|
Item 1:
|
Condensed Consolidated Financial Statements
|
VUZIX CORPORATION
CONSOLIDATED BALANCE SHEETS
|
|
(Unaudited)
September
30,
2018
|
|
|
December 31,
2017
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
$
|
23,471,941
|
|
|
$
|
14,889,636
|
|
Accounts Receivable, Net
|
|
|
1,047,659
|
|
|
|
974,172
|
|
Accrued Project Revenue
|
|
|
-
|
|
|
|
497,784
|
|
Inventories, Net
|
|
|
6,802,593
|
|
|
|
3,852,317
|
|
Manufacturing Vendor Prepayments
|
|
|
513,714
|
|
|
|
154,717
|
|
Prepaid Expenses and Other Assets
|
|
|
1,501,951
|
|
|
|
873,947
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
33,337,858
|
|
|
|
21,242,573
|
|
|
|
|
|
|
|
|
|
|
Long-Term Assets
|
|
|
|
|
|
|
|
|
Fixed Assets, Net
|
|
|
4,075,176
|
|
|
|
4,124,466
|
|
Patents and Trademarks, Net
|
|
|
1,069,954
|
|
|
|
813,774
|
|
Software Development Costs, Net
|
|
|
225,000
|
|
|
|
408,723
|
|
Other Assets
|
|
|
469,316
|
|
|
|
243,717
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
39,177,304
|
|
|
$
|
26,833,253
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts Payable
|
|
$
|
1,796,062
|
|
|
$
|
3,726,056
|
|
Customer Deposits
|
|
|
316,460
|
|
|
|
73,462
|
|
Unearned Revenue
|
|
|
196,769
|
|
|
|
107,824
|
|
Accrued Expenses
|
|
|
1,242,620
|
|
|
|
1,389,771
|
|
Derivative Liability
|
|
|
-
|
|
|
|
152,927
|
|
Income and Other Taxes Payable
|
|
|
30,280
|
|
|
|
3,500
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
3,582,191
|
|
|
|
5,453,540
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
3,582,191
|
|
|
|
5,453,540
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity
|
|
|
|
|
|
|
|
|
Preferred Stock - $0.001 Par Value, 5,000,000 Shares Authorized; 49,626
and 49,626 Shares Issued and Outstanding as of September 30, 2018 and December 31, 2017.
|
|
|
50
|
|
|
|
50
|
|
Common Stock - $0.001 Par Value, 100,000,000 Shared Authorized; 27,564,509
Shares Issued and Outstanding as of September 30, 2018 and 24,276,275 as of December 31, 2017.
|
|
|
27,564
|
|
|
|
24,276
|
|
Additional Paid-in Capital
|
|
|
148,270,081
|
|
|
|
117,827,839
|
|
Accumulated Deficit
|
|
|
(112,702,582
|
)
|
|
|
(96,472,452
|
)
|
|
|
|
|
|
|
|
|
|
Total Stockholders' Equity
|
|
|
35,595,113
|
|
|
|
21,379,713
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Equity
|
|
$
|
39,177,304
|
|
|
$
|
26,833,253
|
|
The accompanying notes are an integral
part of these condensed consolidated financial statements.
VUZIX CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY
(Unaudited for the nine months ended
September 30, 2018)
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Additional
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Paid-In Capital
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2017
|
|
|
49,626
|
|
|
$
|
50
|
|
|
|
24,276,275
|
|
|
$
|
24,276
|
|
|
$
|
117,827,839
|
|
|
$
|
(96,472,452
|
)
|
|
$
|
21,379,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Revenue Adjustment - ASC 606 Adoption
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
81,724
|
|
|
|
81,724
|
|
Exercise of Warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
84,208
|
|
|
|
84
|
|
|
|
39,292
|
|
|
|
-
|
|
|
|
39,376
|
|
Settlement of Derivative Liability upon Exercise of Warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
166,800
|
|
|
|
-
|
|
|
|
166,800
|
|
Exercise of Stock Options
|
|
|
-
|
|
|
|
-
|
|
|
|
20,201
|
|
|
|
20
|
|
|
|
(20
|
)
|
|
|
-
|
|
|
|
-
|
|
Stock-Based Compensation Expense
|
|
|
-
|
|
|
|
-
|
|
|
|
21,666
|
|
|
|
22
|
|
|
|
1,194,732
|
|
|
|
-
|
|
|
|
1,194,754
|
|
Proceeds from Common Stock Offerings
|
|
|
-
|
|
|
|
-
|
|
|
|
3,000,000
|
|
|
|
3,000
|
|
|
|
29,997,000
|
|
|
|
-
|
|
|
|
30,000,000
|
|
Direct Costs of Common Stock Offerings
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,975,000
|
)
|
|
|
-
|
|
|
|
(1,975,000
|
)
|
Common Stock Issued for Services
|
|
|
-
|
|
|
|
-
|
|
|
|
17,159
|
|
|
|
17
|
|
|
|
99,983
|
|
|
|
-
|
|
|
|
100,000
|
|
Common Stock Awards to Directors
|
|
|
-
|
|
|
|
-
|
|
|
|
65,000
|
|
|
|
65
|
|
|
|
431,535
|
|
|
|
-
|
|
|
|
431,600
|
|
Common Stock Awards to Management
|
|
|
-
|
|
|
|
-
|
|
|
|
80,000
|
|
|
|
80
|
|
|
|
487,920
|
|
|
|
-
|
|
|
|
488,000
|
|
Net Loss for the nine months ended September 30, 2018
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(16,311,854
|
)
|
|
|
(16,311,854
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - September 30, 2018
|
|
|
49,626
|
|
|
$
|
50
|
|
|
|
27,564,509
|
|
|
$
|
27,564
|
|
|
$
|
148,270,081
|
|
|
$
|
(112,702,582
|
)
|
|
$
|
35,595,113
|
|
The accompanying
notes are an integral part of these condensed consolidated financial statements.
VUZIX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of Products
|
|
$
|
1,842,500
|
|
|
$
|
1,138,413
|
|
|
$
|
5,853,461
|
|
|
$
|
3,002,744
|
|
Sales of Engineering Services
|
|
|
80,900
|
|
|
|
266,687
|
|
|
|
261,416
|
|
|
|
938,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales
|
|
|
1,923,400
|
|
|
|
1,405,100
|
|
|
|
6,114,877
|
|
|
|
3,941,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales - Products
|
|
|
1,267,320
|
|
|
|
1,089,881
|
|
|
|
4,426,904
|
|
|
|
3,441,650
|
|
Cost of Sales - Engineering Services
|
|
|
35,160
|
|
|
|
407,220
|
|
|
|
219,756
|
|
|
|
872,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cost of Sales
|
|
|
1,302,480
|
|
|
|
1,497,101
|
|
|
|
4,646,660
|
|
|
|
4,313,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit (Loss) (exclusive of depreciation shown separately below)
|
|
|
620,920
|
|
|
|
(92,001
|
)
|
|
|
1,468,217
|
|
|
|
(372,762
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and Development
|
|
|
2,468,449
|
|
|
|
1,506,307
|
|
|
|
7,158,356
|
|
|
|
4,374,202
|
|
Selling and Marketing
|
|
|
966,294
|
|
|
|
908,797
|
|
|
|
4,048,029
|
|
|
|
2,739,978
|
|
General and Administrative
|
|
|
1,666,596
|
|
|
|
1,612,542
|
|
|
|
5,579,500
|
|
|
|
4,155,960
|
|
Depreciation and Amortization
|
|
|
377,724
|
|
|
|
251,366
|
|
|
|
946,335
|
|
|
|
734,175
|
|
Impairment of Software Development Cost
|
|
|
196,223
|
|
|
|
-
|
|
|
|
196,223
|
|
|
|
-
|
|
(Gain) Loss on Inventory Revaluation and Product Discontinuance
|
|
|
(211,416
|
)
|
|
|
1,151,482
|
|
|
|
(211,416
|
)
|
|
|
1,151,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
5,463,870
|
|
|
|
5,430,494
|
|
|
|
17,717,027
|
|
|
|
13,155,797
|
|
Loss from Operations
|
|
|
(4,842,950
|
)
|
|
|
(5,522,495
|
)
|
|
|
(16,248,810
|
)
|
|
|
(13,528,559
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Income
|
|
|
71,089
|
|
|
|
12,956
|
|
|
|
111,075
|
|
|
|
45,800
|
|
Other Taxes
|
|
|
(17,809
|
)
|
|
|
(15,734
|
)
|
|
|
(47,667
|
)
|
|
|
(37,884
|
)
|
Foreign Exchange Loss
|
|
|
(26,963
|
)
|
|
|
(5,246
|
)
|
|
|
(36,615
|
)
|
|
|
(30,299
|
)
|
Loss on asset disposal
|
|
|
-
|
|
|
|
(585
|
)
|
|
|
(56,836
|
)
|
|
|
(585
|
)
|
Gain (Loss) on Derivative Valuation
|
|
|
21,814
|
|
|
|
41,454
|
|
|
|
(13,873
|
)
|
|
|
50,598
|
|
Amortization of Term Debt Discounts and Deferred Issuance Costs
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(175,260
|
)
|
Interest Expense
|
|
|
(2,937
|
)
|
|
|
(12,592
|
)
|
|
|
(19,128
|
)
|
|
|
(77,849
|
)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total Other Income (Expense)
|
|
|
45,194
|
|
|
|
20,253
|
|
|
|
(63,044
|
)
|
|
|
(225,479
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss Before Provision for Income Taxes
|
|
|
(4,797,756
|
)
|
|
|
(5,502,242
|
)
|
|
|
(16,311,854
|
)
|
|
|
(13,754,038
|
)
|
Provision for Income Taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
(4,797,756
|
)
|
|
|
(5,502,242
|
)
|
|
|
(16,311,854
|
)
|
|
|
(13,754,038
|
)
|
Preferred Stock Dividends
|
|
|
(462,034
|
)
|
|
|
(435,321
|
)
|
|
|
(1,351,147
|
)
|
|
|
(1,273,029
|
)
|
Loss Attributable to Common Stockholders
|
|
$
|
(5,259,790
|
)
|
|
$
|
(5,937,563
|
)
|
|
$
|
(17,663,001
|
)
|
|
$
|
(15,027,067
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Loss per Share
|
|
$
|
(0.19
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.65
|
)
|
|
$
|
(0.73
|
)
|
Weighted-average Shares Outstanding - Basic and Diluted
|
|
|
27,504,626
|
|
|
|
21,366,712
|
|
|
|
27,046,913
|
|
|
|
20,515,363
|
|
The accompanying notes are an integral
part of these condensed consolidated financial statements.
