# Vuzix Corp (VUZI) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Vuzix Corp's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1463972/000155837023002560/vuzi-20221231x10k.htm
Accession: 0001558370-23-002560
Filing date: 2023-03-01
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/VUZI/
All MD&A years: /company/VUZI/mda/
Previous year: /company/VUZI/mda/fy2021/ (FY 2021)
Next year: /company/VUZI/mda/fy2023/ (FY 2023)

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of financial condition and results of operations should be read in conjunction with our financial statements and related notes appearing elsewhere in this annual report. In addition to historical information, the following discussion and analysis includes forward looking statements that involve risks, uncertainties and assumptions. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including those discussed in “Risk Factors” and elsewhere in this annual report. See the discussion under “Forward Looking Statements” beginning on page 1 of this annual report.

Overview

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 near-eye displays), in the form of Smart Glasses and Augmented Reality (AR) glasses. Our wearable display devices are worn like eyeglasses or attach to a head worn mount. These devices typically include cameras, sensors, and a computer that enable the user to view, record and interact with video and digital content, such as computer data, the Internet, social media or entertainment applications. Our wearable display products integrate micro-display technology with our advanced optics to produce compact high-resolution display engines, less than half an inch diagonally, which when viewed through our smart glasses products create virtual images that appear comparable in size to that of a computer monitor or a large-screen television.

With respect to our Smart Glasses and AR products, we are focused on the enterprise, industrial, medical and commercial markets. All of the mobile display and mobile electronics markets in which we compete have been subject to rapid technological change over the last decade including the rapid adoption of tablets, larger screen sizes and display resolutions along with declining prices on mobile phones and other computing devices, and as a result we must continue to improve our products’ performance and lower our costs. We believe our technology, intellectual property portfolio and position in the marketplace give us a leadership position in AR and Smart Glasses products, waveguide optics, micro LEDs and display engine technology.

Critical Accounting Policies and Significant Developments and Estimates

The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements and related notes appearing elsewhere in this annual 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 consolidated financial statements, including those related to revenue recognition, bad debts, inventories, warranty reserves, product warranty, carrying value of long-lived assets, 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 we cannot determine future events and their impact with certainty, the actual results may 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.

Our accounting policies are more fully described in the notes to our consolidated financial statements included in this annual report on Form 10-K. The critical accounting policies, judgments and estimates that we believe have the most significant effect on our financial statements are:

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[["","\u25cf","Valuation of inventories;"]]
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[["","\u25cf","Variable interest entities;"]]
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[["","\u25cf","Business combinations:"]]
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[["","\u25cf","Carrying value of long-lived assets, goodwill and other intangible assets;"]]
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[["","\u25cf","Software development costs;"]]
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[["","\u25cf","Revenue recognition;"]]
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[["","\u25cf","Product warranty;"]]
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[["","\u25cf","Stock-based compensation; and"]]
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[["","\u25cf","Income taxes."]]
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Valuation of Inventories

Inventory is stated at the lower of cost or net realizable value, with cost determined on a weighted average first-in, first-out method. Inventory includes purchased parts and components, work in process and finished goods. Provisions for excess, obsolete or slow-moving inventory are recorded after periodic evaluation of historical sales, current economic trends, forecasted sales, estimated product life cycles and estimated inventory levels. Purchasing practices, electronic component obsolescence, accuracy of sales and production forecasts, introduction of new products, product life cycles, product support and foreign regulations governing hazardous materials are factors that contribute to inventory valuation risks. Exposure to inventory valuation risks is managed by maintaining safety stocks, minimum purchase lots, managing product and end-of-life issues brought on by aging components or new product introductions, and by utilizing certain inventory minimization strategies such as vendor-managed inventories. The accounting estimate related to valuation of inventories is considered a “critical accounting estimate” because it is susceptible to changes from period-to-period due to the requirement for management to make estimates relative to each of the underlying factors, ranging from purchasing to sales, production, and after-sale support. If actual demand, market conditions or product life cycles differ from estimates, inventory adjustments to net realizable values would result in a reduction to the carrying value of inventory, an increase in inventory write-offs and a decrease to gross margins.

The write-down and obsolescence provision for finished goods and components totaled $290,405, $519,950 and $1,273,835 for the years ended December 31, 2022, 2021 and 2020, respectively. These provisions are included in Cost of Sales on the Consolidated Statements of Operations.

Business Combinations

The Company applied the acquisition method of accounting for business acquisitions for its business acquisition, described in further detail in Note 2. Under the acquisition method, identifiable assets acquired, liabilities assumed and consideration transferred are measured at their acquisition-date fair value. The Company used an income approach to determine the fair values, described in further detail in Note 2. We relied upon the use of reports from third-party valuation specialists to assist in the estimation of fair values. Purchase price allocations are subject to revision within the measurement period, not to exceed one year from the date of acquisition. Costs to acquire a business may include, but are not limited to, fees for accounting, legal and valuation services, and are expensed as incurred in the Consolidated Statements of Income.

