UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 001-35955
Vuzix Corporation
(Exact name of registrant as specified in its charter)
Delaware
(State of incorporation)
2166 Brighton Henrietta Townline Road
Rochester, New York
(Address of principal executive office)
04-3392453
(I.R.S. employer identification no.)
14623
(Zip code)
(585) 359-5900
(Registrant’s telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act: common stock, par value $0.001 per share
Securities registered pursuant to Section 12(g) of the Act:
warrants to purchase common stock
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No
þ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes þNoo
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference into Part III of this
Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer o
Accelerated filer o
Non-accelerated filer o
(Do not check if a smaller
reporting company)
Smaller reporting company þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
The aggregate market value of the voting and non-voting common equity of the registrant held by non-affiliates as of June 30, 2014 was
approximately $16,035,000 (based on the closing price of the common stock of $2.80 per share on that date, as reported on the OTCQB and,
for purposes of this computation only, the assumption that all of the registrant’s directors and executive officers are affiliates and that
beneficial holders of 10% or more of the outstanding common stock are affiliates).
As of March 27, 2015, there were 15,862,418 shares of the registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K incorporates by reference portions of the registrant’s proxy statement for its 2015 annual meeting of
stockholders.
TABLE OF CONTENTS
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
Item 10
Item 11
Item 12
Item 13
Item 14
Item 15
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosure
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits and Financial Statement Schedules
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FORWARD-LOOKING STATEMENTS
This annual report includes forward-looking statements. These statements are based on our management’s beliefs and assumptions and
on information currently available to our management. The forward-looking statements are contained principally under the headings “Risk
Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business.” Forward-looking
statements include statements concerning:
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our possible or assumed future results of operations;
our business strategies;
our ability to attract and retain customers;
our ability to sell additional products and services to customers;
our cash needs and financing plans;
our competitive position;
our industry environment;
our potential growth opportunities;
expected technological advances by us or by third parties and our ability to leverage them;
the effects of future regulation; and
the effects of competition.
All statements in this annual 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.
Forward-looking statements are made based on management’s beliefs, estimates and opinions on the date the statements are made and
we undertake no obligation to update forward-looking statements if these beliefs, estimates and opinions or other circumstances should
change, except as may be required by applicable law. Although we believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including
the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual
results.
PART I
Item 1. Business
Company Overview
We are engaged in the design, manufacture, marketing and sale of wearable display devices that are worn like eyeglasses and feature
built-in video screens that enable the user to view video and digital content, such as movies, computer data, the Internet or video games. Our
wearable display products, known commercially as Video Eyewear (also referred to as head mounted displays (or HMDs), Smart Glasses,
wearable displays, video glasses, personal viewers, near-eye virtual displays, and near-eye displays or NEDs), contain micro video displays
that offer users a portable high-quality viewing experience. Our Video Eyewear products provide virtual large high-resolution screens, fit in a
user’s pocket or purse and can be viewed practically anywhere, anytime. They can also be used for virtual and augmented reality applications,
in which the wearer is either immersed in a computer generated world or has their real world view augmented with computer generated
information or graphics. In the 4th quarter of 2014, we started selling Smart Glasses, a new category of Video Eyewear that includes a
wearable computer and has much of the capabilities of a smartphone including wireless internet access but that is worn like glasses. We
produce both monocular and binocular Video Eyewear devices. Video Eyewear are designed to work with mobile electronic devices, such as
cell phones, laptop computers, tablets, portable media players and gaming systems.
Historically, we have focused on two markets: the consumer markets for gaming, entertainment and mobile video and the market for
rugged mobile displays for defense, commercial and industrial markets. In June 2012, we sold the assets that comprised our Tactical Defense
Group (the “TDG Assets”), which sold and licensed products and provided services, directly and indirectly, to military organizations and
defense organizations to TDG Acquisition Company, LLC (now operating as Six-15 Technologies). Accordingly, we now focus primarily on
the consumer, commercial and entertainment markets.
Users of mobile display devices, like tablets and smartphones, are increasingly using such devices to replace their personal computer
or console game systems. We believe the displays currently used in these mobile devices do not work ideally for this purpose because they are
either too small, which makes it difficult to view the detail of the images that they display, or too large, making them heavy and difficult to
carry. In contrast, our Video Eyewear products enable users of many mobile devices to effectively view the entire screen on a small, eyeglass-
like device. Our new Smart Glasses, although designed to work as a peripheral to the smartphone, have much of the same capabilities of the
smartphone itself, allowing them to be used as a hands free wearable computer. Our products can be used as a wearable substitute for large-
screen televisions or desktop computer monitors and with the Smart Glasses, allow users to utilize many smartphone applications while
keeping their smartphones in a pocket or purse.
Our Video Eyewear products all employ microdisplays that are smaller than one-inch diagonally, with some as small as one-quarter
of an inch. They currently can display an image with a resolution of up to 1280×720 pixels (High Definition or HD). Users view the display
through our proprietary optics. Using these optics and displays, our Video Eyewear provides a virtual image that appears similar to the image
on a full size computer screen in an office desktop environment or the image on a large flat panel television viewed from normal home TV
viewing distances. For example, when viewed through our optics, a high-resolution 0.35-inch diagonal microdisplay can provide a viewing
experience comparable to that on a 75-inch diagonal television screen viewed at ten feet.
We believe one of the most promising future uses of wearable displays like our Video Eyewear is in applications where virtual 3D
information enhances real world environments. This is often referred to as Augmented Reality or AR. To obtain an enhanced view of the real
environment, users wear see-through Video Eyewear that allow them to see 3D computer-generated objects superimposed on their real-world
views. This see-through capability is accomplished using a see-through optic, such as our waveguides or by the use of cameras.
In the past, see-through HMDs displayed the real world using semi-transparent mirrors placed in front of the user’s eyes. These
HMDs were large and bulky and so they had little mass market appeal. We have developed thin optics, called waveguides that enable
miniature display engines to be mounted in the temples of the HMD, which allows the form factor of the HMD to be comparable to
conventional eyeglasses.
We believe that with a hands free wearable computer like our M100 Smart Glasses, that have the capability to merge virtual
information with the real world, we have the potential to penetrate many markets from the consumer to industry. An example of AR is the
yellow "first down" line seen in television broadcasts of American football games, in which the line the offensive team must cross to receive a
first down is superimposed on the field itself. The real-world elements are the football field and players; the virtual element is the yellow line.
We believe see-through Video Eyewear will enable this kind of experience on smartphones and other viewing devices virtually anywhere and
anytime. Our new Smart Glasses product line runs these kinds of applications natively as they have much of the capabilities of a smartphone
built into them; including running full operating systems like Google, Inc.’s Android.
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Overall Strategy
Our goal is to establish and maintain a leadership position as a worldwide supplier of Video Eyewear and Smart Glasses solutions.
We intend to offer our technologies across major markets, platforms and applications. We will strive to be an innovator in designing near-eye
wearable display devices that can enable new mobile video viewing and general entertainment, VR and AR applications.
To maintain and enhance our position as a leading provider of near-eye virtual display solutions, we intend to:
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improve brand name recognition;
provide excellent products and service;
develop products based on our unique technology for both specialized and large consumer markets;
broaden and develop strategic relationships and partnerships;
offer to sell our products or license our technology to third party companies that would incorporate and sell them as a new
product with their own brand name (OEM partners);
promote and enhance development of third party software that can take advantage of our products;
expand market awareness for Video Eyewear, including applications for mobility (with our Smart Glasses) and Virtual
Reality (VR) and Augmented Reality (AR) for which Video Eyewear is well suited. (VR allows a user to interact with a
computer-simulated environment, whether that environment is a simulation of the real world or an imaginary world and AR
combines real-world and computer-generated data in real time to augment the real world view);
obtain and maintain market leadership and expand our customer base;
reduce production costs while moving to higher margin product offerings;
extend our proprietary technology leadership;
enhance and protect our intellectual property portfolio;
establish multiple revenue sources;
invest in highly qualified personnel;
build and maintain strong product design capabilities; and
leverage further outsourcing as our manufacturing volumes increase to reduce costs.
The Market
Current mobile display technology is almost universally based on direct view screens. These displays are designed to be small and
make portability easy. At the same time, it is difficult for these displays to produce human readable high resolution content without
magnification or large character fonts due to their small size. Our products are aimed at solving these problems by creating large screens that fit
in tiny packages (eyeglasses).
The wireless and entertainment industry has evolved considerably, and continues to do so. The mobile phone, once simply a means to
communicate by voice while “on-the-go,” has evolved into a ubiquitous, location-aware, smart mobile computing device. Mobile products
such as smartphones and tablet computers are becoming the leading computing platforms with an installed base surpassing that of PCs.
Mobile technology is redefining the way people interact with their world and has become an essential lifestyle management and entertainment
tool personalized to users’ unique needs. We believe mobile devices and mobile internet access will have a more profound impact than the
Wired Internet and that interactive AR content is expected to significantly change the way mobile products are used. As a result, we believe
that there is growing demand for mobile access to high-resolution content in several major markets and that demand will grow for Smart
Glasses that have smartphone capabilities in most markets in which smartphones are currently used. We believe wearable near-eye displays
that can provide the equivalent of a high resolution wired internet at home or office experience will be a key component in advanced wearable
wireless devices as these systems move to providing high resolution images without compromising the portability of the product.
Our business focuses on the mobile consumer entertainment and gaming markets and the mobile commercial and industrial markets.
The demand for wearable displays in these markets is being driven by such factors as:
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Increasing use of the Internet in many aspects of society and business, which is increasing demand for Internet access “anywhere,
anytime”.
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· An increasing number of hands-free industrial and commercial applications, such as on-site training and display of information on the
factory floor or retail store, for which our products are well suited.
· Video gaming around the world continues to grow even as more users migrate a greater portion of their game time to mobile devices.
We believe that our high resolution Virtual Display technologies will significantly increase user satisfaction with gaming applications
by engaging the user with a large high resolution mobile screen that also enables stereoscopic imagery and interactive head tracking.
Our Virtual Reality and Augmented Reality Video Eyewear provide this capability.
· We believe the growing use of augmented reality applications on smartphones will drive the need for a wearable display solution to
replace the need to hold up the smartphones to use the application.
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The new user friendly 3D connectivity standards like HDMI 1.4a, 3D console gaming and other 3D content is creating a need for
methods to play this content. We believe that Video Eyewear, with its dual display design, is well suited for the playback of 3D content
and avoids many of the drawbacks such as flicker, image cross talk and color separation, commonly encountered by shutter or color
anaglyph glasses.
· Many 3D viewing solutions require the user to purchase new computer or television equipment. Video Eyewear users do not need a
separate display or shutter glasses to view 3D content. Video Eyewear can also be used to view 3D through mobile devices allowing
3D content to be delivered any time anywhere.
Target Markets
Our target markets and applications by major sector are:
Commercial and Industrial
Our Smart Glasses products are currently focused on the enterprise, industrial and medical markets. They are being used for field
service to warehouse pick and pack applications. The smart glasses run native Android applications within the glasses that allow them to
stream video in realtime which is very useful for many applications. Within the short period of time we have been selling M100 it is being
used for many applications including remote camera viewfinder displays and wearable computer displays, viewing of wireless sensor data ,
providing hands-free access to manuals and other information and for on-site, in-the-field maintenance, servicing, training and education.
Consumer
Media and Entertainment. We believe that there is an increasing demand for convenient, high-resolution, 3D displays to view
content such as movies, entertainment and the Internet in mobile environments and as a secondary display in the home.
Gaming. We believe that there is a need for high-resolution, interactive, stereoscopic 3D display devices for use with desktop
computers, consoles, tablets and other gaming products. We believe that gaming on mobile devices that have graphics and processing
capabilities closely equivalent to laptop computers and consoles but with small, direct view screens is not a satisfactory experience for many
consumers. Our Video Eyewear products are designed to significantly enhance a consumer’s experience by providing larger-appearing, high-
resolution images with stereoscopic 3D capabilities. We believe that there is also a demand for display devices that enable the user to simulate
and experience movement within a three-dimensional environment when using either gaming consoles or mobile devices. We anticipate that
VR and AR will become increasingly popular entertainment applications. Both VR and AR are difficult to implement using traditional desktop
computer monitors and televisions but can be successfully implemented with Video Eyewear. Our technologies and products enable a user to
use those applications.
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Augmented Reality for all Markets
We offer smart wearable display products that enable development and deployment of AR applications. AR Smart Glasses enable its
wearer to see computer-generated information, graphics or images projected into the real world environment or upon an object that the user is
observing. Thus, whether in the warehouse, on the factory floor, or in-the-field, users may access a manual, tutorial, or image that will assist
them in completing a task or locating an item, while also viewing their current surroundings and nearby objects.
We anticipate applications will include the following areas:
Field service, warehousing, and maintenance;
Task support for industrial, manufacturing and medical applications;
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· Navigation;
Sightseeing;
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Social networking
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Location and scene based entertainment and education applications;
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· Mobile commerce and visual search applications; and
· Real time language translation.
Additional possible applications of AR-enabled M100 Smart Glasses include hands free alerts, messaging, location and context
sensitive information and social interaction.
Products
We produce and sell three main types of wearable display products: Video Eyewear (for on-the-go users as remote displays for
mobile and hands-free use); Virtual Reality (or VR) Video Eyewear (for stepping into virtual worlds, simulations & gaming); and Augmented
Reality (AR) Video Eyewear (for overlaying virtual information from the cloud onto the real world). Our products are available with varying
features and include either monocular or binocular display systems. Starting in the fourth quarter of 2014, we began to commercially produce
the Smart Glasses versions of our Video Eyewear that have many of the capabilities of a smartphone to allow applications to be run directly in
the Video Eyewear glasses enabling cloud connected applications through a wireless link directly with the glasses. We believe we provide the
broadest range of consumer Video Eyewear product offerings available in the market and that our products contain some of the most advanced
electronics and optics for their target markets and uses. Our products include:
Binocular Video Eyewear Products
We have won Consumer Electronics Show (or CES) awards for innovation for the past 10 consecutive years (2005 to 2015) for our
series of Binocular Video Eyewear. Our Video Eyewear products have included several models with differing native resolutions and virtual
screen sizes. Our binocular Video Eyewear products contain two microdisplays (a separate display for each eye), typically mounted in a frame
attached to eyeglass-style temples. These products enable mobile and hands-free private viewing of video content on screens that simulate
home theater-sized screens, all of which support 3D applications. Headphones are built into the temples so that users can listen to
accompanying audio in full stereo. These products can be employed as mobile high-resolution displays with products such as smartphones
with video output capability, laptop computers, tablet computers, portable DVD players, and personal digital media/video players (such as
video iPods).
The Wrap series of Video Eyewear, introduced in the fall of 2009, is the fourth generation of Video Eyewear products that we have
produced since 2005.
We are in the process of phasing out the last of our low resolution Wrap series products and now only offer the Wrap 1200 DX,
which has WVGA (852x480 three-color pixels) resolution that simulates a 75-inch screen viewed at 10 feet. The Wrap 1200DX connects to
2D and 3D HDMI video sources. This standard has become the most common video connection in consumer electronics equipment and
smartphones, and is also the standard for 3D Blue-ray discs.
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At the January 2014 CES show we introduced a new Video Eyewear concept, “video headphones” that won two awards in the
wearable technology categories. Video headphones are effectively noise canceling audio headphones with an HD video visor that slides down
in front of the user’s eyes to create a wearable home theater experience. These first video headphones model V720 are for the mobile video
and VR gaming markets. This model will include 720p HD displays, HDMI 1.4a 3D video support. Future versions may also include our
Smart Glasses technology that allows them to run the Android OS and support wireless connections to the user’s HD video source.
We are developing a line of advanced Smart Glasses Video Eyewear products. We began selling the first of these products to
customers late in the 4th quarter of 2014. Ultimately Smart Glass models will be available in both monocular and binocular versions and will
have resolutions up to full HD with wireless connectivity, ideal as a smartphone mobile display accessory and for cloud computing. This
advanced line of products will utilize extremely thin and light weight optics employed in fashion wear eyeglass frames.
Monocular Video Eyewear Products
From 2003 to 2009, we sold a line of monocular (single eye) Video Eyewear Products called the M920, which were discontinued in
2009 and replaced with a monocular high-resolution Video Eyewear model called Tac-Eye. This product is ruggedized and designed to clip
onto a pair of ballistic sunglasses, helmets or conventional safety goggles. The Tac-Eye product line was sold as part of the TDG Asset sale in
June 2012.
Monocular products, due to their single eye display are best used for “information snacking” and are not designed for extended user
viewing without training. Other monocular eyewear issues can include possible visual rivalry problems for eye dominance and focus for the
user wearing them. Typically monocular products have smaller fields of view that result in less information display capability and no
stereoscopic 3D or depth information. Binocular Video Eyewear products overcome these issues and are the best choice in most applications.
For the industrial sector in the 4th quarter of 2013 we began selling our first waveguide based HMD that is fully enabled for AR use. The
M2000AR has tracking sensors, hi-resolution camera, HDMI interface, and see through waveguide based optics that can be mounted to
hardhats or goggles. Applications will include training, manufacturing, maintenance and other hands-free operations.
In the 4th quarter of 2013 we began selling our first monocular pair of Smart Glasses, the M100. Designed for the industrial and
commercial markets, our initial focus has been on the developer community in enterprise and the medical markets. We have been attempting to
create an eco-system around the M100 developer community. Major corporate partners like SAP, AT&T, NTT Docomo and others have been
particularly active. We are also creating an M100 app store with a growing list of applications and tools to enable application development.
Vuzix is also building partnerships with the major suppliers of augmented reality software like wikitude and Metaio, each of which have
developed custom versions of their software that support our M100 smart glasses.
Virtual Reality Products
Virtual Reality (VR) Video Eyewear products provide a user with 3D computer simulated environments that can simulate the real or
an imaginary world. By definition, VR Products are binocular so they can provide an immersive 3D world view for the user. Our current VR
product is the Wrap 1200DX VR, the fourth generation of our VR Video Eyewear. These Virtual Reality products contain “three degrees of
freedom” head tracking technology, which enables the user to look around the environment being viewed by moving his or her head. Today
VR is primarily used for game playing, training and simulations. We anticipate that the V720 video headphones will also have tracking
capabilities and hence will support VR.
Augmented Reality Products
Augmented Reality Products provide a user a live, direct or indirect, view of a physical, real-world environment whose elements are
augmented by computer generated sensory input such as sound, video, graphics or GPS data. Our current AR products include the Wrap
920AR and STAR 1200.
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The Wrap 1200DX-AR enabled Video Eyewear with WVGA resolution has stereo cameras enabling viewing of the real world in
3D. It is designed to plug into a computer’s USB and HDMI video port. It also contains head tracking technology, which enables the user to
look around the environment being viewed by moving his or her head which in turn sends that information back to the computer which then
adjusts the computer generated AR image accordingly.
The STAR 1200DX is our second AR Video Eyewear product with see-through technology that enables the user to see the real
world directly through and around its transparent WVGA widescreen video displays. With the built in sensors and a high performance HD
camera, computer content, such as text, images and video can be overlaid and connected to the real world with the see through displays in full
color 2D or 3D. This product is primarily used by individual researchers and AR software developers.