VUZIX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(16,311,854
|
)
|
|
$
|
(13,754,038
|
)
|
Non-Cash Adjustments
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
|
946,335
|
|
|
|
734,175
|
|
Amortization of Software Development Costs in Cost of Sales - Products
|
|
|
75,000
|
|
|
|
214,838
|
|
Stock-Based Compensation Expense
|
|
|
1,473,383
|
|
|
|
912,102
|
|
Common Stock Awards Compensation Expense
|
|
|
216,744
|
|
|
|
83,750
|
|
Common Stock Issued for Services
|
|
|
50,000
|
|
|
|
100,000
|
|
Loss on Disposal of Fixed Assets
|
|
|
56,836
|
|
|
|
585
|
|
Amortization of Term Debt Discounts and Deferred Issuance Costs
|
|
|
-
|
|
|
|
175,260
|
|
Loss (Gain) on Derivative Valuation
|
|
|
13,873
|
|
|
|
(50,598
|
)
|
Impairment of Software Development Cost
|
|
|
196,223
|
|
|
|
-
|
|
(Gain) Loss on Inventory Revaluation and Product Discontinuance
|
|
|
(211,416
|
)
|
|
|
1,151,482
|
|
(Increase) Decrease in Operating Assets
|
|
|
|
|
|
|
|
|
Accounts Receivable
|
|
|
(73,487
|
)
|
|
|
(367,170
|
)
|
Accrued Project Revenue
|
|
|
497,784
|
|
|
|
(687,001
|
)
|
Inventories
|
|
|
(2,950,276
|
)
|
|
|
(1,342,855
|
)
|
Vendor Prepayments
|
|
|
(358,997
|
)
|
|
|
26,644
|
|
Prepaid Expenses and Other Assets
|
|
|
159,351
|
|
|
|
285,980
|
|
Increase (Decrease) in Operating Liabilities
|
|
|
|
|
|
|
|
|
Accounts Payable
|
|
|
(1,718,578
|
)
|
|
|
734,478
|
|
Accrued Expenses
|
|
|
(66,371
|
)
|
|
|
253,398
|
|
Customer Deposits
|
|
|
242,998
|
|
|
|
(2,573
|
)
|
Unearned Revenue
|
|
|
88,945
|
|
|
|
(392,242
|
)
|
Income and Other Taxes Payable
|
|
|
26,779
|
|
|
|
(5,626
|
)
|
Accrued Compensation
|
|
|
(327,469
|
)
|
|
|
(240,110
|
)
|
Accrued Interest
|
|
|
39,687
|
|
|
|
77,537
|
|
|
|
|
|
|
|
|
|
|
Net Cash Flows Used in Operating Activities
|
|
|
(17,934,510
|
)
|
|
|
(12,091,984
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
Purchase of Fixed Assets
|
|
|
(886,713
|
)
|
|
|
(1,197,452
|
)
|
Investments in Licenses, Patents and Trademarks
|
|
|
(323,347
|
)
|
|
|
(155,284
|
)
|
Investments in Other Assets
|
|
|
(250,000
|
)
|
|
|
-
|
|
Investments in Software Development
|
|
|
(87,500
|
)
|
|
|
(329,204
|
)
|
|
|
|
|
|
|
|
|
|
Net Cash Used in Investing Activities
|
|
|
(1,547,560
|
)
|
|
|
(1,681,940
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
Proceeds from Exercise of Warrants
|
|
|
39,375
|
|
|
|
-
|
|
Proceeds from Common Stock Offerings
|
|
|
30,000,000
|
|
|
|
8,567,500
|
|
Issuance Costs on Common Stock Offerings
|
|
|
(1,975,000
|
)
|
|
|
(650,179
|
)
|
|
|
|
|
|
|
|
|
|
Net Cash Flows from Financing Activities
|
|
|
28,064,375
|
|
|
|
7,917,321
|
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash and Cash Equivalents
|
|
|
8,582,305
|
|
|
|
(5,856,603
|
)
|
Cash and Cash Equivalents - Beginning of Period
|
|
|
14,889,636
|
|
|
|
14,533,944
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents - End of Period
|
|
$
|
23,471,941
|
|
|
$
|
8,677,341
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures
|
|
|
|
|
|
|
|
|
Interest Paid in Cash
|
|
$
|
104,105
|
|
|
$
|
310
|
|
Conversion of Term Debt and Accrued Interest into Common Stock
|
|
$
|
-
|
|
|
$
|
1,861,283
|
|
Subscription Receivable from Officer
|
|
$
|
-
|
|
|
$
|
61,000
|
|
Reclassification of Derivative Liability Upon Exercise of Warrants
|
|
$
|
166,800
|
|
|
$
|
-
|
|
Unamortized Stock Compensation Expense included in Prepaid Expenses
|
|
$
|
740,000
|
|
|
$
|
301,250
|
|
Cumulative Revenue Adjustment - ASC 606 Adoption
|
|
$
|
81,724
|
|
|
$
|
-
|
|
Accrued Stock-Based Compensation Expense - Not Vested
|
|
$
|
313,129
|
|
|
$
|
-
|
|
The accompanying notes are an integral
part of these condensed consolidated financial statements.
VUZIX CORPORATION
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Basis
of Presentation
The accompanying unaudited condensed 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 condensed
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 nine months
ended September 30, 2018 are not necessarily indicative of the results of the Company’s operations for the full fiscal year
or any other period.
The accompanying condensed 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, 2017, as reported in the Company’s Annual Report on Form 10-K filed with the SEC on March
16, 2018.
For the nine
months ended September 30, 2018, Toshiba Japan represented 67% of the Company’s engineering revenues and 27% of the
Company’s total revenues as compared to approximately 98% and 24% in the comparable 2017 period. As of September 30,
2018 and 2017, Toshiba Japan accounted for 1% and 0% of the Company’s accounts receivables and 0% and 59% of the
Company’s accrued project revenue, respectively.
For the nine months ended September 30, 2018, AMA SA represented 14% of the Company’s total revenues
as compared to 8% in the comparable 2017 period. As of September 30, 2018 and 2017, AMA SA accounted for 0% and 6% of the Company’s
accounts receivables, respectively.
Note 2 – Revenue Recognition and Contracts with Customers
Adoption
On January 1, 2018, the Company adopted the new guidance on Revenue from Contracts with Customers under
Topic 606 using the modified retrospective transition method. Results for reporting periods beginning after January 1, 2018 are
presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic
accounting treatment under Topic 605. We recorded a net decrease to opening accumulated deficit of $81,724, as of January 1, 2018
due to the cumulative impact of adopting Topic 606, with the impact primarily related to our post contract support (PCS deferred
revenue). Refer to the following table for the detailed effect to our consolidated balance sheet upon adoption:
|
|
Balance at
December 31,
2017
|
|
|
New Revenue
Standard
Adjustment
|
|
|
Balance at
January 1,
2018
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned Revenue
|
|
$
|
81,724
|
|
|
$
|
(81,724
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Deficit
|
|
$
|
(96,472,452
|
)
|
|
$
|
81,724
|
|
|
$
|
(96,390,728
|
)
|
Under the modified retrospective method
of adoption, we are required to disclose the impact to revenues had we continued to follow our accounting policies under the previous
revenue recognition guidance. We estimate that the impact to revenues for the nine months ended September 30, 2018, primarily
due to deferrals of PCS amounts for product shipped offset by the amortization of the unearned revenue related to our prior PCS
deferred revenue under Topic 605, would have been immaterial.
Disaggregated Revenue
The Company’s total revenue was comprised
of four major product lines: Smart Glasses and iWear Video Headphones sales, OEM product sales, Waveguide sales, and Engineering
services. The following table summarizes the revenue recognized by major product line:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Smart Glasses and iWear Video Headphones Sales
|
|
$
|
1,839,250
|
|
|
$
|
1,093,413
|
|
|
$
|
4,959,496
|
|
|
$
|
2,841,439
|
|
OEM Product Sales
|
|
|
—
|
|
|
|
—
|
|
|
|
766,065
|
|
|
|
—
|
|
Waveguide Sales
|
|
|
3,250
|
|
|
|
45,000
|
|
|
|
127,900
|
|
|
|
161,305
|
|
Engineering Services
|
|
|
80,900
|
|
|
|
266,687
|
|
|
|
261,416
|
|
|
|
938,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
1,923,400
|
|
|
$
|
1,405,100
|
|
|
$
|
6,114,877
|
|
|
$
|
3,941,025
|
|
Significant Judgments
In applying the new guidance under Topic
606, we performed an assessment of 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 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. For the nine months ended September 30, 2018 and the year ended December 31, 2017, the significant
judgments previously mentioned did not have a material effect on the timing or the amount of revenue recognized under the new guidance.
