Item 1:
|
Consolidated Financial Statements
|
VUZIX
CORPORATION
CONSOLIDATED BALANCE SHEETS
|
|
(Unaudited)
March
31,
2019
|
|
|
December 31,
2018
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
$
|
10,085,837
|
|
|
$
|
17,263,643
|
|
Accounts Receivable, Net
|
|
|
199,759
|
|
|
|
772,336
|
|
Inventories, Net
|
|
|
8,110,226
|
|
|
|
7,281,802
|
|
Manufacturing Vendor Prepayments
|
|
|
386,561
|
|
|
|
755,219
|
|
Prepaid Expenses and Other Assets
|
|
|
872,148
|
|
|
|
1,310,095
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
19,654,531
|
|
|
|
27,383,095
|
|
|
|
|
|
|
|
|
|
|
Long-Term Assets
|
|
|
|
|
|
|
|
|
Fixed Assets, Net
|
|
|
4,517,169
|
|
|
|
4,291,690
|
|
Operating Lease Right-of-Use Assets, Net
|
|
|
860,277
|
|
|
|
—
|
|
Patents and Trademarks, Net
|
|
|
1,206,018
|
|
|
|
1,164,543
|
|
Software Development Costs, Net
|
|
|
175,000
|
|
|
|
200,000
|
|
Licenses, Net
|
|
|
406,849
|
|
|
|
437,120
|
|
Intangible Asset, net
|
|
|
1,296,000
|
|
|
|
1,398,000
|
|
Other Assets
|
|
|
296,600
|
|
|
|
259,192
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
28,412,444
|
|
|
$
|
35,133,640
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts Payable
|
|
$
|
1,715,744
|
|
|
$
|
2,668,241
|
|
Operating Lease Right-of-Use Liabilities
|
|
|
533,289
|
|
|
|
—
|
|
Customer Deposits
|
|
|
74,615
|
|
|
|
152,362
|
|
Unearned Revenue
|
|
|
230,344
|
|
|
|
211,726
|
|
Accrued Expenses
|
|
|
943,010
|
|
|
|
1,614,078
|
|
Taxes Payable
|
|
|
77,554
|
|
|
|
30,258
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
3,574,556
|
|
|
|
4,676,665
|
|
|
|
|
|
|
|
|
|
|
Long-Term Liabilities
|
|
|
|
|
|
|
|
|
Operating Lease Right-of-Use Liabilities
|
|
|
326,988
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
3,901,544
|
|
|
|
4,676,665
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity
|
|
|
|
|
|
|
|
|
Preferred Stock - $.001 Par Value, 5,000,000 Shares Authorized; 49,626 and 49,626 Shares Issued and Outstanding as of
March 31, 2019 and December 31, 2018.
|
|
|
50
|
|
|
|
50
|
|
Common Stock - $.001 Par Value, 100,000,000 Shared Authorized; 27,597,917 Shares Issued and Outstanding as of March 31, 2019 and 27,591,670 as of December 31, 2018.
|
|
|
27,598
|
|
|
|
27,591
|
|
Additional Paid-in Capital
|
|
|
149,109,454
|
|
|
|
148,695,775
|
|
Accumulated Deficit
|
|
|
(124,626,202
|
)
|
|
|
(118,266,441
|
)
|
|
|
|
|
|
|
|
|
|
Total Stockholders' Equity
|
|
|
24,510,900
|
|
|
|
30,456,975
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Equity
|
|
$
|
28,412,444
|
|
|
$
|
35,133,640
|
|
The accompanying notes are an
integral part of these condensed consolidated financial statements.
VUZIX
CORPORATION
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited for the three months
ended March 31, 2019 and 2018)
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Additional
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Paid-In Capital
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - January 1, 2019
|
|
|
49,626
|
|
|
$
|
50
|
|
|
|
27,591,670
|
|
|
$
|
27,591
|
|
|
$
|
148,695,775
|
|
|
$
|
(118,266,441
|
)
|
|
$
|
30,456,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-Based Compensation Expense
|
|
|
—
|
|
|
|
—
|
|
|
|
6,247
|
|
|
|
7
|
|
|
|
413,679
|
|
|
|
—
|
|
|
|
413,686
|
|
Net Loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(6,359,761
|
)
|
|
|
(6,359,761
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - March 31, 2019
|
|
|
49,626
|
|
|
$
|
50
|
|
|
|
27,597,917
|
|
|
$
|
27,598
|
|
|
$
|
149,109,454
|
|
|
$
|
(124,626,202
|
)
|
|
$
|
24,510,900
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Additional
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Paid-In Capital
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - January 1, 2018
|
|
|
49,626
|
|
|
$
|
50
|
|
|
|
24,276,275
|
|
|
$
|
24,276
|
|
|
$
|
117,827,839
|
|
|
$
|
(96,472,452
|
)
|
|
$
|
21,379,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Adj. - ASC 606 Adoption
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
81,724
|
|
|
|
81,724
|
|
Stock-Based Compensation Expense
|
|
|
—
|
|
|
|
—
|
|
|
|
6,250
|
|
|
|
6
|
|
|
|
424,694
|
|
|
|
—
|
|
|
|
424,700
|
|
Exercise of Warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
24,930
|
|
|
|
25
|
|
|
|
39,350
|
|
|
|
—
|
|
|
|
39,375
|
|
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
|
)
|
Net Loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,365,650
|
)
|
|
|
(5,365,650
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - March 31, 2018
|
|
|
49,626
|
|
|
$
|
50
|
|
|
|
27,307,455
|
|
|
$
|
27,307
|
|
|
$
|
146,313,883
|
|
|
$
|
(101,756,378
|
)
|
|
$
|
44,584,862
|
|
The accompanying notes are an
integral part of these condensed consolidated financial statements.
