Item 1:
|
Consolidated Financial Statements
|
VUZIX CORPORATION
CONSOLIDATED
BALANCE SHEETS
|
|
(Unaudited)
March 31,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
$
|
6,142,658
|
|
|
$
|
10,606,091
|
|
Accounts Receivable, Net
|
|
|
376,570
|
|
|
|
1,371,913
|
|
Accrued Project Revenue
|
|
|
160,206
|
|
|
|
-
|
|
Note Receivable
|
|
|
250,000
|
|
|
|
250,000
|
|
Inventories, Net
|
|
|
5,668,376
|
|
|
|
5,707,867
|
|
Licenses, Net
|
|
|
527,249
|
|
|
|
-
|
|
Manufacturing Vendor Prepayments
|
|
|
474,518
|
|
|
|
242,539
|
|
Prepaid Expenses and Other Assets
|
|
|
707,286
|
|
|
|
895,098
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
14,306,863
|
|
|
|
19,073,508
|
|
|
|
|
|
|
|
|
|
|
Long-Term Assets
|
|
|
|
|
|
|
|
|
Fixed Assets, Net
|
|
|
3,880,275
|
|
|
|
4,327,676
|
|
Operating Lease Right-of-Use Asset
|
|
|
1,964,984
|
|
|
|
2,096,190
|
|
Patents and Trademarks, Net
|
|
|
1,261,841
|
|
|
|
1,294,675
|
|
Licenses, Net
|
|
|
284,234
|
|
|
|
314,416
|
|
Intangible Asset, Net
|
|
|
888,000
|
|
|
|
990,000
|
|
Other Assets, Net
|
|
|
441,430
|
|
|
|
350,000
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
23,027,627
|
|
|
$
|
28,446,465
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts Payable
|
|
$
|
1,297,924
|
|
|
$
|
1,062,785
|
|
Unearned Revenue
|
|
|
99,714
|
|
|
|
142,463
|
|
Accrued Expenses
|
|
|
555,021
|
|
|
|
885,897
|
|
Taxes Payable
|
|
|
21,200
|
|
|
|
18,687
|
|
Operating Lease Right-of-Use Liability
|
|
|
524,825
|
|
|
|
524,825
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
2,498,684
|
|
|
|
2,634,657
|
|
|
|
|
|
|
|
|
|
|
Long-Term Liabilities
|
|
|
|
|
|
|
|
|
Operating Lease Right-of-Use Liability
|
|
|
1,440,159
|
|
|
|
1,571,365
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
3,938,843
|
|
|
|
4,206,022
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity
|
|
|
|
|
|
|
|
|
Preferred Stock - $.001 Par Value, 5,000,000 Shares Authorized; 49,626 and 49,626 Shares Issued and Outstanding as of March 31, 2020 and December 31, 2019.
|
|
|
50
|
|
|
|
50
|
|
Common Stock - $.001 Par Value, 100,000,000 Shared Authorized; 33,128,620 Shares Issued and Outstanding as of March 31, 2020 and December 31, 2019.
|
|
|
33,128
|
|
|
|
33,128
|
|
Additional Paid-in Capital
|
|
|
169,160,041
|
|
|
|
168,950,076
|
|
Accumulated Deficit
|
|
|
(150,104,435
|
)
|
|
|
(144,742,811
|
)
|
|
|
|
|
|
|
|
|
|
Total Stockholders' Equity
|
|
|
19,088,784
|
|
|
|
24,240,443
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Equity
|
|
$
|
23,027,627
|
|
|
$
|
28,446,465
|
|
The accompanying notes are an integral part of these consolidated financial statements.
VUZIX CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
|
|
Preferred
Stock
|
|
|
Common
Stock
|
|
|
Additional
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Paid-In
Capital
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - January 1, 2020
|
|
|
49,626
|
|
|
$
|
50
|
|
|
|
33,128,620
|
|
|
$
|
33,128
|
|
|
$
|
168,950,076
|
|
|
$
|
(144,742,811
|
)
|
|
$
|
24,240,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-Based Compensation Expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
209,965
|
|
|
|
-
|
|
|
|
209,965
|
|
Q1 2020 Net Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,361,624
|
)
|
|
|
(5,361,624
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - March 31, 2020
|
|
|
49,626
|
|
|
$
|
50
|
|
|
|
33,128,620
|
|
|
$
|
33,128
|
|
|
$
|
169,160,041
|
|
|
$
|
(150,104,435
|
)
|
|
$
|
19,088,784
|
|
|
|
Preferred
Stock
|
|
|
Common
Stock
|
|
|
Additional
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Paid-In
Capital
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - January 1, 2019
|
|
|
49,626
|
|
|
$
|
50
|
|
|
|
27,591,670
|
|
|
$
|
27,591
|
|
|
$
|
148,695,775
|
|
|
$
|
(118,266,441
|
)
|
|
$
|
30,456,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-Based Compensation Expense
|
|
|
-
|
|
|
|
-
|
|
|
|
6,247
|
|
|
|
7
|
|
|
|
413,679
|
|
|
|
-
|
|
|
|
413,686
|
|
Q1 2019 Net Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,359,761
|
)
|
|
|
(6,359,761
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - March 31, 2019
|
|
|
49,626
|
|
|
$
|
50
|
|
|
|
27,597,917
|
|
|
$
|
27,598
|
|
|
$
|
149,109,454
|
|
|
$
|
(124,626,202
|
)
|
|
$
|
24,510,900
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
VUZIX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
The Three Months Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Sales:
|
|
|
|
|
|
|
|
|
Sales of Products
|
|
$
|
1,371,509
|
|
|
$
|
1,373,371
|
|
Sales of Engineering Services
|
|
|
160,206
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total Sales
|
|
|
1,531,715
|
|
|
|
1,373,371
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales:
|
|
|
|
|
|
|
|
|
Cost of Sales - Products Sold
|
|
|
1,426,038
|
|
|
|
1,333,481
|
|
Cost of Sales - Engineering Services
|
|
|
25,161
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total Cost of Sales
|
|
|
1,451,199
|
|
|
|
1,333,481
|
|
|
|
|
|
|
|
|
|
|
Gross Profit (exclusive of depreciation shown separately below)
|
|
|
80,516
|
|
|
|
39,890
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
Research and Development
|
|
|
2,023,058
|
|
|
|
2,516,100
|
|
Selling and Marketing
|
|
|
1,152,808
|
|
|
|
1,417,966
|
|
General and Administrative
|
|
|
1,537,820
|
|
|
|
1,896,402
|
|
Depreciation and Amortization
|
|
|
648,541
|
|
|
|
559,089
|
|
Impairment of Patents and Trademarks
|
|
|
57,532
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
5,419,759
|
|
|
|
6,389,557
|
|
Loss from Operations
|
|
|
(5,339,243
|
)
|
|
|
(6,349,667
|
)
|
|
|
|
|
|
|
|
|
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
Investment Income
|
|
|
22,157
|
|
|
|
58,313
|
|
Other Taxes
|
|
|
(17,686
|
)
|
|
|
(52,662
|
)
|
Foreign Exchange Loss
|
|
|
(26,852
|
)
|
|
|
(15,745
|
)
|
|
|
|
|
|
|
|
|
|
Total Other Income (Expense)
|
|
|
(22,381
|
)
|
|
|
(10,094
|
)
|
|
|
|
|
|
|
|
|
|
Loss Before Provision for Income Taxes
|
|
|
(5,361,624
|
)
|
|
|
(6,359,761
|
)
|
Provision for Income Taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
(5,361,624
|
)
|
|
|
(6,359,761
|
)
|
Preferred Stock Dividends
|
|
|
(499,838
|
)
|
|
|
(465,765
|
)
|
Loss Attributable to Common Stockholders
|
|
$
|
(5,861,462
|
)
|
|
$
|
(6,825,526
|
)
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Loss per Share
|
|
$
|
(0.18
|
)
|
|
$
|
(0.25
|
)
|
Weighted-average Shares Outstanding - Basic and Diluted
|
|
|
33,128,620
|
|
|
|
27,595,767
|
|
The accompanying notes are an integral part of these consolidated financial statements.
