56,078. The decrease in

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depreciation expense was primarily related to certain fixed assets associated with machinery and tooling that became fully depreciated in 2021.

Other Expense. Total other expense was $112,797 for the six months ended June 30, 2022 as compared to $103,581 in the same period in 2021, an increase of $9,216. The overall increase in other expenses was primarily the result of an increase of $46,451 in income and other taxes; and an increase of $64,467 in foreign exchange losses, offset by an increase of $101,702 in investment income due to the recent rise in interest rates.

Provision for Income Taxes. There was not a provision for income taxes in the respective six month periods ending June 30, 2022 and 2021.

Liquidity and Capital Resources

Capital Resources: As of June 30, 2022, we had cash and cash equivalents of $100,581,795, a decrease of $19,622,078 from $120,203,873 as of December 31, 2021.

As of June 30, 2022, we had current assets of $116,941,231 as compared to current liabilities of $7,791,023 which resulted in a positive working capital position of $109,150,208. 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, licensing fee commitments, and operating lease right-of-use liabilities.

Summary of Cash Flow:

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

June 30, 

(as Restated)

June 30, 

    

2022

    

2021

Net Cash Provided by (used in)

 

  

 

  

Net Loss less Non-Cash Operating Expenses

$

(11,183,397)

$

(8,453,538)

Operating Activities

(11,016,909)

(13,108,703)

Investing Activities

 

(8,402,617)

 

(1,238,772)

Financing Activities

 

(202,552)

 

115,882,312

During the six months ended June 30, 2022, we used $11,016,909 of cash for operating activities as compared to $13,108,703 for the comparable period in 2021. For the six months ended June 30, 2022, we incurred a net loss of $20,527,668, which, after adding back non-cash operating expenses of $9,344,271, resulted in a net cash loss of $11,183,397 before changes in working capital. For the six months ended June 30, 2021, we incurred a net loss of $18,396,842, which, after adding back non-cash operating expenses of $9,943,304, resulted in a net cash loss of $8,453,538 before changes in working capital. Net changes in working capital items were $166,489 for the six months ended June 30, 2022, with the largest factor resulting from a $537,537 increase in trade accounts payables and other accrued expenses, a decrease of $294,676 in investments of inventory and vendor prepayments; and partially offset by decreases in accounts receivable and revenues in excess of billings of $569,657 and other prepaid expenses of $492,599.

During the six months ended June 30, 2022, we used $8,402,617 of cash for investing activities, which included $4,500,000 in payments made towards our $15,000,000 technology license fee commitment (as discussed in Note 6), $3,504,931 for purchases of manufacturing equipment, product mold tooling, and backplane chip design and tooling fees; $272,686 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 six months ended June 30, 2021, we used a total of $1,238,772 in cash for investing activities.

During the six months ended June 30, 2022, we used $202,552 in net cash from financing activities, which included $251,057 for share repurchases under our Share Buyback Program that was announced on March 2, 2022; and

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partially offset by $48,505 in proceeds from the exercise of stock options. For the six months ended June 30, 2021, we received $115,882,312 in proceeds from financing activities, primarily from sales of our equity securities.

As of June 30, 2022, the Company does not have any current or long-term debt obligations outstanding other than Licensing Fee Commitments totaling $10,500,000 related to the Atomistic Agreements described in Note 6 of the consolidated financial statements. The Company also has contractual investment commitments for a backplane chip design under the Atomistic Agreements, as further described in Note 5 of the consolidated financial statements, which total approximately $11,000,000 and are expected to be funded to Atomistic over the next 18 to 24 months

Additionally in connection with the Atomistic Agreements, the Company entered a Stock Purchase Agreement with the two founder/owners (“Founders”) of Atomistic under which Vuzix will buy Series B Convertible Preferred shares in Atomistic through the issuance of Vuzix common shares based on the achievement of certain Milestone as defined in the Share Purchase Agreement. There are a total of six Milestone Series B Preferred purchases payable in Vuzix common shares expected to be achieved over the next twenty-four (24) months and one Milestone Series B Preferred purchase payable in cash of $2,500,000 along with the issuance of Vuzix common shares, to take place on the eleventh month anniversary of the Closing of this transaction. These share issuances by Vuzix are subject to a valuation floor and ceiling of $8 and $13 per share of Vuzix’ common stock, which is determined based upon the trailing 10-day VWAP, at the time when the Atomistic Series B preferred shares are purchased. This will result, depending on Vuzix’ share price at the time of their issuance, in the Company’s issuance of a minimum of 1,750,000 to a maximum of 2,843,750 common shares to Atomistic owners/founders in exchange for convertible Series A Preferred shares of Atomistic. In the event the fair market value of the Vuzix common shares issued is between the valuation floor and ceiling of $8 to $13, Vuzix may opt to pay any fair market value shortfall in Vuzix common shares or cash. Once Atomistic has achieved all its milestones or has them waived by Vuzix, and Vuzix issues the required numbers of Vuzix common shares, in exchange for Series A Covertible Preferred shares in Atomistic that could ultimately be converted into common shares of Atomistic, the Company would ultimately end up owning 100% of Atomistic.

The Company’s cash requirements are primarily for funding operating losses, working capital, research and development, capital expenditures, and license fee commitments. We incurred a net loss for the six months ended June 30, 2022 of $20,527,668 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 $223,599,811 as of June 30, 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 discretion. During the six months ended June 30, 2022, the Company repurchased 36,685 shares of our common stock at an average cost of $6.84. As of June 30, 2022, 36,685 shares of our common stock were held in treasury.

Our operations are financed primarily through net proceeds from the sale of our equity securities. As of June 30, 2022, our principal sources of liquidity consisted of cash and cash equivalents of $100,581,795.

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;

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Table of Contents

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
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.

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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 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 June 30, 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.

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Table of Contents

Part II. OTHER INFORMATION

Item 1.Legal Proceedings

We are not currently involved in any actual or pending legal proceedings 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. Except as set forth below, there have been no material changes from those risk factors. The risks discussed in our 2021 Annual Report and described below 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.

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.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: August 9, 2022

By:

/s/ Paul Travers

 

 

Paul Travers

 

 

President, Chief Executive Officer

 

 

(Principal Executive Officer)

 

 

 

Date: August 9, 2022

By:

/s/ Grant Russell

 

 

Grant Russell

 

 

Executive Vice President and Chief Financial

 

 

Officer

 

 

(Principal Financial and Accounting Officer)

31