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Variable Interest Entities

We determine at the inception of each arrangement whether an entity in which we have made an investment or in which we have other variable interests is considered a variable interest entity (VIE). We consolidate VIEs when we are the primary beneficiary. We are the primary beneficiary of a VIE when we have the power to direct activities that most significantly affect the economic performance of the VIE and have the obligation to absorb the majority of their losses or benefits. If we are not the primary beneficiary in a VIE, we account for the investment or other variable interests in a VIE in accordance with applicable GAAP. Each reporting period, we assess whether any changes in our interest or relationship with the entity affect our determination of whether the entity is a VIE and, if so, whether we are the primary beneficiary.

Carrying Value of Long-Lived Assets

If facts and circumstances indicate that a long-lived asset, including a products’ mold tooling and equipment, may be impaired, the carrying value is reviewed in accordance with FASB ASC Topic 360-10 Accounting for the Impairment or Disposal of Long-Lived Assets. If this review indicates that the carrying value of the asset will not be recovered as determined based on projected undiscounted cash flows related to the asset over its remaining life, the carrying value of the asset is reduced to its estimated fair value. Impairment losses are dependent on a number of factors such as general economic trends and major technology advances, and thus could be significantly different from historical results. For the years ended December 31, 2022 and 2021, we recorded a loss on fixed asset disposal of $35,350 and $183,614, respectively, upon the retirement of certain tooling and manufacturing equipment assets no longer in use. No loss on fixed asset disposal charges on tooling and equipment were recorded in 2020.

We perform a valuation of our patents and trademark assets when events or circumstances indicate their carrying amounts may be unrecoverable. For the years ended December 31, 2022, 2021 and 2020, there was an impairment charge of $97,675, $80,163 and $73,532, respectively. The value of the remaining intellectual property, such as patents and trademarks, was valued (net of accumulated amortization) at $2,220,094 as of December 31, 2022, because management believes that this value is recoverable.

Software Development Costs

The Company capitalizes the costs of obtaining and developing its software once technological feasibility has been determined by management or of purchased software solutions when placed into service. Such costs are accumulated and capitalized. These projects could take several years to complete. The capitalized costs are then amortized over 3 years on a straight-line basis. Unsuccessful or discontinued software projects are written off and expensed in the fiscal period where the application is abandoned or discontinued. The unamortized software development costs remaining were valued (net of accumulated amortization) at $500,000 as of December 31, 2022. Management believes that this value is recoverable.

Revenue Recognition

The Company adopted the guidance on Revenue from Contracts with Customers under FASB ASC Topic 606, “Revenue from Contracts with Customers”, as of January 1, 2018. Product sales represent the majority of the Company’s revenue. The Company recognizes revenue from these product sales as performance obligations are satisfied and transfer of control to the customer has occurred, typically upon physical shipment. Revenue is recognized in the amount that the Company expects to receive in exchange from the sale of our products. FOB shipping point is our standard shipping term and revenue is recognized as our products ship to customers, as control is transferred at that time. All of our standard product sales include a 30-day money back guarantee and expected returns are estimated at each reporting period date and a portion of revenue is deferred for all estimated returns. As of December 31, 2022 and 2021, deferred revenue associated with our expected returns was immaterial. The Company collects and remits sales taxes in certain jurisdictions and reports revenue net of any associated sales taxes.

Revenue from engineering consulting and other services is recognized at the time the services are rendered. The Company accounts for its longer-term development contracts, which to date have all been firm fixed-priced contracts, on

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the percentage-of-completion method, whereby income is recognized as work on contracts progresses, but estimated losses on contracts in progress are charged to operations immediately. The percentage-of-completion is determined using the cost-to-cost method. To date, all such contracts have been less than one calendar year in duration.

Product Warranty

Warranty obligations are generally incurred in connection with the sale of our products. The warranty period for these products is generally one year and up to 18 months for certain distributors. Customers may also purchase an additional twelve (12) month extended warranty. Warranty costs are accrued, to the extent that they are not recoverable from third-party manufacturers, for the estimated cost to repair or replace products for the balance of the warranty periods. We provide for the costs of expected future warranty claims at the time of product shipment or over-builds to cover replacements. The adequacy of the provision is assessed at each quarter end and is based on historical experience of warranty claims and costs. The costs incurred to provide for these warranty obligations are estimated and recorded as an accrued liability at the time of sale. Future warranty costs are estimated based on historical performance rates and related costs to repair given products. The accounting estimate related to product warranty is considered a “critical accounting estimate” because judgment is exercised in determining future estimated warranty costs. Should actual performance rates or repair costs differ from estimates, revision to the estimated warranty liability would be required.