VUZIX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Three Months Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(5,361,624
|
)
|
|
$
|
(6,359,761
|
)
|
Non-Cash Adjustments
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
|
648,541
|
|
|
|
559,089
|
|
Amortization of Software Development Costs in Cost of Sales - Products
|
|
|
25,000
|
|
|
|
25,000
|
|
Stock-Based Compensation
|
|
|
282,201
|
|
|
|
489,754
|
|
Impairment of Patents and Trademarks
|
|
|
57,532
|
|
|
|
-
|
|
(Increase) Decrease in Operating Assets
|
|
|
|
|
|
|
|
|
Accounts Receivable
|
|
|
450,454
|
|
|
|
572,577
|
|
Accrued Project Revenue
|
|
|
(160,206
|
)
|
|
|
-
|
|
Inventories
|
|
|
39,491
|
|
|
|
(828,424
|
)
|
Vendor Prepayments
|
|
|
(231,979
|
)
|
|
|
368,658
|
|
Prepaid Expenses and Other Assets
|
|
|
187,812
|
|
|
|
437,947
|
|
Increase (Decrease) in Operating Liabilities
|
|
|
|
|
|
|
|
|
Accounts Payable
|
|
|
235,139
|
|
|
|
(952,497
|
)
|
Accrued Expenses
|
|
|
(330,876
|
)
|
|
|
(171,068
|
)
|
Customer Deposits
|
|
|
-
|
|
|
|
(77,747
|
)
|
Unearned Revenue
|
|
|
(42,749
|
)
|
|
|
18,618
|
|
Income and Other Taxes Payable
|
|
|
2,513
|
|
|
|
43,497
|
|
|
|
|
|
|
|
|
|
|
Net Cash Flows Used in Operating Activities
|
|
|
(4,198,751
|
)
|
|
|
(5,874,357
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
Purchase of Fixed Assets
|
|
|
(221,074
|
)
|
|
|
(724,565
|
)
|
Investments in Patents and Trademarks
|
|
|
-
|
|
|
|
(41,475
|
)
|
Investments in Licenses and Other Intangible Assets
|
|
|
(43,608
|
)
|
|
|
(537,409
|
)
|
|
|
|
|
|
|
|
|
|
Net Cash Used in Investing Activities
|
|
|
(264,682
|
)
|
|
|
(1,303,449
|
)
|
|
|
|
|
|
|
|
|
|
Net Cash Flows from Financing Activities
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash and Cash Equivalents
|
|
|
(4,463,433
|
)
|
|
|
(7,177,806
|
)
|
Cash and Cash Equivalents - Beginning of Period
|
|
|
10,606,091
|
|
|
|
17,263,643
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents - End of Period
|
|
$
|
6,142,658
|
|
|
$
|
10,085,837
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures
|
|
|
|
|
|
|
|
|
Investments in Other Intangible Assets included in Accrued Expenses
|
|
$
|
-
|
|
|
$
|
250,000
|
|
Unamortized Common Stock Expense included in Prepaid Expenses
|
|
$
|
295,725
|
|
|
$
|
463,154
|
|
Non-Cash Investment in Licenses and Other Intangible Assets
|
|
$
|
544,889
|
|
|
$
|
-
|
|
Stock-Based Compensation Expense - Expensed less Previously Issued
|
|
$
|
72,236
|
|
|
$
|
76,068
|
|
The accompanying notes are an integral part of these consolidated financial statements.
VUZIX CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
Note 1 – Basis of
Presentation
The accompanying unaudited consolidated
financial statements of Vuzix Corporation (“the Company”) have been prepared in accordance with generally accepted
accounting principles in the United States of America (“GAAP”) for interim financial information and with the instructions
to Form 10-Q and Regulation S-X of the Securities and Exchange Commission (the “SEC”). Accordingly, the unaudited consolidated
financial statements do not include all information and footnotes required by GAAP for complete financial statements. In the opinion
of management, all adjustments considered necessary for a fair presentation have been included. Certain re-classifications have
been made to prior periods to conform with current reporting. The results of the Company’s operations for the three months
ended March 31, 2020 are not necessarily indicative of the results of the Company’s operations for the full fiscal year or
any other period.
The accompanying interim consolidated financial
statements should be read in conjunction with the audited consolidated financial statements and the notes thereto of the Company
as of December 31, 2019, as reported in the Company’s Annual Report on Form 10-K filed with the SEC on March 16, 2020.
Going Concern
The accompanying unaudited consolidated
financial statements have been prepared assuming that we will continue as a going concern. This basis of accounting contemplates
the recovery of our assets and the satisfaction of liabilities in the normal course of business. These unaudited consolidated
financial statements do not include any adjustments to the specific amounts and classifications of assets and liabilities, which
might be necessary should we be unable to continue as a going concern. The Company incurred net losses for the three months ended
March 31, 2020 of $5,361,624 and annual net losses of $26,476,370 in 2019 and $21,875,713 in 2018. As of March 31, 2020, the Company
had an accumulated deficit of $150,104,435.