VUZIX
CORPORATION
CONSOLIDATED STATEMENTS OF
OPERATIONS
(Unaudited)
|
|
Three Months Ended March
31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Sales:
|
|
|
|
|
|
|
|
|
Sales of Products
|
|
$
|
1,373,371
|
|
|
$
|
1,363,379
|
|
Sales of Engineering Services
|
|
|
—
|
|
|
|
180,516
|
|
|
|
|
|
|
|
|
|
|
Total Sales
|
|
|
1,373,371
|
|
|
|
1,543,895
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales:
|
|
|
|
|
|
|
|
|
Cost of Sales - Products
|
|
|
1,333,481
|
|
|
|
1,182,215
|
|
Cost of Sales - Engineering Services
|
|
|
—
|
|
|
|
184,555
|
|
|
|
|
|
|
|
|
|
|
Total Cost of Sales
|
|
|
1,333,481
|
|
|
|
1,366,770
|
|
|
|
|
|
|
|
|
|
|
Gross Profit (exclusive of depreciation shown separately below)
|
|
|
39,890
|
|
|
|
177,125
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
Research and Development
|
|
|
2,516,100
|
|
|
|
2,055,787
|
|
Selling and Marketing
|
|
|
1,417,966
|
|
|
|
1,534,097
|
|
General and Administrative
|
|
|
1,896,402
|
|
|
|
1,665,229
|
|
Depreciation and Amortization
|
|
|
559,089
|
|
|
|
273,622
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
6,389,557
|
|
|
|
5,528,735
|
|
Loss from Operations
|
|
|
(6,349,667
|
)
|
|
|
(5,351,610
|
)
|
|
|
|
|
|
|
|
|
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
Investment Income
|
|
|
58,313
|
|
|
|
—
|
|
Other Taxes
|
|
|
(52,662
|
)
|
|
|
(28,542
|
)
|
Foreign Exchange Loss
|
|
|
(15,745
|
)
|
|
|
(4,418
|
)
|
Gain on Derivative Valuation
|
|
|
—
|
|
|
|
28,133
|
|
Interest Expense
|
|
|
—
|
|
|
|
(9,213
|
)
|
|
|
|
|
|
|
|
|
|
Total Other Expense
|
|
|
(10,094
|
)
|
|
|
(14,040
|
)
|
|
|
|
|
|
|
|
|
|
Loss Before Provision for Income Taxes
|
|
|
(6,359,761
|
)
|
|
|
(5,365,650
|
)
|
Provision for Income Taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
(6,359,761
|
)
|
|
|
(5,365,650
|
)
|
Preferred Stock Dividends
|
|
|
(465,765
|
)
|
|
|
(438,836
|
)
|
Loss Attributable to Common Stockholders
|
|
$
|
(6,825,526
|
)
|
|
$
|
(5,804,486
|
)
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Loss Attributable to Common Stockholders per Share
|
|
$
|
(0.25
|
)
|
|
$
|
(0.22
|
)
|
Weighted-average Shares Outstanding - Basic and Diluted
|
|
|
27,595,767
|
|
|
|
26,296,188
|
|
The accompanying notes are an
integral part of these condensed consolidated financial statements.
VUZIX
CORPORATION
CONSOLIDATED STATEMENTS OF
CASH FLOWS
(Unaudited)
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(6,359,761
|
)
|
|
$
|
(5,365,650
|
)
|
Non-Cash Adjustments
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
|
559,089
|
|
|
|
273,622
|
|
Amortization of Software Development Costs in Cost of Sales - Products
|
|
|
25,000
|
|
|
|
—
|
|
Stock-Based Compensation Expense
|
|
|
489,754
|
|
|
|
508,451
|
|
Loss (Gain) on Derivative Valuation
|
|
|
—
|
|
|
|
(28,133
|
)
|
(Increase) Decrease in Operating Assets
|
|
|
|
|
|
|
|
|
Accounts Receivable
|
|
|
572,577
|
|
|
|
(77,165
|
)
|
Accrued Project Revenue
|
|
|
—
|
|
|
|
497,784
|
|
Inventories
|
|
|
(828,424
|
)
|
|
|
(424,013
|
)
|
Vendor Prepayments
|
|
|
368,658
|
|
|
|
28,658
|
|
Prepaid Expenses and Other Assets
|
|
|
437,947
|
|
|
|
277,615
|
|
Increase (Decrease) in Operating Liabilities
|
|
|
|
|
|
|
|
|
Accounts Payable
|
|
|
(952,497
|
)
|
|
|
(1,978,637
|
)
|
Accrued Expenses
|
|
|
(171,068
|
)
|
|
|
(211,052
|
)
|
Customer Deposits
|
|
|
(77,747
|
)
|
|
|
137,178
|
|
Unearned Revenue
|
|
|
18,618
|
|
|
|
(26,100
|
)
|
Income and Other Taxes Payable
|
|
|
43,497
|
|
|
|
19,251
|
|
Accrued Compensation
|
|
|
—
|
|
|
|
(92,000
|
)
|
Accrued Interest
|
|
|
—
|
|
|
|
(10,787
|
)
|
|
|
|
|
|
|
|
|
|
Net Cash Flows Used in Operating Activities
|
|
|
(5,874,357
|
)
|
|
|
(6,470,978
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
Purchase of Fixed Assets
|
|
|
(724,565
|
)
|
|
|
(306,739
|
)
|
Investments in Patents and Trademarks
|
|
|
(41,475
|
)
|
|
|
(64,664
|
)
|
Investments in Licenses and Other Intangible Assets
|
|
|
(537,409
|
)
|
|
|
—
|
|
Investments in Software Development
|
|
|
—
|
|
|
|
(43,750
|
)
|
|
|
|
|
|
|
|
|
|
Net Cash Used in Investing Activities
|
|
|
(1,303,449
|
)
|
|
|
(415,153
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
Proceeds from Exercise of Warrants
|
|
|
—
|
|
|
|
39,375
|
|
Proceeds from Common Stock Offerings
|
|
|
—
|
|
|
|
30,000,000
|
|
Issuance Costs on Common Stock Offerings
|
|
|
—
|
|
|
|
(1,975,000
|
)
|
|
|
|
|
|
|
|
|
|
Net Cash Flows from Financing Activities
|
|
|
—
|
|
|
|
28,064,375
|
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash and Cash Equivalents
|
|
|
(7,177,806
|
)
|
|
|
21,178,244
|
|
Cash and Cash Equivalents - Beginning of Period
|
|
|
17,263,643
|
|
|
|
14,889,636
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents - End of Period
|
|
$
|
10,085,837
|
|
|
$
|
36,067,880
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures
|
|
|
|
|
|
|
|
|
Interest Paid in Cash
|
|
$
|
—
|
|
|
$
|
19,999
|
|
Cumulative Revenue Adjustment - ASC 606 Adoption
|
|
|
—
|
|
|
|
81,724
|
|
Investment in Other Intangible Assets included in Accrued Expenses
|
|
|
250,000
|
|
|
|
—
|
|
Unamortized Common Stock Expense included in Prepaid Expenses
|
|
|
463,154
|
|
|
|
—
|
|
Operating Lease Right-of-Use Asset
|
|
|
860,277
|
|
|
|
—
|
|
The accompanying
notes are an integral part of these condensed consolidated financial statements.