Stock-Based Compensation Expense

Our Board of Directors approves grants of stock awards and options to employees to purchase our common stock. Stock-based compensation expense is recorded based upon the estimated fair value of the stock option or stock award at the date of grant. The Company uses the Black-Scholes-Merton option pricing model to estimate the fair value of stock options granted pursuant to ASC Topic 718. The application of this pricing model involves assumptions that are judgmental and sensitive in the determination of compensation expense. The fair market value of our common stock on the date of each option grant is determined based on the most recent quoted sales price on our primary trading stock exchange, currently the NASDAQ Capital Market. For stock options awards under the Company's LTIP (Long-term Incentive Plan), options vest upon the achievement of certain equity market conditions and performance-based milestones. The fair value of options granted under this program were calculated by using a Monte Carlo simulation for the equity market condition tranches and the Black-Scholes-Merton option pricing method for the performance-based tranches. The equity market condition awards are expensed over their derived service periods, which is an output of the Monte Carlo model. Upon the achievement of any market condition milestone, any unrecognized expense to-date would be expensed immediately. The performance-based tranches, that are currently considered probable of achievement, are expensed over their respective implicit service periods. We may experience significant catch-up or reversal of expense in the future in a period when any performance-based milestones first are determined to be probable of achievement or when any that are currently deemed probable are considered no longer probable.

Income Taxes

We have historically incurred operating losses from both a financial reporting and tax return standpoint. We provide deferred income tax assets and liabilities based on the estimated future tax effects of differences between the financial and tax bases of assets and liabilities based upon currently enacted tax laws. Any future recorded value of our deferred tax assets will be dependent upon our ability to generate taxable income in the jurisdictions in which we operate. These assets consist primarily of credit carry-forwards and net operating loss carry-forwards and the future tax effects of temporary differences between balances recorded for financial statement purposes and for tax return purposes. A valuation allowance is established for deferred tax assets in amounts for which realization is not considered more likely than not to occur. The accounting estimate related to income taxes is considered a “critical accounting estimate” because judgment is exercised in estimating future taxable income, including prudent and feasible tax planning strategies, and in assessing the need for any valuation allowance. To date, we have determined a 100% valuation allowance is required and accordingly no deferred tax asset has been reflected in our consolidated financial statements. In the event that it should be determined that all or part of a deferred tax asset in the future is more likely than not to be realized, an adjustment (reduction) of the valuation allowance would increase income to be recognized in the period such determination was made.

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In addition, the calculation of our deferred taxes involves dealing with uncertainties in the application of complex tax regulations. As a result, we recognize liabilities for uncertain tax positions based on the two-step process prescribed by GAAP. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as this requires us to determine the probability of various possible outcomes. We re-evaluate these uncertain tax positions on a quarterly basis based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit and new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision in the period. The Company currently has no uncertain tax positions.

Off-Balance Sheet Arrangements

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

Recent Accounting Pronouncements

Refer to Note 1

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Results of Operations for Fiscal Years Ended December 31, 2022 and December 31, 2021

The following table compares the Company’s consolidated statements of operations data for the years ended December 31, 2022 and 2021.

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Sales.   There was a decrease in total sales for the year ended December 31, 2022, from those in 2021 of $1,329,051 or 10%. The following table reflects the major components of our sales:

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[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

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Sales of products decreased by 18% for the year ended December 31, 2022, compared to the same period in 2021. Smart glasses revenues declined primarily due to a combination of higher average sales discounts due to larger volume reseller sales, negative foreign exchange comparatives and to a lesser extent, a decrease in overall unit sales. Sales of waveguides and display engines for our engineering services customers included in product sales rose by $394,150 for the year ended December 31, 2022, as compared to the same period in 2021.

Sales of engineering services for the year ended December 31, 2022, were $1,330,119, as compared to $380,333 in the same period of 2021, an increase of 250%.

Cost of Sales and Gross Profit (Loss).  Cost of product revenues and engineering services are comprised of materials, components, labor, warranty costs, freight costs, manufacturing overhead, software royalties, the non-cash depreciation for our tooling and manufacturing equipment and amortization of software development costs related to the production of our products and rendering of engineering services. The following table reflects the components of our cost of goods sold:

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[[/GREPCENT_TABLE]]

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For the year ended December 31, 2022, gross profit from total sales was $1,483,126 or 13% as compared to $1,568,490 or 12% in the same period in 2021.

Manufacturing overhead costs, not already added in Cost of Sales, decreased by $184,545 or 8% for the year ended December 31, 2022 over the 2021 comparable period to 19% as a percentage of total sales as compared to 18% in 2021. The decrease in the net dollar amount of these unapplied overhead costs in the current period versus the prior period is primarily due to more absorption of fixed costs being allocated directly to Product Cost of Sales and inventory.

Depreciation and amortization expense decreased by $522,150 or 40% for the year ended December 31, 2022, over the 2021 comparable period to 7% as a percentage of total sales as compared to 10% in 2021. The decrease was due to some of our tooling and manufacturing equipment becoming fully depreciated in the first half of 2022.

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

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feasibility before final development and ongoing maintenance are not capitalized and are included in research and development costs.