The Company’s cash requirements are
primarily for funding operating losses, research and development, working capital, and capital expenditures. Our cash requirements
related to funding operating losses depend upon numerous factors, including new product development activities, our ability to
commercialize our products, our products’ timely market acceptance, selling prices and gross margins, and other factors.
Historically, the Company has met its cash needs primarily by the sale of equity securities.
The Company’s management intends to
take actions necessary to continue as a going concern, as discussed herein. The Company will need to grow its business significantly
to become profitable and self-sustaining on a cash flow basis or it will be required to raise new equity and/or debt capital. Management’s
plans concerning these matters and managing our liquidity include, among other things:
|
·
|
the continued sale of our existing M300XL finished goods and Blade component inventory, of which we have significant levels;
|
|
|
|
|
·
|
the expected success of our third-generation monocular device for enterprise, the M400 Smart Glasses, which entered production near the end of the third quarter of 2019, and to date customer interest and adoption of the M400 has been more rapid than earlier models;
|
|
|
|
|
·
|
the commencement of volume manufacturing and sale of the new Vuzix Smart Swim product in the second quarter of 2020;
|
|
|
|
|
·
|
the timely sale and disposal of as many products and components as possible included in our inventory write-down losses as of December 31, 2019, primarily related to the first M300 Smart Glasses models, including the M300-C Smart Glasses in China, and excess components related to the cessation of such production;
|
|
|
|
|
·
|
increased our efforts to further promote our engineering services programs, which result in overall higher gross margins since such programs enable the absorption of some of our operating costs by utilizing a significant portion of our internal engineering fixed salary costs;
|
|
|
|
|
·
|
continued to pursue licensing and strategic opportunities around our waveguide technologies with potential OEMs, which would include the receipt of upfront licensing fees and on-going supply agreements;
|
|
·
|
greater control of operating costs and reductions in spending growth rates wherever possible;
|
|
|
|
|
·
|
implementation of a Company-wide payroll reduction program for individuals earning more than $60,000 annually with required base salary reductions of 10% to 25% depending upon the respective base salary level in the period from May to December 31, 2020. The expected cash savings will be $1,200,000 and will result in the issuance of stock awards, at a rate of 150% of the net cash wage reductions;
|
|
|
|
|
·
|
decreased tradeshow and external PR expenditures;
|
|
|
|
|
·
|
right-sized operations across all areas of the Company, including head-count freezes or reductions;
|
|
|
|
|
·
|
delayed or curtailed discretionary and non-essential capital expenditures not related to near-term new products;
|
|
|
|
|
·
|
reduced the rate of new product introductions and leveraged existing platforms to reduce new product development and engineering costs;
|
|
|
|
|
·
|
the introduction of the M4000 in the second half of 2020 will be the Company’s next generation see-through waveguide-based product specifically designed for the enterprise market; and
|
|
|
|
|
·
|
further reductions of the rate of research and development spending on new technologies, particularly the use of external contractors.
|
Based upon our
current amount of cash on hand, management’s historical ability to raise capital, and our ability to manage our cost structure
and adjust operating plans if and as required, we have concluded that substantial doubt of our ability to continue as a going concern
has been alleviated.
Customer Concentrations
For the three months
ended March 31, 2020, one customer represented 15% of total product revenue and two confidential defense customers represented
100% of engineering services revenue. For the three months ended March 31, 2019, no one customer represented more than 10% of total
product revenue.
As of March 31, 2020, two customers represented
23% and 11% of accounts receivable, respectively and two confidential defense customers represented 100% of accrued project revenue.
As of December 31, 2019, three customers represented 32%, 26% and 13%, respectively, of accounts receivable.
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 three major product lines: Smart Glasses Sales, Waveguide and Display Engine Sales, and Engineering Services.
The following table summarizes the revenue recognized by major product line:
|
|
Three Months Ended
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
Smart Glasses Sales
|
|
$
|
1,371,509
|
|
|
$
|
1,278,371
|
|
Waveguide and Display Engine Sales
|
|
|
—
|
|
|
|
95,000
|
|
Engineering Services
|
|
|
160,206
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
1,531,715
|
|
|
$
|
1,373,371
|
|
Significant Judgments
Under Topic 606 “Revenue from Contracts with Customers”,
there are judgments used 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. Judgments made include considerations in determining
our transaction prices for our standard product sales that include an end-user 30-day right to return if not satisfied with product
and include general payment terms that are between Net 30 and 60 days. For our Engineering Services, performance obligations are
recognized over time using the input method and the estimated costs to complete each project are considered significant judgments.
Performance Obligations
Revenues from our performance obligations
are typically satisfied at a point in time for Smart Glasses, Waveguides and Display Engines, and our OEM Products, which are recognized
when the customer obtains control and ownership, which is generally upon shipment. The Company also records revenue for performance
obligations relating to our Engineering Services over time by using the input method measuring progress toward satisfying the performance
obligations. Satisfaction of our performance obligations related to our Engineering Services is measured by the Company’s
cost 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 of 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
date of billing, subject to an agreed upon customer acceptance period.
The following table presents a summary of
the Company’s net sales by revenue recognition method as a percentage of total net sales for the three months ended March
31, 2020:
|
|
% of Total Net Sales
|
|
Point-in-Time
|
|
|
90
|
%
|
Over Time - Input Method
|
|
|
10
|
%
|
Total
|
|
|
100
|
%
|
Remaining Performance Obligations
As of March 31, 2020, the Company had $695,000
of remaining performance obligations under two current waveguide development projects with two global aerospace and defense firms,
which represents the total transaction price of these development agreements of $855,000, less revenue recognized under percentage
of completion in the three months ended March 31, 2020. The Company currently expects to recognize the remaining revenue relating
to these existing performance obligations of $695,000 in the second quarter of 2020. Revenues earned less amounts paid at March
31, 2020 in the amount of $160,206 are reflected as Accrued Project Revenue in the accompanying Consolidated Balance Sheets.
As of March 31, 2020, the Company had $86,000
of remaining performance obligations related to its extended warranties, which are included in deferred revenue on our Consolidated
Balance Sheets. The Company is recognizing this deferred revenue on a straight-line basis ending on September 30, 2020.
Note 3 – Loss Per Share
Basic loss per share is computed by dividing
the loss attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution from the assumed exercise of stock options and warrants, and the conversion
of convertible preferred shares. During periods of net loss, all common stock equivalents are excluded from the diluted EPS calculation
because they are anti-dilutive. Since the Company reported a net loss for the three months ended March 31, 2020 and 2019, 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 March 31, 2020 and 2019, there were 12,858,707 and 7,529,006 common stock share equivalents, respectively, potentially issuable
under conversion of preferred shares, options, and warrants that could dilute basic earnings per share in the future.