Performance Obligations
Revenues from our performance obligations
satisfied at a point in time are typically for standard goods (Smart Glasses, iWear Video Headphones and Waveguides) and our OEM
Products, which are recognized when the customer obtains control, 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 are 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, except in certain European countries where it is two years for some consumer focused
products. In the case of our OEM product and waveguide sales, some include a standard product warranty of up to eighteen (18) months.
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 nine months ended September
30, 2018:
|
|
% of Total Net Sales
|
|
Point-in-Time
|
|
|
96
|
%
|
Over Time - Input Method
|
|
|
4
|
%
|
Total
|
|
|
100
|
%
|
Remaining Performance Obligations
As of September 30, 2018, the Company had
$228,000 of remaining performance obligations under our OEM product purchase agreement, which represents the transaction price
of firm orders less inception to date sales recognized. The Company expects to recognize sales relating to this existing performance
obligation of $228,000 during the remainder of 2018.
As of September 30, 2018, the Company had $141,000 of remaining performance obligations under a current
waveguide development agreement, which represents the transaction price of the agreement less inception to date revenue recognized.
The Company expects to recognize revenue relating to this existing performance obligation of $141,000 during the fourth quarter
of 2018.
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 nine months ended September 30, 2018 and 2017, the calculation for basic and diluted earnings per
share is considered to be the same, as the impact of potential common shares is anti-dilutive. As of September 30, 2018 and 2017,
there were 8,615,525 and 6,532,259 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:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Purchased Parts and Components
|
|
$
|
3,468,816
|
|
|
$
|
1,669,209
|
|
Work in Process
|
|
|
18,574
|
|
|
|
25,090
|
|
Finished Goods
|
|
|
3,990,662
|
|
|
|
2,994,342
|
|
Less: Reserve for Obsolescence
|
|
|
(675,459
|
)
|
|
|
(836,324
|
)
|
Net
|
|
$
|
6,802,593
|
|
|
$
|
3,852,317
|
|
Note 5 – Cost-Method
Investment
The Company’s cost-method investments
consist of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Private Corporation
|
|
$
|
250,000
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
250,000
|
|
|
$
|
—
|
|
In the second quarter of 2018, the Company
acquired, for a purchase price of $250,000, approximately a 1% ownership interest, in the form of preferred stock, in a private
corporation in the low vision near eye display market, which the Company has valued at cost. As part of this investment, the private
corporation and the Company entered into a non-binding memorandum of understanding, with the goal of assisting in the Company’s
development and supply of Vuzix display systems for the private corporation’s products. The Company expects to earn additional
equity in the private corporation by being compensated for its work in kind and as a result could earn approximately a further
4% equity interest in this firm. This investment was recorded at cost as its fair value is not readily determinable. As of September
30, 2018, the investment is included in Long-Term Other Assets.
Note 6 – Accrued
Expenses
Accrued expenses consisted of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Accrued Wages and Related Costs
|
|
$
|
628,130
|
|
|
$
|
163,305
|
|
Accrued Officer Compensation
|
|
|
-
|
|
|
|
327,469
|
|
Accrued Professional Services
|
|
|
226,348
|
|
|
|
531,728
|
|
Accrued Warranty Obligations
|
|
|
280,852
|
|
|
|
167,503
|
|
Accrued Interest
|
|
|
86,457
|
|
|
|
171,435
|
|
Other Accrued Expenses
|
|
|
20,833
|
|
|
|
28,331
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,242,620
|
|
|
$
|
1,389,771
|
|
Included in Accrued Wages and Related Costs are remaining provisions for the costs related to the separation
of two officers of Vuzix, the Vice President of Sales and its COO, which occurred in the second quarter of 2018. The accrued interest
is related to previously unpaid officer compensation remaining at September 30, 2018 and December 31, 2017.
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 except in certain European countries where it can be twenty-four (24) months
for some consumer products. 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 nine months ended September
30, 2018 and the balance as of December 31, 2017 were as follows:
Accrued Warranty Obligation at December 31, 2017
|
|
$
|
167,503
|
|
Reductions for Settling Warranties
|
|
|
(259,905
|
)
|
Warranties Issued During Period
|
|
|
373,254
|
|
|
|
|
|
|
Accrued Warranty Obligations at September 30, 2018
|
|
$
|
280,852
|
|
Note 7 – Derivative Liability and Fair Value Measurements
The Company recognized a derivative liability for the warrants to purchase shares of its common stock
issued in connection with the Company’s equity offering and related debt conversions on August 5, 2013. Those warrants had
a cashless exercise provision and an exercise price that was subject to adjustment in the event of subsequent equity sales at a
lower purchase price (subject to certain exceptions) along with full-ratchet anti-dilution provisions. In accordance with FASB
ASC 815-10-25, we measured the derivative liability using a Monte Carlo Options Lattice pricing model at their issuance date and
subsequently re-measured the liability on each reporting date.
Accordingly, at the end of each quarterly
reporting date, the derivative fair market value is re-measured and adjusted to current market value. As of September 30, 2018
and December 31, 2017 a total of nil and 38,100 warrants were outstanding that contained a full-ratchet anti-dilution provision,
respectively.
The Company has adopted FASB ASC Topic 820 for financial instruments measured at fair value on a recurring
basis. FASB ASC Topic 820 defines fair value, establishes a framework for measuring fair value in accordance with GAAP and expands
disclosures about fair value measurements.
Fair value is defined as the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. FASB ASC Topic 820 establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring
fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities
(level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:
- Level
1, defined as observable inputs such as quoted prices for identical instruments in active markets;
- Level
2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted
prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not
active; and
- Level
3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions,
such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are
unobservable.
The carrying amount of cash, accounts receivable,
accounts payable, and accrued expenses approximates their fair value due to their short maturity.
We measure certain financial instruments
at fair value on a recurring basis. Assets and liabilities measured at fair value on a recurring basis are as follows at September
30, 2018:
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liability
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total liabilities measured at fair value (Current liabilities)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
We measure certain financial instruments
at fair value on a recurring basis. Assets and liabilities measured at fair value on a recurring basis are as follows at December
31, 2017:
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liability
|
|
$
|
152,927
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
152,927
|
|
Total liabilities measured at fair value (Current Liabilities)
|
|
$
|
152,927
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
152,927
|
|
Fair value — December 31, 2017
|
|
$
|
152,927
|
|
|
|
|
|
|
Reclassification of warrant exercises and warrant expirations to Additional Paid-in Capital
|
|
|
(166,800
|
)
|
Change in fair value for the period of warrant derivative liability
|
|
|
13,873
|
|
|
|
|
|
|
Fair value — September 30, 2018
|
|
$
|
—
|
|
As of August 5, 2018, all unexercised warrants
that contained a full-ratchet anti-dilution provision expired.
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 September 30, 2018 and December 31, 2017, 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 September 30, 2018
and December 31, 2017.
On January 2, 2015 the Company closed a
sale of Series A Preferred Stock to Intel Corporation (the “Series A Purchaser”), pursuant to which we issued and
sold an aggregate of 49,626 shares of the Company’s Series A Preferred Stock, at a purchase price of $500 per share, for
an aggregate purchase price of $24,813,000. Each share of Series A Preferred Stock is convertible, at the option of the Series
A holder, into 100 shares of the Company’s common stock (determined by dividing the Series A Original Issue Price of $500
by the Series A Conversion Price). The Series A Conversion Price is $5.00, subject to adjustment in the event of stock splits,
dividends or other combinations.
Each share of Series A Preferred Stock is
entitled to receive dividends at a rate of 6% per year, compounded quarterly and payable in cash or in kind, at the Company’s
sole discretion. As of September 30, 2018, total accumulated and unpaid preferred dividends were $6,200,210. As of December 31,
2017, total accumulated and unpaid preferred dividends were $4,849,063. There were no declared preferred dividends owed as of September
30, 2018 or December 31, 2017.
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 $0.001. As of
September 30, 2018 and December 31, 2017 there were 27,564,509 and 24,276,275 shares of common stock issued and outstanding, respectively.
Note 10 – Stock
Warrants
A summary of the various changes in warrants
during the nine-month period ended September 30, 2018 is as follows:
|
|
Number of
Warrants
|
|
|
|
|
|
Warrants Outstanding at December
31, 2017
|
|
|
1,184,912
|
|
Exercised During the Period
|
|
|
(113,850
|
)
|
Issued During the Period
|
|
|
1,200,000
|
|
Expired During the Period
|
|
|
(8,000
|
)
|
|
|
|
|
|
Warrants Outstanding,
September 30, 2018
|
|
|
2,263,062
|
|
The outstanding warrants as of September
30, 2018 expire from November 3, 2018 to June 18, 2021. The weighted average remaining term of the warrants is 1.41 years. The
weighted average exercise price is $8.53 per share.
Note 11 – Stock
Based Compensation Plans
A summary of stock option activity for
the nine months ended September 30, 2018 is as follows:
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
|
1,510,244
|
|
|
$
|
5.04
|
|
Granted
|
|
|
133,500
|
|
|
|
5.55
|
|
Exercised
|
|
|
(76,354
|
)
|
|
|
5.61
|
|
Expired or Forfeited
|
|
|
(177,527
|
)
|
|
|
6.14
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September
30, 2018
|
|
|
1,389,863
|
|
|
$
|
4.93
|
|
The weighted average remaining contractual
term for all options as of September 30, 2018 and December 31, 2017 was 7 years and 7.6 years, respectively.