VUZIX CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
Note 1 – Basis
of Presentation
The accompanying unaudited consolidated
financial statements of Vuzix Corporation (“the Company") have been prepared in accordance with generally accepted
accounting principles in the United States of America (“GAAP”) for interim financial information and with the instructions
to Form 10-Q and Regulation S-X of the Securities and Exchange Commission (the “SEC”). Accordingly, the unaudited
consolidated financial statements do not include all information and footnotes required by GAAP for complete financial statements.
In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Certain re-classifications
have been made to prior periods to conform with current reporting. The results of the Company’s operations for the three
months ended March 31, 2019 are not necessarily indicative of the results of the Company’s operations for the full fiscal
year or any other period.
The accompanying interim consolidated financial
statements should be read in conjunction with the audited consolidated financial statements and the notes thereto of the Company
as of December 31, 2018, as reported in the Company’s Annual Report on Form 10-K filed with the SEC on March 15, 2019.
The accompanying unaudited consolidated
financial statements have been prepared assuming that we will continue as a going concern. This basis of accounting contemplates
the recovery of our assets and the satisfaction of liabilities in the normal course of business. These unaudited consolidated financial
statements do not include any adjustments to the specific amounts and classifications of assets and liabilities, which might be
necessary should we be unable to continue as a going concern. The Company incurred net losses for the three months ended March
31, 2019 of $6,359,761 and annual net losses of $21,875,713 in 2018 and $19,633,502 in 2017. As of March 31, 2019, the Company
has an accumulated deficit of $124,626,202.
The Company’s cash requirements are
primarily for funding operating losses, working capital, research and development, and capital expenditures. 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.
The Company’s management intends
to take actions necessary to continue as a going concern, as discussed herein. The Company will need to grow its business significantly
to become profitable and self-sustaining on a cash flow basis or it will be required to raise new equity and/or debt capital.
Management’s plans concerning these matters and managing our liquidity include, among other things:
|
·
|
the continued sale of our existing M300, M300XL and Blade inventory;
|
|
·
|
the introduction of our M400 Smart Glasses, our third-generation monocular device for enterprise. We expect to launch the product in the third quarter of 2019;
|
|
·
|
the commencement of volume manufacturing and sale of the new M100 Smart Swim product in the third quarter of 2019;
|
|
·
|
new engineering services and product sales into business customers, first responder, defense and governmental entity customers;
|
|
·
|
tightly control operating costs and reduce spending growth rates wherever possible;
|
|
·
|
decrease tradeshow and PR firm spending;
|
|
·
|
right size operations across all areas of the Company, both with head-count and spending;
|
|
·
|
delay or curtail discretionary and non-essential capital expenditures not related to near-term new products; and
|
|
·
|
reduce the rate of research and development spending on new technologies, particularly the use of costly external contractors.
|
However, if these plans are not successful
within a reasonable time period, we will have to raise additional capital to maintain operations and/or materially reduce our operating
and new product development costs.
If the Company raises additional funds,
the ownership interest of existing stockholders may be diluted. The amount of such dilution could increase due to the issuance
of new securities with warrants or other dilutive characteristics, such as full ratchet anti-dilution clauses or price resets.
Based upon our current amount of cash on
hand, management’s historical ability to raise capital, and our ability to manage our cost structure and adjust operating
plans if and as required, we have concluded that substantial doubt of our ability to continue as a going concern has been alleviated.
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 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 have adopted this standard
effective January 1, 2019. The adoption of this standard did not impact our Consolidated Financial Statements for the current
or prior periods presented.
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. We have adopted this standard effective January 1, 2019. Upon adoption, we recognized an Operating Lease Right-of-Use
Asset of $994,000, a current Operating Lease Liability of $533,000 and a long-term Operating Lease Liability of $461,000. We applied
Topic 842 to all leases as of January 1, 2019 with comparable periods continuing to be reported under Topic 840. Upon adoption,
we elected: (i) the package of practical expedients permitted under the transition guidance within the new standard, which among
other things, allowed us to carry forward the historical lease classification and (ii) the practical expedient which allows us
not to separate non-lease components from lease components, as they are not considered the predominate components in our contracts.
The adoption of this standard does not have a significant impact on our consolidated results of operations or cash flows. See Note
12 for further details.
For the three
months ended March 31, 2019, no one customer represented more than 10% of our product revenue. For the three months ended March
31, 2018, Toshiba Japan represented 94% of the Company’s engineering revenues and 18% of the Company’s total revenues.
As of March 31, 2019, no significant customer
represented more than 10% of accounts receivable. As of December 31, 2018, Toshiba and SATS represented 32% and 38%, respectively,
of accounts receivable.
Note 2 – Revenue Recognition and Contracts with Customers
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 and Display Engine Sales,
and Engineering Services. The following table summarizes the revenue recognized by major product line:
|
|
Three Months Ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
Smart Glasses and iWear Video Headphones Sales
|
|
$
|
1,278,371
|
|
|
$
|
1,212,771
|
|
OEM Product Sales
|
|
|
—
|
|
|
|
114,170
|
|
Waveguide and Display Engine Sales
|
|
|
95,000
|
|
|
|
36,438
|
|
Engineering Services
|
|
|
—
|
|
|
|
180,516
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
1,373,371
|
|
|
$
|
1,543,895
|
|
Significant Judgments
Under Topic 606, there are judgments used
that could potentially impact both the timing of our satisfaction of performance obligations and our determination of transaction
prices used in determining revenue recognized by major product line. Judgments made include considerations in determining our
transaction prices for our standard product sales that include an end-user 30-day right to return if not satisfied with product
and include payment terms that are between Net 30 and 60 days. For our Engineering Services, performance obligations are recognized
over time using the input method and the estimated costs to complete each project are considered significant judgments.
Performance Obligations
Revenues from our performance
obligations satisfied at a point in time are typically for standard goods (Smart Glasses, Waveguides, and Display Engines) and our OEM
Products, which are recognized when the customer obtains control and ownership, which is generally upon shipment. The Company
also records revenue for performance obligations relating to our Engineering Services over time by using the input method
measuring progress toward satisfying the performance obligations. Satisfaction of our performance obligations related to our
Engineering Services is measured by the Company’s cost incurred as a percentage of total expected costs to project
completion as the inputs of actual costs incurred by the Company are directly correlated with progress of completing the
contract. As such, the Company believes that our methodologies for recognizing revenue over time for our Engineering Services
correlate directly with the transfer of control of the underlying assets to our customers.
Our standard product sales include a twelve (12) month assurance-type product warranty, except in certain
European countries where it can be twenty-four (24) months 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. In 2018, we began offering extended warranties
to customers, which extend the standard product warranty on product sales for an additional twelve (12) month period. All revenue
related to extended product warranty sales is deferred and recognized over the extended warranty period. Our engineering services
contracts vary from contract to contract but typically include payment terms of Net 30 days from date of billing, subject to an
agreed upon customer acceptance period.