Note 4 – Inventories,
Net
Inventories are stated at the lower of cost
and net realizable value and consisted of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Purchased Parts and Components
|
|
$
|
5,524,161
|
|
|
$
|
5,985,214
|
|
Work in Process
|
|
|
2,231,136
|
|
|
|
2,414,142
|
|
Finished Goods
|
|
|
2,500,949
|
|
|
|
2,096,744
|
|
Less: Reserve for Obsolescence
|
|
|
(4,587,870
|
)
|
|
|
(4,788,233
|
)
|
Net
|
|
$
|
5,668,376
|
|
|
$
|
5,707,867
|
|
Note 5 — Licenses,
Net
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
Licenses
|
|
$
|
493,717
|
|
|
$
|
493,717
|
|
Less: Accumulated Amortization
|
|
|
(227,123
|
)
|
|
|
(179,301
|
)
|
Additions
|
|
|
544,889
|
|
|
|
—
|
|
|
|
|
811,483
|
|
|
|
314,416
|
|
Less: Current Portion
|
|
|
(527,249
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Licenses, Net
|
|
$
|
284,234
|
|
|
$
|
314,416
|
|
In January 2020, the Company entered into
a global non-exclusive master reseller agreement for certain smart glasses software under which it committed to sell a minimum
number of software licenses in 2020. The amount capitalized, included in current assets on the Consolidated Balance Sheets, will
be expensed to cost of goods sold during the period based on actual software licenses sold, with any of the remaining prepaid
licenses expensed at the end of the master reseller agreement’s term.
Note 6 – Intangible
Asset, Net
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
Intangible Asset
|
|
$
|
1,500,000
|
|
|
$
|
1,500,000
|
|
Less: Accumulated Amortization
|
|
|
(612,000
|
)
|
|
|
(510,000
|
)
|
|
|
|
|
|
|
|
|
|
Intangible Asset, Net
|
|
$
|
888,000
|
|
|
$
|
990,000
|
|
On October 4, 2018, the Company entered
into amendment No. 1 to agreements (the “TDG Amendment”) with TDG Acquisition Company, LLC (“TDG”), aka
Six15 Technologies, LLC. The TDG Amendment amends certain provisions of prior agreements between Vuzix and TDG, including an asset
purchase agreement dated June 15, 2012, and an authorized reseller agreement dated June 15, 2012.
Pursuant to the TDG Amendment, the
Company will be permitted to engage in sales of heads-up display components or subsystems (and any services to support such sale)
for incorporation into a finished good or system for sale to military organizations, subject to certain conditions. The Company
will also be permitted to sell its products to defense and security organizations that include business customers and governmental
entity customers that primarily provide security and defense services, including police, fire fighters, EMTs, other first responders,
and homeland and border security. The Company will owe TDG commissions with respect to all such sales until June 15, 2022, when
the amendment and original non-compete agreements expire, after which the Company will be free to sell any product to any customer
world-wide with no commission liability to TDG. Total commissions expense under this agreement for the three months ended March
31, 2020 and 2019 was $36,580 and nil, respectively.
Total amortization expense for this intangible
asset for the three months ended March 31, 2020 and 2019 was $102,000. Future monthly amortization expense for the next 26 months
is $34,000 per month or $408,000 per annum.
Note 7 – Accrued
Expenses
Accrued expenses consisted of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Accrued Wages and Related Costs
|
|
$
|
286,126
|
|
|
$
|
394,669
|
|
Accrued Professional Services
|
|
|
69,690
|
|
|
|
217,721
|
|
Accrued Warranty Obligations
|
|
|
99,115
|
|
|
|
98,893
|
|
Other Accrued Expenses
|
|
|
100,090
|
|
|
|
174,614
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
555,021
|
|
|
$
|
885,897
|
|
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 liability at the time of sale.
The Company estimates its future warranty costs based on product-based historical performance rates and related costs to repair.
The
changes in the Company’s accrued warranty obligations for the three months ended March 31, 2020 and the balance as of December
31, 2019 were as follows:
Accrued Warranty Obligation at December 31, 2019
|
|
$
|
98,893
|
|
Reductions for Settling Warranties
|
|
|
(17,122
|
)
|
Warranties Issued During Period
|
|
|
17,344
|
|
|
|
|
|
|
Accrued Warranty Obligations at March 31, 2020
|
|
$
|
99,115
|
|
Note 8 – 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 9 – 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 special rights
and qualifications. A total of 5,000,000 shares of preferred stock with a par value of $0.001 are authorized as of March 31, 2020
and December 31, 2019, 49,626 of which are designated as Series A Preferred Stock. There were 49,626 shares of Series A Preferred
Stock issued and outstanding on March 31, 2020 and December 31, 2019.
On January 2, 2015, the Company closed a
sale of Series A Preferred Stock to Intel Corporation (the “Series A Purchaser”), pursuant to which we issued and sold
an aggregate of 49,626 shares of the Company’s Series A Preferred Stock, at a purchase price of $500 per share, for an aggregate
purchase price of $24,813,000. Each share of Series A Preferred Stock is convertible, at the option of the Series A holder, into
100 shares of the Company’s common stock (determined by dividing the Series A Original Issue Price of $500 by the Series
A Conversion Price, which is equal to $5.00).
Each share of Series A Preferred Stock is
entitled to receive dividends at a rate of 6% per year, compounded quarterly and payable in cash or in kind, at the Company’s
sole discretion. As of March 31, 2020, total accumulated and unpaid preferred dividends were $9,100,930. As of December 31, 2019,
total accumulated and unpaid preferred dividends were $8,601,092. There were no declared preferred dividends owed as of March 31,
2020 or December 31, 2019.
The Series A Purchaser has the right, but
not the obligation, to participate in any proposed issuance by the Company of its securities, subject to certain exceptions and
in such amount as is sufficient to maintain the Series A Purchaser’s ownership percentage in the Company, calculated immediately
prior to such applicable financing, at a purchase price equal to the per share price of the Company’s securities in such
applicable financing.
Common
Stock
The Company’s authorized common stock
consists of 100,000,000 shares, par value of $.001. As of March 31, 2020 and December 31, 2019, there were 33,128,620 shares of
common stock issued and outstanding.