As of September 30, 2018, there were 924,309 options that were fully-vested and exercisable at a weighted
average exercise price of $4.53 per share. The weighted average remaining contractual term on the vested options is 6.1 years.
As of September 30, 2018, there were 465,554
unvested options exercisable at a weighted average exercise price of $5.72 per share. The weighted average remaining contractual
term on the unvested options is 8.8 years.
For the nine months ended September 30,
2018, all options exercised were on a cashless basis.
The weighted average fair value of option
grants was calculated using the Black-Scholes-Merton option pricing method. At September 30, 2018, the Company had approximately
$2,410,000 of unrecognized stock compensation expense, which will be recognized over a weighted average period of approximately
2.7 years.
During the three months ended September
30, 2018, the Company issued 45,000 shares of common stock to its independent board members as part of their annual retainer for
services covering the period of July 2018 to June 2019. The fair market value on the date of award of the stock issued was $6.88,
resulting in an aggregate fair value of approximately $310,000. The fair market value of these awards is expensed over 12 months.
As of September 30, 2018, there was approximately $232,000 of unrecognized expense related to these stock awards.
During the nine months ended September 30, 2018, the Company awarded 100,000 shares of common stock to
its board members and members of management. The fair market value of each share awarded was $6.10 on the date of grant, May 4,
2018, for an aggregate fair market value of $610,000. The aggregate fair market value of stock awards issued to external directors
was $122,000 and the aggregate fair market value of stock awards issued to other members of management was $488,000, which are
vesting over 12 and 48 month periods, respectively. As of September 30, 2018, there was approximately $508,000 of unrecognized
expense related to these stock awards.
For the three months ended September 30,
2018 and 2017, the Company recorded total stock-based compensation expense of approximately $291,000 and $425,000, respectively.
For the nine months ended September 30, 2018 and 2017, the Company recorded total stock-based compensation expense of approximately
$1,473,000 and $912,000, respectively. For the nine months ended September 30, 2018, stock-based compensation expense includes
approximately $384,000 of one-time compensation expense related to accrued severance.
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:
We filed a defamation lawsuit against Ricardo
Antonio Pearson (aka Richard Pearson) in the Supreme Court of the State of New York, County of New York on April 5, 2018. The
Company’s complaint against Mr. Pearson alleges he published false and defamatory articles about the Company. Vuzix is seeking
damages in excess of $80 million, including punitive damages, and money damages.
On July 24, 2018, a purported shareholder
class action lawsuit was filed in the United States District Court, Southern District of New York, against the Company, certain
of its current and former directors and executive officers and the placement agents of the Company’s registered direct offering
that was completed in January 2018. The complaint alleges violations of federal securities laws under Sections 11 and 15 of the
Securities Act and under Sections 10(b) and 20(a) of the Exchange Act on behalf of a putative class of shareholders that purchased
stock between November 9, 2017 and March 20, 2018, or pursuant and/or traceable to the Company’s registration statement
and prospectus filed in connection with the registered direct offering. The complaint alleges that the Company and certain of
its officers and directors made materially false and/or misleading statements and failed to disclose material adverse events about
the Company’s business, operations and prospects in press releases and public filings. The complaint seeks damages in unspecified
amounts, costs and expenses of bringing the action, and other unspecified relief. A similar purported class action was filed against
the Company and certain of its current and former executive officers and directors on July 27, 2018, in the United States District
Court, Southern District of New York. The Company believes the allegations are false and intends to vigorously defend itself.
The Company plans to file a motion to dismiss the complaints.
On or about October 27, 2018,
Bob Glenn filed a shareholder derivative suit in the Supreme Court of the State of New York, County of Monroe against certain
of the Company’s current and former directors and executive officers. The Company was named as a nominal defendant
only. The complaint alleges breaches of fiduciary duty, unjust enrichment, and waste of corporate assets. The complaint
alleges that the Company and certain of its officers and directors made materially false and/or misleading statements and
failed to disclose material adverse events about the Company’s business, operations and prospects in press releases and
public filings. The complaint seeks a declaration that the defendants have breached and/or aided and abetted the breach of
their fiduciary duties to the Company, determining and awarding damages, and directing the Company to reform and improve
its corporate governance. Similar derivative suits were filed by Michael Washington and John Mayer on or about October 26,
2018 and October 29, 2018. The Company believes the allegations are false and intends to vigorously defend itself. The
Company plans to file a motion to dismiss the complaints.
Note 13 – Contractual Obligations
The Company is party to several lease agreements,
with the largest being for its office and manufacturing facility under an operating lease that commenced October 3, 2015 and expires
on October 3, 2020. The Company also leases small office spaces in Spain (five-year lease), England (two-year lease) and Japan
(two-year lease).
Future minimum payments required under
operating lease obligations as of September 30, 2018 are as follows:
|
|
Total
Minimum
Lease Payments
|
|
2018 (3 months remaining)
|
|
$
|
110,546
|
|
2019
|
|
|
442,185
|
|
2020
|
|
|
382,702
|
|
2021
|
|
|
7,632
|
|
2022
|
|
|
8,904
|
|
Total
|
|
$
|
951,969
|
|
Under the lease agreements described above,
the Company is required to pay the pro rata share of the real property taxes and assessments, expenses and other charges associated
with these facilities. Rent expense for the three months ended September 30, 2018 and 2017 totaled $117,372 and $115,718, respectively.
Rent expense for the nine months ended September 30, 2018 and 2017 totaled $349,168 and $344,227, respectively.
Note 14 – Recent Accounting
Pronouncements
Recent Accounting Pronouncements
In July 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)
2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815).
This ASU requires that when determining whether certain financial instruments should be classified as liabilities or equity instruments,
an entity should not consider the down round feature. The ASU also re-characterizes as a scope exception the indefinite deferral
available to private companies with mandatorily redeemable financial instruments and certain noncontrolling interests, which does
not have an accounting effect but addresses navigational concerns within the FASB Accounting Standards Codification. The provisions
of the ASU related to down rounds are effective for public business entities for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2018. We do not expect the implementation of this standard to have a material effect
on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires lessees to recognize
a right-of-use asset and lease liability in the balance sheet for all leases, including operating leases, with terms of more than
twelve months. The amendments also require qualitative disclosures along with specific quantitative disclosures. The new guidance
will be effective for fiscal years beginning after December 15, 2018, and interim periods within those years, with early adoption
permitted. The amendments must be applied on a modified retrospective basis. We anticipate the adoption of this standard will have
a material impact on our consolidated financial statements. While we are continuing to assess the potential impacts of the standard,
we currently believe the most significant impact relates to our accounting for our office leases. Under the new guidance, the net
present value of the obligation for our office leases will appear on the balance sheet. Currently, they are classified as operating
leases and payments are expensed in the period incurred.
Accounting Pronouncements Adopted in 2018
In June 2017, the FASB issued ASU 2018-07,
Compensation — Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The amendments
in this Update expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from
nonemployees. Consistent with the accounting for employee share-based payment awards, award payments issued to nonemployees are
measured at grant-date fair value. The amendments in this Update are effective for public business entities for fiscal years beginning
after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted, but no earlier than an
entity’s adoption date of Topic 606. The Company adopted this standard in the quarter ended June 30, 2018. The adoption
of this standard did not have a material impact on our consolidated financial statements and related disclosures.
In May 2017, the FASB issued ASU 2017-09,
Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting, which provides guidance about which changes to
the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The new
standard is effective for annual reporting periods, including interim periods within those annual periods, beginning after December
15, 2017. The Company adopted this standard in the quarter ended March 31, 2018. The adoption of this standard did not have a
material impact on our consolidated financial statements and related disclosures.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain
Cash Receipts and Cash Payments. The standard makes eight targeted changes to how cash receipts and cash payments are presented
and classified in the statement of cash flows. The standard is effective for fiscal years beginning after December 15, 2017, and
interim periods within those fiscal years. The new standard requires adoption on a retrospective basis unless it is impracticable
to apply, in which case the Company would be required to apply the amendments prospectively as of the earliest date practicable.
The Company adopted this standard effective January 1, 2018. Adoption of this standard did not impact our consolidated financial
statements for the current or prior periods presented.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition
and Measurement of Financial Assets and Financial Liabilities, which updates certain aspects of recognition, measurement, presentation
and disclosure of financial instruments. The Company adopted this standard effective June 29, 2018, upon the execution of our preferred
share equity investment described in Note 5. The Company has elected to measure equity investments that do not have readily determinable
fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions
for the identical or a similar investment of the same issuer. The adoption of this standard did not have a material impact on our
consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606). Topic 606 supersedes the revenue recognition requirements in Topic 605 “Revenue
Recognition” (Topic 605) and requires entities to recognize revenues when control of the promised goods or services is transferred
to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those
goods or services. We adopted Topic 606 as of January 1, 2018 using the modified retrospective transition method. Results for
reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and
continue to be reported in accordance with our historic accounting treatment under Topic 605. We recorded a net decrease to opening
accumulated deficit of $81,724, as of January 1, 2018 due to the cumulative impact of adopting Topic 606, with the impact primarily
related to our post contract support (PCS deferred revenue).
Note 15 – Subsequent Events
Software Licenses and Investment:
On October 4, 2018, the Company invested
in WakingApp Ltd., a private corporation that is in the augmented reality software tool market. The Company participated in a financing
round with other investors that resulted in the Company acquiring less than a 1% ownership interest, in the form of preferred stock,
in WakingApp Ltd., for a purchase price of $250,000. As part of this investment, the Company entered into
a commercial agreement with WakingApp such that WakingApp would: (i) provide full support of the Company’s AR products through
the WakingApp AR tool software; (ii) provide three (3) working AR environments built with their tools to give away as demonstrations
on the M300; and (iii) allow the Company to provide 60-day free licenses to their AR software tool to up to 100,000 of the Company’s
developers and customers.