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year Ended","\u200b","% of","\u200b","Year Ended","\u200b","% of","\u200b","Dollar","\u200b","% Increase","\u200b"],["\u200b","\u200b","December 31, 2022","\u200b","Total Sales","\u200b","December 31, 2021","\u200b","Total Sales","\u200b","Change","\u200b","(Decrease)","\u200b"],["Research and Development","\u200b","$","12,676,688","","107","%","$","11,674,954","","89","%","$","1,001,734","","9","%"]]
[[/GREPCENT_TABLE]]

​

Research and development costs for the year ended December 31, 2022, increased by $1,001,734 or 9%, as compared to the same period in 2021. This increase was largely due to an increase of $557,165 in external development expenses related to our Next Generation Smart Glasses (Shield) and Blade 2.0; a $386,821 increase in salary and benefits expenses due to additional personnel; an increase of $78,920 in technology licensing fees; and an increase of $84,300 in recruitment and hiring fees, and partially offset by a decrease of $147,843 in supplies and consumables expense.

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

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year Ended","\u200b","% of","\u200b","Year Ended","\u200b","% of","\u200b","Dollar","\u200b","% Increase","\u200b"],["\u200b","\u200b","December 31, 2022","\u200b","Total Sales","\u200b","December 31, 2021","\u200b","Total Sales","\u200b","Change","\u200b","(Decrease)","\u200b"],["Selling and Marketing","\u200b","$","8,078,538","","68","%","$","6,118,929","","46","%","$","1,959,609","","32","%"]]
[[/GREPCENT_TABLE]]

​

Selling and marketing costs for the year ended December 31, 2022, increased by $1,959,609 or 32%, as compared to the same period in 2021. This increase was largely due to a $1,685,428 increase in salary and salary benefits related expense; an increase of $368,018 in travel related expenses; an increase of $360,034 in trade show expenses; an increase of $117,423 in recruiting and hiring expenses; and a $47,794 increase in advertising costs; and partially offset by a decrease of $441,585 in website development and maintenance costs; and a $196,478 decrease for consulting costs.

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

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year Ended","\u200b","% of","\u200b","Year Ended","\u200b","% of","\u200b","Dollar","\u200b","% Increase","\u200b"],["\u200b","\u200b","December 31, 2022","\u200b","Total Sales","\u200b","December 31, 2021","\u200b","Total Sales","\u200b","Change","\u200b","(Decrease)","\u200b"],["General and Administrative","\u200b","$","21,038,562","","178","%","$","22,502,833","","171","%","$","(1,464,271)","","(7)","%"]]
[[/GREPCENT_TABLE]]

​

General and administrative costs for the year ended December 31, 2022 decreased by $1,464,271 or 7%, as compared to the same period in 2021. This decrease was largely due to a $1,259,137 decrease in non-cash stock-based compensation which was significantly higher in the first quarter of 2021 due to the vesting of an achieved equity market capitalization milestone under the LTIP; a $515,952 decrease in legal expenses; a $89,262 decrease in recruitment and hiring expenses related to new external board members who joined the Board of Directors in June 2021; and partially offset by increases in audit and tax advisory fees of $261,958, and insurance premiums of $209,528.

Depreciation and Amortization.  Depreciation and amortization expense, not included in Cost of Sales, for the year ended December 31, 2022 was $1,788,584 as compared to $988,104 in the same period in 2021, an increase of $800,480. The increase in depreciation and amortization expense is primarily due to the amortization of our technology license related to the Atomistic Agreements which began on May 12, 2022.

Other Income (Expense), Net. Total other income was $1,468,698 for the year ended December 31, 2022, as compared to other expense of $397,053 in the same period in 2021, an increase of $1,865,851. The overall increase in other income was primarily the result of an increase of $1,342,068 in investment income resulting from the recent rise in interest rates earned on the Company’s excess cash period over period; a $466,705 gain recorded for an employee

44

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retention credit refund claim that was filed with the IRS on November 10, 2022; and a decrease of $94,371 in income and other taxes, partially offset by an increase of $37,393 in foreign exchange losses.

Provision for Income Taxes.  There were no provisions for income taxes in 2022 or 2021.

Results of Operations for Fiscal Years Ended December 31, 2021 and December 31, 2020

​

The following table compares the Company’s consolidated statements of operations data for the years ended December 31, 2021 and 2020.