Note 10 – Stock
Warrants
A summary of the various changes in warrants
during the three months ended March 31, 2020 is as follows:
|
|
Number of
Warrants
|
|
|
|
|
|
Warrants Outstanding at December 31, 2019
|
|
|
6,512,516
|
|
Exercised During the Period
|
|
|
—
|
|
Issued During the Period
|
|
|
—
|
|
Expired During the Period
|
|
|
—
|
|
|
|
|
|
|
Warrants Outstanding at March 31, 2020
|
|
|
6,512,516
|
|
Of the outstanding
warrants as of March 31, 2020, 1,033,062 expire on June 18, 2021 and the remaining 5,479,454 expire on January 2, 2022. The weighted
average remaining term of the warrants was 1.7 years. The weighted average exercise price was $4.56 per share.
Note 11 – Stock
Option Plans
A summary of stock option activity for the
three months ended March 31, 2020 is as follows:
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2019
|
|
|
1,383,591
|
|
|
$
|
4.77
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Expired or Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2020
|
|
|
1,383,591
|
|
|
$
|
4.77
|
|
The weighted average remaining contractual
term for all options as of March 31, 2020 and December 31, 2019 was 6.0 years and 6.3 years, respectively.
As of March 31, 2020, there were 1,058,503
options that were fully vested and exercisable at a weighted average exercise price of $4.67 per share. The weighted average remaining
contractual term on the vested options is 5.3 years.
As of March 31, 2020, there were 325,088
unvested options exercisable at a weighted average exercise price of $5.12 per share. The weighted average remaining contractual
term on the unvested options is 8.3 years.
The weighted average fair value of option
grants was calculated using the Black-Scholes-Merton option pricing method. At March 31, 2020, the Company had approximately $1,394,000
of unrecognized stock compensation expense, which will be recognized over a weighted average period of approximately 2.1 years.
For the three months ended March 31, 2020
and 2019, the Company recorded total stock-based compensation expense, including stock awards, of $282,201 and $489,754, respectively.
Note 12 – Litigation
We are not currently involved in any actual
or pending legal proceeding or litigation and we are not aware of any such proceedings contemplated by or against us or involving
our property, except as follows:
On or about December 16, 2019, Throop,
LLC (“Throop") filed a patent infringement lawsuit in the United States District Court for the Central District of California
against the Company. The complaint alleges that certain Vuzix products (which have yet to be sufficiently identified) infringe
claims of U.S. Patent No. 7,035,897 and U.S. Patent No. 9,479,726. Both patents expired on January 14, 2020. The complaint
purports to seek an injunction or payment of an ongoing royalty with respect to the patents, an award of damages to compensate
for alleged past infringement, trebled damages, and an award of costs and attorney’s fees. On March 6, 2020, before
the Company filed a formal response to the complaint with the Court, Throop filed a voluntary dismissal without prejudice of the
California complaint in response to the Company’s position that venue was improper. The Company denies that Throop is entitled
to the relief requested and intends to vigorously defend itself against the claims asserted and any lawsuit related thereto brought
against the Company going forward.
Note 13 – Right-of-Use Assets and Liabilities
Future lease payments under operating leases
as of March 31, 2020 were as follows:
Remainder of 2020
|
|
$
|
456,524
|
|
2021
|
|
|
599,190
|
|
2022
|
|
|
587,286
|
|
2023
|
|
|
489,405
|
|
Total Future Lease Payments
|
|
|
2,132,405
|
|
Less: Imputed Interest
|
|
|
(167,421
|
)
|
Total Lease Liability Balance
|
|
$
|
1,964,984
|
|
Operating lease costs under the operating
leases totaled $150,000 and $140,300 for the three months ended March 31, 2020 and 2019, respectively.
As of March 31, 2020, the weighted average
discount rate was 4.5% and the weighted average remaining lease term was 3.5 years.
Note 14 – Subsequent Events
On May 4, 2020, the Company implemented
a Company-wide payroll reduction program for individuals earning more than $60,000 annually with required base salary reductions
of 15% to 25% depending upon the respective base salary level in the period from May to December 31, 2020. The expected cash savings
will be $1,200,000 and will result in the issuance of stock awards under the Company’s 2014 Stock Incentive Plan, at a rate
150% of the net cash wage reductions. The FMV of these stock awards has been determined at $1.53 and a total of 1,178,590 stock awards
were issued. These awards are subject to vesting and resale rules.
On April 21, 2020, the Company entered into
a Paycheck Protection Program (PPP) Term Note under the Paycheck Protection Program of the recently enacted Coronavirus Aid, Relief,
and Economic Security Act (“CARES Act”) administered by the U.S. Small Business Administration (the “US SBA”).
The Company received total proceeds of $1,555,900 from the PPP Note. The PPP Note bears interest at the annual rate of 1%, with
the first six months of interest deferred, has a term of two years, and is unsecured and guaranteed by the US SBA. The Company
may apply for forgiveness of the PPP Note, with the amount which may be forgiven equating to the sum of payroll costs, covered
rent and mortgage obligations, and covered utility payments incurred by the Company during the eight-week period beginning on April
21, 2020, calculated in accordance with the terms of the CARES Act.
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, 2019.
As used in this report, unless otherwise
indicated, the terms “Company,” “Vuzix”, “management,” “we,” “our,”
and “us” refer to Vuzix Corporation.
Critical Accounting Policies and Significant Developments
and Estimates
The discussion and analysis of our financial
condition and results of operations is based on our unaudited consolidated financial statements and related notes appearing elsewhere
in this quarterly report. The preparation of these statements in conformity with generally accepted accounting principles requires
the appropriate application of certain accounting policies, many of which require us to make estimates and assumptions about future
events and their impact on amounts reported in our consolidated financial statements, including the statement of operations, balance
sheet, cash flow and related notes. We continually evaluate our estimates used in the preparation of our 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 and embedded derivatives, valuation of stock compensation awards,
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;
|
|
·
|
Stock-based compensation; and
|
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, 2019. There have been no significant changes in our accounting policies for the three-month period
ended March 31, 2020.
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, but also known as 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 micro-display technology with
our advanced optics to produce compact high-resolution display engines, less than half an inch diagonally, which when viewed through
our smart glasses products create virtual 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, first responder, and medical markets. All of the mobile display
and mobile electronics markets in which we compete have been and continue to be subject to rapid technological change almost yearly
over the last decade including the rapid adoption of tablets, larger screen sizes and display resolutions along with declining
prices on mobile phones and other computing devices, and as a result we must continue to improve our products’ performance
and lower our costs. We believe our 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.