We launched a new line of Video Eyewear augmented reality Smart Glasses in the 4th quarter of 2014. Our M100 Smart Glasses,
designed to be a smartphone accessory at first, are an intelligent wearable computing systems specifically designed to enable both Cloud
Computing and augmented reality. We received an Innovations Design and Engineering Award for the M100 Smart Glasses at the January
2014 Consumer Electronics Show. The M100 is a wearable “hands free display” much like today’s hands-free audio systems commonly used
with cellphones for voice calls. The M100 Smart Glasses include a small display, camera, compass, motion-tracker and audio system for
wirelessly connecting via Bluetooth or Wi-Fi with the cellphone and displaying or mirroring information such as texts (SMS), email, mapping
GPS, and video data. The embedded camera in the Smart Glasses are usable for recording and/or seeing the real world. Additionally the
camera is usable for a variety of AR applications. Input and control of the M100 consists of using the wirelessly connected smartphone or
speech recognition voice control. Being a monocular device and therefore not designed for full-time viewing by the user, the M100 is designed
for information “snacking” or content viewing limited to short sessions. Finally, as the M100 runs the standard Android OS, Ice Cream
Sandwich version, it is compatible with thousands of existing titles “out of the box” and it allows for fast and easy third party applications to
be developed, sold and downloaded to run directly in the M100 Smart Glasses. We are building an eco-system of developers around these
smart glasses and anticipate that most of the software being developed can be used on future generations of our smart glasses.
At the January 2014 Consumer Electronics trade show, we also won an innovation award for the prototype of our binocular Smart
Glasses technology. This new technology, based on our proprietary see-through waveguide optics and HD display technology, is designed to
fit into the frames of designer-styled glasses. We intend to introduce binocular Smart Glasses within the next 12 months using this technology.
These new smart glasses will allow users to see and augment the real world as if looking through a conventional pair of fashionable
eyeglasses. Again, because this product will run the Android operating system and is built upon the eco-system we are building for the M100,
a significant base of applications should already exist for them when we launch and newly developed applications will be easily enabled using
these advanced AR functions.
We believe cloud or internet-connected Smart Glasses applications will be created for manufacturing, medical, field maintenance and
repair, training, gaming and social media uses for both our monocular and binocular smart glasses product lines.
Custom Solutions and Engineering Solutions
We have in the past provided full optics systems, including head mounted displays, human computer interface devices, and wearable
computers to commercial, industrial and defense customers. As a result of the sale of the TDG Assets in June 2012, we no longer pursue
general engineering services work with defense or security organizations. Any future Defense R&D programs we participate in will be limited
to the advancement of our waveguide technology and require the consent of TDG Acquisition Company, LLC (the purchaser of our TDG
Assets, now operating as Six-15 Technologies), whose consent is not to be unreasonably withheld. We currently are fulfilling U.S. Navy
Research labs waveguide engineering contract. In addition, we are also applying for additional follow-on DOD funding, in partnership with
Six-15, to help accelerate the development of our waveguide optics. Any ultimate waveguide based products we create for defense or security
markets will be exclusively marketed for us by Six-15.
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Technology
We believe that it is important to make substantial investments in research and development to maintain our competitive advantage.
The development and procurement of intellectual property rights relating to our technologies is a key aspect of our business strategy. We
believe that it is now technologically feasible to improve upon the weight, ergonomics, optical performance, see-through capabilities,
luminance, power efficiency, compactness, field of view and resolution of the current generation of virtual displays and display components.
“Early technology adopters” have been the majority of the purchasers of our consumer Video Eyewear products to date. However, our near-
to-eye virtual display technology has been gradually improving in performance and we believe will soon meet the high expectations of the
consumer mass markets with respect to screen resolution, image size and ergonomics. We expect to continue to improve our products through
our ongoing research and development and advancements made by our third party suppliers of key components.
We also develop intellectual property through our ongoing performance under engineering service contracts. We intend to continue to
pursue development contracts for applications that enhance our waveguide optics technology. Our policy is to retain our proprietary rights
with respect to the principal commercial applications of our technology under any engineering services work we perform, whenever possible.
To the extent new technology development has been funded by a U.S. federal agency, under applicable U.S. federal laws, the agency has the
right to obtain a non-exclusive, non-transferable, irrevocable, fully paid license to practice or have practiced this technology for governmental
use.
During 2014 and 2013, we spent $1,752,560 and $1,751,397, respectively, on research and development activities. We expect to
increase our research and development expenditures in the future as our revenues grow. We have also acquired and licensed technologies
developed by third parties and we may do so in the future.
We believe that the range of our proprietary technologies gives us a significant competitive advantage. Our technologies relate to
advanced optics systems including passive and active see-through imaging waveguides; micro-projection display engines; high resolution
scanning displays; motion tracking systems; and specialized software drivers and applications for video eyewear displays. We also have a
portfolio of trade secrets and expertise in nano-imprinting using quartz mold substrates, Nano structure UV (ultra violet) embossing, and
engineering tool sets for the design and manufacturing of diffractive waveguide optics.
We believe once commercialized, our low-power HD scanning engine and waveguide technologies will allow us to produce ultra-thin
high-resolution eyeglass styled display systems at a low cost. We will then have fuller vertical integration of our supply chain which we
believe will help us obtain us a strong competitive advantage. We estimate that commercialization of our low-power HD scanning engine and
waveguide technologies will in total require approximately $3 to $5 million in funding and we are looking for outside funding sources to help
fund this work. The commercialization of the waveguide technologies for our first product, the M2000, was completed in 2014. We are now
focusing our efforts on the next generation waveguides and display engines that will shrink the entire assembly to a module that will fit in
typical off-the-shelf sports sunglasses.
In December 2005, we entered into a technology acquisition agreement with New Light Industries, Ltd., covering an extremely
compact head-mounted virtual display. In August 2011, we entered into a technology license agreement with Nokia Corporation for their Exit
Pupil Expanding (EPE) optics technology, also known as waveguides. Under the agreement, we are performing on-going research and
development on the EPE optics and are expected to manufacture and bring to market components and products containing the licensed
technology. In addition, we will provide Nokia with the ability to purchase products and components which incorporate the licensed
technology. The combination of Vuzix and Nokia technology is expected to accelerate the development and introduction of new wearable
display products in an eyeglass form factor to the market.
Our technologies enable us to provide low-cost, small form factor, high-resolution Video Eyewear products. To protect our
technologies, we have developed a patent portfolio which currently consists of 39 issued U.S. and foreign patents and 10 pending U.S. and
foreign patent applications. We also have several new invention disclosures, covering additional aspects of our waveguide technology and our
smart glasses virtual display technology that are currently being prepared for purposes of submitting design and utility patent applications. Our
U.S. patents expire on various dates from December 30, 2014 until November 13, 2029. Our international patents expire on various dates
from May 30, 2015 until October 17, 2032. In addition, in connection with our sale of the TDG Assets, we received a worldwide, royalty
free, assignable grant-back license to all the patents and other intellectual property sold for use in the manufacture and sale of products in the
consumer markets.
8
Major technologies that we employ in our products include:
Hardware Technology
Virtual Display Technology (including Lens Technology and Optics Assemblies)
Microdisplay optics represent a significant cost of goods for both us and our competitors. This cost is a function of the physical size
of the microdisplay and the cost of the supporting optics. Smaller microdisplays are less expensive to produce but they require larger and more
sophisticated optics to make near-eye systems that have no user adjustments, large fields of view and very low distortion specifications. Larger
displays require less magnification and less complex optics, but the optics become very bulky and the displays are significantly more
expensive to manufacture. To improve our Video Eyewear’s fashion and ergonomics, we are developing thin and lightweight optics that can
be integrated with very small microdisplays that we expect will match conventional eyewear frames in size and weight. These new optics and
displays provide what we believe are significantly improved ergonomics compared to competing wearable virtual displays.
See-Through Waveguides: We are developing both passive and dynamic waveguide optics that are the basis for our future slim
wearable Video Eyewear displays. Our dynamic waveguides use index modulated liquid crystal material to switch beam steering gratings built
in a thin glass window to scan an image into the user’s eye. We are also developing passive optical display engine that uses a 1.4 mm thick
see-through blade of glass or plastic with an ultra-compact micro display engine to magnify and focus the light from a display into a user’s
eye. We have proven this technology to perform to HD standards and are currently in production with our M2000AR industrial grade
wearable display products using it. We are now on a path to improve the waveguide’s performance to provide larger fields of view and better
optical efficiency. Wearable Video Eyewear incorporating these engines will appear to others as practically indistinguishable from today’s
conventional sunglasses by most every measure comfort, size, weight and ergonomics. We have filed patent applications with respect to this
technology. We have also entered into a technology license agreement with Nokia Corporation for their Exit Pupil Expanding (EPE) optics
technology.
LED Scanning Display Engine: We have patents and patents pending on a LED Scanning Display Engine (SDE). The SDE will
incorporate both the display subsystem and a waveguide optic in a single monolithic design that we believe will enable us to produce low cost,
HD resolution displays in a form factor that will be integrated into frames similar in size to ordinary sunglasses. We have successfully
prototyped both monochrome and color versions of the SDE in our design labs. If our continued research is successful we believe we will be
able to produce a low cost, high-resolution display that will be superior to existing microdisplay technology with respect to price, resolution,
weight, form-factor and power consumption.
Nanoimprinting: We continue to develop a portfolio of trade secrets and expertise in nanoimprinting. From quartz substrate molds
with unique nano-structured grating surfaces built into them to UV (ultra violet) embossing, and engineering tool sets for the design of
diffractive waveguide optics. These trade secrets deal with the manufacture of molds through to volume production UV embossing. We
believe these technologies are essential to the production of our 1.4 mm thick see through lenses which we believe are the cornerstone to
making fashionable eyeglass styled Smart Glasses.
Patents and other Intellectual Property
We have an intellectual property policy which has as its objectives: (i) the development of new intellectual property to further our
intellectual property position in relation to personal display technology; and (ii) the maintenance and protection of our valuable trade secrets
and know-how. We seek to further achieve these objectives through the education and training of our engineering staff and the adoption of
appropriate systems, policies and procedures for the creation, identification and protection of intellectual property.
9
Our general practice is to file patent applications for our technology in the United States, Europe and Japan, while inventions which
are considered to have the greatest potential are further protected by the filing of patent applications in additional countries, including Canada,
Russia and China. We file and prosecute our patent applications in pursuit of the most extensive fields of protection possible including, where
appropriate, the application of the relevant technology to the broader display industry.
We believe that our intellectual property portfolio, coupled with our key supplier relationships and accumulated experience in the
personal display field, gives us an advantage over potential competitors. We also believe our copyrights, trademarks, and patents are critical to
our success, and we intend to maintain and protect these. We also rely on proprietary technology, trade secrets, and know-how, which are not
patented. To protect our rights in these areas, we require all employees and, where appropriate, contractors, consultants, advisors and
collaborators, to enter into confidentiality, invention assignment and non-competition agreements.
In addition to our various patents, we have 10 registered U.S. trademarks and 41 trademark registrations worldwide and 2 pending
international trademark applications.
Competitors and Competitive Advantage
The personal display industry in which we operate is highly competitive. We compete against both direct view display technology
and near-eye display technology. We believe that the principal competitive factors in the personal display industry include image size, image
quality, image resolution, power efficiency, manufacturing cost, weight and dimension, feature implementation, ergonomics and, finally, the
interactive capabilities of the overall display system.
Most of our competitors’ products for mobile use are based on direct view display systems in which the user views the display
device, or screen, directly without magnification. These products have several disadvantages compared to near-eye virtual displays and our
wearable Video Eyewear products. If the screens are large enough to read a full conventional internet page or HD video without external
magnification or image zooming, the products must be large and bulky, such as laptops, tablets, personal computers. If the displays are small,
such as those incorporated in smartphones and smart watches, the screens can be difficult to read when displaying higher resolution content.
Despite the limitations of direct view personal displays, advanced multi-media enabled smartphones and now smart watches are being
produced in ever increasing volumes by a number of manufacturers, including Motorola, Inc., Nokia Corporation, Sony Ericsson Mobile
Communications AB, Blackberry, Samsung Electronics Co., Ltd., LG Electronics Apple Inc. (Apple), Google, Pebble, Qualcomm and others.
We expect that these large and well-funded companies, as well as newer entrants into the marketplace, will make products that are competitive
with ours based on improvements to their existing direct view display technologies or on new technologies. Examples of new display
technology include foldable displays, e-ink and Qualcomm’s mirasol reflective technology called IMOD. The “retinal” displays on the latest
Apple iPads and iPhones provide very high resolution and are proving effective as mobile direct view personal displays for a variety of
applications, including many that were once considered applications where Video Eyewear was superior.
Aside from direct view displays, we also have competitors who produce near eye personal displays, or Video Eyewear. For the past
decade most of such products were mainly low-resolution, bulky in size, poor ergonomically, costly, and heavy in their power requirements.
We believe that most of our competitors’ near eye products have had inferior optics, marginal electronics and poor industrial design and that,
as a result, our Video Eyewear products are superior to many of our competitors’ in both visual performance and ergonomics.
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Competition — Binocular Video Eyewear Products
Today, there are few companies that compete with Vuzix in the binocular Video Eyewear space; they include Carl Zeiss, Seiko Epson
(Epson), Sony, and Acupix. Carl Zeiss introduced its first model called the Cinemizer several years ago and has updated to Oled displays but
has restricted its sales primarily to Germany thus far. Epson and Sony are both selling products that look like the larger head mounted displays
from 10 to 15 years ago. Epson ships their “Moverio” HMD and Sony introduced their “HMZ” HMD late in 2011 for home or fixed location
use. Sony recently announced a third version of their HMZ with several claimed improvements designed to solve some of its many user
comfort problems. We believe neither of these competitive products have been received well in the market place due to their bulky and non-
user-friendly designs. Brother International also began marketing a see-through HMD on a limited basis in Japan in late 2011. In the fall of
2012, Acupix of Korea introduced a WVGA video eyewear model with HDMI inputs, but it lacks support for legacy video devices and user
optical adjustments. In early January 2014, TDG Acquisition Company, LLC (the purchaser of our TDG Assets, now operating as Six-15
Technologies) announced its new Tac-Eye AR line of see-through AR products for its target marketplaces. A new entity, Oculus has been
shipping developer kits for its large field of view VR goggle HMD called the Oculus Rift and has announced that a new model will be
available in 2014. We believe the unit is very bulky relative to the wearer’s head and offers only limited resolution to each eye. We expect that,
as the market grows and matures and as the technology becomes more refined, more companies may compete with us.
There are a number of smaller companies that have products that compete with our Video Eyewear products. They generally use
binocular display module (BDM) produced by Kopin Corporation. Kopin offers binocular display modules of varying resolutions to original
equipment manufacturers (or OEMs). Those modules are designed for easy customization by OEMs and include microdisplays, backlights,
optics and optional drive electronics. The availability of those BDMs has greatly reduced the investment required for new competitors to enter
the business. Currently, Kopin BDMs are primarily used by Asian-based Video Eyewear manufacturers. There are also several Chinese
companies offering what we believe are inferior solutions in this market, but we believe their distribution in North America and Europe is
limited. Other microdisplay manufacturers may also introduce BDM modules built around their products. We believe that the products
produced by those manufacturers have one or more of the deficiencies described above. Kopin does not currently compete with Vuzix at the
retail level. Kopin is also our primary supplier of microdisplays.
In 2010, our largest competitor, MyVu, ceased operations. Its intellectual property assets were sold to unnamed parties in Asia. Other
companies that have stated their intention to enter this market when their product development is complete are Lumus and Microvision
Corporation. At the last 3 CES tradeshows, Lumus demonstrated a see-through HD optics engine in a pair of Video Eyewear. They have not
yet announced a product that is production ready. Microvision has also announced that they are currently focused on the Pico projection
markets, as described below, and that they are not planning to introduce a wearable display solution.
Another product incorporating recently developed technology is a handheld projector that utilizes micro-displays and optics to project
digital images onto any nearby viewing surface, such as a wall. These devices are referred to as pocket projectors or pico projectors and are
designed to overcome the limitations of the native small screen on smartphones and other mobile devices. Pico projectors use either liquid
crystal on silicon displays (LCOS) or color lasers to create their image. We believe pico projectors have had higher unit sales to date than
Video Eyewear primarily because of their cost advantage and higher resolutions.
In the VR and AR markets, there are few competitor in the consumer space with effectively no competition in all but the very high-
end researcher market. Oculus is now selling a developers’ kit VR head mounted display and both Cinemizer and Sony have announced their
intent to offer upgrades to their new products for virtual reality applications. Seiko Epson is selling a see through HMD that they have
announced would be improved to include a camera for AR purposes. Today’s VR applications are primarily PC based entertainment
applications, a market we believe Sony is not about to focus on against its PS4gaming console.
Further, industry bloggers have speculated that companies such as Apple and Microsoft may offer or support AR Video Eyewear
products in the near future.
Competition — Monocular Video Eyewear Products
Although several companies produce monocular Video Eyewear, we believe that sales of their products to date have been limited. To
date, the market opportunity for monocular products other than night vision products has been limited primarily to trial tests rather than
commercial volume purchases for industrial applications. Current competitors in these markets are Liteye Systems, Inc., Lumus, Shimadzu
Corporation, Kopin, Motorola, Creative Display Systems, Brother, Google, LLC, BAE Systems, Six-15 Technologies, LLC (the purchaser of
our TDG Assets), Rockwell Collins, Inc. and its subsidiary Kaiser. Kopin has begun to aggressively promote its upcoming Golden-i that
combines a speech recognition controlled head mounted computer with a monocular near-eye display and recently demonstrated several new
monocular reference designs that they claim they are only licensing to OEM customers. The Motorola Solutions group introduced Golden-i in
late 2012. Google has developed a wearable display device named Google Glass which is a headset product with similar form and function to
our M100 Smart Glasses. In January 2015, Google stopped selling its first version of Glass. We expect that we will encounter competition in
the future from major consumer electronics’ product companies and suppliers of imaging and information products for defense applications.
11
There is competition in all classes of products manufactured by us, including from divisions of large companies and many small
companies. Our sales do not represent a significant share of the market for any class of products. The principal points of competition for these
products include, among other factors: price, product performance, the availability of supporting applications, the experience and brand name
of the particular company and history of its dealings in such products. We believe that most of the monocular Video Eyewear products
currently offered by our competitors are inferior to ours because they are bulky, have smaller image sizes with lesser performing optics and/or
are currently priced higher than our products.
Sales and Marketing
Sales
We believe we have two distinct strategies for the sales of our products.
In the smart glasses and AR markets we are initially focused on the enterprise space and as such are building strategic marketing
relationships with companies like SAP. In the case of SAP we are working with their internal development teams who are deploying pilot test
programs in the field service and warehousing areas with their customers. We will be using the SAP sales and support team to address these
customers. We are in parallel developing a value added reseller (VAR) network with leading companies in separate markets from warehousing
to field service to medical. As these VARs finish their value added software we expect them to roll out their finished solutions to their
customer base. We are also supporting direct sales with select larger key accounts. For our smart glasses we are also developing a rich eco
system with application developers from around the world. To support this effort we opened an internet based developer center and in
December 2014 introduced our application store where M100 customers can download and purchase application. We are also hosting many
developer hackathon events with partners companies like NTT docomo and AT&T.