The following table presents a summary
of the Company’s net sales by revenue recognition method as a percentage of total net sales for the three months ended March
31, 2019:
|
|
% of Total
Net Sales
|
|
Point-in-Time
|
|
|
100
|
%
|
Over Time - Input Method
|
|
|
—
|
%
|
Total
|
|
|
100
|
%
|
Remaining Performance Obligations
As of March 31, 2019, the Company had $970,000
of 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
$970,000 during the second quarter of 2019.
As of March 31, 2019, the Company had $148,000
of remaining performance obligations related to its extended warranties. The Company expects to recognize this deferred revenue
on a twelve (12) month straight-line basis beginning on October 1, 2019.
Note 3 – Loss Per Share
Basic loss per share is computed by dividing
the loss attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution from the assumed exercise of stock options and warrants, and the conversion
of convertible preferred shares. During periods of net loss, all common stock equivalents are excluded from the diluted EPS calculation
because they are anti-dilutive. Since the Company reported a net loss for the three months ended March 31, 2019 and 2018, the
calculation for basic and diluted earnings per share is considered to be the same, as the impact of potential common shares is
anti-dilutive. As of March 31, 2019 and 2018, there were 7,529,006 and 8,800,821 common stock share equivalents, respectively,
potentially issuable under conversion of preferred shares, options, and warrants that could dilute basic earnings per share in
the future.
Note 4 – Inventories,
Net
Inventories are stated at the lower of
cost and net realizable value and consisted of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Purchased Parts and Components
|
|
$
|
3,206,094
|
|
|
$
|
3,284,848
|
|
Work in Process
|
|
|
631,840
|
|
|
|
1,523,616
|
|
Finished Goods
|
|
|
4,783,213
|
|
|
|
2,837,183
|
|
Less: Reserve for Obsolescence
|
|
|
(510,921
|
)
|
|
|
(363,845
|
)
|
Net
|
|
$
|
8,110,226
|
|
|
$
|
7,281,802
|
|
Note 5 – Intangible
Asset, Net
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
Intangible Asset
|
|
$
|
1,500,000
|
|
|
$
|
1,500,000
|
|
Less: Accumulated Amortization
|
|
|
(204,000
|
)
|
|
|
(102,000
|
)
|
|
|
|
|
|
|
|
|
|
Intangible Asset, Net
|
|
$
|
1,296,000
|
|
|
$
|
1,398,000
|
|
On October 4, 2018, the Company entered
into amendment No. 1 to the original agreements (the “TDG Amendment”) with TDG Acquisition Company, LLC (“TDG”),
aka Six15 Technologies, LLC. The TDG Amendment amends certain provisions of prior agreements between Vuzix and TDG, including an
asset purchase agreement dated June 15, 2012, and an authorized reseller agreement dated June 15, 2012.
Pursuant to the TDG Amendment, the Company
will be permitted to engage in sales of heads-up display components or subsystems (and any services to support such sale) for incorporation
into a finished goods or systems for sale to military organizations, subject to certain conditions. The Company will also be permitted
to sell its products to defense and security organizations that include business customers and governmental entity customers that
primarily provide security and defense services, including police, fire fighters, EMTs, other first responders, and homeland and
border security. The Company will owe TDG commissions with respect to all such sales until June 2022.
This reacquired right covers the
entire remaining term of the original non-compete agreement with TDG, which expires June 15, 2022. The capitalized cost of this
reacquired right is being amortized over 44 months, which began in October 2018. Total amortization expense for this intangible
asset for the three months ended March 31, 2019 was $102,000. As of March 31, 2019, there was $250,000 in accrued current liabilities
for the final payment due under the terms of this agreement.
Note 6 – Accrued
Expenses
Accrued expenses consisted of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Accrued Wages and Related Costs
|
|
$
|
281,286
|
|
|
$
|
461,619
|
|
Accrued Professional Services
|
|
|
123,967
|
|
|
|
138,438
|
|
Accrued Warranty Obligations
|
|
|
241,530
|
|
|
|
218,047
|
|
Other Accrued Expenses
|
|
|
296,227
|
|
|
|
795,974
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
943,010
|
|
|
$
|
1,614,078
|
|
Included in Other Accrued Expenses as of March 31, 2019 is $250,000 for the final payment described above
in Note 5 related to the TDG Amendment. As of December 31, 2018, there was $750,000 in Other Accrued Expenses related to the TDG Amendment.
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-focused 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 three months ended March 31, 2019 and the balance as of December 31, 2018 were as follows:
Accrued Warranty Obligation at December 31, 2018
|
|
$
|
218,047
|
|
Reductions for Settling Warranties
|
|
|
(62,394
|
)
|
Warranties Issued During Period
|
|
|
85,877
|
|
|
|
|
|
|
Accrued Warranty Obligations at March 31, 2019
|
|
$
|
241,530
|
|
Note 7 – 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 8 – Capital
Stock
Preferred
stock
The Board of Directors is authorized to
establish and designate different series of preferred stock and to fix and determine their voting powers and other special rights
and qualifications. A total of 5,000,000 shares of preferred stock with a par value of $0.001 are authorized as of March 31, 2019
and December 31, 2018, 49,626 of which are designated as Series A Preferred Stock. There were 49,626 shares of Series A Preferred
Stock issued and outstanding on March 31, 2019 and December 31, 2018.
On January 2, 2015 the Company closed a
sale of Series A Preferred Stock to Intel Corporation (the “Series A Purchaser”), pursuant to which we issued and
sold an aggregate of 49,626 shares of the Company’s Series A Preferred Stock, at a purchase price of $500 per share, for
an aggregate purchase price of $24,813,000. Each share of Series A Preferred Stock is convertible, at the option of the Series
A holder, into 100 shares of the Company’s common stock (determined by dividing the Series A Original Issue Price of $500
by the Series A Conversion Price, which is equal to $5.00).
Each share of Series A Preferred Stock
is entitled to receive dividends at a rate of 6% per year, compounded quarterly and payable in cash or in kind, at the Company’s
sole discretion. As of March 31, 2019, total accumulated and unpaid preferred dividends were $7,134,996. As of December 31, 2018,
total accumulated and unpaid preferred dividends were $6,669,232. There were no declared preferred dividends owed as of March
31, 2019 or December 31, 2018.
The Series A Purchaser has the right, but
not the obligation, to participate in any proposed issuance by the Company of its securities, subject to certain exceptions and
in such amount as is sufficient to maintain the Series A Purchaser’s ownership percentage in the Company, calculated immediately
prior to such applicable financing, at a purchase price equal to the per share price of the Company’s securities in such
applicable financing.