Impact of COVID-19
As our global operations expose us to risks
associated with pandemics and epidemics worldwide, we could be harmed and our operations could suffer as a result. The recent COVID-19
pandemic has impacted our business operations and the results of our operations in the first quarter, primarily with delays in
expected orders and smart glasses deployment by several customers, and to a lesser degree due to a reduction in manufacturing output
caused by supplier shortages and delays from some of our suppliers in China. In addition, due to delays in certain supply chain
areas, the expected launch times of our new M4000 and new version of our Blade Smart Glasses have been delayed several weeks. Additionally,
we are experiencing increased lead times in regulatory testing of our products in some new countries, which has been forcing us
to postpone customer deliveries in these new regions.
The broader implications of COVID-19 on
our results from operations going forward remains uncertain. The COVID-19 pandemic has the 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. However,
on the other hand, opportunities in the medical field with telemedicine and guided remote support and in enterprise with remote
support use cases have been growing for Vuzix smart glasses products. As companies try to go back to work, the need for enabling
remote training and support for equipment in the field is becoming a new challenge for enterprise to address and our smart glasses
products are poised to help companies address these challenges. Flying restrictions and resumption of travel in general it appears
is not coming back any time soon and, in the interest of safety, companies are looking for alternatives. Vuzix smart glasses
solutions and those offered by our Value-Added Resellers provide a wide array of solutions today that can help immediately address
these challenges. Also, our products are being used in medical applications from remote support for residents doing their rounds
to remote patient care in assisted living facilities or the ICU (intensive care unit).
As an essential manufacturer of telecommunications
and microelectronic devices, as well as a supplier of essential technology services and products for medical professionals, first
responders and other public safety, national defense and security customers, we have maintained our current production operations
through this crisis. As we are committed to the safety and well-being of all our employees, we separated our production staff into
2 six-hour non-overlapping shifts, versus the 1 eight-hour shift that was in place before the COVID-19 outbreak. The majority of
our non-production employees have been working remotely for Vuzix and will continue to do so for the time being.
Recent Accounting Pronouncements
See Note 1 to the consolidated financial
statements.
Results of Operations
Comparison of Three Months Ended
March 31, 2020 and March 31, 2019
The following table compares the Company’s
consolidated statements of operations data for the three months ended March 31, 2020 and 2019:
|
|
Three Months Ended 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
Dollar Change
|
|
|
% Increase (Decrease)
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of Products
|
|
$
|
1,371,509
|
|
|
$
|
1,373,371
|
|
|
$
|
(1,862
|
)
|
|
|
(0
|
%)
|
Sales of Engineering Services
|
|
|
160,206
|
|
|
|
-
|
|
|
|
160,206
|
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales
|
|
|
1,531,715
|
|
|
|
1,373,371
|
|
|
|
158,344
|
|
|
|
12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales - Products Sold
|
|
|
1,426,038
|
|
|
|
1,333,481
|
|
|
|
92,557
|
|
|
|
7
|
%
|
Cost of Sales - Engineering Services
|
|
|
25,161
|
|
|
|
-
|
|
|
|
25,161
|
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cost of Sales
|
|
|
1,451,199
|
|
|
|
1,333,481
|
|
|
|
117,718
|
|
|
|
9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit (exclusive of depreciation shown separately below)
|
|
|
80,516
|
|
|
|
39,890
|
|
|
|
40,626
|
|
|
|
102
|
%
|
Gross Profit %
|
|
|
5
|
%
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and Development
|
|
|
2,023,058
|
|
|
|
2,516,100
|
|
|
|
(493,042
|
)
|
|
|
(20
|
%)
|
Selling and Marketing
|
|
|
1,152,808
|
|
|
|
1,417,966
|
|
|
|
(265,158
|
)
|
|
|
(19
|
%)
|
General and Administrative
|
|
|
1,537,820
|
|
|
|
1,896,402
|
|
|
|
(358,582
|
)
|
|
|
(19
|
%)
|
Depreciation and Amortization
|
|
|
648,541
|
|
|
|
559,089
|
|
|
|
89,452
|
|
|
|
16
|
%
|
Impairment of Patents and Trademarks
|
|
|
57,532
|
|
|
|
-
|
|
|
|
57,532
|
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from Operations
|
|
|
(5,339,243
|
)
|
|
|
(6,349,667
|
)
|
|
|
1,010,424
|
|
|
|
(16
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Income
|
|
|
22,157
|
|
|
|
58,313
|
|
|
|
(36,156
|
)
|
|
|
(62
|
%)
|
Other Taxes
|
|
|
(17,686
|
)
|
|
|
(52,662
|
)
|
|
|
34,976
|
|
|
|
(66
|
%)
|
Foreign Exchange Loss
|
|
|
(26,852
|
)
|
|
|
(15,745
|
)
|
|
|
(11,107
|
)
|
|
|
71
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Income (Expense)
|
|
|
(22,381
|
)
|
|
|
(10,094
|
)
|
|
|
(12,287
|
)
|
|
|
122
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(5,361,624
|
)
|
|
$
|
(6,359,761
|
)
|
|
$
|
998,137
|
|
|
|
(16
|
%)
|
Sales. There was an
overall increase in total sales for the three months ended March 31, 2020 over the same period in 2019 of $158,344 or 12%. The
following table reflects the major components of our sales:
|
|
Three Months Ended March 31, 2020
|
|
|
% of Sales
|
|
|
Three Months Ended March 31, 2019
|
|
|
% of Sales
|
|
|
Dollar Change
|
|
|
% Increase (Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of Smart Glasses
|
|
$
|
1,354,433
|
|
|
|
88
|
%
|
|
$
|
1,252,001
|
|
|
|
91
|
%
|
|
$
|
102,432
|
|
|
|
8
|
%
|
Sales of Waveguides & Display Engines
|
|
|
-
|
|
|
|
0
|
%
|
|
|
95,000
|
|
|
|
7
|
%
|
|
|
(95,000
|
)
|
|
|
(100
|
%)
|
Sales Freight out
|
|
|
17,076
|
|
|
|
1
|
%
|
|
|
26,370
|
|
|
|
2
|
%
|
|
|
(9,294
|
)
|
|
|
(35
|
%)
|
Sales of Engineering Services
|
|
|
160,206
|
|
|
|
11
|
%
|
|
|
-
|
|
|
|
0
|
%
|
|
|
160,206
|
|
|
|
NM
|
|
Total Sales
|
|
$
|
1,531,715
|
|
|
|
100
|
%
|
|
$
|
1,373,371
|
|
|
|
100
|
%
|
|
$
|
158,344
|
|
|
|
12
|
%
|
Sales of Smart Glasses products rose by
8%, primarily the result of our M400 Smart Glasses, which we began selling in the fourth quarter of 2019. Sales revenues from our
M-Series Smart Glasses was $1,040,526, a 43% increase of $322,935 over the prior year’s quarter. Total M-Series unit sales
increased by 35% for the first quarter of 2020 versus the same period in 2019, and M400s made up 75% of revenues as compared to
nil in the 2019 period, when the M400 was not for sale. Sale revenues of Blade smart glasses decreased by $293,450 or 55%, primarily
driven by a 20% decrease in their average sales price and lower unit sales.