On the consumer side, our products are targeted at applications including video viewing, remote monitors and Virtual Reality. In
2005, as our products and technology evolved, we began to sell standard Video Eyewear products for the consumer markets and have since
built a multi-national sales channel with offices out of the UK and Japan. In 2007, we introduced Virtual Reality products and in 2010 we
introduced our first Augmented Reality products. In June 2012, we sold the TDG Assets of our Tactical Display Group, which sold and
licensed products and provided services, directly and indirectly, to military organizations and defense and security organizations.
As we broaden our markets we will continue to expand on these strategies for each of our target application areas and markets.
Finally, we regularly attend industry trade shows in our application markets.
Marketing
Our marketing group is responsible for product management, planning, advertising, marketing communications, and public relations.
We have an internal public relations effort in the U.S. and have at times retained external public relations firms for the U.S. market. In the UK
we employ a public relations firm part-time. We also employ a marketing firm to help prepare brochures, packaging, tradeshow messaging and
advertising campaigns. Our consumer products are currently mainly sold under the Vuzix Wrap brands. We intend to become known as the
premier supplier of Video Eyewear products for video viewing and Virtual and Augmented Reality enabled Smart Glasses. We plan to
undertake specific marketing activities as needed, including, but not limited to:
·
·
·
product reviews, case studies and promotions in trade publications;
enhancement and maintenance of our Website, Web Store and Social Media sites;
internet and web page advertising and targeted emails;
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·
·
·
public relations;
print advertising, catalogs and point of purchase displays
trade shows and event sponsorships; and
Engineering Services
We primarily solicit sales of our engineering services programs directly. We believe we have established a solid reputation for
quality, performance and innovation for near-eye virtual display systems that will be attractive to many types of commercial users that want to
leverage our services and products within their businesses. Attendance at industry trade shows, conferences and application white papers are
tools we use to generate customer interest. In regard to defense and security markets, due to the sale of our TDG Assets in June 2012, we only
work with select defense sections within the U.S. government with respect to our waveguide technology.
Consumer
We engage in a variety of marketing efforts that are intended to drive customers to our products and to grow awareness of our AR
Smart Glasses, VR products and Video Eyewear in general. Public relations are an important aspect of our marketing and we intend to
continue to distribute samples of our products to key industry participants. We intend to focus our consumer marketing efforts for the next 12
months on:
·
·
·
·
distinguishing our Video Eyewear product category from current competitors and by offering products with performance such as our
Smart Glasses technology that is superior to that of our competitors;
creating awareness with the press and general public about the AR and VR applications that are now possible with our Video Eyewear,
with particular emphasis on our Smart Glasses products;
attempting to create and build further consumer acceptance and momentum around the Video Eyewear category as compared to existing
alternative technologies; and
creating brand awareness of the Vuzix brands.
Our Video Eyewear and VR Video Eyewear products are currently sold directly to consumers through select specialty retailers,
through catalogue offerings and through third party North American distributors including D&H. Our products over the last 24 months have
been sold by the following U.S. based resellers and distributors: Hammacher Schlemmer, Macy’s , Amazon, D&H and directly from us
through our website. Our latest Wrap 1200DX AR Video Eyewear models are not currently offered through third party resellers in North
America, and must be purchased directly from Vuzix. Our website, www.vuzix.com is an important part of our direct sales efforts. For
resellers with physical retail locations in the United States, we have in the past offered point of purchase systems that include a video frame
running a slide show presentation about the products and an integrated fully functional Video Eyewear product that allows potential customers
to use our products.
We currently sell our products internationally through distributors, resellers, and various Vuzix operated web stores in Europe and
Japan. Our international focus is currently on Japan and the EU. In Japan, we have a branch sales and service office in Tokyo, and a small
warehouse outside of Tokyo. We employ two full-time staff in Japan. In spring 2008, we created a wholly owned subsidiary, Vuzix (Europe)
Limited, through which to conduct our business in the EU and Middle Eastern markets. Resellers in 50 countries placed orders with us during
2014. We maintain a small European sales office in Oxford, England. We have also retained a sales consultant (who acts as our European
Director of Operations), a UK public relations firm and a mobile applications consultant to provide us with advice regarding the European
market. For customer support and warehousing, we have contracted with a third-party end user technical support firm and fulfillment center to
service our customers in the EU.
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Manufacturing
Currently, we purchase product components from our suppliers, engage third party contract manufacturing firms to perform electronic
circuit board and cable assemblies, and perform the final assembly of our products ourselves in our Rochester, New York facility. We are
experienced in the successful production of our products in moderate volumes. We expect to continue to perform final assembly of our Video
Eyewear products ourselves over the short term. However, as our volume increases and cost effective third party sourcing becomes feasible,
we are already planning to outsource more of our final assembly, with the possible exception of certain critical optical and display components.
We currently purchase almost all of the microdisplays used in our products from Kopin. Our relationship with Kopin is generally on a
purchase order basis and Kopin does not have a contractual obligation to provide adequate supply or acceptable pricing to us on a long-term
basis. We procure a small percentage of our microdisplays from other sources such as Syndiant. While we do not manufacture our
components, we own the tooling that is used to make our custom components with the exception of certain authentication chips and connectors
that may be required to support industry standard device connectivity. We do not believe that we are dependent on our relationships with any
supplier other than Kopin in order to continue to operate our business effectively. Kopin before we sold the TDG Assets had also been a
significant customer of our night vision display electronics modules and owns just under 3% of our common stock. Some of our accessory
products are sourced from third parties as finished goods. We typically have them print our Vuzix brand name on these products of they are
co-branded. Such third party products represented less than 10% of our sales in 2014.
We generally procure components and products from our vendors on a purchase order basis without any long-term commitments. We
currently use several Asian manufacturing sources, where we have located some of our tooling. Over time, we expect to globally source
almost all of our components which we believe will minimize product costs. We anticipate that procuring assembled products from third
parties will result in decreased labor force requirements, capital equipment costs, component inventories, and the cost of maintaining
inventories of work in progress.
Employees
As of March 27, 2015, we had 31 full-time employees in North America: 5 in sales and marketing, distribution, and customer service;
12 in research and development and engineering services support; 7 in manufacturing, operations and purchasing; 1 in quality assurance; and 6
in accounting, management, IT, and administration. We also work with a group of sub-contractors, mainly for industrial and mechanical
design assistance in the Rochester, New York area. To further our waveguide research development we work with various commercial and
academic researchers in the United Stated and Finland. In Japan, we have 2 full-time employees and in the UK we have 1 full-time and 1 part-
time contractor to manage our European sales and marketing activities.
History
We were incorporated in Delaware in 1997 as VR Acquisition Corp. In 1997, we acquired substantially all of the assets of Forte
Technologies, Inc. (Forte), which was engaged in the manufacture and sale of Virtual Reality headsets and the development of related
technologies. Forte was originally owned and controlled by Kopin, our main current microdisplay supplier. Most of the technologies
developed by Forte are now owned and used by us.
In 1997 we changed our name to Kaotech Corporation. In 1998 we changed our name to Interactive Imaging Systems, Inc. In 2004 we
changed our name to Vicuity Corporation and then to Icuiti Corporation. In 2007, we changed to our current name, Vuzix Corporation. None
of these name changes were the result of a change in our ownership control.
Reference in this report to “Vuzix”, the “Company”, “we,” “us,” “our” and similar words refer to Vuzix Corporation and its wholly-
owned subsidiaries.
Item 1A Risk Factors
An investment in our securities involves a high degree of risk. An investor should carefully consider the risks described below, together
with all of the other information included in this annual report, before making an investment decision. If any of the following risks actually
occurs, our business, financial condition or results of operations could suffer. In that case, the market value of our securities could decline,
and an investor may lose all or part of his or her investment.
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Risks Related to Our Business
We have incurred net losses since our inception and if we continue to incur net losses in the foreseeable future the market price of our
common stock may decline.
We reported a net loss of $7,868,858 for the year ended December 31, 2014, and we reported net loss of $10,146,228 for the year
ended December 31, 2013. We have an accumulated deficit of $44,161,390 as of December 31, 2014.
We may not achieve or maintain profitability in the future. In particular, we expect that our expenses relating to sales and marketing
and product development and support, as well as our general and administrative costs, may increase, requiring us to increase sales in order to
achieve and maintain profitability. If we do not achieve and maintain profitability, our financial condition will ultimately be materially and
adversely affected and we would eventually be required to raise additional capital. We may not be able to raise any necessary capital on
commercially reasonable terms or at all. If we fail to achieve or maintain profitability on a quarterly or annual basis within the timeframe
expected by investors, the market price of our common stock may decline.
In preparing our consolidated financial statements, our management determined that our disclosure controls and procedures and
internal controls over financial reporting were ineffective as of December 31, 2014 which could result in material misstatements in our
financial statements.
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in
Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended, or the Exchange Act. As of December 31, 2014, our management has
determined that our disclosure controls and procedures and internal controls over financial reporting were ineffective because of material
weaknesses including a financial reporting and close process that does not ensure accurate financial reporting on a timely basis, limited
segregation of duties, lack of adequate monitoring of subsidiaries, and weaknesses in our inventory control.
We intend to implement remedial measures designed to address the ineffectiveness of our disclosure controls and procedures and
internal controls during our 2015 fiscal year. With the closing of our private placement of Series A Preferred Stock in January 2015 (the
“Series A Private Placement”) we now have the financial resources to permit the hiring of additional staff and the development, assessment,
implementation and testing of the changes in controls and procedures that we believe are necessary to conclude that the material weakness has
been remediated. If these remedial measures are insufficient to address the ineffectiveness of our disclosure controls and procedures and
internal controls, or if other material weaknesses or significant deficiencies in our internal control are discovered or occur in the future and the
ineffectiveness of our disclosure controls and procedures and internal controls continues, we may fail to meet our future reporting obligations
on a timely basis, our consolidated financial statements may contain material misstatements, we could be required to restate our prior period
financial results, our operating results may be harmed, and we may be subject to class action litigation. Any failure to address the
ineffectiveness of our disclosure controls and procedures could also adversely affect the results of the periodic management evaluations
regarding the effectiveness of our internal control over financial reporting and our disclosure controls and procedures that are required to be
included in our annual report on Form 10-K. Internal control deficiencies and ineffective disclosure controls and procedures could also cause
investors to lose confidence in our reported financial information. We can give no assurance that the measures we plan to take in the future will
remediate the ineffectiveness of our disclosure controls and procedures or that any material weaknesses or restatements of financial results will
not arise in the future due to a failure to implement and maintain adequate internal control over financial reporting or adequate disclosure
controls and procedures or circumvention of these controls. In addition, even if we are successful in strengthening our controls and
procedures, in the future those controls and procedures may not be adequate to prevent or identify irregularities or errors or to facilitate the fair
presentation of our consolidated financial statements.
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Prior to the sale of the TDG Assets in June 2012, we depended on defense related engineering contracts and the sales of specialized
products to defense customers for up to 60% of our sales each year and as a result our sales and our revenues have materially declined
and may not return to their pre-2012 levels or increase unless we develop new markets and products.
Since inception, a substantial portion of our sales have been derived from the sale of night vision display drive electronics to two
suppliers to the U.S. government. As a result of our sale of the assets that comprised our Tactical Defense Group in June 2012 (the “TDG
Assets”), we no longer sell night vision display drive electronics, which has materially reduced our revenue and cash flow and could
materially adversely affect our ability to achieve or maintain profitability in the future.
The next largest source of our revenues has been sales directly to the U.S. Department of Defense, primarily for research and
development engineering programs. As a result of the sale of the TDG Assets, we no longer perform general engineering services for the U.S.
Government and/or its defense contractors, but rather only waveguide related services, unless so requested by the buyer of the TDG Assets.
Under our Asset Purchase Agreement with the purchaser of the TDG Assets, all future U.S. government sales of waveguide development and
related engineering services by us must be approved by the buyer. We have no long-term contracts with the U.S. government for engineering
services on our waveguide technologies. We expect to submit proposals for additional development contract funding in cooperation with the
buyer. However, development contract funding is subject to legislative authorization and, even if funds are appropriated, such funds may be
withdrawn based on changes in government priorities.
We may not be successful in obtaining new government waveguide research, development and engineering services programs or
future waveguide based new product sales. Our inability to obtain sales from general non-waveguide related government engineering services
contracts could have a material adverse effect on our results of operations and would likely cause us to delay or slow our growth plans,
resulting in lower net sales than projected and adversely affecting our liquidity and profitability.
We operate in a highly competitive market and the size and resources of some of our competitors may allow them to compete more
effectively than we can, which could result in a loss of our market share and a decrease in our revenue and profitability.
The market for display devices, including Video Eyewear, is highly competitive. Further, we expect competition to intensify in the
future as existing competitors introduce new and more competitive offerings alongside their existing products, and as new market entrants
introduce new products into our markets. We compete against established, well-known diversified consumer electronics manufacturers such as
Samsung Electronics Co., Sony Corporation, and Toshiba Corporation, and large software and other products companies such as Google and
Microsoft. Many of our current competitors have substantial market share, diversified product lines, well-established supply and distribution
systems, strong worldwide brand recognition and greater financial, marketing, research and development and other resources than we do. In
addition, many of our existing and potential competitors enjoy substantial competitive advantages, such as:
·
·
longer operating histories;
the capacity to leverage their sales efforts and marketing expenditures across a broader portfolio of products;
· broader distribution and established relationships with channel partners;
·
access to larger established customer bases;
· greater resources to make acquisitions;
·
·
larger intellectual property portfolios; and
the ability to bundle competitive offerings with other products and services.
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Moreover, smartphones, tablets and new wearable devices with ever growing larger video display screens and computing power have
significantly improved the mobile personal computing experience. It is possible that, in the future, the manufacturers of these devices, such as
Apple Inc., Samsung, LG, and others may design or develop products similar to ours. In addition to competition or potential competition from
large, established companies, new companies may emerge and offer competitive products. Increased competition may result in pricing
pressures and reduced profit margins and may impede our ability to increase the sales of our products, any of which could substantially harm
our business and results of operations.
Our lack of long-term purchase orders and commitments from our customers may lead to a rapid decline in our sales and profitability.
All of our customers issue purchase orders solely in their own discretion, often shortly before the requested date of shipment. Our
customers are generally able to cancel orders (without penalty) or delay the delivery of products on relatively short notice. In addition, our
current customers may decide not to purchase products from us for any reason. If those customers do not continue to purchase our products,
our sales volume and profitability could decline rapidly with little or no warning.
We cannot rely on long-term purchase orders or commitments to protect us from the negative financial effects of a decline in demand
for our products. We typically plan our production and inventory levels based on internal forecasts of customer demand, which are highly
unpredictable and can fluctuate substantially. The uncertainty of product orders makes it difficult for us to forecast our sales and allocate our
resources in a manner consistent with our actual sales. Moreover, our expense levels and the amounts we invest in capital equipment and new
product development costs are based in part on our expectations of future sales and, if our expectations regarding future sales are inaccurate,
we may be unable to reduce costs in a timely manner to adjust for sales shortfalls. Furthermore, because we have historically often depended
on a small number of customers for the majority of our sales, the ramifications of these risks is greater than if we had a greater number of
customers. As a result of our lack of long-term purchase orders and purchase commitments, we may experience a rapid decline in our sales
and profitability.
As a result of these and other factors, investors should not rely on our revenues and our operating results for any one quarter or year
as an indication of our future revenues or operating results. If our quarterly revenues or results of operations fall below expectations of
investors or public market analysts, the price of our common stock could fall substantially.
If any of our major customers on whom we depend fails to pay us amounts owed in a timely manner, we could suffer a significant
decline in cash flow and liquidity which, in turn, could cause us to fail to pay our liabilities and render us unable to purchase adequate
inventory to sustain or expand our sales volume.
Our accounts receivable represented approximately 19% and 13% of our total current assets as of December 31, 2014 and
December 31, 2013, respectively. As of December 31, 2014 three customers owed us approximately 60% of our total accounts receivable. At
certain times there can be substantial amounts and concentrations of our accounts receivable, and if any of our major customers fails to pay us
amounts owed in a timely manner, we could suffer a significant decline in cash flow and liquidity which could adversely affect our ability to
pay our liabilities and to purchase inventory to sustain or expand our current sales volume and adversely affect our ability to continue our
business.
In addition, the portions of our business sold through distributors and retail stores is characterized by long periods for collection from
our customers and short periods for payment to our suppliers, the combination of which may cause us to have liquidity problems. We
experience an average accounts settlement period ranging from one month to as high as two and half months from the time we deliver our
products to the time we receive payment from our customers. In contrast, we typically need to place certain deposits and advances with our
suppliers on a portion of the purchase price. Because our payment cycle is considerably shorter than our receivable collection cycle, we may
experience working capital shortages. Working capital management, including prompt and diligent billing and collection, is an important factor
in our results of operations and liquidity. System problems, industry trends, our customers’ liquidity problems or payment practices or other
issues may extend our collection period, which would adversely impact our liquidity, our ability to pay our liabilities and to purchase inventory
to sustain or expand our current sales volume, and adversely affect our ability to continue our business.
17
If we do not effectively maintain and further develop our sales channels for our consumer focused products, including developing and
supporting our retail sales channel and distributors, our business could be harmed.
We depend upon effective sales channels to reach the consumers who are the ultimate purchasers of our Video Eyewear products. In
the United States, we primarily sell our products directly from our website and through a mix of retail channels and specialty retailers, some of
which we reach certain U.S. markets through distributors. In international markets, we primarily sell directly to consumers or through
distributors who in turn sell to local retailers.
We depend on our distributors to reach certain market segments in the United States and to reach our international retailers. Our
distributors generally offer products from several different manufacturers. Accordingly, we are at risk that these distributors may give higher
priority to selling other companies’ products. If we were to lose the services of a distributor, we might need to find another distributor in that
area, and there can be no assurance of our ability to do so in a timely manner or on favorable terms. Further, our distributors build inventories
in anticipation of future sales, and if such sales do not occur as rapidly as they anticipate, our distributors will decrease the size of their future
product orders. We are also subject to the risks of our distributors encountering financial difficulties, which could impede their effectiveness
and also expose us to financial risk if they are unable to pay for the products they purchase from us. Any reduction in sales by our current
distributors, loss of key distributors or decrease in revenue from our distributors could adversely affect our revenue, operating results and
financial condition.
Our future growth and profitability may be adversely affected if our marketing initiatives are not effective in generating sufficient levels
of brand awareness.
Our future growth and profitability from our consumer, commercial and industrial products will depend in large part upon the
effectiveness and efficiency of our marketing efforts, including our ability to:
· create awareness of our brand and products, including general awareness of Video Eyewear and the new Smart Glasses product
category;
· convert consumer awareness into actual product purchases;
· identify the most effective and efficient levels of spending for marketing expenditures in our new target market;
· effectively manage marketing costs (including creative and media) in order to maintain acceptable operating margins and return on
marketing investment;
· successfully offer to sell our products or license our technology to third party companies for sale under their own brand name as
OEM partners; and
· select the right markets in which to market our products.
Our planned marketing expenditures may not result in increased total sales or generate sufficient levels of product and brand name
awareness. We may not be able to manage our marketing expenditures on a cost-effective basis.
18
If we fail to accurately forecast seasonal demand for our consumer Video Eyewear products, our results of operations for the entire
fiscal year may be materially adversely affected.