Common
Stock
The Company’s authorized common stock
consists of 100,000,000 shares, par value of $.001. As of March 31, 2019 and December 31, 2018 there were 27,597,917 and 27,591,670
shares of common stock issued and outstanding, respectively.
Note 9 – Stock
Warrants
A summary of the various changes in warrants
during the three-month period ended March 31, 2019 is as follows:
|
|
Number of
Warrants
|
|
|
|
|
|
Warrants Outstanding at December 31, 2018
|
|
|
2,233,062
|
|
Exercised During the Period
|
|
|
—
|
|
Issued During the Period
|
|
|
—
|
|
Expired During the Period
|
|
|
(1,200,000
|
)
|
|
|
|
|
|
Warrants Outstanding at March 31, 2019
|
|
|
1,033,062
|
|
The outstanding warrants as of March 31,
2019 expire on June 18, 2021. The remaining term of the warrants is 2.2 years and the exercise price is $7.00 per share.
Note 10 – Stock-Based
Compensation Plans
A summary of stock option activity for
the three months ended March 31, 2019 is as follows:
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
1,546,521
|
|
|
$
|
5.11
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Expired or Forfeited
|
|
|
(11,500
|
)
|
|
|
5.98
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2019
|
|
|
1,535,021
|
|
|
$
|
5.10
|
|
The weighted average remaining contractual
term for all options as of March 31, 2019 and December 31, 2018 was 6.9 years and 7.2 years, respectively.
As of March 31, 2019, there were 999,891
options that were fully-vested and exercisable at a weighted average exercise price of $4.73 per share. The weighted average remaining
contractual term on the vested options is 6.0 years.
As of March 31, 2019, there were 535,130
unvested options exercisable at a weighted average exercise price of $5.80 per share. The weighted average remaining contractual
term on the unvested options is 8.7 years.
The weighted average fair value of option
grants was calculated using the Black-Scholes-Merton option pricing method. At March 31, 2019, the Company had approximately $2,700,000
of unrecognized stock compensation expense, which will be recognized over a weighted average period of approximately 2.7 years.
For the three months ended March 31, 2019 and 2018, the Company recorded total stock-based compensation expense,
including stock awards, of approximately $490,000 and $508,000, respectively.
Note 11 – 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 monetary damages.
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 12 – Right-of-Use Assets and Liabilities
The Company has signed several
lease agreements, with the largest being for its office and manufacturing facility in the Rochester, New York area under
an operating lease that commenced October 3, 2015 and expires on October 3, 2020. This lease has an original five-year term
with an option by the Company to renew for two additional three-year terms at pre-agreed to lease rates. This renewal term
is excluded from our right-to-use asset and liability as of March 31, 2019 as the renewal option for our current leased
facility is not reasonably certain. Rent expense under the operating leases totaled $140,300 and $112,896 for the three
months ended March 31, 2019 and 2018, respectively.
Certain leases provide for increases in
future minimum annual rental payments as defined in the lease agreements. The leases generally also include real estate taxes and
common area maintenance charges in the annual rental payments. Short-term leases are leases having a term of twelve months or less.
The Company recognizes short-term leases on a straight-line basis and does not record a related lease asset or liability for such
leases.
As none of our leases provide an implicit
interest rate, we use our incremental borrowing rate to determine our discount rate at lease inception based upon the information
available at commencement in determining the present value of lease payments. As of March 31, 2019, the weighted average discount
rate was 5% and the weighted average remaining lease term was 1.7 years.
Future lease payments under operating leases
as of March 31, 2019 were as follows:
Remainder of 2019
|
|
$
|
428,109
|
|
2020
|
|
|
|
|
|
451,832
|
|
2021
|
|
|
|
|
|
7,854
|
|
2022
|
|
|
|
|
|
7,854
|
|
2023
|
|
|
|
|
|
5,236
|
|
|
Total Future Lease Payments
|
|
|
900,885
|
|
|
Less: Imputed Interest
|
|
|
(40,608
|
)
|
|
Total Lease Liability Balance
|
|
$
|
860,277
|
|
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, 2018.
As used in this report, unless otherwise
indicated, the terms “Company,” “Vuzix”, “management,” “we,” “our,”
and “us” refer to Vuzix Corporation.
Critical Accounting Policies and Significant Developments
and Estimates
The discussion and analysis of our financial
condition and results of operations is based on our unaudited consolidated financial statements and related notes appearing elsewhere
in this quarterly report. The preparation of these statements in conformity with generally accepted accounting principles requires
the appropriate application of certain accounting policies, many of which require us to make estimates and assumptions about future
events and their impact on amounts reported in our consolidated financial statements, including the statement of operations, balance
sheet, cash flow and related notes. We continually evaluate our estimates used in the preparation of our financial statements,
including those related to revenue recognition, bad debts, inventories, warranty reserves, product warranty, carrying value of
long-lived assets, fair value measurement of financial instruments and embedded derivatives, valuation of stock compensation awards,
and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities
that are not apparent from other sources. Since future events and their impact cannot be determined with certainty, the actual
results will inevitably differ from our estimates. Such differences could be material to the consolidated financial statements.
We believe that our application of accounting
policies, and the estimates inherently required therein, are reasonable. We periodically re-evaluate these accounting policies
and estimates and make adjustments when facts and circumstances dictate a change. Historically, we have found our application
of accounting policies to be appropriate, and actual results have not differed materially from those determined using necessary
estimates.
Management believes certain factors and
trends are important in understanding our financial performance. The critical accounting policies, judgments and estimates that
we believe have the most significant effect on our consolidated financial statements are:
|
·
|
Valuation of inventories;
|
|
·
|
Carrying value of long-lived assets;
|
|
·
|
Software development costs;
|
|
·
|
Stock-based compensation; and
|
Our accounting policies are more fully
described in the notes to our consolidated financial statements included in this quarterly report and in our annual report on
Form 10-K for the year ended December 31, 2018. There have been no significant changes in our accounting policies other than the
adoption of ASC 842, see Note 12 for further discussion, for the three-month period ended March 31, 2019.
Off Balance Sheet Arrangements
We do not have any off-balance sheet arrangements
that have, or are reasonably likely to have, an effect on our financial condition, financial statements, revenues or expenses.
Business Matters
We are engaged in the design, manufacture,
marketing and sale of wearable computing devices and augmented reality wearable display devices also referred to as head mounted
displays (or HMDs, but also known as HUDs or near-eye displays), in the form of Smart Glasses and Augmented Reality (AR) glasses.