Non-Compete Amendment:
On October 4, 2018, the Company entered
into amendment No. 1 to agreements (the “TDG Amendment”), with TDG Acquisition Company, LLC (“TDG”). 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, homeland and border security. The Company will owe TDG commissions with respect to
all such sales until June 2022.
Pursuant to the TDG Amendment, the
Company also agreed to pay to TDG $1,500,000, as follows: (a) $750,000, within three (3) days after the date of the TDG Agreement;
(b) $500,000, on or before January 4, 2019; and $250,000, on or before April 5, 2019.
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, 2017.
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 are based on our unaudited condensed consolidated financial statements and related notes appearing
elsewhere in this quarterly report. The preparation of these statements in conformity with generally accepted accounting 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;
|
|
·
|
fair value measurement of financial instruments and embedded derivatives;
|
|
·
|
stock-based compensation; and
|
Our accounting policies are more fully
described in the notes to our condensed consolidated financial statements included in this quarterly report and in our annual
report on Form 10-K for the year ended December 31, 2017. There have been no significant changes in our accounting policies other
than the adoption of ASC 606, see Note 2 for further discussion, for the nine-month period ended September 30, 2018.
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 augmented reality wearable display devices
also referred to as head mounted displays (or HMDs, but also known as Video Eyewear, near-eye displays or near-eye virtual displays),
in the form of Smart Glasses and Augmented Reality (AR) glasses. Our AR wearable display devices are worn like eyeglasses and contain
varying features such as built-in video screens and audio. These devices also often include cameras, sensors, and a computer, that
enable the user to view and interact with video and digital content, such as movies, computer data, the Internet or video games.
Our AR wearable display products provide virtual large high-resolution screens and present a virtual image to the user through
our proprietary optics and projection engines. Using these optics and displays, our AR wearable display devices provide a virtual
image that appears to the wearer in sizes ranging from the image from a typical smart phone screen at arm’s length away,
to models that offer wall-sized home theatre screens. Our virtual imaging products integrate microdisplay technology with our advanced
optics to produce compact high-resolution display engines, less than half an inch diagonally, which when viewed through our eyeglasses
products create virtual images that appear comparable in size to that of a computer monitor or a large-screen television.
Our Smart Glasses are designed to work
standalone or as a peripheral to the smartphone and have many of the same capabilities of the smartphone itself, allowing them
to be used as a hands-free wearable computer. Our products can be used as a wearable substitute for large-screen televisions,
desktop computer monitors or tablets. Additionally, our Smart Glasses allow users to utilize many smartphone applications while
keeping their smartphones in a pocket or purse. Users of mobile devices sometime employ tablets and smartphones to replace their
personal computer or console game systems while they are outside their homes or offices. Our wearable display products enable
users of these mobile devices to effectively view the entire screen on a small, eyeglass-like device allowing real world interaction
while viewing the screen.
Recent Accounting Pronouncements
See Note 14 to the consolidated financial
statements.
Results of Operations
Comparison of Three Months Ended
September 30, 2018 and September 30, 2017
The following table compares the Company’s
consolidated statements of operations data for the three months ended September 30, 2018 and 2017:
|
|
3 Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
Dollar
Change
|
|
|
% Increase (Decrease)
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of Products
|
|
$
|
1,842,500
|
|
|
$
|
1,138,413
|
|
|
$
|
704,087
|
|
|
|
62
|
%
|
Sales of Engineering Services
|
|
|
80,900
|
|
|
|
266,687
|
|
|
|
(185,787
|
)
|
|
|
(70
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales
|
|
|
1,923,400
|
|
|
|
1,405,100
|
|
|
|
518,300
|
|
|
|
37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales - Products
|
|
|
1,267,320
|
|
|
|
1,089,881
|
|
|
|
177,439
|
|
|
|
16
|
%
|
Cost of Sales - Engineering Services
|
|
|
35,160
|
|
|
|
407,220
|
|
|
|
(372,060
|
)
|
|
|
(91
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cost of Sales
|
|
|
1,302,480
|
|
|
|
1,497,101
|
|
|
|
(194,621
|
)
|
|
|
(13
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit (Loss) (exclusive of depreciation shown separately below)
|
|
|
620,920
|
|
|
|
(92,001
|
)
|
|
|
712,921
|
|
|
|
(775
|
%)
|
Gross Profit (Loss) %
|
|
|
32
|
%
|
|
|
(7
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and Development
|
|
|
2,468,449
|
|
|
|
1,506,307
|
|
|
|
962,142
|
|
|
|
64
|
%
|
Selling and Marketing
|
|
|
966,294
|
|
|
|
908,797
|
|
|
|
57,497
|
|
|
|
6
|
%
|
General and Administrative
|
|
|
1,666,596
|
|
|
|
1,612,542
|
|
|
|
54,054
|
|
|
|
3
|
%
|
Depreciation and Amortization
|
|
|
377,724
|
|
|
|
251,366
|
|
|
|
126,358
|
|
|
|
50
|
%
|
Impairment of Software Development Cost
|
|
|
196,223
|
|
|
|
-
|
|
|
|
196,223
|
|
|
|
NM
|
|
(Gain) Loss on Inventory Revaluation and Product Discontinuance
|
|
|
(211,416
|
)
|
|
|
1,151,482
|
|
|
|
(1,362,898
|
)
|
|
|
(118
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from Operations
|
|
|
(4,842,950
|
)
|
|
|
(5,522,495
|
)
|
|
|
679,545
|
|
|
|
(12
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Income
|
|
|
71,089
|
|
|
|
12,956
|
|
|
|
58,133
|
|
|
|
449
|
%
|
Other Taxes
|
|
|
(17,809
|
)
|
|
|
(15,734
|
)
|
|
|
(2,075
|
)
|
|
|
13
|
%
|
Loss on asset disposal
|
|
|
-
|
|
|
|
(585
|
)
|
|
|
585
|
|
|
|
(100
|
%)
|
Foreign Exchange Loss
|
|
|
(26,963
|
)
|
|
|
(5,246
|
)
|
|
|
(21,717
|
)
|
|
|
414
|
%
|
Gain on Derivative Valuation
|
|
|
21,814
|
|
|
|
41,454
|
|
|
|
(19,640
|
)
|
|
|
(47
|
%)
|
Interest Expense
|
|
|
(2,937
|
)
|
|
|
(12,592
|
)
|
|
|
9,655
|
|
|
|
(77
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Income (Expense)
|
|
|
45,194
|
|
|
|
20,253
|
|
|
|
24,941
|
|
|
|
123
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss Before Provision for Income Taxes
|
|
|
(4,797,756
|
)
|
|
|
(5,502,242
|
)
|
|
|
704,486
|
|
|
|
(13
|
%)
|
Provision for Income Taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(4,797,756
|
)
|
|
$
|
(5,502,242
|
)
|
|
$
|
704,486
|
|
|
|
(13
|
%)
|
Sales.
There was an
overall increase in total sales for the quarter ended September 30, 2018 over the same period in 2017 of $518,300 or 37%. The following
table reflects the major components of our sales:
|
|
Quarter Ended
September
30,
2018
|
|
|
% of
Sales
|
|
|
Quarter Ended
September
30,
2017
|
|
|
% of
Sales
|
|
|
Dollar
Change
|
|
|
% Increase
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of Smart Glasses
|
|
$
|
1,715,042
|
|
|
|
89
|
%
|
|
$
|
1,027,397
|
|
|
|
73
|
%
|
|
$
|
687,645
|
|
|
|
67
|
%
|
Sales of Video Eyewear
|
|
|
93,470
|
|
|
|
5
|
%
|
|
|
50,892
|
|
|
|
4
|
%
|
|
|
42,578
|
|
|
|
84
|
%
|
Sales of Waveguides
|
|
|
3,250
|
|
|
|
0
|
%
|
|
|
45,000
|
|
|
|
3
|
%
|
|
|
(41,750
|
)
|
|
|
(93
|
)%
|
Sales Freight out
|
|
|
30,738
|
|
|
|
2
|
%
|
|
|
15,124
|
|
|
|
1
|
%
|
|
|
15,614
|
|
|
|
103
|
%
|
Sales of Engineering Services
|
|
|
80,900
|
|
|
|
4
|
%
|
|
|
266,687
|
|
|
|
19
|
%
|
|
|
(185,787
|
)
|
|
|
(70
|
)%
|
Total Sales
|
|
$
|
1,923,400
|
|
|
|
100
|
%
|
|
$
|
1,405,100
|
|
|
|
100
|
%
|
|
$
|
518,300
|
|
|
|
37
|
%
|
The overall increase in total sales
was primarily the result of stronger sales of smart glasses, primarily our M300s, which in the third quarter of 2018 had
sales of $1,715,042 as compared to $1,027,397 in the same period in 2018, a 67% increase. Sales of our new Blade Smart
Glasses, included in this revenue category, were 11% of our smart glass revenue category. Our iWear Video Headphones unit
sales rose 84% in the third quarter of 2018 as compared to the same period in 2017. Production of this product was
discontinued as of September 30, 2018 and all remaining residual stock to be sold will result in minimal future revenues from
this product category. Sales of Waveguides for the three months ending September 30, 2018 were $3,250 versus $45,000 in the
prior year’s comparable period.
Sales of engineering services for the three-month period ending September 30, 2018 was $80,900 as compared
to $266,687 in the 2017 period. The 2018 amount represents the commencement of a new program with a new aviation focused customer.