Historically, a high percentage of our consumer Video Eyewear product annual sales have been attributable to the winter holiday
selling season. Like many manufacturers of consumer electronics products, we must make merchandising and inventory decisions for the
winter holiday selling season well in advance of actual sales. Further compounding the difficulty of this forecasting are other fluctuations in
demand for the consumer electronics products that work with our Video Eyewear products, often due to the same seasonal influences, as well
as technological advances and new models which are often introduced later in the calendar year. Inaccurate projections of demand or
deviations in the demand for our products may cause large fluctuations in our fourth quarter results and could have a material adverse effect on
our results of operations for the entire fiscal year.
In contrast, a substantial portion of our expenses are personnel related and include salaries, stock-based compensation, benefits and
research and development expenses, which are not seasonal in nature. Accordingly, in the event of revenue shortfalls, we are generally unable
to mitigate the negative impact on our results from operations in the short term.
Our products require ongoing research and development and we may experience technical problems or delays, which could lead our
business to fail.
Our research and development efforts remain subject to all of the risks associated with the development of new products based on
emerging and innovative technologies, including, for example, unexpected technical problems or the possible insufficiency of funds for
completing development of these products. If we experience technical problems or delays, further improvements in our products and the
introduction of future products could be delayed, and we could incur significant additional expenses and our business may fail.
We believe that since the closing of the Series A Private Placement on January 2, 2015 we have sufficient funds to maintain our
current levels of expenditure for research and development of new products and technologies, and to obtain and maintain patents and other
intellectual property rights in these technologies. If we cannot obtain any necessary future additional capital when needed, we might be forced
to reduce our research and development efforts which could materially and adversely affect our business. If we attempt to raise capital in an
offering of shares of our common stock, preferred stock, convertible securities or warrants, our then-existing stockholders’ interests will be
diluted.
We depend on advances in technology by other companies and if those advances do not materialize, some of our anticipated new
products could be delayed or cancelled.
We rely on and will continue to rely on technologies (including microdisplays) that are developed and produced by other companies.
The commercial success of certain of our planned future products will depend in part on advances in these and other technologies by other
companies. We may, from time to time, contract with and support companies developing key technologies in order to accelerate the
development of them for our specific uses. Such activities might not result in useful technologies or components for us. We are attempting to
mitigate this risk by exploring ways to develop our own microdisplay technologies using LED scanning displays, but there can be no
assurance that we will be successful in doing so.
If we fail to keep pace with changing technologies, our business and results of operations may be materially adversely affected.
Rapidly changing customer requirements, evolving technologies and industry standards characterize the consumer electronics, wireless
phone, and display industries. To achieve our goals, we need to enhance our existing products and develop and market new products that keep
pace with continuing changes in industry standards, requirements and customer preferences. If we cannot keep pace with these changes, our
business could suffer. For example, the market segment for our M100 Smart Glasses Video Eyewear, a hands-free cloud computing product
that began shipping in late 2013, is part of the new wearable technology category that may not develop or may take longer to develop than we
anticipate which may impact our ability to grow revenues.
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If microdisplay-based personal displays do not gain some reasonable level of acceptance in the market for mobile displays, our business
strategy may fail.
The mobile display market is dominated by displays larger than one-inch, most of which are based on direct view liquid crystal
display, or LCD and organic light emitting display, or OLED technology. A number of companies have made and continue to make substantial
investments in, and are conducting research to improve characteristics of, small direct view LCDs. Many of the leading manufacturers of these
larger direct view LCDs, including LG Electronics, Royal Philips Electronics, Samsung Electronics Co., Ltd., Sony Corporation, HiMax,
Omnivision, Citizen, and Sharp Corporation, are large, established companies with global marketing capabilities, widespread brand
recognition and extensive financial resources. Advances in direct view LCD and OLED technology or other technologies may overcome their
current limitations and permit them to remain or become more attractive technologies for personal viewing applications, which could limit the
potential market for our Video Eyewear technology and cause our business strategy to fail.
Another product incorporating recently developed technology is a handheld projector that utilizes microdisplays and optics to project
digital images onto any nearby viewing surface, such as a wall. These devices are referred to as pocket projectors or Pico projectors and are
designed to overcome the limitations of the native small screen on smartphones and other mobile devices. As a result we view Pico projector
as an competitive alternative to our mobile displays. Pico projectors use either liquid crystal on silicon displays (LCOS), digital light
processing displays (DLP) or color lasers to create their image. To date, we believe Pico projectors have had higher unit sales than Video
Eyewear primarily because of their cost advantage, which results from their requiring only a single display. Pico projectors have recently been
incorporated into cellular phones in an effort to produce a shareable large screen that is easier to view.
It is difficult to assess or predict with any certainty the potential size, timing and viability of market opportunities for our microdisplay-
based Video Eyewear products or their market acceptance. Market acceptance of Video Eyewear technology will depend, in part, upon
consumer acceptance of near-to-eye displays and upon microdisplay technology providing benefits comparable to or greater than those
provided by alternative direct view display technology at a competitive price. Video Eyewear products work best when used close to the eye,
which may not be acceptable to consumers. Such acceptance may depend on the relative complexity, reliability, usefulness and cost-
effectiveness of our near-eye display products compared to other display products available in the market or that may be developed by our
competitors. In addition, our products are not designed for a shared experience amongst multiple viewers at the same time. Potential customers
may be reluctant to adopt our Video Eyewear products because of concerns surrounding perceived risks relating to use and the fact that it is a
new technology. If consumers fail to accept near-to-eye displays in the numbers we anticipate or as soon as we anticipate, the sales of our
Video Eyewear products and our results of operations would be adversely affected and our business strategy may fail.
There are a number of competing providers of microdisplay-based personal display technology, including smart glasses, and we may fail
to capture a substantial portion of the personal display market.
In addition to competing with direct view displays, we also compete with microdisplay-based personal display technologies that have
been developed by other companies. Our primary personal display competitors include Carl Zeiss, Inc., Sony, Epson, Google, Brother
International, 5DT Inc., eMagin Corporation, Kopin Corporation (Kopin), MicroVision, Inc. (Microvision), Lumus Ltd. (Lumus), Kaiser
Electro Optics Inc., Toshiba, TDG Acquisition Company, LLC (the purchaser of the TDG Assets, now operating as Six-15 Technologies) in
certain markets, and Accupix of Korea. Oculus, a new startup company that was purchased by Facebook in March 2014, intends to introduce
a very wide field of view head-worn goggle system. In September 2014, Samsung announced its plans to introduce a virtual reality, or VR
product, its Gear VR, which allows its Note 4 smart phone to be mounted in a head worn goggle frame to create an Oculus content compatible
immersive VR system. The Gear VR began shipping in early 2015 and Samsung recently announced forthcoming Gear VR models for its
upcoming Galaxy 6 smart phones. Numerous other start-up companies have announced their intentions to offer AR smart glass and VR
products and developer kits in the near future. Recently, Razer demonstrated its Open-Source VR Gaming head worn goggle system similar to
the Oculus developer kit, and Carl Zeiss demonstrated its VR One, a head worn goggle for existing smart phones with larger direct view
screens for VR applications, like the Samsung Gear VR. Further, industry blogs have speculated that companies such as Apple and Microsoft
may offer or support VR and AR Video Eyewear products in the near future. In January 2015, Microsoft introduced its Hololens project, a
head worn AR smart glass helmet with transparent holographic optics. No pricing, technical details, or release date has been made other than
developer kits will be available in 2015. The Gear VR and Zeiss VR One utilize the wearer’s existing smart phone rather than microdisplays
which reduces the cost of these VR systems substantially, assuming the customer already owns the compatible smart phone. Most of our
competitors have greater financial, marketing, distribution and technical resources than we do. Moreover, our competitors may succeed in
developing new microdisplay-based personal display technologies and near-eye products that are more affordable or have more or more
desirable features than our technology. If our products are unable to capture a reasonable portion of the personal display market, our business
strategy may fail.
20
Our business and products are subject to government regulation and we may incur additional compliance costs or, if we fail to comply
with applicable regulations, may incur fines or be forced to suspend or cease operations.
Our products must comply with certain requirements of the U.S. Federal Communications Commission (FCC) regulating
electromagnetic radiation in order to be sold in the United States and with comparable requirements of the regulatory authorities of the
European Union, or EU, China and other jurisdictions in order to be sold in those jurisdictions. Our smart glass products include wireless
radios and receivers which require additional emission testing. We are also subject to various governmental regulations related to toxic,
volatile, and other hazardous chemicals used in the third party components incorporated into our products, including the Restriction of Certain
Hazardous Substances Directive, or RoHS, issued by the EU effective July 1, 2006. This directive restricts the distribution of products within
the EU that exceed very low maximum concentration values of certain substances, including lead.
We believe that all our current products comply with the regulations of the jurisdictions in which they are sold. From time to time, our
products are subject to new domestic and international requirements. Compliance with regulations enacted in the future could substantially
increase our cost of doing business or otherwise have a material adverse effect on our results of operations and our business. Any inability by
us to comply with regulations in the future could result in the imposition of fines or in the suspension or cessation of our operations or sales in
the applicable jurisdictions. Any such inability by us to comply with regulations may also result in our not being permitted, or limit our ability
to ship our products, which would adversely affect our revenue and ability to achieve or maintain profitability.
If we fail to comply with environmental requirements, our business, financial condition, operating results and reputation could be
adversely affected.
We are subject to various environmental laws and regulations including laws governing the hazardous material content of our products
and laws relating to the collection of and recycling of electrical and electronic equipment. Examples of these laws and regulations include the
EU Restrictions of Hazardous Substances Directive, or the RoHS Directive, and the EU Waste Electrical and Electronic Equipment Directive,
or the WEEE Directive, as well as the implementing legislation of the EU member states. Similar laws and regulations have been passed or are
pending in China, South Korea, Norway and Japan and may be enacted in other regions, including in the United States, and we are, or may in
the future be, subject to these laws and regulations.
The RoHS Directive and the similar laws of other jurisdictions ban the use of certain hazardous materials such as lead, mercury and
cadmium in the manufacture of electrical equipment, including our products. Although we have policies and procedures in place requiring our
contract manufacturers and major component suppliers to comply with the RoHS Directive requirements, we cannot assure you that our
manufacturers and suppliers consistently comply with these requirements. In addition, if there are changes to these or other laws (or their
interpretation) or if new similar laws are passed in other jurisdictions, we may be required to re-engineer our products to use components
compatible with these regulations. This re-engineering and component substitution could result in additional costs to us or disrupt our
operations or logistics.
The WEEE Directive requires electronic goods producers to be responsible for the collection, recycling and treatment of such products.
Changes in interpretation of the directive may cause us to incur costs or have additional regulatory requirements to meet in the future in order
to comply with this directive, or with any similar laws adopted in other jurisdictions. Our failure to comply with past, present and future
similar laws could result in reduced sales of our products, substantial product inventory write-offs, reputational damage, penalties and other
sanctions, which could harm our business and financial condition. We also expect that our products will be affected by new environmental
laws and regulations on an ongoing basis. To date, our expenditures for environmental compliance have not had a material impact on our
results of operations or cash flows and, although we cannot predict the future impact of such laws or regulations, they will likely result in
additional costs and may increase penalties associated with violations or require us to change the content of our products or how they are
manufactured, which could have a material adverse effect on our business and financial condition.
21
New regulations related to conflict minerals may cause us to incur additional expenses and could limit the supply and increase the costs
of certain metals used in the manufacturing of our products.
As a public company, we are subject to new requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act of
2010, or the Dodd-Frank Act, that require us to diligence, disclose and report whether or not our products contain conflict minerals. The
implementation of these new requirements could adversely affect the sourcing, availability and pricing of the materials used in the manufacture
of components used in our products. In addition, we have and will continue to incur additional costs to comply with the disclosure
requirements, including costs related to conducting diligence procedures to determine the sources of conflict minerals that may be used or
necessary to the production of our products and, if applicable, potential changes to products, processes or sources of supply as a consequence
of such verification activities. It is also possible that we may face reputational harm if we determine that certain of our products contain
minerals not determined to be conflict free or if we are unable to alter our products, processes or sources of supply to avoid such materials.
Our products will likely experience rapidly declining unit prices and we may not be able to offset that decline with production cost
decreases or higher unit sales.
In the markets in which we expect to compete, prices of established consumer electronics display products tend to decline significantly
over time. In order to maintain our profit margins over the long term, we believe that we will need to continuously develop product
enhancements and new technologies that will either slow price declines of our products or reduce the cost of producing and delivering our
products. While we anticipate many opportunities to reduce production costs over time, we may not be able to reduce our component costs.
We expect to attempt to offset the anticipated decrease in our average selling price by introducing new products, increasing our sales volumes
or adjusting our product mix. If we fail to do so, our results of operations will be materially and adversely affected.
If we cannot obtain and maintain appropriate patent and other intellectual property rights protection for our technology, our business
will suffer.
The value of our personal display, smart glass and related technologies is dependent on our ability to secure and maintain appropriate
patent and other intellectual property rights protection. We intend to continue to pursue additional patent protection for our new products and
technology. Although we own many patents covering our technology that have already been issued, we may not be able to obtain additional
patents that we apply for, our patents may be found invalid if challenged and our patents may not afford the degree of protection that we desire
or require.
Any patent or trademark owned by us may be challenged and invalidated or circumvented. Patents may not issue from any of our
pending or future patent applications. Any claims and issued patents or pending patent applications may not be broad or strong enough to
adequately protect our business. Effective intellectual property protection may be unavailable or limited in certain foreign countries.
Unauthorized parties may attempt to copy or otherwise use aspects of our processes and products that we regard as proprietary.
Policing unauthorized use of our proprietary information and technology is difficult and our efforts to do so may not prevent misappropriation
of our technologies. We may become engaged in litigation to protect or enforce our patent and other intellectual property rights or in
International Trade Commission proceedings to abate the importation of goods that would compete unfairly with our products and, if
unsuccessful, these actions could result in the loss of patent or other intellectual property rights protection for the key technologies on which
our business strategy depends.
We rely in part on unpatented proprietary technology, and others may independently develop the same or similar technology or
otherwise obtain access to our unpatented technology. We require employees, consultants, financial advisors, suppliers and strategic partners
to enter into confidentiality agreements, but these agreements may not provide sufficient protection for our trade secrets, know-how or other
proprietary information
22
Our products could infringe on the intellectual property rights of others.
Companies in the consumer electronics, wireless communications, semiconductor and display industries steadfastly pursue and protect
intellectual property rights. This has resulted in considerable and costly litigation to determine the validity of patents and claims by third parties
of infringement of patents or other intellectual property rights. Our products could be found to infringe on the intellectual property rights of
others. Other companies may hold or obtain patents or inventions or other proprietary rights in technology necessary for our business.
Periodically, other companies inquire about our products and technology in their attempts to assess whether we violate their intellectual
property rights. If we are forced to defend against infringement claims, we may face costly litigation, diversion of technical and management
personnel, and product shipment delays, even if the allegations of infringement are unwarranted. If there is a successful claim of infringement
against us and we are unable to develop non-infringing technology or license the infringed or similar technology on a timely basis, or if we are
required to cease using one or more of our business or product names due to a successful trademark infringement claim against us, it could
adversely affect our business.
Our intellectual property rights and proprietary rights may not adequately protect our products.
Our commercial success will depend substantially on our ability to obtain patents and other intellectual property rights and maintain
adequate legal protection for our products in the United States and other countries. We will be able to protect our intellectual property from
unauthorized use by third parties only to the extent that these assets are covered by valid and enforceable patents, trademarks, copyrights or
other intellectual property rights, or are effectively maintained as trade secrets. As of the date of this filing, we have 39 issued patents and 10
patent applications pending. We apply for patents covering our products, services, technologies and designs, as we deem appropriate. We may
fail to apply for patents on important products, services, technologies or designs in a timely fashion, or at all. We do not know whether any of
our patent applications will result in the issuance of any patents. Even if patents are issued, they may not be sufficient to protect our products,
services, technologies, or designs. Our existing and future patents may not be sufficiently broad to prevent others from developing competing
products, services technologies, or designs. Intellectual property protection and patent rights outside of the United States are even less
predictable. As a result, the validity and enforceability of patents cannot be predicted with certainty. Moreover, we cannot be certain whether:
· we were the first to conceive of or invent the inventions covered by each of our issued patents and pending patent applications;
· we were the first to reduce to practice inventions covered by each of our issued patents and pending patent applications;
· we were the first to file patent applications for these inventions;
· others will independently develop similar or alternative products, technologies, services or designs or duplicate any of our products,
technologies, services or designs;
· any patents issued to us will provide us with any competitive advantages, or will be challenged by third parties;
· we will develop additional proprietary products, services, technologies or designs that are patentable; or
· the patents of others will have an adverse effect on our business.
The patents we own or license and those that may be issued to us in the future may be challenged, invalidated, rendered unenforceable
or circumvented, and the rights granted under any issued patents may not provide us with proprietary protection or competitive advantages.
Moreover, third parties could practice our inventions in territories where we do not have patent protection or in territories where they could
obtain a compulsory license to our technology where patented. Such third parties may then try to import products made using our inventions
into the United States or other territories. We cannot ensure that any of our pending patent applications will result in issued patents, or even if
issued, predict the breadth, validity and enforceability of the claims upheld in our and other companies’ patents.
23
We have registered and applied to register certain of our trademarks in several jurisdictions worldwide. In some jurisdictions where we
have applied to register our trademarks, other applications or registrations exist for the same, similar or otherwise related products or services.
If we are not successful in arguing that there is no likelihood of confusion between our marks and the marks that are the subject of the other
applications or registrations owned by third parties, our applications may be denied, preventing us from obtaining trademark registrations and
adequate protection for our marks in the relevant jurisdictions, which could impact our ability to build our brand identity and market our
products and services in those jurisdictions. Whether or not our application is denied, third parties may claim that our trademarks infringe their
rights. As a result, we could be forced to pay significant settlement costs or cease the use of these trademarks and associated elements of our
brand in the United States or other jurisdictions.
Even in those jurisdictions where we are able to register our trademarks, competitors may adopt or apply to register similar trademarks
to ours, may register domain names that mimic ours or incorporate our trademarks, or may purchase keywords that are identical or confusingly
similar to our brand names as terms in Internet search engine advertising programs, which could impede our ability to build our brand identity
and lead to confusion among potential customers of our products and services. If we are not successful in proving that we have prior rights in
our marks and arguing that there is a likelihood of confusion between our marks and the marks of these third parties, our inability to prevent
these third parties from use may negatively impact the strength, value and effectiveness of our brand names and our ability to market our
products and prevent consumer confusion.
The laws of certain countries do not protect intellectual property and proprietary rights to the same extent as the laws of the United
States and, therefore, in certain jurisdictions, we may be unable to protect our products, services, technologies and designs adequately against
unauthorized third-party copying, infringement or use, which could adversely affect our competitive position. To protect or enforce our
intellectual property rights, we may initiate proceedings or litigation against third parties. Such proceedings or litigation may be necessary to
protect our trade secrets or know-how, products, technologies, designs, brands, reputation, likeness, authorship works or other intellectual
property rights. Such proceedings or litigation also may be necessary to determine the enforceability, scope and validity of the proprietary
rights of others. Any proceedings or lawsuits that we initiate could be expensive, take significant time and divert management’s attention from
other business concerns. Additionally, we may provoke third parties to assert claims against us. These claims could invalidate or narrow the
scope of our own intellectual property rights. We may not prevail in any proceedings or lawsuits that we initiate and the damages or other
remedies awarded, if any, may be commercially valuable. The occurrence of any of these events may adversely affect our business, financial
condition and operating results.