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year Ended December 31,"],["\u200b","","\u200b","\u200b","","\u200b","\u200b","","Dollar","","% Increase"],["\u200b","\u200b","2021","\u200b","2020","\u200b","Change","\u200b","(Decrease)"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Sales:","","\u200b","","","\u200b","","","\u200b","","","","\u200b"],["Sales of Products","\u200b","$","12,784,600","","$","10,081,209","","$","2,703,391","","27","%"],["Sales of Engineering Services","\u200b","","380,333","","\u200b","1,500,287","","\u200b","(1,119,954)","","(75)","%"],["\u200b","\u200b","","","","\u200b","","","\u200b","","","","\u200b"],["Total Sales","\u200b","","13,164,933","","\u200b","11,581,496","","\u200b","1,583,437","","14","%"],["\u200b","\u200b","","","","\u200b","","","\u200b","","","","\u200b"],["Cost of Sales:","\u200b","","","","\u200b","","","\u200b","","","","\u200b"],["Cost of Sales - Products","\u200b","","9,709,268","","\u200b","7,914,686","","\u200b","1,794,582","","23","%"],["Cost of Sales - Inventory Reserve for Obsolescence","\u200b","\u200b","519,950","\u200b","\u200b","1,273,835","\u200b","\u200b","(753,885)","\u200b","(59)","%"],["Cost of Sales - Depreciation and Amortization","\u200b","","1,321,467","","\u200b","1,512,979","","\u200b","(191,512)","","(13)","%"],["Cost of Sales - Engineering Services","\u200b","","45,758","","\u200b","282,038","","\u200b","(236,280)","","(84)","%"],["\u200b","\u200b","","","","\u200b","","","\u200b","","","","\u200b"],["Total Cost of Sales","\u200b","","11,596,443","","\u200b","10,983,538","","\u200b","612,905","","6","%"],["\u200b","\u200b","","","","\u200b","","","\u200b","","","","\u200b"],["Gross Profit","\u200b","","1,568,490","","\u200b","597,958","","\u200b","970,532","","162","%"],["Gross Profit %","\u200b","","12","%","\u200b","5","%","\u200b","","","","\u200b"],["\u200b","\u200b","","","","\u200b","","","\u200b","","","","\u200b"],["Operating Expenses:","\u200b","","","","\u200b","","","\u200b","","","","\u200b"],["Research and Development","\u200b","","11,674,954","","\u200b","7,568,074","","\u200b","4,106,880","","54","%"],["Selling and Marketing","\u200b","","6,118,929","","\u200b","4,039,772","","\u200b","2,079,157","","51","%"],["General and Administrative","\u200b","","22,502,833","","\u200b","6,915,213","","\u200b","15,587,620","","225","%"],["Depreciation and Amortization","\u200b","","988,104","","\u200b","1,128,831","","\u200b","(140,727)","","(12)","%"],["Loss on Fixed Asset Disposal","\u200b","","183,614","","\u200b","\u2014","","\u200b","183,614","","NM","\u200b"],["Impairment of Patents and Trademarks","\u200b","","80,163","","\u200b","73,532","","\u200b","6,631","","9","%"],["\u200b","\u200b","","","","\u200b","","","\u200b","","","","\u200b"],["Loss from Operations","\u200b","","(39,980,107)","","\u200b","(19,127,464)","","\u200b","(20,852,643)","","109","%"],["\u200b","\u200b","","","","\u200b","","","\u200b","","","\u200b","\u200b"],["Other Income (Expense):","\u200b","","","","\u200b","","","\u200b","","","","\u200b"],["Investment Income","\u200b","","53,511","","\u200b","41,120","","\u200b","12,391","","30","%"],["Income and Other Taxes","\u200b","","(307,368)","","\u200b","(103,833)","","\u200b","(203,535)","","196","%"],["Foreign Exchange Loss","\u200b","","(143,196)","","\u200b","(67,895)","","\u200b","(75,301)","","111","%"],["Gain on Debt Extinguishment, net of Loss on Note Receivable","\u200b","","\u2014","","\u200b","1,305,900","","\u200b","(1,305,900)","","(100)","%"],["\u200b","\u200b","","","","\u200b","","","\u200b","","","","\u200b"],["Total Other Income (Expense), Net","\u200b","","(397,053)","","\u200b","1,175,292","","\u200b","(1,572,345)","","(134)","%"],["\u200b","\u200b","","","","\u200b","","","\u200b","","","","\u200b"],["Loss Before Provision for Income Taxes","\u200b","","(40,377,160)","","\u200b","(17,952,172)","","\u200b","(22,424,988)","","125","%"],["Provision for Income Taxes","\u200b","","\u2014","","\u200b","\u2014","","\u200b","\u2014","","\u2014","%"],["\u200b","\u200b","","","","\u200b","","","\u200b","","","","\u200b"],["Net Loss","\u200b","$","(40,377,160)","\u200b","$","(17,952,172)","\u200b","$","(22,424,988)","","125","%"]]
[[/GREPCENT_TABLE]]

45

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​

Sales.   There was an increase in total sales for the year ended December 31, 2021 from those in 2020 of $1,583,437 or 14%. The following table reflects the major components of our sales:

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year Ended","\u200b","% of","\u200b","Year Ended","\u200b","% of","\u200b","Dollar","\u200b","% Increase","\u200b"],["\u200b","\u200b","December 31, 2021","\u200b","Total Sales","\u200b","December 31, 2020","\u200b","Total Sales","\u200b","Change","\u200b","(Decrease)","\u200b"],["Sales of Smart Glasses","\u200b","$","12,784,600","","97","%","$","10,081,209","","87","%","$","2,703,391","","27","%"],["Sales of Engineering Services","\u200b","","380,333","","3","%","","1,500,287","","13","%","","(1,119,954)","","(75)","%"],["Total Sales","\u200b","$","13,164,933","","100","%","$","11,581,496","","100","%","$","1,583,437","","14","%"]]
[[/GREPCENT_TABLE]]

​

Sales of Smart Glasses products rose by $2,703,391 or 27% in the year ended December 31, 2021, primarily as a result of continued growth of our M400 model and M4000 Smart Glasses sales, as compared to the same period in 2020. Sales revenues from our M-Series Smart Glasses were $10,254,905, a 22% increase of $1,848,282 over the prior year. Revenues of Blade Smart Glasses decreased by $395,529 or 23% in the year ended December 31, 2021 versus the comparable period in 2020 primarily driven by component shortages required to make Blade projector engines in the second half of 2021 and higher unit sales in the prior year’s comparable quarter when we offered lower selling prices on the previous Blade model, which we discontinued in the fall of 2020.

Sales of Engineering Services for the year ended December 31, 2021, were $380,333 as compared to $1,500,287 in the 2020 comparable period. The revenue recognized in the year ended December 31, 2021 for engineering services was primarily a result of waveguide and display engine development projects which commenced in 2020 and were completed in the first quarter of 2021. We believe that ongoing and new engineering services programs have been deferred to give customers time to evaluate and present to their end customers the solutions we helped to design and delivered in 2020 and the first quarter of 2021, which has been made more difficult by the ongoing disruptions caused by COVID-19.

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 depreciation for our tooling and manufacturing equipment and amortization of software development costs related to the production of our products and rendering of engineering services. The following table reflects the components of our cost of goods sold:

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year Ended","\u200b","% of","\u200b","Year Ended","\u200b","% of","\u200b","Dollar","\u200b","% Increase","\u200b"],["\u200b","\u200b","December 31, 2021","\u200b","Total Sales","\u200b","December 31, 2020","\u200b","Total Sales","\u200b","Change","\u200b","(Decrease)","\u200b"],["Product Cost of Sales","","\u200b","7,832,397","","59","%","$","7,573,557","","65","%","$","258,840","","3","%"],["Engineering Services Cost of Sales","","\u200b","45,758","","0","%","\u200b","282,038","","2","%","\u200b","(236,280)","","(84)","%"],["Manufacturing Overhead - Unapplied","","\u200b","2,396,821","","18","%","\u200b","1,614,964","","14","%","\u200b","781,857","","48","%"],["Depreciation and Amortization","\u200b","\u200b","1,321,467","\u200b","10","%","\u200b","1,512,979","\u200b","13","%","\u200b","(191,512)","\u200b","(13)","%"],["\u200b","","\u200b","","","","","\u200b","","","","","\u200b","","","","\u200b"],["Total Cost of Sales","\u200b","$","11,596,443","","88","%","$","10,983,538","","95","%","$","612,905","","6","%"],["\u200b","\u200b","","","","","\u200b","","","","","\u200b","","","","","\u200b"],["Gross Profit","\u200b","$","1,568,490","","12","%","$","597,958","","5","%","$","970,532","","162","%"]]
[[/GREPCENT_TABLE]]

​

For the year ended December 31, 2021, gross profit from total sales was $1,568,490 or 12% as compared to $597,958 or 5% in the same period in 2021.

Manufacturing overhead costs, not already added in Cost of Sales, increased by $781,857 or 48% for the year ended December 31, 2021, over the 2020 comparable period to 18% as a percentage of total sales as compared to 14% in 2020, primarily due to manufacturing supply chain additional personnel and increased non-cash stock-based compensation expense.

46

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In addition to its normal Reserve for Obsolescence provision, the Company reserved for (i) an additional 25% of its remaining M300XL finished goods and related accessory inventory on-hand as of December 31, 2021and (ii) all of its Blade 1.5 excess components that will not be used in current planned builds of the Blade in 2022, due to end-of-life availability of some required components. The total reserve write-down recorded at December 31, 2021 was $519,950. The write-down and obsolescence provision for finished goods and components, included in Product Cost of Sales, totaled $1,273,835 for the year ended December 31, 2020.

Research and Development.   Our research and development costs consist primarily of compensation costs for personnel, related stock-based compensation expenses, third-party services, purchase of research supplies and materials, and consulting fees related to research and development. Software development expenses to determine technical feasibility before final development and ongoing maintenance are not capitalized and are included in research and development costs.