The 2017 period’s revenue was comprised primarily of the amounts billed to Toshiba under our development supply agreement,
which was completed in March 2018.
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 Product Cost of Sales
|
|
Quarter
Ended
September
30,
2018
|
|
|
As
% Related
Product
Sales
|
|
|
Quarter
Ended
September
30,
2017
|
|
|
As
% Related
Product
Sales
|
|
|
Dollar
Change
|
|
|
%
Increase
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product Cost of Sales
|
|
$
|
657,992
|
|
|
|
36
|
%
|
|
$
|
526,040
|
|
|
|
46
|
%
|
|
$
|
131,952
|
|
|
|
25
|
%
|
Freight Costs
|
|
|
177,807
|
|
|
|
10
|
%
|
|
|
151,650
|
|
|
|
13
|
%
|
|
|
26,157
|
|
|
|
17
|
%
|
Manufacturing Overheads
|
|
|
220,980
|
|
|
|
12
|
%
|
|
|
219,834
|
|
|
|
19
|
%
|
|
|
1,146
|
|
|
|
1
|
%
|
Warranty Costs
|
|
|
101,292
|
|
|
|
5
|
%
|
|
|
82,995
|
|
|
|
7
|
%
|
|
|
18,297
|
|
|
|
22
|
%
|
Amortization of Software Development Costs
|
|
|
75,000
|
|
|
|
4
|
%
|
|
|
71,613
|
|
|
|
6
|
%
|
|
|
3,387
|
|
|
|
5
|
%
|
Software Royalties
|
|
|
34,249
|
|
|
|
2
|
%
|
|
|
37,749
|
|
|
|
3
|
%
|
|
|
(3,500
|
)
|
|
|
(9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cost of Sales - Products
|
|
$
|
1,267,320
|
|
|
|
69
|
%
|
|
$
|
1,089,881
|
|
|
|
96
|
%
|
|
$
|
177,439
|
|
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit - Product Sales
|
|
$
|
575,180
|
|
|
|
31
|
%
|
|
$
|
48,532
|
|
|
|
4
|
%
|
|
$
|
526,648
|
|
|
|
1,085
|
%
|
For the quarter ended September 30, 2018 we reported an overall
gross profit from product sales of $575,180 as compared to $48,532 in the prior year’s period. On a product cost of sales
basis only, product direct costs were 36% of sales in the 2018 period as compared to 46% in the prior year’s period, representing
improved average sales prices of our smart glasses. Manufacturing overhead costs for the 2018 period, as a percentage of total
product sales, declined to 12% for the 2018 period from 19% in the 2017 period, all the result of higher product revenues.
Costs for engineering services for the three months ended September 30, 2018 were $35,160 as compared
to $407,220 in the three-month period ending September 30, 2017. The 2017 period amounts represented costs related to the Toshiba
engineering program which was completed in March 2018. The 2018 engineering program commenced in September 2018 and was at a smaller
scale than the Toshiba project. There was $45,740 gross profit from engineering services for the 2018 period versus a gross loss
from engineering services of $140,533 in the same period in 2017 when the Toshiba project was active.
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.
|
|
Quarter
Ended
September
30,
2018
|
|
|
%
of
Sales
|
|
|
Quarter
Ended
September
30,
2017
|
|
|
%
of
Sales
|
|
|
Dollar
Change
|
|
|
% Increase
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and Development
|
|
$
|
2,468,449
|
|
|
|
128
|
%
|
|
$
|
1,506,307
|
|
|
|
107
|
%
|
|
$
|
962,142
|
|
|
|
64
|
%
|
Comparing our research and development costs for the quarter ended September 30, 2018 versus the same
period in 2017, there was an increase in 2018 salary, benefits and stock compensation expenses of $581,608, primarily the result
of additional R&D staff as compared to the same period in 2017; increased consulting and contractor fees for Blade Smart Glasses
software development of $293,629; increased research, development projects and supplies costs of $62,280; and a $9,724 increase
in travel 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.
|
|
Quarter
Ended
September
30,
2018
|
|
|
%
of
Sales
|
|
|
Quarter
Ended
September
30,
2017
|
|
|
%
of
Sales
|
|
|
Dollar
Change
|
|
|
% Increase
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and Marketing
|
|
$
|
966,294
|
|
|
|
50
|
%
|
|
$
|
908,797
|
|
|
|
65
|
%
|
|
$
|
57,497
|
|
|
|
6
|
%
|
These costs increased overall as compared to the same period in 2017 primarily due to the following factors:
a $62,968 increase in salary, separation payments, commissions, benefits and stock compensation expenses; an increase of $269,466
in our app store and website related costs; a decrease of $201,078 in advertising, marketing and trade show costs; and a decrease
of $30,810 in travel costs.
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.
|
|
Quarter Ended
September
30,
2018
|
|
|
% of
Sales
|
|
|
Quarter Ended
September
30,
2017
|
|
|
% of
Sales
|
|
|
Dollar
Change
|
|
|
% Increase
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and Administrative
|
|
$
|
1,666,596
|
|
|
|
87
|
%
|
|
$
|
1,612,542
|
|
|
|
115
|
%
|
|
$
|
54,054
|
|
|
|
3
|
%
|
General and administrative costs rose by
3% or $54,054 for the third quarter of 2018 versus the 2017 period primarily because of: increased salary, separation and stock
compensation costs of $16,768; an increase of $153,361 in legal fees; an increase of $45,194 in computer subscriptions, credit
card fees and insurance costs; an increase in SOX consultants costs of $45,114, and a reduction of $220,399 in IR and shareholder
related expenses.
Depreciation and Amortization.
Depreciation
and amortization expense for the three months ended September 30, 2018 was $377,724 as compared to $251,366 in the same period
in 2017, an increase of $126,358. The increase in depreciation and amortization expense is due to new investments in depreciable
assets.
(Gain) Loss on Inventory Revaluation
and Product Discontinuance.
There was a gain on inventory valuation for the three months ended September 30, 2018 of $211,416
as compared to loss of $1,151,482 in the same period in 2017. The 2017 loss write-down was the result of management’s decision
to further reduce the suggested retail selling price of its iWear Video Eyewear inventory on hand and the remaining contracted
production to a price below the product’s then current carrying cost. The 2018 gain was the result of improved net production
yields and other lower discontinuance costs over the prior 2017 estimates that were realized when production of this product was
completely discontinued during the quarter.
Other Income (Expense)
. Total
other income was $45,194 for the three months ended September 30, 2018 as compared to $20,253 in the same period in 2017. The overall
increase of $24,941 in other income and expenses was primarily the result of an increased loss of $21,717 in foreign exchange for
the three months ended September 30, 2018 as compared to the same period in 2017, offset by a $58,133 increase in investment income.
Provision for Income Taxes.
There
was not a provision for income taxes in the three-month periods ending September 30, 2018 and 2017.
Comparison of Nine Months Ended September 30, 2018 and
September 30, 2017
The following table compares the Company’s
consolidated statements of operations data for the nine months ended September 30, 2018 and 2017:
|
|
9 Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
Dollar
Change
|
|
|
% Increase (Decrease)
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of Products
|
|
$
|
5,853,461
|
|
|
$
|
3,002,744
|
|
|
$
|
2,850,717
|
|
|
|
95
|
%
|
Sales of Engineering Services
|
|
|
261,416
|
|
|
|
938,281
|
|
|
|
(676,865
|
)
|
|
|
(72
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales
|
|
|
6,114,877
|
|
|
|
3,941,025
|
|
|
|
2,173,852
|
|
|
|
55
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales - Products
|
|
|
4,426,904
|
|
|
|
3,441,650
|
|
|
|
985,254
|
|
|
|
29
|
%
|
Cost of Sales - Engineering Services
|
|
|
219,756
|
|
|
|
872,137
|
|
|
|
(652,381
|
)
|
|
|
(75
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cost of Sales
|
|
|
4,646,660
|
|
|
|
4,313,787
|
|
|
|
332,873
|
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit (Loss) (exclusive of depreciation shown separately below)
|
|
|
1,468,217
|
|
|
|
(372,762
|
)
|
|
|
1,840,979
|
|
|
|
(494
|
%)
|
Gross Profit (Loss) %
|
|
|
24
|
%
|
|
|
(10
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and Development
|
|
|
7,158,356
|
|
|
|
4,374,202
|
|
|
|
2,784,154
|
|
|
|
64
|
%
|
Selling and Marketing
|
|
|
4,048,029
|
|
|
|
2,739,978
|
|
|
|
1,308,051
|
|
|
|
48
|
%
|
General and Administrative
|
|
|
5,579,500
|
|
|
|
4,155,960
|
|
|
|
1,423,540
|
|
|
|
34
|
%
|
Depreciation and Amortization
|
|
|
946,335
|
|
|
|
734,175
|
|
|
|
212,160
|
|
|
|
29
|
%
|
Impairment of Software Development Cost
|
|
|
196,223
|
|
|
|
-
|
|
|
|
196,223
|
|
|
|
NM
|
|
(Gain) Loss on Inventory Revaluation and Product Discontinuance
|
|
|
(211,416
|
)
|
|
|
1,151,482
|
|
|
|
(1,362,898
|
)
|
|
|
(118
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from Operations
|
|
|
(16,248,810
|
)
|
|
|
(13,528,559
|
)
|
|
|
(2,720,251
|
)
|
|
|
20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Income
|
|
|
111,075
|
|
|
|
45,800
|
|
|
|
65,275
|
|
|
|
143
|
%
|
Other Taxes
|
|
|
(47,667
|
)
|
|
|
(37,884
|
)
|
|
|
(9,783
|
)
|
|
|
26
|
%
|
Loss on asset disposal
|
|
|
(56,836
|
)
|
|
|
(585
|
)
|
|
|
(56,251
|
)
|
|
|
9,616
|
%
|
Foreign Exchange Loss
|
|
|
(36,615
|
)
|
|
|
(30,299
|
)
|
|
|
(6,316
|
)
|
|
|
21
|
%
|
Gain (Loss) on Derivative Valuation
|
|
|
(13,873
|
)
|
|
|
50,598
|
|
|
|
(64,471
|
)
|
|
|
(127
|
%)
|
Amortization of Term Debt Discount and Deferred Issuance Costs
|
|
|
-
|
|
|
|
(175,260
|
)
|
|
|
175,260
|
|
|
|
(100
|
%)
|
Interest Expense
|
|
|
(19,128
|
)
|
|
|
(77,849
|
)
|
|
|
58,721
|
|
|
|
(75
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Income (Expense)
|
|
|
(63,044
|
)
|
|
|
(225,479
|
)
|
|
|
162,435
|
|
|
|
(72
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss Before Provision for Income Taxes
|
|
|
(16,311,854
|
)
|
|
|
(13,754,038
|
)
|
|
|
(2,557,816
|
)
|
|
|
19
|
%
|
Provision for Income Taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(16,311,854
|
)
|
|
$
|
(13,754,038
|
)
|
|
$
|
(2,557,816
|
)
|
|
|
19
|
%
|
Sales.