If we are unable to anticipate consumer preferences and successfully develop attractive products, we might not be able to maintain or
increase our revenue and profitability.
Our success depends on our ability to identify and originate product trends as well as to anticipate and react to changing customer
demands in a timely manner. If we are unable to introduce new products or novel technologies in a timely manner or our new products or
technologies are not accepted by customers, our competitors may introduce more attractive products, which could hurt our competitive
position. Our new products might not receive customer acceptance if their preferences shift to other products, and our future success depends
in part on our ability to anticipate and respond to these changes. Failure to anticipate and respond in a timely manner to changing customer
preferences could lead to, among other things, lower revenue and excess inventory levels.
As we continually seek to enhance our products, we may incur additional costs to incorporate new or revised features. We might not be
able to, or determine that it is not in our interests to, raise prices to compensate for these additional costs.
If our customers are not satisfied with our technical support or software updates on some of our products, they may choose not to
purchase our products, either of which would adversely impact our business and operating results.
Our business relies, in part, on our customers’ satisfaction with the technical support and software updates we provide to support our
products. If we fail to provide technical support services that are responsive, satisfy our customers’ expectations and resolve issues that they
encounter with our products, customers may choose not to purchase additional products and we may face brand and reputational harm, which
could adversely affect our operating results.
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If we lose our rights under our third-party technology licenses, our operations could be adversely affected.
Our business depends in part on technology rights licensed from third parties. We could lose our exclusivity or other rights to use the
technology under our licenses if we fail to comply with the terms and performance requirements of the licenses. In addition, certain licensors
may terminate a license upon our breach and have the right to consent to sublicense arrangements. If we were to lose our rights under any of
these licenses, or if we were unable to obtain required consents to future sublicenses, we could lose a competitive advantage in the market, and
may even lose the ability to commercialize certain products or technologies completely. Either of these results could substantially decrease our
revenues.
Our products may be subject to future health and safety regulations that could increase our development and production costs.
Products incorporating microdisplays and wearable computers could become subject to new health and safety regulations that would
reduce our ability to commercialize these near-eye display products. Compliance with any such new regulations could increase our cost to
develop and produce products using the microdisplay display engine and adversely affect our financial results.
We may be subject to product liability or warranty claims that could result in significant direct or indirect costs, or we could experience
greater returns from retailers than expected, which could harm our business and operating results.
We generally provide a one-year warranty on all of our products, except in the European Union, or EU, where we provide a two-year
warranty on all of our products. The occurrence of any material defects in our products could make us liable for damages and warranty claims
in excess of our current reserves. In addition, we could incur significant costs to correct any defects, warranty claims or other problems,
including costs related to product recalls. Any negative publicity related to the perceived quality and safety of our products could affect our
brand image, decrease retailer, distributor and customer demand, and adversely affect our operating results and financial condition. Also, while
our warranty is limited to repairs and returns, warranty claims may result in litigation, the occurrence of which could adversely affect our
business and operating results.
Our dependence on sales to distributors increases the risks of managing our supply chain and may result in excess inventory or
inventory shortages.
We expect the majority of our distributor relationships for our Video Eyewear and Smart Glasses products and their accessories to
involve distributors taking inventory positions and reselling to multiple customers. Under some typical distributor relationships, we would not
recognize revenue until the distributors sell the product through to their end user customers and receive payment thereon; however, at this time
we do not currently enter into these types of arrangements. Our distributor relationships may reduce our ability to forecast sales and increase
risks to our business. Since our distributors would act as intermediaries between us and the end user customers or resellers, we would be
required to rely on our distributors to accurately report inventory levels and production forecasts. This may require us to manage a more
complex supply chain and monitor the financial condition and credit worthiness of our distributors and their major end user customers. Our
failure to manage one or more of these risks could result in excess inventory or shortages that could adversely impact our operating results and
financial condition.
Our operating results may be adversely impacted by worldwide political and economic uncertainties and specific conditions in the markets
we address.
In the recent past, the economy in the United States and elsewhere has experienced periods of slower economic activity, large
government debt levels and operating deficits, increased energy costs, decreased consumer confidence, reduced corporate profits and capital
spending, and adverse business conditions. Any worsening of the current global economic and financial conditions could materially adversely
affect (i) our ability to raise, or the cost of, needed capital, and (ii) demand for our current and future products. We cannot predict the timing,
strength, or duration of any economic slowdown or subsequent economic recovery, worldwide, or in the display industry.
25
Our results of operations may suffer if we are not able to successfully manage our increasing exposure to foreign exchange rate risks.
A substantial majority of our sales and cost of components are denominated in U.S. dollars. As our business grows both our sales and
production costs may increasingly be denominated in other currencies. Where such sales or production costs are denominated in other
currencies, they are converted to U.S. dollars for the purpose of calculating any sales or costs to us. Our sales may decrease as a result of any
appreciation of the U.S. dollar against these other currencies.
The majority of our current expenditures are incurred in U.S. dollars and many of our components come from countries that currently
peg their currency against the U.S. dollar. If the pegged exchange rates should change adversely or be allowed to float up, additional U.S.
dollars will be required to fund our purchases of these components.
Although we do not currently enter into currency option contracts or engage in other hedging activities, we may do so in the future.
There is no assurance that we will undertake any such hedging activities or that, if we do so, they will be successful in reducing the risks to us
of our exposure to foreign currency fluctuations.
Due to our significant level of international operations, including the use of foreign contract manufactures, we are subject to
international operational, financial, legal and political risks which could harm our operating results.
We purchase product components from our suppliers, engage third party contract manufacturing firms to perform electronic circuit
board and cable assemblies, and, up until most recently, have performed the final assembly of our products ourselves in our Rochester, New
York facility. In September 2014, we began the final assembly of our M100 Smart Glasses product in China. We expect to continue to
perform final assembly of certain of our Video Eyewear products ourselves over the short term and use our Rochester facility primarily for the
final assembly initial production runs of new products. However, if our volume increases and cost effective third party sourcing becomes
feasible, we anticipate that we may outsource the bulk of the final assembly, with the possible exception of certain critical optical and display
components. Accordingly, a substantial part of our operations, including manufacturing of certain components used in our products and most
recently the M100 Smart Glasses, are outside of the United States and many of our customers and suppliers have some or all of their
operations in countries other than the United States. Risks associated with our doing business outside of the United States include:
· compliance burdens and costs with a wide variety of foreign laws and regulations, particularly labor, environmental and other laws
and regulations that govern our operations in those countries;
· legal uncertainties regarding foreign taxes, tariffs, quotas, export controls, export licenses, import controls and other trade barriers;
· economic instability and high levels of inflation in the countries of our suppliers and customers, particularly in the Asia-Pacific
region, causing delays or reductions in orders for their products and therefore our sales;
· political instability in the countries in which our suppliers operate, particularly in China, Korea and Taiwan;
· changes or volatility in currency exchange rates.
· difficulties in collecting accounts receivable and longer accounts receivable payment cycles; and
· potentially adverse tax consequences.
Any of these factors could harm our own, our suppliers’ and our customers’ international operations and businesses and impair our
and their ability to continue expanding into international markets.
26
We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act or similar anti-bribery laws
in other jurisdictions in which we operate.
The global nature of our business and the significance of our international revenue create various domestic and local regulatory
challenges and subject us to risks associated with our international operations. The U.S. Foreign Corrupt Practices Act, or the FCPA, the U.K.
Bribery Act 2010, or the U.K. Bribery Act, and similar anti-bribery and anticorruption laws in other jurisdictions generally prohibit U.S.-
based companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining
business, directing business to another, or securing an advantage. In addition, U.S. public companies are required to maintain records that
accurately and fairly represent their transactions and have an adequate system of internal accounting controls. Under the FCPA, U.S.
companies may be held liable for the corrupt actions taken by directors, officers, employees, agents, or other strategic or local partners or
representatives. As such, if we or our intermediaries fail to comply with the requirements of the FCPA or similar legislation, governmental
authorities in the United States and elsewhere could seek to impose substantial civil and/or criminal fines and penalties which could have a
material adverse effect on our business, reputation, operating results and financial condition.
We operate in areas of the world that experience corruption by government officials to some degree and, in certain circumstances,
compliance with anti-bribery and anticorruption laws may conflict with local customs and practices. Our global operations require us to import
and export to and from several countries, which geographically expands our compliance obligations. In addition, changes in such laws could
result in increased regulatory requirements and compliance costs which could adversely affect our business, financial condition and results of
operations. We cannot be assured that our employees or other agents will not engage in prohibited conduct and render us responsible under the
FCPA or the U.K. Bribery Act or other anti-bribery or anticorruption laws. If we are found to be in violation of the FCPA, the U.K. Bribery
Act or other anti-bribery or anticorruption laws (either due to acts or inadvertence of our employees, or due to the acts or inadvertence of
others), we could suffer criminal or civil penalties or other sanctions, which could have a material adverse effect on our business.
We are subject to governmental export and import controls and economic sanctions laws that could subject us to liability and impair our
ability to compete in international markets.
The U.S. and various foreign governments have imposed controls, export license requirements and restrictions on the import or export
of some technologies. Our products are subject to U.S. export controls, including the Commerce Department’s Export Administration
Regulations and various economic and trade sanctions regulations established by the Treasury Department’s Office of Foreign Assets
Controls, and exports of our products must be made in compliance with these laws. Furthermore, U.S. export control laws and economic
sanctions prohibit the provision of products and services to countries, governments, and persons targeted by U.S. sanctions. Even though we
take precautions to prevent our products from being provided to targets of U.S. sanctions, our products, including our firmware updates, could
be provided to those targets or provided by our customers despite such precautions. Any such provision could have negative consequences,
including government investigations, penalties and reputational harm. Our failure to obtain required import or export approval for our products
could harm our international and domestic sales and adversely affect our revenue.
If our estimates or judgments relating to our critical accounting policies prove to be incorrect, our operating results could be adversely
affected.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on
various other assumptions that we believe to be reasonable under the circumstances, as provided in the section titled “Management’s
discussion and analysis of financial condition and results of operations” in this report. The results of these estimates form the basis for making
judgments about the carrying values of assets, liabilities and equity, and the amount of revenue and expenses that are not readily apparent from
other sources. Our operating results may be adversely affected if our assumptions change or if actual circumstances differ from those in our
assumptions, which could cause our operating results to fall below the expectations of securities analysts and investors, resulting in a decline
in our stock price. Significant assumptions and estimates used in preparing our consolidated financial statements include those related to
revenue recognition, stock-based compensation expense, software development costs, derivatives and fair value measurements, excess and
obsolete inventory write-downs, warranty reserves, and long-lived assets.
27
We are exposed to increased regulatory oversight and incur increased costs as a result of being a public company whose common stock
is listed on the NASDAQ Capital Market.
As a public company, we incur and will continue to incur costs associated with our public company reporting requirements and
corporate governance requirements, including meeting the additional requirements under the Sarbanes-Oxley Act, as well as rules implemented
by the SEC and the NASDAQ Stock Market. These rules and regulations have increased over the last decade, and will continue to increase,
and will continue to make, certain activities more time consuming and costly. Further, we will be incurring costs in connection with hiring
additional accounting, financial and compliance staff with appropriate public company experience and technical accounting knowledge. Any of
these expenses could harm our business, operating results and financial condition. In January 2015, our common stock was approved for
listing on the NASDAQ Capital Market, as a result of which we will incur increased costs associated with satisfying the listing requirements
and rules of the NASDAQ Stock Market.
Any significant disruption to our ecommerce business could result in lost sales.
Our sales through our ecommerce channel have been growing. Sales through vuzix.com and our related EU, UK and Japanese web
stores generally have higher profit margins than sales through resellers. Online sales are subject to a number of risks. System interruptions or
delays could cause potential customers to fail to purchase our products and could harm our brand. The operation of our direct to consumer
ecommerce business through vuzix.com depends on our ability to maintain the efficient and uninterrupted operation of online order-taking and
fulfillment operations. Our ecommerce operations subject us to certain risks that could have an adverse effect on our operating results,
including risks related to the computer systems that operate our website and related support systems, such as system failures, viruses,
computer hackers and similar disruptions. If we are unable to continually add software and hardware, effectively upgrade our systems and
network infrastructure and take other steps to improve the efficiency of our systems, system interruptions or delays could occur that adversely
affect our operating results.
We utilize third party vendors for our customer-facing ecommerce technology, portions of our order management system and
fulfillment internationally. We depend on our technology vendors to manage “up-time” of the front-end ecommerce store, manage the intake of
our orders, and export orders for fulfillment. In the future, we could begin to run all or a greater portion of our ecommerce components
ourselves rather than use third party vendors. Any failure on the part of our third party ecommerce vendors or in our ability to transition third
party services effectively could result in lost sales and harm our business.
Failure to adequately protect customer data could harm our brand and our reputation in the marketplace.
Changing regulations and laws governing the Internet, data privacy, data protection and ecommerce transactions (including taxation,
pricing and electronic communications) could impede the growth of our ecommerce business, increase our cost of doing business and limit our
ability to collect and use information collected from our customers. Further, new regulations limiting our ability to collect, use and disclose
customer data, or imposing additional requirements with respect to the retention and security of customer data, could limit our marketing
activities and could adversely affect our business and financial condition.
In connection with our ecommerce services, we process, store and transmit customer data. We also collect customer data through
certain marketing activities. Failure to prevent or mitigate data loss or other security breaches, including breaches of our vendors’ technology
and systems, could expose us or our customers to a risk of loss or misuse of such information, adversely affect our operating results, result in
litigation or potential liability for us and otherwise harm our business. Further, we are subject to general business regulations and laws, as well
as regulations and laws specifically governing the Internet, ecommerce and electronic devices. Existing and future laws and regulations, or
new interpretations of these laws, may adversely affect our ability to conduct our ecommerce business.
28
We may lose the services of key management personnel and may not be able to attract and retain other necessary personnel.
Changes in our management could have an adverse effect on our business. This is especially an issue while our staff is small. We are
dependent upon the active participation of several key management personnel, including Paul J. Travers, our President and Chief Executive
Officer. Mr. Travers is critical to the strategic direction and overall management of our company as well as our research and development
process. Mr. Travers is an at-will employee and there are no vesting restrictions on any of the common stock that he owns other than on some
incentive stock options representing less than 2% of his total holdings. The loss of Mr. Travers could adversely affect our business, financial
condition and operating results. We do not carry key person life insurance on any of our senior management or other key personnel other than
our CEO. While we have life insurance coverage on our CEO, we do not believe the coverage would be sufficient to completely protect us
against losses we may suffer if his services were to become unavailable to us in the future. Our Executive Vice President and Chief Financial
Officer, Grant Russell, a Canadian citizen, currently has his principal residence in Vancouver, Canada and a second residence in Rochester,
New York. If he becomes unable to legally or efficiently travel to and work in the United States, his ability to perform some of his duties
could be materially adversely affected.
We must hire highly skilled technical personnel as employees and as independent contractors in order to develop our products. The
competition for highly skilled technical, managerial and other personnel is at times intense. Our recruiting and retention success is substantially
dependent on our ability to offer competitive salaries and benefits to our employees. We must compete with companies that possess greater
financial and other resources than we do and that may be more attractive to potential employees and contractors. To be competitive, we may
have to increase the compensation, bonuses, stock options and other fringe benefits offered to employees in order to attract and retain such
personnel. The costs of retaining or attracting new personnel may have a material adverse effect on our business and operating results. If we
fail to attract and retain the technical and managerial personnel we need to be successful, our business, operating results and financial condition
could be materially adversely affected.
Our failure to effectively manage growth could harm our business.
We have regularly expanded the number and types of products we sell, and we will endeavor to further expand our product portfolio.
We must replace and regularly introduce on a timely basis new products and technologies, enhance existing products, and effectively stimulate
customer demand for new products and upgraded versions of our existing products.
The replacement and expansion of our products places a significant strain on our management, operations and engineering resources.
Specifically, the areas that are strained most by these activities include the following:
· New Product Launch: With the growth of our product portfolio, we will experience increased complexity in coordinating product
development, manufacturing, and shipping. As this complexity increases, it places a strain on our ability to accurately coordinate the
commercial launch of our products with adequate supply to meet anticipated customer demand and effectively market to stimulate
demand and market acceptance. We have experienced delays in the past. If we are unable to scale and improve our product launch
coordination, we could frustrate our customers and lose possible retail shelf space and product sales;
· Existing Products Impacted by New Introductions: The introduction of new products or product enhancements may shorten the life
cycle of our existing products, or replace sales of some of our current products, thereby offsetting the benefit of even a successful
product introduction, and may cause customers to defer purchasing our existing products in anticipation of the new products and
potentially lead to challenges in managing inventory of existing products. We may also provide price protection to some of our
retailers as a result of our new product introductions. If we fail to effectively manage new product introductions, our revenue and
profitability may be harmed;
· Forecasting, Planning and Supply Chain Logistics: With the growth of our product portfolio, we will experience increased
complexity in forecasting customer demand, in planning for production, and in transportation and logistics management. If we are
unable to scale and improve our forecasting, planning and logistics management, we could frustrate our customers, lose product sales
or accumulate excess inventory; and
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· Support Processes: To manage the growth of our operations, we will need to continue to improve our transaction processing,
operational and financial systems, and procedures and controls to effectively manage the increased complexity. If we are unable to
scale and improve these areas, the consequences could include: delays in shipment of product, degradation in levels of customer
support, lost sales, decreased cash flows, and increased inventory. These difficulties could harm or limit our ability to increase our
sales.
Our facilities and information systems and those of our key suppliers could be damaged as a result of disasters or unpredictable events,
which could have an adverse effect on our business operations.
We operate the majority of our business from one location in the Rochester, New York area. We also rely on third party
manufacturing plants in Asia and third party logistics, sales and marketing facilities in Japan and England, and in other parts of the world to
provide key components of our Video Eyewear products and services necessary for our operations. If major disasters such as earthquakes,
fires, floods, wars, terrorist attacks, computer viruses, transportation disasters or other events occur in any of these locations, or our
information systems or communications network or those of any of our key component suppliers breaks down or operates improperly as a
result of such events, our facilities or those of our key suppliers may be seriously damaged, and we may have to stop or delay production and
shipment of our products. We may also incur expenses relating to such damages. If production or shipment of our products or components is
stopped or delayed or if we incur any increased expenses as a result of damage to our facilities, our business, operating results and financial
condition could be materially adversely affected.
A failure of our information technology systems could materially adversely affect our business.
A failure or prolonged interruption in our information technology systems that compromises our ability to meet our customers' needs,
or impairs our ability to record, process and report accurate information to the SEC could have a material adverse effect on our financial
condition.
A breach of our cyber security systems could materially adversely affect our business.
A breach that compromises our proprietary data or our ability to meet our customers’ needs or impairs our ability to record, process
and report accurate information could have a material adverse effect on our financial condition.
Terrorism and the uncertainty of future terrorist attacks or war could reduce consumer confidence which could adversely affect our
operating results.
Terrorist acts or acts of war may cause damage or disruption to our facilities, information systems, vendors, employees and customers,
which could significantly harm our sales and results of operations. In the future, fears of war or additional acts of terrorism may have a
negative effect on consumer confidence or consumer discretionary spending patterns, as well as have an adverse effect on the economy in
general. This impact may be particularly harmful to our business because we expect to rely heavily on discretionary consumer spending and
consumer confidence levels.