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year Ended","\u200b","% of","\u200b","Year Ended","\u200b","% of","\u200b","Dollar","\u200b","% Increase","\u200b"],["\u200b","\u200b","December 31, 2021","\u200b","Total Sales","\u200b","December 31, 2020","\u200b","Total Sales","\u200b","Change","\u200b","(Decrease)","\u200b"],["Research and Development","\u200b","$","11,674,954","","89","%","$","7,568,074","","65","%","$","4,106,880","","54","%"]]
[[/GREPCENT_TABLE]]

​

Research and development costs for the year ended December 31, 2021, increased by $4,106,880 or 54% as compared to 2020. This increase was largely due to a $2,532,628 increase in salary and salary benefits related expenses, of which $944,065 was related to non-cash stock-based compensation; an increase of $1,173,817 in external development expenses primarily related to our Next Generation Smart Glasses; an increase of $296,748 in other research and development consulting fees; and an increase of $99,947 in research and development supplies.

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

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year Ended","\u200b","% of","\u200b","Year Ended","\u200b","% of","\u200b","Dollar","\u200b","% Increase","\u200b"],["\u200b","\u200b","December 31, 2021","\u200b","Total Sales","\u200b","December 31, 2020","\u200b","Total Sales","\u200b","Change","\u200b","(Decrease)","\u200b"],["Selling and Marketing","\u200b","$","6,118,929","","46","%","$","4,039,772","","35","%","$","2,079,157","","51","%"]]
[[/GREPCENT_TABLE]]

​

Selling and marketing costs for the year ended December 31, 2021, increased by $2,079,157 or 51% as compared to 2020. This increase was largely due to a $1,089,571 increase in salary and salary benefits related expenses, of which $420,661 was related to non-cash stock-based compensation; an increase of $578,621 in sales consulting and marketing fees, primarily for foreign full-time contractors; a $595,263 increase in advertising costs; an increase of $242,570 in website development and maintenance costs; partially offset by decreases of $316,319 in trade show expenses; a decrease of $102,215 in commissions largely due to a reduction in commissions payable to TDG for defense related engineering services; and a decrease of $35,670 in travel related expenses.

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

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year Ended","\u200b","% of","\u200b","Year Ended","\u200b","% of","\u200b","Dollar","\u200b","% Increase","\u200b"],["\u200b","\u200b","December 31, 2021","\u200b","Total Sales","\u200b","December 31, 2020","\u200b","Total Sales","\u200b","Change","\u200b","(Decrease)","\u200b"],["General and Administrative","\u200b","$","22,502,833","","171","%","$","6,915,213","","60","%","$","15,587,620","","225","%"]]
[[/GREPCENT_TABLE]]

​

General and administrative costs for the year ended December 31, 2021, increased by $15,587,620 or 225% as compared 2020. This increase was largely due to a $13,471,358 increase in salary and salary benefits related expenses, of which $12,668,230 was related to non-cash stock-based compensation, primarily related to the Company’s LTIP, which was implemented in the first quarter of 2021 and unlike traditional time vesting options, option awards under the LTIP vest only upon the achievement of predetermined market equity capitalization, revenue and EBITDA milestones and if participants are currently employed by the Company when the milestones are achieved; an increase of $875,230 in legal expenses; an increase of $357,444 in insurance premiums; an increase of $217,433 in audit and tax advisory fees; an increase of $205,329 in recruitment and hiring fees; an increase in shareholder related expenses of $151,524; an increase of $109,846 in regulatory filing fees; and an increase of $100,228 in software subscription expenses.

47

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Depreciation and Amortization.  Depreciation and amortization expense, not included in Cost of Sales, for the year ended December 31, 2021, was $988,104 as compared to $1,128,831 in the same period in 2020, a decrease of $140,727. The decrease in depreciation expense is primarily due to leasehold improvements in our West Henrietta, New York, location, which became fully amortized in October 2020.

Other Income (Expense), Net. Total other expense, net was $397,053 for the year ended December 31, 2021 as compared to income of $1,175,292 in the period in 2020. The overall decrease of $1,572,345 in other income was primarily the result of no gain from debt extinguishment in the year ended December 31, 2021, whereas we had a net gain on debt extinguishment of $1,305,900 in 2020; an increase of $203,535 in income, foreign enterprise and other taxes; and an increase of $75,301 in foreign exchange losses.

Provision for Income Taxes.  There were no provisions for income taxes in 2022 or 2021.

Liquidity and Capital Resources

​

Capital Resources: As of December 31, 2022, we had cash and cash equivalents of $72,563,943, a decrease of $47,639,930 from $120,203,873 as of December 31, 2021.

As of December 31, 2022, we had current assets of $91,241,241 as compared to current liabilities of $15,277,358 which resulted in a positive working capital position of $75,963,883. As of December 31, 2021, we had a working capital position of $132,994,189. Our current liabilities are comprised principally of accounts payable, accrued expenses, licensing fee commitments, and operating lease right-of-use liabilities.