Sales of Waveguides and Display Engines
for the three months ended March 31, 2020 were nil versus $95,000 in the prior year’s comparable period. These are made-to-order
products and no new orders were received in the first quarter of 2020.
Sales of Engineering Services for the three
months ended March 31, 2020 was $160,206 as compared to nil in the 2019 period. The revenue recognized in the three months ended
March 31, 2020 for engineering services was a result of two waveguide and display engine development projects which commenced in
the first quarter of 2020 and both are expected to be completed in the second quarter of 2020.
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, 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:
Component of Cost of Sales
|
|
Three Months Ended March 31, 2020
|
|
|
As % Related Product Sales
|
|
|
Three Months Ended March 31, 2019
|
|
|
As % Related Product Sales
|
|
|
Dollar Change
|
|
|
% Increase (Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product Cost of Sales
|
|
$
|
744,575
|
|
|
|
54
|
%
|
|
$
|
710,098
|
|
|
|
52
|
%
|
|
$
|
34,477
|
|
|
|
5
|
%
|
Freight Costs
|
|
|
112,111
|
|
|
|
8
|
%
|
|
|
132,970
|
|
|
|
10
|
%
|
|
|
(20,859
|
)
|
|
|
(16
|
%)
|
Manufacturing Overhead
|
|
|
506,204
|
|
|
|
37
|
%
|
|
|
415,901
|
|
|
|
30
|
%
|
|
|
90,303
|
|
|
|
22
|
%
|
Warranty Costs
|
|
|
222
|
|
|
|
0
|
%
|
|
|
23,483
|
|
|
|
2
|
%
|
|
|
(23,261
|
)
|
|
|
(99
|
%)
|
Amortization of Software Development Costs
|
|
|
25,000
|
|
|
|
2
|
%
|
|
|
25,000
|
|
|
|
2
|
%
|
|
|
-
|
|
|
|
0
|
%
|
Software Royalties
|
|
|
37,926
|
|
|
|
3
|
%
|
|
|
26,029
|
|
|
|
2
|
%
|
|
|
11,897
|
|
|
|
46
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cost of Sales - Products
|
|
$
|
1,426,038
|
|
|
|
104
|
%
|
|
$
|
1,333,481
|
|
|
|
97
|
%
|
|
$
|
92,557
|
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gross Profit (Loss)
|
|
$
|
(54,529
|
)
|
|
|
|
|
|
$
|
39,890
|
|
|
|
|
|
|
$
|
(94,419
|
)
|
|
|
(237
|
%)
|
For the three months ended March 31, 2020,
we reported an overall gross loss from product sales of $54,529 as compared to a gross profit of $39,890 in the same period in
2019. On a product cost of sales basis only, product direct costs were 54% of sales in the 2020 period as compared to 52% in 2019,
primarily driven by lower selling prices of the M300XL in Q1-2020 versus the same period in 2019.
Manufacturing overhead costs for the three
months ended March 31, 2020, as a percentage of total product sales, increased to 37% from 30% in the same period in 2019, with
the majority of this increase representing additional personnel year-over-year. There was a negligible warranty expense of $222
for the three months ended March 31, 2020 as compared to $23,483 in the same period in 2019. This warranty cost reduction resulted
from actual warranty returns being less than previously expected and for which we provisioned.
Costs for engineering services for the three
months ended March 31, 2020 were $25,161 as compared to nil in 2019. The majority of the 2020 period amounts represented the reclassification
of our internal R&D wage costs associated with two waveguide development projects. There was a gross profit of $135,045 from
engineering services for the three months ended March 31, 2020 versus nil in the same period in 2019.
Research and
Development. Our research and development expenses consist primarily of compensation costs for personnel, related
stock compensation expenses, third party services, purchase of research supplies and materials, and consulting fees related to
research and development. Software development expenses to determine technical feasibility before final development and ongoing
maintenance are not capitalized and are included in research and development costs.
|
|
Three Months Ended March 31, 2020
|
|
|
% of Sales
|
|
|
Three Months Ended March 31, 2019
|
|
|
% of Sales
|
|
|
Dollar Change
|
|
|
% Increase (Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and Development
|
|
$
|
2,023,058
|
|
|
|
132
|
%
|
|
$
|
2,516,100
|
|
|
|
183
|
%
|
|
$
|
(493,042
|
)
|
|
|
(20
|
%)
|
Research and development
costs for the three months ended March 31, 2020 decreased by $493,042 or 20% as compared to the same period in 2019. This reduction
was largely driven by a decrease of $386,979 in external consulting fees related to our Blade software development, which was completed
in the first half of 2019; and a reduction of $119,532 in net salary costs.
Selling and Marketing.
Selling and marketing costs consist of trade show costs, advertising, sales samples, travel costs, sales staff compensation costs
including stock compensation expense, consulting fees, public relations agency fees, website costs and sales commissions paid to
full-time staff and outside consultants.
|
|
Three Months Ended March 31, 2020
|
|
|
% of Sales
|
|
|
Three Months Ended March 31, 2019
|
|
|
% of Sales
|
|
|
Dollar Change
|
|
|
% Increase (Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and Marketing
|
|
$
|
1,152,808
|
|
|
|
75
|
%
|
|
$
|
1,417,966
|
|
|
|
103
|
%
|
|
$
|
(265,158
|
)
|
|
|
(19
|
%)
|
Selling and marketing costs for the three
months ended March 31, 2020 decreased by $265,158 or 19% as compared to the same period in 2019. This reduction in costs was due
to the following factors: a decrease in advertising and trade shows of $219,011; a $91,259 decrease in salary and stock-based
compensation; and a $80,720 decrease in external consulting fees paid to foreign sales staff; partially offset by a $37,133 increase
in computer and software subscription costs; and a $34,087 increase in commissions largely due to commissions payable to TDG pursuant
to our non-compete agreement amendment (as described in Note 6 of the financial statements).