Our wearable display devices are worn like eyeglasses or attach to a head-worn mount. These devices typically include cameras,
sensors, and a computer that enable the user to view, record and interact with video and digital content, such as computer data,
the Internet, social media or entertainment applications. Our wearable display products integrate micro-display technology with
our advanced optics to produce compact high-resolution display engines, less than half an inch diagonally, which when viewed through
our smart glasses products create virtual images that appear comparable in size to that of a computer monitor or a large-screen
television.
With respect to our Smart Glasses and AR
products, we are focused on the enterprise, industrial, commercial, first responder, and medical markets. All of the mobile display
and mobile electronics markets in which we compete have been and continue to be subject to rapid technological change almost yearly
over the last decade including the rapid adoption of tablets, larger screen sizes and display resolutions along with declining
prices on mobile phones and other computing devices, and as a result we must continue to improve our products’ performance
and lower our costs. We believe our intellectual property portfolio gives us a leadership position in the design and manufacturing
of micro-display projection engines, waveguides, mechanical packaging, ergonomics, and optical systems.
Recent Accounting Pronouncements
See Note 1 to the consolidated financial
statements.
Results of Operations
Comparison of Three Months Ended
March 31, 2019 and March 31, 2018
The following table compares the Company’s
consolidated statements of operations data for the three months ended March 31, 2019 and 2018:
|
|
The Months Ended March
31,
|
|
|
|
2019
|
|
|
2018
|
|
|
Dollar
Change
|
|
|
% Increase
(Decrease)
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of Products
|
|
$
|
1,373,371
|
|
|
$
|
1,363,379
|
|
|
$
|
9,992
|
|
|
|
1
|
%
|
Sales of Engineering Services
|
|
|
—
|
|
|
|
180,516
|
|
|
|
(180,516
|
)
|
|
|
(100
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales
|
|
|
1,373,371
|
|
|
|
1,543,895
|
|
|
|
(170,524
|
)
|
|
|
(11
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales - Products
|
|
|
1,333,481
|
|
|
|
1,182,215
|
|
|
|
151,266
|
|
|
|
13
|
%
|
Cost of Sales - Engineering Services
|
|
|
—
|
|
|
|
184,555
|
|
|
|
(184,555
|
)
|
|
|
(100
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cost of Sales
|
|
|
1,333,481
|
|
|
|
1,366,770
|
|
|
|
(33,289
|
)
|
|
|
(2
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit (exclusive of depreciation shown separately below)
|
|
|
39,890
|
|
|
|
177,125
|
|
|
|
(137,235
|
)
|
|
|
(77
|
%)
|
Gross Profit %
|
|
|
3
|
%
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and Development
|
|
|
2,516,100
|
|
|
|
2,055,787
|
|
|
|
460,313
|
|
|
|
22
|
%
|
Selling and Marketing
|
|
|
1,417,966
|
|
|
|
1,534,097
|
|
|
|
(116,131
|
)
|
|
|
(8
|
%)
|
General and Administrative
|
|
|
1,896,402
|
|
|
|
1,665,229
|
|
|
|
231,173
|
|
|
|
14
|
%
|
Depreciation and Amortization
|
|
|
559,089
|
|
|
|
273,622
|
|
|
|
285,467
|
|
|
|
104
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from Operations
|
|
|
(6,349,667
|
)
|
|
|
(5,351,610
|
)
|
|
|
(998,057
|
)
|
|
|
19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Income
|
|
|
58,313
|
|
|
|
—
|
|
|
|
58,313
|
|
|
|
NM
|
|
Other Taxes
|
|
|
(52,662
|
)
|
|
|
(28,542
|
)
|
|
|
(24,120
|
)
|
|
|
85
|
%
|
Foreign Exchange Loss
|
|
|
(15,745
|
)
|
|
|
(4,418
|
)
|
|
|
(11,327
|
)
|
|
|
256
|
%
|
Gain on Derivative Valuation
|
|
|
—
|
|
|
|
28,133
|
|
|
|
(28,133
|
)
|
|
|
(100
|
%)
|
Interest Expense
|
|
|
—
|
|
|
|
(9,213
|
)
|
|
|
9,213
|
|
|
|
(100
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Expense
|
|
|
(10,094
|
)
|
|
|
(14,040
|
)
|
|
|
3,946
|
|
|
|
(28
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss Before Provision for Income Taxes
|
|
|
(6,359,761
|
)
|
|
|
(5,365,650
|
)
|
|
|
(994,111
|
)
|
|
|
19
|
%
|
Provision for Income Taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(6,359,761
|
)
|
|
$
|
(5,365,650
|
)
|
|
$
|
(994,111
|
)
|
|
|
19
|
%
|
Sales.
There was an
overall decrease in total sales for the quarter ended March 31, 2019 over the same period in 2018 of $170,524 or 11%. The following
table reflects the major components of our sales:
|
|
Quarter Ended
March 31,
2019
|
|
|
% of
Sales
|
|
|
Quarter Ended
March 31,
2018
|
|
|
% of
Sales
|
|
|
Dollar
Change
|
|
|
% Increase
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of Smart Glasses
|
|
$
|
1,252,001
|
|
|
|
91
|
%
|
|
$
|
1,176,121
|
|
|
|
76
|
%
|
|
$
|
75,880
|
|
|
|
6
|
%
|
Sales of Video Eyewear
|
|
|
—
|
|
|
|
0
|
%
|
|
|
117,830
|
|
|
|
8
|
%
|
|
|
(117,830
|
)
|
|
|
(100
|
)%
|
Sales of Waveguides & Display Engines
|
|
|
95,000
|
|
|
|
7
|
%
|
|
|
36,438
|
|
|
|
2
|
%
|
|
|
58,562
|
|
|
|
161
|
%
|
Sales Freight out
|
|
|
26,370
|
|
|
|
2
|
%
|
|
|
32,990
|
|
|
|
2
|
%
|
|
|
(6,620
|
)
|
|
|
(20
|
)%
|
Sales of Engineering Services
|
|
|
—
|
|
|
|
0
|
%
|
|
|
180,516
|
|
|
|
12
|
%
|
|
|
(180,516
|
)
|
|
|
(100
|
)%
|
Total Sales
|
|
$
|
1,373,371
|
|
|
|
100
|
%
|
|
$
|
1,543,895
|
|
|
|
100
|
%
|
|
$
|
(170,524
|
)
|
|
|
(11
|
)%
|
Sales of smart glasses products rose by 6%, primarily the result of our new Blade Smart Glasses included
in this revenue category. There were no sales of Video Eyewear in the 2019 period as the product was discontinued in September
2018. Sales of Waveguides and Display Engines for the three months ended March 31, 2019 were $95,000 versus $32,990 in the prior
year’s comparable period.