There was an
overall increase in total revenue for the nine months ended September 30, 2018 over the same period in 2017 of $2,173,852 or 55%.
The following table reflects the major components of our sales:
|
|
9 Months
Ended
September
30,
2018
|
|
|
% of
Sales
|
|
|
9 Months
Ended
September
30,
2017
|
|
|
% of
Sales
|
|
|
Dollar
Change
|
|
|
% Increase
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of Smart Glasses
|
|
$
|
4,572,715
|
|
|
|
75
|
%
|
|
$
|
2,636,749
|
|
|
|
67
|
%
|
|
$
|
1,935,966
|
|
|
|
73
|
%
|
Sales of OEM Products
|
|
|
766,065
|
|
|
|
13
|
%
|
|
|
-
|
|
|
|
0
|
%
|
|
|
766,065
|
|
|
|
NM
|
|
Sales of Video Eyewear
|
|
|
302,064
|
|
|
|
5
|
%
|
|
|
168,216
|
|
|
|
4
|
%
|
|
|
133,848
|
|
|
|
80
|
%
|
Sales of Waveguides
|
|
|
127,900
|
|
|
|
2
|
%
|
|
|
161,305
|
|
|
|
4
|
%
|
|
|
(33,405
|
)
|
|
|
(21
|
)%
|
Sales Freight out
|
|
|
84,717
|
|
|
|
1
|
%
|
|
|
36,474
|
|
|
|
1
|
%
|
|
|
48,243
|
|
|
|
132
|
%
|
Sales of Engineering Services
|
|
|
261,416
|
|
|
|
4
|
%
|
|
|
938,281
|
|
|
|
24
|
%
|
|
|
(676,865
|
)
|
|
|
(72
|
)%
|
Total Sales
|
|
$
|
6,114,877
|
|
|
|
100
|
%
|
|
$
|
3,941,025
|
|
|
|
100
|
%
|
|
$
|
2,173,852
|
|
|
|
55
|
%
|
The overall increase in total sales was
primarily the result of stronger smart glasses sales, primarily our M300, sales of which in the first nine months of 2018 which
were $4,452,715 as compared to $2,636,749 in the same period in 2017, a 73% increase. Sales of our new Blade Smart Glasses, included
in this revenue category, were 4% of our smart glass revenue category. Sales of our OEM products under the Toshiba Supply Agreement
were $766,065 in the first nine months of 2018 as compared to nil in the same period in 2017. Our iWear Video Headphones sales
rose 80% in the first nine months of 2018 as compared to the same period in 2017. Production of this product was
discontinued as of September 30, 2018 and all remaining residual stock to be sold will result in minimal future revenues from
this product category. Sales of Waveguides for the nine months ending September 30, 2018 were $127,900 versus $161,305 in the prior year’s comparable period.
Sales of engineering services for the nine-month period ending September 30, 2018 decreased to $261,416
from $938,281 in 2017 period. The 2017 period’s revenue was comprised primarily of the amounts billed to Toshiba under our
development agreement with them and when the development program was active. This Toshiba program was completed in March 2018.
Cost of Sales and Gross Profit (Loss).
Cost of product revenues and engineering services are comprised of materials, components, labor, warranty costs, freight
costs, manufacturing overhead, software royalties, 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 Product Cost of Sales
|
|
9
Months Ended
September
30,
2018
|
|
|
As
% Related
Product
Sales
|
|
|
9
Months Ended
September
30,
2017
|
|
|
As
% Related
Product
Sales
|
|
|
Dollar
Change
|
|
|
%
Increase
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product Cost of Sales
|
|
$
|
2,556,717
|
|
|
|
44
|
%
|
|
$
|
1,928,053
|
|
|
|
64
|
%
|
|
$
|
628,664
|
|
|
|
33
|
%
|
Freight Costs
|
|
|
498,140
|
|
|
|
9
|
%
|
|
|
381,394
|
|
|
|
13
|
%
|
|
|
116,746
|
|
|
|
31
|
%
|
Manufacturing Overheads
|
|
|
832,332
|
|
|
|
14
|
%
|
|
|
653,471
|
|
|
|
22
|
%
|
|
|
178,861
|
|
|
|
27
|
%
|
Warranty Costs
|
|
|
365,295
|
|
|
|
6
|
%
|
|
|
175,184
|
|
|
|
6
|
%
|
|
|
190,111
|
|
|
|
109
|
%
|
Amortization of Software Development Costs
|
|
|
75,000
|
|
|
|
1
|
%
|
|
|
214,838
|
|
|
|
7
|
%
|
|
|
(139,838
|
)
|
|
|
(65
|
)%
|
Software Royalties
|
|
|
99,420
|
|
|
|
2
|
%
|
|
|
88,710
|
|
|
|
3
|
%
|
|
|
10,710
|
|
|
|
12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cost of Sales - Products
|
|
$
|
4,426,904
|
|
|
|
76
|
%
|
|
$
|
3,441,650
|
|
|
|
115
|
%
|
|
$
|
985,254
|
|
|
|
29
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit - Product Sales
|
|
$
|
1,426,557
|
|
|
|
24
|
%
|
|
$
|
(438,906
|
)
|
|
|
15
|
%
|
|
$
|
1,865,463
|
|
|
|
(425
|
)%
|
For the nine months ended September 30,
2018 we reported an overall gross profit from product sales of $1,426,557 as compared to a gross loss of $438,906 in the prior
year’s period. On a product cost of sales basis only, product direct costs decreased to 44% of sales versus 64% in the prior
year’s period when we recorded inventory obsolescence provisions of $473,324 related to initial M300 volume production issues
and the move from our contract manufacturer’s California site to their China facility in spring 2017. Manufacturing overhead
costs rose by 27% primarily due to staff additions as part of the commencement of Blade production in Rochester, NY, as opposed
to offshore where our other smart glasses products are assembled. As a percentage of total product sales, manufacturing overhead
costs declined to 14% for the 2018 period from 22% in the 2017 period.
Costs for engineering services for the nine months ended September 30, 2018 was $219,756 as compared to
$872,137 in the prior 2017 period. These amounts represent direct project costs as well as the reclassification of internal research
and development wage costs related to the Toshiba engineering program which was completed in March 2018. We earned a gross profit
of $41,660 for nine months ending September 30, 2018, versus a gross profit from engineering services of $66,144 in the same period
in 2017.
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.
|
|
9
Months Ended
September
30,
2018
|
|
|
%
of
Sales
|
|
|
9
Months Ended
September
30,
2017
|
|
|
%
of
Sales
|
|
|
Dollar
Change
|
|
|
%
Increase
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and Development
|
|
$
|
7,158,356
|
|
|
|
117
|
%
|
|
$
|
4,374,202
|
|
|
|
111
|
%
|
|
$
|
2,784,154
|
|
|
|
64
|
%
|
Comparing our research and development costs
for the nine months ending September 30, 2018 versus the same period in 2017: there was an increase in 2018 salary, benefits and
stock compensation expenses of $1,325,420, primarily the result of additional R&D staff versus the same period in 2017; increased
research, development projects and supplies costs of $183,617 and increased consulting and contractor fees of $960,857, both primarily
related to software development services for our Blade Smart Glasses; a $91,099 increase in travel costs; increases in supply,
rentals, subscription and license expenses totaling $187,807; and a $30,183 increase in hiring expenses.
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.
|
|
9
Months Ended
September
30,
2018
|
|
|
%
of
Sales
|
|
|
9
Months Ended
September
30,
2017
|
|
|
%
of
Sales
|
|
|
Dollar
Change
|
|
|
%
Increase
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and Marketing
|
|
$
|
4,048,029
|
|
|
|
66
|
%
|
|
$
|
2,739,978
|
|
|
|
70
|
%
|
|
$
|
1,308,051
|
|
|
|
48
|
%
|
These costs increased overall as compared to the same period in 2017 primarily due to the following factors:
a $464,526 increase in salary, separation payments, commissions, benefits and stock compensation expenses; an increase of $532,046
in our app store and website related costs; an increase of $235,017 in advertising, marketing and trade show costs; and an increase
of $81,935 in travel costs.
General and Administrative.