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Risks Related to Manufacturing
We do not manufacture our own microdisplays, one of the key components of our Video Eyewear and Smart Glasses products, and we
may not be able to obtain the microdisplays we need.
We do not currently own or operate any manufacturing facilities for microdisplays, one of the key components in our Video Eyewear
products. We currently purchase almost all of the microdisplays used in our products from Kopin. Our relationship with Kopin generally is on
a purchase order basis and Kopin does not have a contractual obligation to provide adequate supply or acceptable pricing to us on a long-term
basis. Kopin could discontinue sourcing merchandise for us at any time. If Kopin were to discontinue its relationships with us, or discontinue
providing specific products to us, and we are unable to contract with a new supplier that can meet our requirements, or if Kopin or such other
supplier were to suffer a disruption in their production, we could experience disruption of our inventory flow, a decrease in sales and the
possible need to redesign our products. Any such event could disrupt our operations and have an adverse effect on our business, financial
condition and results of operations. Recently several new LCOS and alternative OLED suppliers have begun offering microdisplays suitable
for use in our products. These manufacturers include Syndiant, Texas Instruments, OmniVision, HiMax, eMagin, Silicon Microdisplay,
Sony, Omnivision, Citizen and others. With new tooling and electronics any one of these alternative displays could be incorporated into our
products but our costs of production could be higher and make our products uneconomic for the marketplace.
Certain other components and services necessary for the manufacture of our products are available from only a limited number of
sources, and other components and services are only available from a single source.
If we lose access to components from a particular supplier, or experience a significant disruption in the supply of products and
components from a current supplier, we may be unable to locate alternative suppliers of comparable quality at an acceptable price, or at all, and
our business could be materially and adversely affected. In addition, if we experience a significant increase in demand for our products, our
suppliers might not have the capacity or elect to meet our needs as they allocate components to other customers. Identifying a suitable supplier
is an involved process that requires us to become satisfied with the supplier’s quality control, responsiveness and service, financial stability
and labor and other ethical practices, and if we seek to source materials from new suppliers there can be no assurance that we could do so in a
manner that does not disrupt the manufacture and sale of our products. Our reliance on single source, or a limited number of, suppliers
involves a number of additional risks, including risks related to:
· supplier capacity constraints;
· price increases;
· timely delivery;
· component quality;
· failure of a key supplier to remain in business and adjust to market conditions;
· delays in, or the inability to execute on, a supplier roadmap for components and technologies; and
· natural disasters, fire, acts of terrorism or other catastrophic events.
Our inability to obtain sufficient quantities of high quality components or services on a timely basis could result in future
manufacturing delays, increased costs and ultimately in reduced or delayed sales or lost orders which could materially and adversely affect our
operating results.
We do not control our contract manufacturers or suppliers, or require them to comply with a formal code of conduct, and actions that
they might take could harm our reputation and sales.
We do not control our contract manufacturers or suppliers, including their labor, environmental or other practices, or require them to
comply with a formal code of conduct. Though we conduct periodic visits to some of our contract manufacturers and suppliers, these visits are
not so frequent or thorough enough to detect non-compliance with applicable laws and good industry practices. A violation of labor,
environmental or other laws by our contract manufacturers or suppliers, or a failure of these parties to follow ethical business practices, could
lead to negative publicity and harm our reputation. In addition, we may choose to seek alternative manufacturers or suppliers if these violations
or failures were to occur. Identifying and qualifying new manufacturers or suppliers can be time consuming and we might not be able to
substitute suitable alternatives in a timely manner or at an acceptable cost. Other consumer products companies have faced significant criticism
for the actions of their manufacturers and suppliers, and we could face such criticism ourselves. Any of these events could adversely affect our
brand, harm our reputation, reduce demand for our products and harm our ability to meet demand if we need to identify alternative
manufacturers or suppliers.
31
We depend on third parties to provide integrated circuit chip sets and other critical components for use in our products.
We do not manufacture the integrated circuit chip sets, optics, microdisplays, backlights, printed circuit boards or other electronic
components which are used in our products. Instead, we purchase them from third party suppliers or rely on third party independent
contractors for these integrated circuit chip sets and other critical components, some of which are customized or specially made for us. We also
may use third parties to assemble all or portions of our products. Some of these third party contractors and suppliers are small companies with
limited financial resources. If any of these third party contractors or suppliers were unable or unwilling to supply these integrated circuit chip
sets or other critical components to us, we would be unable to manufacture and sell our products until a replacement supplier could be found.
We cannot assure investors that a replacement third party contractor or supplier could be found on reasonable terms or in a timely manner.
Any interruption in our ability to manufacture and distribute our products could cause our display business to be unsuccessful and the value of
investors’ investment in us may decline.
The consumer electronics industry is subject to significant fluctuations in the availability of components. If we do not properly anticipate
the need for critical components, we may be unable to meet the demands of our customers and end-users.
The availability of certain of the components that we require to produce our Video Eyewear and Smart Glasses products may decrease.
As the availability of components decreases, the cost of acquiring those components ordinarily increases. High growth product categories such
as the consumer electronics and mobile phone markets have experienced chronic shortages of components during periods of exceptionally
high demand. If we do not properly anticipate the need for or procure critical components, we may pay higher prices for those components,
our gross margins may decrease and we may be unable to meet the demands of our customers and end-users, which could reduce our
competitiveness, cause a decline in our market share and have a material adverse effect on our results of operations.
Unanticipated disruptions in our operations or slowdowns by our suppliers, distributors and shipping companies could adversely affect
our ability to deliver our products and service our customers.
Our ability to provide high quality customer service, process and fulfill orders and manage inventory depends on the efficient, timely
and uninterrupted performance of our manufacturing and distribution facilities and our management information systems and the facilities and
systems of our third party suppliers, distributors and shipping companies.
Any material disruption or slowdown in the operation of our manufacturing and distribution facilities or our management information
systems, or comparable disruptions or slowdowns suffered by our principal suppliers, distributors or shippers could cause delays in our
ability to receive, process and fulfill customer orders and may cause orders to be canceled, lost or delivered late, goods to be returned or receipt
of goods to be refused. If any of these events occur, our sales and operating results could be materially and adversely affected.
Risks Related to Our Common Stock
The rights of holders of common stock may be impaired by the possible future issuance of additional preferred stock.
Our board of directors has the right, without approval of the holders of our common stock, to issue additional preferred stock with
voting, dividend, conversion, liquidation and other rights which could adversely affect the voting power and equity interest of the holders of
common stock, which could be issued with the right to more than one vote per share, and could be utilized as a method of discouraging,
delaying or preventing a change of control. The possible negative impact on takeover attempts could adversely affect the price of our common
stock. Although we have no present intention to issue any shares of preferred stock other than the Series A Preferred Stock currently
outstanding or to create any additional series of preferred stock, we may issue these shares in the future.
32
Additional stock offerings in the future may dilute then existing stockholders’ percentage ownership of our company.
Given our plans and expectations that we may need additional capital and personnel, we may need to issue additional shares of
common stock or securities convertible or exercisable for shares of common stock, including convertible preferred stock, convertible notes,
stock options or warrants. The issuance of additional securities in the future will dilute the percentage ownership of then existing stockholders.
We have not paid dividends in the past and do not expect to pay dividends in the future on our common stock.
We have never paid cash dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future. The
payment of dividends on our common stock will depend on earnings, financial condition, debt covenants in place, and other business and
economic factors affecting us at such time as our board of directors may consider relevant. If we do not pay dividends, our common stock may
be less valuable because a return on a stockholders’ investment will only occur if our stock price appreciates. In addition, the holder of our
outstanding shares of Series A Preferred Stock is entitled to certain dividends prior to payments of dividends to holders of common stock.
If securities analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and
trading volume could decline.
The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about
us or our business. If one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our
business, our stock price would likely decline. Securities analysts have only recently commenced research coverage on us. If one or more of
these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our stock could decrease, which might
cause our stock price and trading volume to decline.
Our issuance of common stock upon conversion of convertible notes or preferred stock or exercise of warrants or options may depress
the price of our common stock.
As of March 27, 2015, we have issued and outstanding 15,862,418 shares of common stock, 49,626 shares of Series A Preferred
Stock convertible into 4,962,600 shares of common stock, an aggregate of $2,037,500 in principal amount of convertible notes convertible
into an aggregate of 905,556 shares of common stock, warrants to purchase 537,103 shares of common stock, and options to purchase
720,551 shares of common stock. The issuance of shares of common stock upon conversion of convertible notes or preferred stock, or
exercise of outstanding warrants or options could result in substantial dilution to our stockholders, which may have a negative effect on the
price of our common stock.
The interests of the holder of our Series A Preferred Stock, which holds shares representing approximately 24% of the voting power of
our stock and has the right to nominate and elect two directors, may conflict with the interests of our other stockholders.
On January 2, 2015, we entered into and closed a Series A Preferred Stock Purchase Agreement, pursuant to which we issued and sold
to Intel Corporation (the “Series A Purchaser”) 49,626 shares of Series A Preferred Stock . Each share of Series A Preferred Stock is
convertible into 100 shares of common stock and votes on an-converted basis with the common stock. The shares issuable upon conversion of
the Series A Preferred Stock then represented approximately 30% of the total voting power of our outstanding stock. As of the date of this
filing, the shares issuable upon conversion of the Series A Preferred Stock represent approximately 24% of the total voting power of our
outstanding stock. The Series A Purchaser will be able to vote this significant amount of shares with respect to any matter submitted to
stockholders for a vote. In addition, the Series A Purchaser is entitled to nominate and elect two additional directors to the Company’s Board
of Directors (the “Board Election Right”), one of whom is required to qualify as an “independent” director, as that term is used in applicable
exchange listing rules. The Series A Purchaser has not yet exercised the Board Election Right, but if it does so, the Series A Purchaser will
have increased influence over matters considered by the Board of Directors. The Series A Purchaser may exercise its stockholder rights in a
way that it believes is in its best interests, which may conflict with the interests of our other stockholders.
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Sales of common stock by the Series A Purchaser may depress the price of our common stock.
The shares of common stock issuable upon conversion of the outstanding shares of Series A Preferred Stock currently represent
approximately 24% of our outstanding common stock, giving effect to conversion of such shares of Series A Preferred Stock. Resale of such
conversion shares by the Series A Purchaser may depress the price of our common stock.
Item 1B. Unresolved Staff Comments
Not required for a smaller reporting company.
Item 2. Properties
We lease approximately 8,800 square feet at our facilities located at 2166 Brighton Henrietta Townline Road, Rochester, New York
14623. In this facility, we have located our manufacturing, research and development, sales and administration offices. We currently pay
approximately $65,000 per year in rent, including common area maintenance costs. The existing one-year lease will expire on September 30,
2015.
We believe that this facility is in good operating condition and currently adequately serves our needs, however we intend to move to
expanded premises when the lease on our current facilities is up. We anticipate that, suitable additional or alternative space will be available on
commercially reasonable terms to accommodate expansion of our operations.
In Oxford, England, we rent 400 square feet of office space at a cost of approximately $10,500 per annum. This location is leased
pursuant to a renewable two-year lease which is set to expire on September 29, 2015.
In Tokyo, Japan, we rent 175 square feet of office space at a cost of approximately $25,000 per annum. This location is leased pursuant
to a renewable one-year lease which is set to expire on March 1, 2016.
Item 3. Legal Proceedings
We are not currently involved in any pending legal proceeding or litigation and we are not aware of any such proceedings contemplated
by or against us or that our property is subject to. To our knowledge, there are no material legal proceedings to which any of our directors,
officers or affiliates, or any beneficial owner of more than five percent of our common stock, or any associate of any of the foregoing, is a
party adverse to us or any of our subsidiaries or has a material interest adverse to us or any of our subsidiaries.
Item 4. Mine Safety Disclosures
Not applicable.
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Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
PART II
Market for our Common Stock
Our common stock is listed on the NASDAQ Capital Market under the symbol “VUZI”. Prior to January 28, 2015 our stock was quoted
in the United States on the OTCQB under the symbol “VUZI”.
The following table sets forth, for the fiscal quarters indicated, the high and low closing sales prices for Vuzix’ common stock as quoted
on the OTCQB. The quotations on the OTCQB reflect inter-dealer prices, without mark-up, mark-down or commission, and may not
represent actual transactions.
Vuzix Stock Prices
Low
High
Fiscal Quarters
First 2014
Second 2014
Third 2014
Fourth 2014
Vuzix Stock Prices
Fiscal Quarters
First 2013
Second 2013
Third 2013
Fourth 2013
$
$
2.45 $
2.10
2.42
2.65
Low
High
3.70 $
2.25
1.80
2.12
4.58
3.45
4.14
4.75
9.00
7.30
6.50
3.91
The prices listed in the above price tables are adjusted to reflect the impact of our 1 for 75 reverse stock split, which was effective
February 6, 2013.
Our common stock was previously traded on the TSX Venture Exchange, or the “TSX-V”, under the symbol “VZX”, but was delisted on
November 14, 2013.
Holders of Record
As of March 27, 2015, there were 41 holders of record of our common stock.
Dividends
We currently do not pay regular dividends on our outstanding common stock. The declaration of any future dividends and, if declared, the
amount of any such dividends, will be subject to our actual future earnings, capital requirements, regulatory restrictions, debt covenants, other
contractual restrictions and to the discretion of our board of directors. Our board of directors may take into account such matters as general
business conditions, our financial condition and results of operations, our capital requirements, our prospects and such other factors as our
board of directors may deem relevant.
Shares of Series A Preferred stock are entitled to receive dividends at a rate of 6% per annum, compounded quarterly and payable in cash
or in kind, at our discretion.
Issuer Purchases of Equity Securities
We did not purchase equity securities that are registered under Section 12 of the Exchange Act during the year ended December 31, 2014.
35
Equity Compensation Plan Information
The following table provides information about our equity compensation plans as of December 31, 2014.
Number of
Securities to
be Issued
Upon Exercise
of Outstanding
Options,
Warrants and
Rights(2)
Weighted
Average
Exercise Price
of
Outstanding
Options,
Warrants and
Rights
Number of
Securities
Remaining
Available for
Future Issuance
(1)
720,551 $
—
720,551 $
4.46
—
4.46
457,500
—
457,500
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
(1)
The amount appearing under “Number of securities remaining available for future issuance under equity compensation plans” includes
shares available under our 2014 Equity Incentive Plan.
Item 6. Selected Financial Data
Not required for a smaller reporting company.
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 3 of this
annual report.
Overview
We are engaged in the design, manufacture, marketing and sale of wearable display devices that are worn like eyeglasses and feature
built-in video screens that enable the user to view video and digital content, such as movies, computer data, the Internet or video games. Our
wearable display products, known commercially as Video Eyewear (also referred to as head mounted displays or HMDs), smart glasses,
wearable displays, video glasses, personal viewers, near-eye virtual displays, and near-eye displays (NEDs) contain micro video displays that
offer users a portable high-quality viewing experience. Our Video Eyewear products provide virtual large high-resolution screens, fit in a
user’s pocket or purse and can be viewed practically anywhere, anytime. They can also be used for virtual and augmented reality applications,
in which the wearer is either immersed in a computer generated world or has their real world view augmented with computer generated
information or graphics. In the 4th quarter of 2014, we started shipping smart glasses, a new category of Video Eyewear that has much of the
capabilities of a smartphone including wireless internet access but that is worn like glasses. We produce both monocular and binocular Video
Eyewear devices. Video Eyewear are designed to work with mobile electronic devices, such as cell phones, laptop computers, tablets, portable
media players and gaming systems.
Our Video Eyewear products feature high performance miniature display modules, low power electronics and related optical systems. We
produce both monocular and binocular Video Eyewear devices that we believe are excellent solutions for many mobile computer or video
viewing requirements. With respect to our Video Eyewear products, we focus on the consumer markets for gaming and mobile video while
our Virtual and Augmented Reality products are also sold in the consumer, industrial, commercial, academic and medical markets. The
consumer electronics and mobile phone accessory markets in which we compete has been subject to rapid technological change including the
rapid adoption of tablets and most recently larger screen sizes and display resolutions along with declining prices on mobile phones, and as a
result we must continue to improve our products’ performance and lower our costs. Today, we believe our intellectual property portfolio gives
us a leadership position in microdisplay electronics, waveguides, ergonomics, packaging, motion tracking and optical systems.
36
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 are believed 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. These accounting
policies and estimates are periodically reevaluated, and adjustments are made 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:
·
·
·
·
·
·
·
·
valuation of inventories;
carrying value of long-lived assets;
software development costs
revenue recognition;
product warranty;
fair value measurement of financial instruments and embedded derivatives;
stock-based compensation; and
income taxes.
Valuation of Inventories
Inventory is stated at the lower of cost or market, 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 lifecycles and estimated
inventory levels. Purchasing practices, electronic component obsolescence, accuracy of sales and production forecasts, introduction of new
products, product lifecycles, product support and foreign regulations governing hazardous materials are the 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, to production, to after-sale support. If actual demand, market conditions or product
lifecycles differ from estimates, inventory adjustments to lower market values would result in a reduction to the carrying value of inventory, an
increase in inventory write-offs and a decrease to gross margins.
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. 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 in the future will be dependent on a number of factors such as general economic trends
and major technology advances, and thus could be significantly different than historical results. No impairment charges on tooling and
equipment were recorded in 2014 or 2013.
37
We perform a valuation of our patents and trademark assets when events or circumstances indicate their carrying amounts may be
unrecoverable. We recorded an impairment charge of $104,716 representing cost of $166,500, less accumulated amortization of $61,784 in
2014, and an impairment charge of $73,423 representing cost of $98,797, less accumulated amortization of $25,374 in 2013 regarding our
abandoned patents and trademarks. The value of the remaining intellectual property, such as patents and trademarks, were valued (net of
accumulated amortization) at $423,849 as of December 31, 2014, because management believes that its value is recoverable.
Software Development Costs
The Company capitalizes the costs of obtaining its software once technological feasibility has been determined by management. Such
costs are accumulated and capitalized. These projects could take several years to complete. The capitalized costs are then amortized over 3 to
5 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 value of the unamortized software development costs remaining, were valued (net of
accumulated amortization) at $787,738 as of December 31, 2014, because management believes that its value is recoverable.
Revenue Recognition
We recognize revenue from product sales in accordance with FASB ASC Topic 605, Revenue Recognition. Product sales represent the
majority of our revenue and there have been no material changes in or inflation in our product pricing over the past two fiscal periods. We
recognize revenue from these product sales when persuasive evidence of an arrangement exists, delivery has occurred or services have been
provided, the sale price is fixed or determinable, and collectability is reasonably assured. Additionally, we sell our products on terms which
transfer title and risk of loss at a specified location, typically shipping point. Accordingly, revenue recognition from product sales occurs when
all factors are met, including transfer of title and risk of loss, which typically occurs upon shipment by us. If these conditions are not met, we
will defer the revenue recognition until such time as these conditions have been satisfied. We collect and remit sales taxes in certain
jurisdictions and report revenue net of any associated sales taxes. We also sell certain products through distributors who are granted limited
rights of return for stock balancing against purchases made within a prior 90 day period, including price adjustments downwards on any
existing inventory. The provision for product returns and price adjustments is assessed for adequacy both at the time of sale and at each
quarter end and is based on recent historical experience and known customer claims.