Sales of engineering services for the three-month
period ending March 31, 2019 was nil as compared to $180,516 in the 2018 period. There were no new programs that commenced in
the first quart of 2019 and all the 2018 engineering services projects were completed by end of the year.
Cost of Sales and Gross Profit.
Cost
of product revenues and engineering services are comprised of materials, components, labor, warranty costs, freight costs, manufacturing
overhead, software royalties, and the non-cash amortization of software development costs related to the production of our products
and rendering of engineering services. The following table reflects the components of our cost of goods sold for products:
Component of Cost of Sales
|
|
Quarter Ended
March
31, 2019
|
|
|
As % Related
Product
Sales
|
|
|
Quarter Ended
March
31, 2018
|
|
|
As % Related
Product
Sales
|
|
|
Dollar
Change
|
|
|
% Increase
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product Cost of Sales
|
|
$
|
710,098
|
|
|
|
52
|
%
|
|
$
|
624,928
|
|
|
|
46
|
%
|
|
$
|
85,170
|
|
|
|
14
|
%
|
Freight Costs
|
|
|
132,970
|
|
|
|
10
|
%
|
|
|
148,078
|
|
|
|
11
|
%
|
|
|
(15,108
|
)
|
|
|
(10
|
%)
|
Manufacturing Overhead
|
|
|
415,901
|
|
|
|
30
|
%
|
|
|
258,843
|
|
|
|
19
|
%
|
|
|
157,058
|
|
|
|
61
|
%
|
Warranty Costs
|
|
|
23,483
|
|
|
|
2
|
%
|
|
|
123,060
|
|
|
|
9
|
%
|
|
|
(99,577
|
)
|
|
|
(81
|
%)
|
Amortization of Software Development Costs
|
|
|
25,000
|
|
|
|
2
|
%
|
|
|
—
|
|
|
|
0
|
%
|
|
|
25,000
|
|
|
|
NM
|
|
Software Royalties
|
|
|
26,029
|
|
|
|
2
|
%
|
|
|
27,306
|
|
|
|
2
|
%
|
|
|
(1,277
|
)
|
|
|
(5
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cost of Sales - Products
|
|
$
|
1,333,481
|
|
|
|
97
|
%
|
|
$
|
1,182,215
|
|
|
|
87
|
%
|
|
$
|
151,266
|
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit - Product Sales
|
|
$
|
39,890
|
|
|
|
3
|
%
|
|
$
|
181,164
|
|
|
|
13
|
%
|
|
$
|
(141,274
|
)
|
|
|
(78
|
%)
|
For the quarter
ended March 31, 2019, we reported an overall gross profit from product sales of $39,890 as compared to $181,164 in the prior year’s
period. On a product cost of sales basis only, product direct costs were 52% of sales in the 2019 period as compared to 46% in
the prior year’s period, the increase resulting from slightly lower margins on our Blade Smart Glasses as compared to our
M series products. Manufacturing overhead costs for the 2019 period, as a percentage of total product sales, increased to 30%
for the 2019 period from 19% in the 2018 period, as we have increased our production floor space, including related personnel,
in anticipation of increased Blade manufacturing and the expected commencement in Q3-2019 of M400 production.
Costs for engineering
services for the three months ended March 31, 2019 were nil as compared to $184,555 in the three-month period ending March 31,
2018. The 2018 period amounts represented costs related to the Toshiba engineering program which was completed in March 2018.
There was nil gross profit from engineering services for the 2019 period versus a gross loss from engineering services of $4,039
in the same period in 2018 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
March
31, 2019
|
|
|
% of
Sales
|
|
|
Quarter Ended
March
31, 2018
|
|
|
% of
Sales
|
|
|
Dollar
Change
|
|
|
% Increase
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and Development
|
|
$
|
2,516,100
|
|
|
|
183
|
%
|
|
$
|
2,055,787
|
|
|
|
133
|
%
|
|
$
|
460,313
|
|
|
|
22
|
%
|
Comparing our research
and development costs for the quarter ended March 31, 2019 versus the same period in 2018, there was an increase in salary,
benefits and stock compensation expenses of $358,585, primarily the result of additional R&D staff as compared to the same
period in 2018; and an increase of $102,000 in consulting fees for software contractors relating to our Blade product.
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
March
31, 2019
|
|
|
% of
Sales
|
|
|
Quarter Ended
March
31, 2018
|
|
|
% of
Sales
|
|
|
Dollar
Change
|
|
|
% Increase
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and Marketing
|
|
$
|
1,417,966
|
|
|
|
103
|
%
|
|
$
|
1,534,097
|
|
|
|
99
|
%
|
|
$
|
(116,131
|
)
|
|
|
(8
|
%)
|
These costs decreased overall as compared
to the same period in 2018 primarily due to the following factors: a $73,261 decrease in salary, commissions, benefits and stock
compensation expenses; a $38,883 decrease in advertising, marketing and trade show costs; a $44,268 decrease in website costs;
partially offset by a $28,138 increase in consulting fees.
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
March
31, 2019
|
|
|
% of
Sales
|
|
|
Quarter Ended
March
31, 2018
|
|
|
% of
Sales
|
|
|
Dollar
Change
|
|
|
% Increase
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and Administrative
|
|
$
|
1,896,402
|
|
|
|
138
|
%
|
|
$
|
1,665,229
|
|
|
|
108
|
%
|
|
$
|
231,173
|
|
|
|
14
|
%
|
General and administrative costs rose by
14% or $231,173 for the first quarter of 2019 versus the 2018 period primarily because of: increased accounting and SOX consultant
costs of $39,383; increased IT and security assessment consulting fees of $208,984; increased legal fees of $158,170; increased
IR and shareholder related expenses of $20,632; offset by a decrease in salary, commissions, benefits and stock compensation expenses
of $160,027 and a decrease in travel expenses of $40,122.
Depreciation and Amortization.
Depreciation
and amortization expense for the three months ended March 31, 2019 was $559,089 as compared to $273,622 in the same period in
2018, an increase of $285,467. The increase in depreciation and amortization expense is due to new investments in depreciable
assets and our intangible asset related to the TDG Amendment.
Other Income (Expense)
. Total
other expense was $10,094 for the three months ended March 31, 2019 as compared to $14,040 in the same period in 2018. The overall
decrease of $3,946 in other expenses was primarily the result of an increased loss of $24,120 in other taxes; a decreased gain
of $28,133 in derivative valuation for the three months ended March 31, 2019 as compared to the same period in 2018, offset by
a $58,313 increase in investment income.
Provision for Income Taxes. There was not
a provision for income taxes in the respective three-month periods ending March 31, 2019 and 2018.