​

Summary of Cash Flow:

​

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

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","December 31,","\u200b","December 31,","\u200b","December 31,"],["\u200b","","2022","","2021","","2020"],["Net Cash Provided by (used in)","","\u200b","","","\u200b","","","\u200b"],["Operating Activities","\u200b","","(24,521,082)","\u200b","","(26,980,411)","\u200b","","(13,964,053)"],["Investing Activities","\u200b","","(21,170,816)","\u200b","","(4,852,452)","\u200b","","(1,485,513)"],["Financing Activities","\u200b","","(1,948,032)","\u200b","","115,967,228","\u200b","","40,912,983"]]
[[/GREPCENT_TABLE]]

​

During the year ended December 31, 2022, we used $24,521,082 of cash for operating activities. Net changes in working capital items were $2,544,394 for the year ended December 31, 2022, with the largest factors resulting from a $2,052,376 increase in trade accounts receivables and other accrued receivables and a decrease of $591,784 in net trade payables and accrued expenses, partially offset by a $98,988 decrease in inventory and vendor prepayments. For the year ended December 31, 2021, we used a total of $26,980,411 in cash for operating activities.

During the year ended December 31, 2022, we used $21,170,816 of cash for investing activities, which included $16,500,000, in payments made towards our $30,000,000 technology license fee commitment (as discussed in Note 7), $2,300,000 for the purchase price for the Moviynt acquisition (as discussed in Note 2), $1,723,622 for purchases of manufacturing equipment and product mold tooling; $499,031 in patent and trademark expenditures; and a further investment of $125,000 in the purchase of software operating license upgrades for our smart glasses platform. For the year ended December 31, 2021, we used a total of $4,852,452 in cash for investing activities.

During the year ended December 31, 2022, we used $1,948,032 in net cash from financing activities, which included $2,005,744 for share repurchases under our Share Buyback Program that was announced on March 2, 2022, and partially offset by $57,712 in proceeds from the exercise of stock options. For the year ended December 31, 2021, we received $115,967,228 in proceeds from financing activities, primarily from sales of our equity securities.

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Table of Contents

As of December 31, 2022, the Company does not have any current or long-term debt obligations outstanding other than licensing fee commitments totaling $11,500,000 related to the Atomistic Agreements described in Note 7 of the consolidated financial statements.

Additionally, as part of the Atomistic Agreements, the Company entered a Stock Purchase Agreement with the stockholders of Atomistic under which the Company will buy Series B Preferred shares of Atomistic through the issuance of Vuzix common shares based on certain deliverables and the achievement of milestones as defined in the Share Purchase Agreement. This will result, depending upon Vuzix’ share price at the time of each issuance, in the Company’s issuance of a minimum of 1,750,000 to a maximum of 2,843,750 common shares to Atomistic stockholders in exchange for convertible preferred shares of Atomistic over approximately the next six to 24 months. Once Atomistic has achieved all its milestones or has them waived by the Company, and the Company issues the required number of Vuzix common shares, in exchange for Series B Preferred shares in Atomistic that could ultimately be converted into common shares of Atomistic, the Company would ultimately own just under 99.9% of Atomistic.

The Company’s cash requirements are primarily for funding operating losses, working capital, research and development, capital expenditures, and license fee commitments. We incurred a net loss for the years ended December 31, 2022, 2021 and 2020 of $40,763,573 (of which $15,775,553 was related to non-cash stock-based compensation primarily due to our LTIP), $40,377,160 (of which $17,302,833 was related to non-cash stock-based compensation primarily due to our LTIP), and $17,952,172 in 2020, respectively. The Company has an accumulated deficit of $243,835,716 as of December 31, 2022.

On March 2, 2022, our Board of Directors approved the repurchase by the Company of up to an aggregate of $25 million of our common stock by open market or privately negotiated transactions under the Share Buyback Program. This program is in effect for one year, does not obligate the Company to acquire any particular amount of common stock, and may be suspended or discontinued at any time at the Company’s sole discretion. During the year ended December 31, 2022, the Company repurchased 464,672 shares of our common stock at an average cost of $4.32. As of December 31, 2022, 464,672 shares of our common stock were held in treasury.

Our operations have historically been financed primarily through net proceeds from the sale of our equity securities. As of December 31, 2022, our principal sources of liquidity consisted of cash and cash equivalents of $72,563,943.

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Contractual Obligations

The following is a summary of our contractual payment obligations as of December 31, 2022:

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[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","Less than","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","More than"],["Contractual Obligations","\u200b","Total","\u200b","1 Year","\u200b","1-3 Years","\u200b","3-5 Years","\u200b","5 Years"],["Operating Lease Obligations","","$","1,021,753","","$","\u2014","","$","1,021,753","","\u2014","","\u2014"],["Licensing Fees Commitment","\u200b","\u200b","11,500,000","","\u200b","11,500,000","","\u200b","\u2014","","\u2014","","\u2014"],["Open Purchase Obligations","","\u200b","8,082,184","","\u200b","8,082,184","","\u200b","\u2014","","\u2014","","\u2014"]]
[[/GREPCENT_TABLE]]

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