Revenue from any engineering consulting and other services is recognized at the time the services are rendered. For our longer-term
development contracts, which to date have all been firm, fixed-priced contracts, we recognize revenue on the percentage-of-completion
method. Under this method income is recognized as work on contracts progresses, but estimated losses on contracts in progress are charged to
operations immediately. To date, all of our longer-term development contracts have been less than one calendar year in duration. We generally
submit invoices for our work under these contracts on a monthly basis. The percentage-of-completion is determined using the cost-to-cost
method.
We recognizes software license revenue under ASC 985-605 “Software Revenue Recognition” and under ASC 605-25 “Revenue
Arrangements with Multiple Deliverables”, and related interpretations, as amended.
Licensed software may be sold as a stand-alone element, with other software elements, or in conjunction with hardware products. When our
products consists of more than one element, the product is considered to be a multiple element arrangement (MEA). When sold as a stand-
alone element, the revenue is recognized upon shipment as discussed above. When sold as part of a MEA, revenue from the licensed software
is recognized when the product and embedded software is shipped to the customer.
For either a single element transaction or a MEA, the Company allocates consideration to all deliverables based on their relative
stand-alone selling prices. Amendments to ASC 605-25, which became effective January 1, 2011, establish a hierarchy to determine the stand-
alone selling price as follows:
·
·
·
Vendor Specific Objective Evidence of the fair value (VSOE),
Third Party Evidence (TPE)
Best Estimate of the Selling Price (ESP)
Sales which constitute a MEA are accounted for by determining if the elements can be accounted for as separate accounting units, and if
so, by applying values to those units, per the hierarchy above. If VSOE is not available, management estimates the fair selling price using
historical pricing for similar items, in conjunction with current pricing and discount policies.
38
Revenue from licensed software is recognized upon shipment and in accordance with industry-specific software recognition accounting
guidance. Software updates that will be provided free of charge are evaluated on a case-by-case basis to determine whether they meet the
definition of an upgrade and create a multiple element arrangement.
Fees charged to customers for post-contract Technical Support are recognized ratably over the term of the contract. Costs related to
maintenance obligations are expensed as incurred.
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 except in European countries where it is two years. 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.
Derivatives and Fair Value Measurements
FASB ASC Topic 820, “Fair Value Measurements and Disclosures” (ASC 820) defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. ASC 820 clarifies
that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. ASC 820 permits an entity to measure certain financial assets and financial liabilities at fair value with
changes in fair value recognized in earnings each period. In accordance with ASC 815-10-25, we measured the derivative liability using a
Lattice pricing model at their issuance date and subsequently they are remeasured. Accordingly, at the end of each quarterly reporting date the
derivative fair market value is remeasured and adjusted to current market value. Derivatives that have more than one year remaining in their life
are shown as long term derivative liabilities.
Significant unobservable inputs are used in the fair value measurement of the Company’s derivative liability. The primary input factors
driving the economic or fair value of the derivatives warrants and convertible notes are the stock price of the Company’s shares; the price
volatility of the shares, reset events, and exercise behavior. An important valuation input factor used in determining fair value was the expected
volatility of observed share prices and the probability of projected resets in warrant exercise and note conversion prices from financing before
each security’s maturity. For exercise behavior the Company assumed that without a target price of 2 times the projected reset price or higher
that the holders of the warrants and convertible notes would hold to maturity. In determining the fair value of the derivatives it was assumed
that the Company’s business would be conducted as a going concern and that holding to maturity was reasonable. Further the January 2, 2015
Series A Preferred financing reduced the expected probably to near zero for price resets from financing events.
ASC 820 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value. Level 1 inputs
are quoted prices in active markets for identical assets or liabilities. Level 2 inputs are inputs other than quoted prices included in Level 1 that
are directly or indirectly observable for the asset or liability. Such inputs include quoted prices in active markets for similar assets and
liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are
observable for the asset or liability, or inputs derived principally from or corroborated by observable market data by correlation or other
means. Level 3 inputs are unobservable inputs for the asset or liability. Such inputs are used to measure fair value when observable inputs are
not available.
39
Stock-Based Compensation
Our board of directors approves grants of stock options to employees to purchase our common stock. A stock compensation expense is
recorded based upon the estimated fair value of the stock option at the date of grant. The accounting estimate related to stock-based
compensation is considered a “critical accounting estimate” because estimates are made in calculating compensation expense including
expected option lives, forfeiture rates and expected volatility. 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.
Income Taxes
We have historically incurred domestic operating losses from both a financial reporting and tax return standpoint. Accordingly, 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 on 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 effect of temporary differences between balances recorded for financial statement purposes
and for tax return purposes. AA 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 amounts have 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 in excess of
the nil amount currently recorded, an adjustment of the valuation allowance would increase income to be recognized in the period such
determination was made.
In addition, the calculation of our tax liabilities 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 within the interpretation. 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. This evaluation is 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, an effect on our financial condition,
financial statements, revenues or expenses.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09 ("ASU 2014-09"), Revenue
from Contracts with Customers, an updated standard on revenue recognition. ASU 2014-09 provides enhancements to the quality and
consistency of how revenue is reported while also improving comparability in the financial statements of companies reporting using
International Financial Reporting Standards and GAAP. The core principle of the new standard is for companies to recognize revenue to
depict the transfer of goods or services to customers in amounts that reflect the consideration to which the company expects to be entitled in
exchange for those goods or services. The new standard also will result in enhanced disclosures about revenue, provide guidance for
transactions that were not previously addressed comprehensively, and improve guidance for multiple-element arrangements. ASU 2014-09
will be effective in the first quarter of fiscal 2017 and may be applied on a full retrospective or modified retrospective approach. The Company
is still currently evaluating the impact of implementation of this standard on its financial statements.
40
In August 2014, the FASB issued ASU 2014-15, ”Presentation of Financial Statements – Going Concern”, which provides guidance
on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to
perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements
are issued. An entity will be required to provide certain disclosures if conditions of events raise substantial doubt about the entity’s ability to
continue as a going concern. The ASU applies to all entities and is effective for annual periods ending after December 15, 2016, and interim
periods thereafter, with early adoption permitted. We are currently evaluating the impact of the adoption of ASU 2014-15 on our consolidated
financial statements and have not yet determined when we will adopt the standard.
Results of Operations for Fiscal Years Ended December 31, 2014 and December 31, 2013
The following table compares the Company’s consolidated statements of operations data for the twelve months ended December 31, 2014 and
2013.
Years Ended December 31,
2014
2013
Dollar Change
% Increase
(Decrease)
Sales of Products
Sales of Engineering Services
Total Sales
Cost of Sales — Products
Cost of Sales — Engineering Services
Total Cost of Sales
Gross Profit
Gross Margin %
Operating Expenses:
Research and Development
Selling and Marketing
General and Administrative
Depreciation and Amortization
Impairment of Patents and Trademarks
$
2,474,559
557,517
$
1,856,806
532,247
$
617,753
25,270
3,032,076
2,389,053
643,023
1,884,678
217,233
1,354,909
227,186
529,769
(9,953)
2,101,911
1,582,095
519,816
930,165
806,958
123,207
31%
34%
1,752,560
1,232,520
2,593,384
279,317
104,716
1,751,397
1,091,514
2,165,341
377,840
73,423
1,163
141,006
428,043
(98,523)
31,293
Loss from Operations
(5,032,332)
(4,652,557)
(379,775)
Other Income (Expense)
Other Taxes
Foreign Exchange Loss
Loss on Sale of Assets
Gain (Loss) on Debt Conversions and Extinguishment
Loss on Derivative Valuation
Amortization of Senior Term Debt Discount
Interest Expense
(83,419)
(2,713)
—
29,262
(2,194,001)
(393,525)
(192,130)
(88,274)
(13,692)
(40,352)
(1,272,296)
(3,575,278)
—
(503,779)
4,855
10,979
40,352
1,301,558
1,381,277
(393,525)
311,649
Total Other Income (Expense)
(2,836,526)
(5,493,671)
2,657,145
Loss from Before Provision for Income Taxes
Provision for Income Taxes
(7,868,858)
(10,146,228)
—
—
2,277,370
—
Net Loss
$
(7,868,858) $ (10,146,228) $
2,277,370
33%
5%
27%
39%
(4%)
33%
15%
(3%)
0%
13%
20%
(26%)
43%
8%
5%
80%
100%
102%
(39%)
(100%)
(62%)
48%
22%
—
22%
Sales. The increase in 2014 Product sales over 2013 was primarily the result of a 312% increase in monocular Video Eyewear sales
of the M100 Smart Glasses and M2000AR waveguide products. Offsetting this increase was a 45% decrease in sales of our Wrap series of
video viewers and AR/VR products in 2014 as compared to 2013. These Wrap products were being phased out and we had limited quantities
left for sale in the second half of 2014 versus 2013 when the Wrap was still in volume production.
Cost of Sales and Gross Margin. Cost of product revenues and engineering services is comprised of materials, components, labor
and manufacturing overheads, and amortization of software development costs related to the production of our products and rendering
engineering services. The decreased gross margin percentage earned in 2014 was primarily the result of a start-up manufacturing costs of
approximately $72,000 incurred for M100 manufacturing in China in the summer of 2014 and the amortization of software development costs
of $71,613, together representing 4.7% of total sales. Additionally M100 sales to Lenovo in China are at a lower margin than the average
earned on M100 sales made elsewhere.
earned on M100 sales made elsewhere.
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 research and
development costs. Software development expenses to determine technical feasibility before final development and ongoing maintenance that
are not capitalized are included in research and development costs. Comparing 2014 versus 2013 research and development costs, there was a
reduction in 2014 salaries of $74,198 as the result of capitalizing portions related to software development costs, a reduction of $46,700 in rent
related costs allocated to research and development activities, a $42,342 increase in consulting fees related to new product development, a
$67,859 increase in research and development supplies and materials, and a $13,587 increase in travel expenses travel expenses in 2014 over
2013 the result of increased costs to support the commencement of M100 manufacturing in China.
41
Selling and Marketing. Selling and marketing costs consist of trade show costs, advertising, travel costs, sales staff compensation
costs, consulting fees and sales commissions paid to full-time staff and outside consultants. The increased costs for 2014 was mainly
attributable to higher personnel salary costs and increased travel costs.
General and Administrative. General and administrative costs include professional fees, investor relations (IR) costs including
shares and warrants issued for IR services, salaries and related stock compensation, travel costs, office and rental costs. Investor relations
costs totaled $513,700 for the year ended December 31, 2014, an increase of $259,092 over the 2013 costs of $254,608 for the same period.
The Company increased its level of IR activities with its consultants and attended more investor conferences. Travel costs totaled $166,706 for
the year ended December 31, 2014, an increase of $43,886 over the same period’s spending in 2013. These costs increased due to expanded
international travel to Asia and within the US to investor conferences. Consulting costs totaled $57,374 for the year ended December 31,
2014, an increase of $45,520 over the same period’s spending in 2013. Computer and IT related costs totaled $77,651 for the year ended
December 31, 2014, an increase of $32,629 over the same period’s spending in 2013. A large portion of this increase was the result of making
the IT function a full-time position in 2014 whereas in 2013 it was part-time function of a given staff member. And finally salaries, external
director fees and stock compensation expenses increased to $978,709 for the year ended December 31, 2014 as compared to $919,796 for the
same period in 2013, an increase of $58,913. For the year ending December 31, 2014, total external director fees were $31,600 versus $-0- for
the 2013 year.
Depreciation and Amortization. The reduction in depreciation and amortization expense is due to assets that have become fully
depreciated and lower capital expenditures over the last 2 fiscal years.
Other Income (Expense). Other income and expenses was primarily attributable to two items. The Company recorded a loss of
$2,194,001 on the derivative liability valuation mark-to-market revaluation for 2014 versus $3,575,278 in 2013, a reduction of $1,381,277.
Secondly, in 2013 the Company recorded a Loss on Debt Extinguishment of $1,272,296 related to the early repayment of two debentures
upon the closing of our August 5, 2013 public offering. These costs included early payment penalties, write-off of unamortized debt issuance
costs, and write-off of unamortized term debt discounts. A net gain of $29,262 was recorded on the conversion of notes for the year ending
December 31, 2014 resulting from the extinguishment of the debt and the related derivative liability. There were no such gains in 2013. The
provision for other taxes for 2014 was $83,419 compared to $88,274 for 2013. The composition of each year’s other taxes provision was
primarily for franchise taxes payable to the State of Delaware, our state of incorporation, which increased substantially due to the reverse stock
split effected in February 2013. The balance represents Japanese branch taxes which currently average approximately $12,000 per annum.
Provision for Income Taxes. There were no provisions for income taxes in 2014 or 2013.
Liquidity and Capital Resources
As of December 31, 2014, we had cash and cash equivalents of $84,967, a decrease of $225,173 from $310,140 as of December 31,
2013.
At December 31, 2014, we had current liabilities of $3,386,588 compared to current assets of $1,959,449 which resulted in a negative
working capital position of $1,427,139. As at December 31, 2013 we had a negative working capital position of $1,981,232. Our current
liabilities are comprised principally of accounts payable, accrued expenses and notes payable.
Operating Activities. We used $4,609,050 of cash for 2014 compared to $5,091,550 in 2013. The major non-cash operating items for
2014 resulted from a $237,006 decrease in accounts payable, a $168,613 increase in accounts receivable and a $208,367 increase in prepaid
expenses. The major non-cash operating items for 2013 resulted from a $266,446 reduction in inventory, a $379,634 reduction in accounts
payable and a $44,320 increase in accounts receivable.
42
Investing Activities. Investing activities used $901,340 of cash for 2014 as compared to a use of $459,194 for the same period in 2013.
In 2014, we used $195,903 of cash primarily for the purchase of computer equipment additions and tooling, as compared to $145,929 for the
same period in 2013. The costs of registering our intellectual property rights were $86,647 in 2014 and $72,704 in the same period in 2013.
We invested $618,790 in software development costs related to our products in 2014, as compared to $240,561 in 2013.
Financing Activities. We generated $5,285,217 of cash from financing activities in 2014 as compared to generating $5,794,330 of cash
from financing activities in 2013. During 2014, the primary source of cash were the gross proceeds from the sale of senior convertible notes
of $3,000,000, less direct offering associated costs of $139,340, the proceeds of $2,682,669 from the exercise of warrants for cash, less the
repayment of $345,968 in short-term notes payable.
During 2013, the primary source of cash were the gross proceeds from the public offering of $8,050,000, less direct offering associated
costs of $1,204,799, the proceeds of $1,000,000 from the sale of a convertible debenture less issuance costs of $183,809, and $382,884 from
the sale of notes payable, less the repayment of $2,137,983 in long and short-term notes payable.
Capital Resources. As of December 31, 2014, we had a cash balance of $84,967, a decrease of $225,173 from $310,140 as of
December 31, 2013. The outstanding balance under our line of credit as of December 31, 2014 was $112,500 versus $-0- as of December 31,
2013.
On June 3, 2014, we entered into and closed a securities purchase agreement (the “June 2014 Purchase Agreement”) with various
accredited investors (the “June 2014 Investors”) pursuant to which we issued and sold to the June 2014 Investors a total of $3,000,000
principal amount of 5% Senior Secured Convertible Notes (the “June 2014 Notes”). There are no scheduled payments on the June 2014
Notes, which are due on June 3, 2017, prior to maturity. Interest on the June 2014 Notes accrues at the rate of 5% per year, compounded
annually, and is payable at maturity in cash, or (provided certain conditions are met) in shares of common stock valued at the then effective
conversion price. The June 2014 Notes are convertible into common stock at an initial conversion price of $2.25 per share, subject to
adjustment in the event of stock splits, stock dividends, and similar transactions, and under their original terms in the event of subsequent sales
of common stock or securities convertible or exercisable for common stock, at a price per share lower than the then effective conversion price,
subject to certain exceptions. The Company is not permitted to prepay any portion of the principal amount of the June 2014 Notes without the
prior written consent of the June 2014 Investors unless certain conditions are met.
During 2014, holders of the warrants issued in our public offering which closed on August 5, 2013 exercised for cash warrants for
the purchase of 1,192,296 shares of common stock and the Company received proceeds of $2,682,669 from such warrant exercises.
On January 2, 2015 (the “Series A Closing Date”), we entered into and closed a Series A Preferred Stock Purchase Agreement (the
“Series A Purchase Agreement”) with Intel Corporation (the “Series A Purchaser”), pursuant to which we issued and sold to the Series A
Purchaser, 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 (the “Series A Private Placement”). Each share of Series A Preferred Stock is convertible, at the option of the
Series A Purchaser, into 100 shares of the Company’s common stock (determined by dividing the Series A Original Issue Price of $500 by
the Series A Conversion Price. The Series A Conversion Price is $5.00, subject to adjustment in the event of stock splits, dividends or other
combinations).
43
Each share of Series A Preferred Stock is entitled to receive dividends at a rate of 6% per annum, compounded quarterly and payable
in cash or in kind, at the Company’s sole discretion. In the event of the liquidation, dissolution or winding up of the Company, each share of
Series A Preferred Stock is entitled to a liquidation preference equal to one times (1x) the Series A Purchaser’s original per share purchase
price, plus a right to receive an additional liquidation distribution together with the common stock holders pro rata on an as converted basis,
but not in excess of $1,000 per share in the aggregate (subject to adjustment for accrued but unpaid dividends and in the event of stock splits,
dividends or other combinations). Each share of Series A Preferred Stock is entitled to vote with the holders of the Company’s common stock
on matters presented to its stockholders, and is entitled to cast such number of votes equal to the whole number of shares of common stock
into which such shares of Series A Preferred Stock are convertible. The holders of record of the Series A Preferred Stock will be entitled to
nominate and elect 2 directors to the Company’s Board of Directors (the “Board Election Right”), at least one of whom will be required to
qualify as an “independent” director, as that term is used in applicable exchange listing rules. The Board Election Right with respect to the
independent director will terminate on such date as the number of shares of Series A Preferred Stock then outstanding is less than 40% of the
original amount purchased by the Series A Purchaser. The Board Election Right with respect to the second director shall terminate on such
date as the number of shares of Series A Preferred Stock then outstanding is less than 20% of the original amount purchased by the Series A
Purchaser. The Company also granted the Series A Purchaser the right to have a board observer at meetings of the Company’s Board of
Directors and committees thereof. As of the date of the filing of this Annual Report, the Series A Purchaser has not requested the appointment
of its 2 directors nor asked to have its observer attend board meetings.
For as long as at least 25% (or 12,406 shares) of the Series A Preferred Stock is outstanding, the Company may not, without the
consent of holders of at least 60% of the then outstanding shares of Series A Preferred Stock, take certain actions, including but not limited to:
(i) liquidate, dissolve, or wind up the business and affairs of the Company; (ii) amend, alter or repeal any provision of its charter or bylaws in
a manner that adversely effects the rights of the Series A Preferred Stock; (iii) create or issue any capital stock that is equal to or senior to the
Series A Preferred Stock with respect to preferences; (iv) create or issue any debt security, subject to certain exceptions; (v) pay off any debt
obligation prior to its stated maturity date; or (vi) enter into any stockholders rights plan or similar arrangement or take other actions that may
limit actions that holders of a majority of the Series A Preferred Stock can take under Section 203 (“Section 203”) of the Delaware General
Corporation Law, as well as such other customary provisions protecting the rights of the holder of the Series A Preferred Stock, as are
outlined in the Certificate of Designation.