General
and administrative costs include professional fees, investor relations (IR) costs including shares and warrants issued for IR
services, salaries and related stock compensation, travel costs, office and rental costs.
|
|
9 Months Ended
September
30,
2018
|
|
|
% of
Sales
|
|
|
9 Months Ended
September
30,
2017
|
|
|
% of
Sales
|
|
|
Dollar
Change
|
|
|
% Increase
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and Administrative
|
|
$
|
5,579,500
|
|
|
|
91
|
%
|
|
$
|
4,155,960
|
|
|
|
105
|
%
|
|
$
|
1,423,540
|
|
|
|
34
|
%
|
General and administrative costs rose by
34% or $1,423,540 for the nine month period ending September 30, 2018 versus the 2017 period primarily because of: increased salary,
separation and stock compensation costs of $1,130,568 due to the hiring of new staff as compared to the prior year’s period
and separation costs of the Company’s former COO; an increase of $256,013 in legal fees; an increase in travel expenses of
$93,955; and increased bank, credit card fees, software subscriptions, insurance, and office supplies totaling $141,878; a $225,861
decrease in external IR and shareholder related costs; and a $150,780 decrease in audit and SOX consultancy costs from the 2017
period when we were making significant investments in these areas.
Depreciation and Amortization.
Depreciation
and amortization expense for the nine months ended September 30, 2018 was $946,335 as compared to $734,175 in the same period in
2017, an increase of $212,160. The increase in depreciation and amortization expense is due to new investments in depreciable assets.
(Gain) Loss on Inventory
Revaluation and Product Discontinuance.
There was a gain on inventory valuation for the nine months ended September 30,
2018 of $211,416 as compared to loss of $1,151,482 in the same period in 2017. The 2017 loss write-down was the result of
management’s decision to further reduce the suggested retail selling price of its iWear Video Eyewear inventory on hand
and the remaining contracted production to a price below the product’s then current carrying cost. The 2018 gain was
the result of improved net production yields and other lower discontinuance costs over the prior 2017 estimates that were
realized when production of this product was completely discontinued during the quarter.
Other Income (Expense).
Total
other expense was $63,044 for the nine months ended September 30, 2018 as compared to an expense of $225,749 in the same period
in 2017. The overall decrease of $162,435 in these other expenses was primarily the result of $-0- for the amortization of senior
term debt discounts and deferred financing costs for the nine months ended September 30, 2018 as compared to a 2017 expense of
$175,260 and a related reduction in interest expense of $58,721 due to the conversions and maturity of the debt on June 3, 2017.
Other items reducing the impact of preceding costs savings were a $64,471 increased loss on the derivative valuation, $56,251 loss
on asset disposals and abandonment, and a $65,275 increase in investment income.
Provision for Income Taxes
.
There
was not a provision for income taxes in the nine-month periods ended September 30, 2018 and 2017.
Liquidity and Capital Resources
As of September 30, 2018, we had cash
and cash equivalents of $23,471,941, an increase of $8,582,305 from $14,889,636 as of December 31, 2017.
At September 30, 2018, we had current assets
of $33,337,858 compared to current liabilities of $3,582,191 which resulted in a positive working capital position of $29,755,667.
At December 31, 2017, we had a working capital position of $15,807,364. Our current liabilities are comprised principally of accounts
payable and accrued expenses.
Operating Activities
.
We
used $17,934,510 of cash for operating activities for the nine months ended September 30, 2018 and $12,091,984 in the same period
in 2017. The net cash operating loss after adding back non-cash adjustments for the nine months ended September 30, 2018 was $13,144,406,
along with the following changes in operating assets and liabilities for the period: a $497,784 decrease in accrued project revenue,
a $2,950,276 increase in net inventory, a $1,929,994 decrease in accounts payable, and a $327,469 decrease in accrued compensation.
The major operating items for the nine months ended September 30, 2017 resulted from a $10,432,444 loss from operations after
non-cash adjustments, and a $687,001 increase in accrued project revenue, a $1,342,855 increase in net inventory, a $367,170 increase
in accounts receivable, a $734,478 increase in accounts payable, a $392,242 reduction in unearned revenue, a $240,110 reduction
in accrued compensation, and a $253,398 increase in accrued expenses.
Investing Activities
.
Cash
used in investing activities was $1,547,560 for the nine months ended September 30, 2018 as compared to $1,681,940 in the same
period in 2017. During the first nine months of 2018, $886,713 was used primarily for the purchase of manufacturing equipment,
product mold tooling, and computer equipment as compared to spending of $1,197,452 for the same period in 2017. The costs of registering
our intellectual property rights and license purchases, included in the investing activities totals described above, were $323,347
in the nine-month period ending September 30, 2018 and $155,284 in the same period in 2017. During the nine months ending September
30, 2018, a total of $87,500 in software development costs were capitalized, versus $329,204 for the same period in 2017. During
the 2018 period, the Company invested $250,000 in a private corporation that is in the low vision near-eye display market.
Financing Activities.
We generated $28,064,375 of cash from financing activities for the nine months ending September 30, 2018 as compared to $7,917,321
in the same period in 2017. For the 2018 period, financing activities consisted primarily of a public offering of 3,000,000 shares
of common stock and warrants to purchase an aggregate of up to 1,200,000 shares of common stock in January 2018, resulting in proceeds
after commissions and offering expenses of $28,025,000. In the same period in 2017, financing activities consisted of a public
offering of 1,500,000 shares of common stock in August 2017, resulting in proceeds after offering expenses of $7,917,321.
Capital Resources.
As
of September 30, 2018, we had a cash and cash equivalents balance of $23,471,941.
We incurred a net loss for the nine months
ended September 30, 2018 of $16,311,854 and annual net losses of $19,633,502 in 2017 and $19,250,082 in 2016. The Company has an
accumulated deficit of $112,702,582 as of September 30, 2018.
The Company’s cash requirements are
primarily for funding operating losses, working capital, research and development, and capital expenditures. 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 capital. Our cash requirements related to funding operating losses depend on 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 by the sale of equity, borrowings under notes, and
sales of convertible debt. On January 29, 2018, the Company closed a public offering of 3,000,000 shares of common stock and warrants
to purchase an aggregate of up to 1,200,000 shares of common stock resulting in net proceeds of $28,025,000 after commissions
and offering expenses.
In early October 2018, we announced we had amended the 10-year non-compete restrictions with the buyer
of its defense division, TDG Acquisition LLC (DBA – Six15 Technologies (“Six15”)) in June 2012. This amendment
will allow us to immediately pursue opportunities related to the Company’s smart glasses and waveguide optics technologies
into these expanded market opportunities related to first responders, US Department of Defense, Security Organizations and the
Military. Additionally, Vuzix is now permitted to perform contract work with
and
sell its waveguide optics and display engines to the largest third-party defense suppliers around the world that wish to incorporate
Vuzix near-eye display or HMD technologies into the products and systems that they sell into Military Organizations. And while
direct sales of products and services by Vuzix to Military Organizations are still precluded pursuant to the original non-compete,
these new markets for Vuzix products should be significant in both the United States and globally.
Pursuant
to the TDG Amendment, the Company also agreed to pay to TDG $1,500,000, as follows: (a) $750,000, within three (3) days after the
date of the TDG Agreement; (b) $500,000, on or before January 4, 2019; and $250,000, on or before April 5, 2019.
We believe our existing cash and cash equivalent balances will be sufficient to meet our working capital
and capital expenditure needs for at least the next twelve months. We will continue to invest in our research and development,
IP portfolio, and new products offerings. Our future capital requirements may vary materially from those currently planned and
will depend on many factors, including our levels of revenue, the timing and extent of spending on research and development efforts
and other business initiatives, the expansion of sales and marketing activities, the timing of new product introductions, market
acceptance of our products, acquisitions, and overall economic conditions. To the extent that current and anticipated future sources
of liquidity are insufficient to fund our future business activities and requirements, we may be required to seek additional equity
or debt financing. If the Company raises additional equity funds by these methods, 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. The incurrence of debt financing would result in debt
service obligations and the instruments governing such debt could provide for operating and financing covenants that would restrict
our future operations. 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 plans in the future.
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 statements concerning:
|
·
|
Our cash needs and financing plans;
|
|
·
|
Our possible or assumed future results of operations;
|
|
·
|
Our business strategies;
|
|
·
|
Our ability to attract and retain customers;
|
|
·
|
Our ability to sell additional products and services to customers;
|
|
·
|
Our competitive position;
|
|
·
|
Our industry environment;
|
|
·
|
Our potential growth opportunities;
|
|
·
|
Expected technological advances by us or by third parties and our ability to leverage them;
|
|
·
|
The effects of future regulation; and
|
|
·
|
The effects of competition.
|
All statements in this quarterly report
that are not historical facts are forward-looking statements. We may, in some cases, use terms such as “anticipates,”
“believes,” “could,” “estimates,” “expects,” “intends,” “may,”
“plans,” “potential,” “predicts,” “projects,” “should,” “will,”
“would” or similar expressions that convey uncertainty of future events or outcomes to identify forward-looking statements.
The outcome of the events described in
these forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause our actual
results, performance or achievements to be materially different from any future results, performances or achievements expressed
or implied by the forward-looking statements.
All such forward-looking statements are subject to certain risks and uncertainties and should be evaluated
in light of important risk factors. These risk factors include, but are not limited to, those that are described in “Risk
Factors” under Item 1A and elsewhere in our annual report on Form 10-K for the year ended December 31, 2017 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.
Any of these factors could cause our actual results to differ materially from our anticipated results.
We caution readers to carefully consider such factors. Many of these factors are beyond our control. In addition, any forward-looking
statements represent our estimates only as of the date they are made and should not be relied upon as representing our estimates
as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, except as may be
required under applicable securities laws, we specifically disclaim any obligation to do so.