General and
Administrative. General and administrative costs include professional fees, investor relations (IR) costs including
shares and warrants issued for IR services, salaries and related stock compensation, travel costs, office and rental costs.
|
|
Three Months Ended March 31, 2020
|
|
|
% of Sales
|
|
|
Three Months Ended March 31, 2019
|
|
|
% of Sales
|
|
|
Dollar Change
|
|
|
% Increase (Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and Administrative
|
|
$
|
1,537,820
|
|
|
|
100
|
%
|
|
$
|
1,896,402
|
|
|
|
138
|
%
|
|
$
|
(358,582
|
)
|
|
|
(19
|
%)
|
General and administrative for the
three months ended March 31, 2020 decreased by $358,582 or 19% as compared to the same period in 2019. This reduction in
costs was due to the following factors: a decrease in legal fees of $152,065; a decrease in IT and security consulting fees
of $133,693; a decrease in salary, commissions, benefits and stock compensation expenses of $66,060 related to staff
reductions; and a decrease in IR and shareholder related expenses of $46,970; partially offset by an increase in insurance
premiums of $41,038.
Depreciation and Amortization. Depreciation
and amortization expense for the three months ended March 31, 2020 was $648,541 as compared to $559,089 in the same period in 2019,
an increase of $89,452. The increase in depreciation expense is due to new investments in depreciable assets, including manufacturing
equipment and molds placed into service from construction-in-progress and leasehold improvements associated with our plant expansion
which were completed in the first quarter of 2019.
Other Income (Expense). Total
other expense, net was $22,381 for the three months ended March 31, 2020 as compared to $10,094 in the period in 2019. The overall
increase of $12,287 in other expenses was primarily the result of a decrease of $36,156 in investment interest income; an increase
of $11,107 in foreign exchange losses; partially offset by a decrease of $34,976 in other capital and branch taxes.
Provision for Income Taxes. There
was not a provision for income taxes in the respective three-month periods ending March 31, 2020 and 2019.
Liquidity and Capital Resources
As of March 31, 2020, we had cash and cash
equivalents of $6,142,658, a decrease of $4,463,433 from $10,606,091 as of December 31, 2019.
As of March 31, 2020, we had current assets
of $14,306,863 as compared to current liabilities of $2,498,684 which resulted in a positive working capital position of $11,808,179.
At December 31, 2019, we had a working capital position of $16,438,851. Our current liabilities are comprised principally of accounts
payable, operating lease liabilities and accrued expenses.
During the three months ended March 31,
2020, we used $4,198,751 of cash for operating activities which includes: (i) a net loss of $5,361,624, partially offset by non-cash
expenses totaling $1,013,274, (ii) $450,454 collection of trade accounts receivables that existed as of December 31, 2019, and
(iii) $330,876 paydown of accrued expenses that existed as of December 31, 2019. For the three months ended March 31, 2019, we
used $5,584,357 of cash for operating activities.
During the three months ended March 31, 2020, we used $264,682
of cash for investing activities, which includes $221,074 for purchases of manufacturing equipment and product mold tooling. For
the three months ended March 31, 2019, we used $1,303,449 of cash for investing activities.
As of March 31, 2020, the Company does not
have any current or long-term debt obligations outstanding.
We incurred a net loss for the three months
ended March 31, 2020 of $5,361,624 and annual net losses of $26,476,370 in 2019 and $21,875,713 in 2018. As of March 31, 2020,
the Company had an accumulated deficit of $150,104,435.
The Company needs to grow its business significantly
to become profitable and self-sustaining on a cash flow basis or it will be required to raise new equity and/or debt capital. Our
cash requirements related to funding operating losses depend upon numerous factors, including new product development activities,
our ability to commercialize our products, our products’ timely market acceptance, selling prices and gross margins, and
other factors. The Company’s management intends to take actions necessary to continue as a going concern, and accordingly,
our consolidated financial statements included in this report have been prepared assuming that we will continue as a going concern.
This basis of accounting contemplates the recovery of our assets and the satisfaction of liabilities in the normal course of business.
The consolidated financial statements included in this report do not include any adjustments to the specific amounts and classifications
of assets and liabilities which might be necessary should we be unable to continue as a going concern.
If the Company raises additional funds by
new equity issuances, the ownership interests of existing shareholders may be diluted. The amount of such dilution could increase
due to the issuance of new warrants or securities with other dilutive characteristics, such as full ratchet anti-dilution clauses
or price resets.
However, there can be no assurance that
we will be able to raise capital in the future or that if we raise additional capital it will be sufficient to execute our business
plan. To the extent that we are unable to raise sufficient additional capital, we will be required to substantially modify our
business plan and our plans for operations, which could have a material adverse effect on us and our financial condition.
Forward Looking Statements
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:
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trends in our operating expenses, including personnel costs, research and development expense, sales and marketing expense, and general and administrative expense;
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the effect of competitors and competition in our markets;
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our wearable products and their market acceptance and future potential;
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our ability to develop, timely introduce, and effectively manage the introduction of new products and services or improve our existing products and services;
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expected technological advances by us or by third parties and our ability to leverage them;
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our ability to attract and retain customers;
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our ability to accurately forecast consumer demand and adequately manage our
inventory;
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our ability to deliver an adequate supply of product to meet demand;
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our ability to maintain and promote our brand and expand brand awareness;
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our ability to detect, prevent, or fix defects in our products;
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our reliance on third-party suppliers, contract manufacturers and logistics providers and our limited control over such parties;
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trends in revenue, costs of revenue, and gross margin and our possible or assumed future results of operations;
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our ability to attract and retain highly skilled employees;
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the impact of foreign currency exchange rates;
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the effect of future regulations;
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the sufficiency of our existing cash and cash equivalent balances and cash flow from operations to meet our working capital and capital expenditure needs for at least the next 12 months; and
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general market, political, economic and business conditions.
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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” under Item
1A and elsewhere in our annual report on Form 10-K for the year ended December 31, 2019 and other filings we make with the Securities
and Exchange Commission and the following: business and economic conditions, rapid technological changes accompanied by frequent
new product introductions, competitive pressures, dependence on key customers, inability to gauge order flows from customers, fluctuations
in quarterly and annual results, the reliance on a limited number of third party suppliers, limitations of our manufacturing capacity
and arrangements, the protection of our proprietary technology, the effects of pending or threatened litigation, the dependence
on key personnel, changes in critical accounting estimates, potential impairments related to investments, foreign regulations,
liquidity issues, and potential material weaknesses in internal control over financial reporting. Further, during weak or uncertain
economic periods, customers may delay the placement of their orders. These factors often result in a substantial portion of our
revenue being derived from orders placed within a quarter and shipped in the final month of the same quarter.
We caution readers to carefully consider
such factors. Many of these factors are beyond our control. In addition, any forward-looking statements represent our estimates
only as of the date they are made and should not be relied upon as representing our estimates as of any subsequent date. While
we may elect to update forward-looking statements at some point in the future, except as may be required under applicable securities
laws, we specifically disclaim any obligation to do so.