Liquidity and Capital Resources
As of March 31, 2019, we had cash and cash
equivalents of $10,085,837, a decrease of $7,177,806 from $17,263,643 as of December 31, 2018.
At March 31, 2019, we had current assets
of $19,654,531 compared to current liabilities of $3,574,556 which resulted in a positive working capital position of $16,079,975.
At December 31, 2018, we had a working capital position of $22,706,430. Our current liabilities are comprised principally of accounts
payable, operating lease liabilities and accrued expenses.
Operating Activities
. We used $5,874,357
of cash for operating activities for the three months ended March 31, 2019 and $6,470,978 in the same period in 2018. The net
cash operating loss after adding back non-cash adjustments for the three months ended March 31, 2019 was $5,285,918, along with
the following changes in operating assets and liabilities for the period: a $572,577 decrease in accounts receivable, a $828,424
increase in net inventory, a $368,658 decrease in vendor prepayments, a $437,947 decrease in prepaid expenses, and $952,497 decrease
in accounts payable. The net cash operating loss after adding back non-cash adjustments for the comparative three-month period
ended March 31, 2018 was $4,611,710, along with the following changes in operating assets and liabilities for the 2018 period:
a $497,784 decrease in accrued revenue, a $424,013 increase in net inventory, a $1,978,637 decrease in accounts payable, and a
$211,052 decrease in accrued expenses.
Investing Activities
. Cash
used in investing activities was $1,303,449 for the three months ended March 31, 2019 as compared to $415,153 in the same period
in 2018. During the first three months of 2019, $724,565 was used primarily for the purchase of manufacturing equipment, product
mold tooling, and computer equipment as compared to a spending of $306,739 for the same period in 2018. The costs of registering
our intellectual property rights and license purchases, included in the investing activities totals described above, were $41,475
in the three-month period ended March 31, 2019 and $64,664 in the same period in 2018. During the three months ended March 31,
2019, a total of $537,409 in license and other intangible asset costs were capitalized, $500,000 of which was the second of three
payments required under our TDG Amendment, versus nil for the same period in 2018.
Financing Activities
.
We
generated no cash from financing activities for the three months ended March 31, 2019 as compared to $28,064,375 in the same period
in 2018.
Capital Resources.
As
of March 31, 2019, we had a cash and cash equivalents balance of $10,085,837.
We incurred a net loss for the three months ended March 31, 2019 of $6,359,761 and annual net losses of $21,875,713
in 2018 and $19,633,502 in 2017. The Company has an accumulated deficit of $124,626,202 as of March 31, 2019.
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 equity and/or debt 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. The Company’s management intends
to take actions necessary to continue as a going concern, and accordingly, our consolidated financial statements included in this
report have been prepared assuming that we will continue as a going concern. This basis of accounting contemplates the recovery
of our assets and the satisfaction of liabilities in the normal course of business. The consolidated financial statements included
in this report do not include any adjustments to the specific amounts and classifications of assets and liabilities which might
be necessary should we be unable to continue as a going concern.
Historically, the Company has met its cash
needs primarily by the sale of equity. If the Company raises additional funds by new equity issuances, the ownership interests
of existing shareholders may be diluted. The amount of such dilution could increase due to the issuance of new warrants or securities
with other dilutive characteristics, such as full ratchet anti-dilution clauses or price resets.
However, there can be no assurance that
we will be able to raise capital in the future or that if we raise additional capital it will be sufficient to execute our business
plan. To the extent that we are unable to raise sufficient additional capital, we will be required to substantially modify our
business plan and our plans for operations, which could have a material adverse effect on us and our financial condition.
Forward Looking Statements
This quarterly report includes forward-looking
statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements
are based on our management’s beliefs and assumptions and on information currently available to our management. Forward-looking
statements include, but are not limited to, statements concerning:
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trends in our operating expenses, including personnel costs, research and development expense,
sales and marketing expense, and general and administrative expense;
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the effect of competitors and competition in our markets;
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our wearable products and their market acceptance and future potential;
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our ability to develop, timely introduce, and effectively manage the introduction of new
products and services or improve our existing products and services;
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expected technological advances by us or by third parties and our ability to leverage them;
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our ability to attract and retain customers;
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our ability to accurately forecast consumer demand and adequately manage inventory;
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our ability to deliver an adequate supply of product to meet demand;
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our ability to maintain and promote our brand and expand brand awareness;
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our ability to detect, prevent, or fix defects in our products;
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our reliance on third-party suppliers, contract manufacturers and logistics providers and
our limited control over such parties;
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trends in revenue, costs of revenue, and gross margin and our possible or assumed future
results of operations;
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our ability to attract and retain highly skilled employees;
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the impact of foreign currency exchange rates;
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the effect of future regulations;
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the sufficiency of our existing cash and cash equivalent balances and cash flow from operations
to meet our working capital and capital expenditure needs for at least the next 12 months; and
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general market, political, economic and business conditions.
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All statements in this quarterly report
that are not historical facts are forward-looking statements. We may, in some cases, use terms such as “anticipates,”
“believes,” “could,” “estimates,” “expects,” “intends,” “may,”
“plans,” “potential,” “predicts,” “projects,” “should,” “will,”
“would” or similar expressions that convey uncertainty of future events or outcomes to identify forward-looking statements.
All such forward-looking statements are subject to certain risks and uncertainties and should be evaluated
in light of important risk factors that may cause our actual results, performance or achievements to be materially different from
any future results, performances or achievements expressed or implied by the forward-looking statements. These risk factors include,
but are not limited to, those that are described in “Risk Factors” under Item 1A and elsewhere in our annual report
on Form 10-K for the year ended December 31, 2018 and other filings we make with the Securities and Exchange Commission and the
following: business and economic conditions, rapid technological changes accompanied by frequent new product introductions, competitive
pressures, dependence on key customers, inability to gauge order flows from customers, fluctuations in quarterly and annual results,
the reliance on a limited number of third party suppliers, limitations of our manufacturing capacity and arrangements, the protection
of our proprietary technology, the effects of pending or threatened litigation, the dependence on key personnel, changes in critical
accounting estimates, potential impairments related to investments, foreign regulations, liquidity issues, and potential material
weaknesses in internal control over financial reporting. Further, during weak or uncertain economic periods, customers may delay
the placement of their orders. These factors often result in a substantial portion of our revenue being derived from orders placed
within a quarter and shipped in the final month of the same quarter.
We caution readers to carefully consider
such factors. Many of these factors are beyond our control. In addition, any forward-looking statements represent our estimates
only as of the date they are made and should not be relied upon as representing our estimates as of any subsequent date. While
we may elect to update forward-looking statements at some point in the future, except as may be required under applicable securities
laws, we specifically disclaim any obligation to do so.