The Series A Purchaser has the right to participate in any proposed issuance by the Company of its securities, subject to certain
exceptions (the “Participation Right”). In the event the Series A Purchaser is not afforded the opportunity to exercise its Participation Right,
the Series A Purchaser will have the right, but not the obligation, up to two times per calendar year, to acquire additional securities from the
Company 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.
Additionally, the Company’s Board of Directors approved the Offering for purposes of Section 203, which prohibits transactions
with interested stockholders under Delaware state law. The Board of Directors approved the exemption of the Series A Purchaser from
Section 203 with respect to any future business combinations or other transactions covered by Section 203 and, for such purposes, the Series
A Purchaser will not be deemed an “interested stockholder”. Furthermore, the Board of Directors has waived any claims based on the
corporate opportunity doctrine under Delaware state law or with respect to any duty of the Series A Purchaser, the directors appointed
pursuant to the Board Election Right or the board observer, to disclose any information regarding the Series A Purchaser that may be of
interest to the Company or permit the Company to participate in any projects or investments based on such information.
In connection with the Series A Private Placement, the Company entered into an investor’s rights agreement (the “Rights
Agreement”) with the Series A Purchaser, pursuant to which the Company agreed to file a “resale” registration statement with the Securities
and Exchange Commission (the “SEC”) covering all shares of common stock issuable upon conversion of the Series A Preferred Stock sold
in the Series A Private Placement. This registration statement was declared effective on February 17, 2015.
44
In connection with the Series A Private Placement, each of the holders of notes issued by the Company on June 3, 2014 (the “June
2014 Notes”) agreed to irrevocably waive their rights to anti-dilution protection under Section 5(b) of the June 2014 Notes in the event the
Company issues additional securities at a per share price lower than the conversion price of the June 2014 Notes (the “June 2014 Note
Waiver”). The obligations of the holder of the June 2014 Notes under the June 2014 Note Waiver will be binding on all assignees of the June
2014 Notes. Additionally, holders of the June 2014 Notes waived their rights of participation with respect to the June 2014 Private Placement
and agreed to subordinate their participation rights to the Series A Purchaser’s Participation Right.
In connection with the Series A Private Placement, holders of approximately 86% of outstanding warrants issued by the Company in
its public offering on August 5, 2013 and in connection with the conversion by certain holders of the Company’s outstanding debt in
connection with the Company’s public offering (collectively, the “July 2013 Warrants”) agreed to irrevocably waive their rights to anti-dilution
protection under Section 2(b) of the July 2013 Warrants in the event the Company issues additional securities at a per share price lower than
the exercise price of the July 2013 Warrants (the “July 2013 Warrant Waiver”). The obligations of the holder of the July 2013 Warrants under
the July 2013 Warrant Waiver will be binding on all assignees of the July 2013 Warrants.
Since January 1, 2015 the Company has received requests to exercise 4,665,892 warrants that were associated with its August 2013
stock offering which were exercisable into common stock at $2.25 per share. A total of 504,500 of these warrants have been exercised for
cash, netting proceeds of $1,135,125 to the Company. The balance of 4,161,392 warrants was exercised on a cashless basis resulting in the
issuance of 3,551,281 common shares. The Company did not offer the holders of warrants any inducement to exercise. There are currently
65,100 warrants outstanding from the August 2013 offering and the total warrants outstanding as of March 27, 2015.
Additionally, $337,500 in convertible notes have been converted to common stock during this same time period in 2015. Total
convertible notes outstanding as of the date of March 27, 2015, excluding accrued interest is $2,037,500, which is convertible into 905,556
shares.
After the Series A Preferred Stock Offering, we believe our existing cash and cash equivalent balances and cash flow from operations
will be sufficient to meet our working capital and capital expenditure needs for the foreseeable future even with continued operating losses
similar in size to the amounts reported for the years ended December 31, 2014 and 2013. There can however be no assurance that we will be
able to generate positive cash flows from operations in the future.
We have developed an operating plan which includes the expansion of our existing premises and personnel resources. As part of this
plan we will be relocating our corporate offices, research and development facilities and manufacturing to a facility at least 3 times our existing
facility. This will include the installation of new cleanroom space to meet the expanded production needs of our waveguide optics. Most of the
new personnel resources will focused on research and development staff and select marketing and sales personnel as well as some finance
head count increases to improve the Company’s financial reporting controls. We intend to introduce several new products over the next year
which we expect to be successful including our award winning IWear 720 (formerly named the V720) Video Headphones, successor models
of the M100 Smart Glasses and new Smart Glass products based on our waveguide optics technologies. Such expenditures, along with
further future net operating losses, product tooling expenses, and related working capital investments, will be the principal use of our cash.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Not required for a smaller reporting company
Item 8. Financial Statements and Supplementary Data
The information required by this item is incorporated herein by reference to pages F-1 through F-30 of this annual report and is indexed under
Item 15(a)(1) and (2).
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
45
Item 9A. Controls and Procedures
The information contained in this section covers management’s evaluation of our disclosure controls and procedures and our assessment of
our internal control over financial reporting as of December 31, 2014.
(a) Evaluation of Disclosure Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this annual report as required by Rule 13a-15 under the Securities Exchange
Act of 1934 (the “Exchange Act”). Disclosure controls and procedures are those controls and other procedures that are designed to ensure that
information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported,
within the time periods specified by the rules and forms promulgated by the SEC. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that such information is accumulated and communicated to management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. As a result of this
evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective
as of December 31, 2014 because of the material weaknesses set forth below.
(b) Management’s Annual Report on Internal Control Over Financial Reporting
This annual report does not include an attestation report of our registered public accounting firm due to exemption provisions
established by the rules of the Securities and Exchange Commission for smaller reporting companies.
Our management is responsible for establishing and maintaining adequate “internal control over financial reporting,” as defined in
Rule 13a-15(f) and 15d-15(f) under the Exchange Act. Our system of internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external
reporting purposes in accordance with US GAAP.
Our internal control over financial reporting includes those policies and procedures that (a) pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (b) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with US GAAP, and that our
receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (c) provide reasonable
assurance regarding prevention or timely detection of unauthorized use, acquisition, or disposition of our assets that could have a material
effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting, no matter how well conceived or operated, can only
provide reasonable assurance, not absolute assurance, that the objectives of the control system are met. Such controls may not prevent or detect
every misstatement. An evaluation of effectiveness is subject to the risk that the controls may become inadequate because of changes in
conditions, or that the degree of compliance with policies or procedures may decrease over time.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our
internal control over financial reporting as of December 31, 2014. In making this assessment, we utilized the criteria set forth in 1992 by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control — Integrated Framework.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a
reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely
basis. As a result of this evaluation, we concluded that our internal control over financial reporting was not effective as of December 31, 2014
because of the material weaknesses set forth below.
46
The following is a summary of our material weaknesses as of December 31, 2014:
Financial Reporting and Close Process
Our current financial close process does not ensure accurate financial reporting on a timely basis. We also did not maintain effective
controls over the period-end financial close and reporting processes in relation to the consolidation of our subsidiary’s financial information.
The specific deficiencies contributing to this material weakness related (a) to inadequate policies and procedures, (b) ineffective procedures and
controls over journal entries, accruals and reserves, (c) inadequate controls and procedures related to the timely preparation and review of
account reconciliations, (d) inadequate segregation of duties, (e) inadequate controls over cut-off procedures, (f) deficiencies in end-user
computing controls of critical spreadsheets, and (g) an insufficient complement of personnel with appropriate levels of knowledge and
experience. Due to the actual and potential errors on financial statement balances and disclosures, management has concluded that these
deficiencies in internal controls over the period-end financial close and reporting processes constituted a material weakness in internal control
over financial reporting. We intend to establish and document financial close processes and procedures including responsibilities and due
dates. We also intend to commence utilizing a closing checklist to ensure all procedures are performed and appropriate reviews are completed
on a timely basis each quarter and year-end period. Additionally, we intend to implement controls over critical spreadsheets, including change
control, input control, access and data security and appropriate review procedures. Further, we intend to seek additional resources with strong
accounting and reporting experience when financial resources are available.
Segregation of Duties
There is limited segregation of duties which could result in a material misstatement in our financial statements. Given our staff levels,
certain duties within the accounting and finance department cannot be properly segregated. However, we believe that none of these segregation
of duty deficiencies resulted in material misstatement to the financial statements as we rely on certain compensating controls, including periodic
substantive review of the financial statements by the Chief Executive Officer, Chief Financial Officer, Audit Committee and Board of
Directors.
Monitoring of Subsidiaries
We have not designed adequate monitoring controls related to our European subsidiary or Japanese branch sales office, such that we
can be assured that a material misstatement of financial results would be prevented or detected on a timely basis.
Inventory
We have identified weaknesses in our inventory controls as follows:
· Documented processes and controls are insufficient and are not working effectively for several key inventory processes
·
·
including inventory adjustments and reserves for excess, defective and obsolete inventory.
Supervision and checking of physical counts.
Inventory valuation processes and controls are not sufficiently documented and are not working effectively including costs to
be expensed versus inventoried and maintenance of adequate supporting documentation for current unit costs and bill of
materials.
Internal Controls Procedures and Risk Assessment Program
We have concluded that formal written internal control policies and procedures do not currently exist for all areas within our
operations. A well-established and documented internal control structure is pertinent to our ability to maintain accurate books and records,
prevent and detect fraud, maintain segregation of duties, report timely financial results and to properly comply with management’s
requirements to report on the effectiveness of internal controls over financial reporting pursuant to the Sarbanes-Oxley Act. In determining key
controls and appropriate internal controls for us management needs to further develop its risk assessment process, including a fraud risk
assessment and monitoring program, that is appropriate for our size and complexity, to assess the risks of material misstatement in the
significant accounts and disclosures and related assertions and to ensure implementation of controls to prevent or detect errors or fraud that
could result in material misstatements.
47
(c) Change in Internal Control Over Financial Reporting
No change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during the
three months ended December 31, 2014 that has materially affected, or is likely to materially affect, our internal control over financial
reporting.
Item 9B. Other Information
None.
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information required by this item will be presented in our definitive proxy statement not later than 120 days after the end of the fiscal year
covered by this annual report and is incorporated in this annual report by reference thereto.
Item 11. Executive Compensation
The information required by this item will be presented in our definitive proxy statement not later than 120 days after the end of the fiscal year
covered by this annual report and is incorporated in this annual report by reference thereto, except, however, the section entitled
“Compensation Committee Report” shall not be deemed to be “soliciting material” or to be filed with the Securities and Exchange Commission
or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Exchange Act of 1934, as amended.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item will be presented in our definitive proxy statement not later than 120 days after the end of the fiscal year
covered by this annual report and is incorporated in this annual report by reference thereto.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item will be presented in our definitive proxy statement not later than 120 days after the end of the fiscal year
covered by this annual report and is incorporated in this annual report by reference thereto.
Item 14. Principal Accounting Fees and Services
The information required by this item will be presented in our definitive proxy statement not later than 120 days after the end of the fiscal year
covered by this annual report and is incorporated in this annual report by reference thereto.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)
The following documents are filed as part of this report
(1) Financial Statements
Report of Freed Maxick CPAs, P.C., Independent Registered Public Accounting Firm
Report of EFP Rotenberg, LLP, Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2014 and 2013
Consolidated Statements of Stockholders’ (Deficit) Equity For The Years Ended December 31, 2014 and 2013
Consolidated Statements of Operations For the Years Ended December 31, 2014 and 2013
Consolidated Statement of Cash Flows For the Years Ended December 31, 2014 and 2013
Notes to Consolidated Financial Statements
48
Page
F-2
F-3
F-4
F-5
F-6
F-7
F-8
(2) Financial Statement Schedules
Financial statement schedules have been omitted since they are not required, not applicable or the information is otherwise included.
(3) Exhibits
A list of exhibits filed with this annual report is set forth in the Exhibit Index and is incorporated in this Item 15(a)(3) by reference.
49
VUZIX CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Freed Maxick CPAs, P.C., Independent Registered Public Accounting Firm
Report of EFP Rotenberg, LLP, Independent Registered Public Accounting Firm
Consolidated Balance Sheets — For the Years Ended December 31, 2014 and 2013
Consolidated Statements of Stockholders’ Deficit — For The Years Ended December 31, 2014 and 2013
Consolidated Statements of Operations — For the Years Ended December 31, 2014 and 2013
Consolidated Statements of Cash Flows — For the Years Ended December 31, 2014 and 2013
Notes to Consolidated Financial Statements
F-1
Page
F-2
F-3
F-4
F-5
F-6
F-7
F-8
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Vuzix Corporation
Rochester, New York
We have audited the accompanying consolidated balance sheet of Vuzix Corporation and its subsidiary (the “Company”) as of December 31,
2014, and the related consolidated statements of operations, cash flows, and changes in stockholders’ deficit for the year then ended. These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform an audit of the Company’s internal control over financial
reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position
of Vuzix Corporation and its subsidiary as of December 31, 2014, and the results of their operations and their cash flows for the year then
ended, in conformity with U.S. generally accepted accounting principles.
/s/ Freed Maxick CPAs, P.C.
Rochester, New York
March 31, 2015
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Vuzix Corporation
We have audited the accompanying consolidated balance sheet of Vuzix Corporation and its subsidiary (the “Company”) as of December 31,
2013, and the related consolidated statements of operations, changes in stockholders’ (deficit) equity and cash flows for the year then ended.
Vuzix Corporation’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.
Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Vuzix
Corporation and its subsidiary as of December 31, 2013, and the results of its operations and its cash flows for the year ended December 31,
2013 in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As
discussed in Note 3 to the consolidated financial statements, these conditions raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in Note 3. The consolidated financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might
result should the Company be unable to continue as a going concern.
/s/ EFP Rotenberg, LLP
EFP Rotenberg, LLP
Rochester, New York
April 9, 2014
F-3
VUZIX CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
Current Assets
Cash and Cash Equivalents
Accounts Receivable, Net
Inventories, Net (Note 2)
Prepaid Expenses and Other Assets
Total Current Assets
Tooling and Equipment, Net (Note 3)
Patents and Trademarks, Net (Note 4)
Software Development Costs, Net (Note 5)
Debt Issuance Costs, Net (Note 6)
Total Assets
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current Liabilities
Accounts Payable
Line of Credit (Note 7)
Notes Payable (Note 8)
Current Portion of Long-term Debt, net of discount (Note 11)
Current Portion of Capital Leases
Customer Deposits
Unearned Revenue
Accrued Expenses (Note 9)
Income and Other Taxes Payable
Total Current Liabilities
Long-Term Liabilities
Long-Term Derivative Liability (Note 10)
Long-Term Portion of Term Debt, net of discount (Note 11)
Long-Term Portion of Capital Leases (Note 12)
Long-Term Portion of Accrued Interest
Total Long-Term Liabilities
Total Liabilities
Stockholders’ Deficit
Preferred Stock — $.001 Par Value, 5,000,000 Shares Authorized; 0 Shares Issued and Outstanding in
Each Period
Common Stock — $.001 Par Value, 100,000,000 Shares Authorized December 31, 2014 and
700,000,000 Shares Authorized December 31, 2013; 11,295,387 Shares Issued and Outstanding
December 31, 2014 and 9,600,453 on December 31, 2013
Additional Paid-in Capital
Accumulated Deficit
Total Stockholders’ Deficit
Total Liabilities and Stockholders’ Deficit
The accompanying notes are an integral part of these consolidated financial statements.
F-4
December 31, December 31,
2014
2013
$
84,967 $
383,533
911,949
579,000
1,959,449
416,965
423,489
787,738
112,521
310,140
214,920
953,627
200,936
1,679,623
446,329
495,608
240,561
—
$
3,700,162 $
2,862,121
$
2,183,565 $
112,500
37,038
128,425
16,882
120,550
53,403
699,067
35,158
2,420,571
—
278,467
99,320
24,670
131,077
39,700
591,199
75,851
3,386,588
3,660,855
13,541,138
1,088,996
—
81,451
12,035,816
170,496
16,882
16,365
14,711,585
12,239,559
18,098,173
15,900,414
—
—
11,296
29,752,083
(44,161,390)
9,600
23,244,639
(36,292,532)
(14,398,011)
(13,038,293)
$
3,700,162 $
2,862,121
VUZIX CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
Common Stock
Shares*
Amount
Additional
Paid-In Capital
Accumulated
Preferred Stock
Subscriptions
Deficit
Shares
Amount
Receivable
Total
Balance — December 31,
2012
3,536,865 $
3,537 $
19,933,202 $ (26,146,304)
— $
— $
— $ (6,209,565)
Issuance of Common Stock in
Public Offering
Direct Financing Associated
Costs
Conversion of Term Debt and
Accrued Interest
Conversion of Accrued
Compensation and Interest
Exercise of Warrants
Stock Compensation Expense
Issuance of Warrants in
Conjunction with Public
Offering
Reclass Fair Value of Warrant
Derivative Liability upon
Expiration of Full Ratchet
Price Protection
Reclass Fair Value of Warrant
Derivative Liability upon
Exercise
2013 Net Loss
Exercise of Warrants
Stock Compensation Expense
Conversion of Note Payable
Stock Issues for Services
Reclass Fair Value of
Derivative Liability upon note
conversion
Reclass Fair Value of Warrant
Derivative Liability upon
Exercise
2014 Net Loss
4,025,000
1,158,003
4,025
8,045,975
(1,358,641)
1,158
2,314,849
821,285
59,300
—
821
59
—
1,641,748
133,366
159,272
—
—
—
—
(8,236,786)
526,245
85,409
—
—
— (10,146,228)
—
—
Balance — December 31,
2013
9,600,453 $
9,600 $
23,244,639 $ (36,292,532)
— $
— $
— $ (13,038,293)
1,228,582
—
277,778
188,574
1,229
—
278
189
2,681,466
260,746
372,881
564,685
—
—
—
—
500,261
2,127,405
—
—
—
(7,868,858)
—
—
2,127,405
(7,868,858)
—
Balance — December 31,
2014
11,295,387 $
11,296 $
29,752,083 $ (44,161,390)
— $
— $
— $ (14,398,011)
* All share amounts for all periods reflect the Company’s 1-for-75 reverse stock split, which was effective February 6, 2013.
The accompanying notes are an integral part of these consolidated financial statements.
F-5
8,050,000
(1,358,641)
2,316,007
1,642,569
133,425
159,272
(8,236,786)
526,245
2,682,695
260,746
373,159
564,874
500,261
85,409
— (10,146,228)
VUZIX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Sales of Products
Sales of Engineering Services
Total Sales
Cost of Sales — Products
Cost of Sales — Engineering Services
Total Cost of Sales
Gross Profit
Operating Expenses:
Research and Development
Selling and Marketing
General and Administrative
Depreciation and Amortization
Impairment of Patents and Trademarks
Total Operating Expenses
Loss from Operations
Other Income (Expense)
Other Taxes
Foreign Exchange Loss
Loss on Sale of Assets
Gain (Loss) on Debt Conversions and Extinguishment (Note 11)
Loss on Derivative Valuation (Note 10)
Amortization of Senior Term Debt Discount (Note 11)
Interest Expense
Total Other Income (Expense)
Loss from Before Provision for Income Taxes
Provision for Income Taxes (Note 13)
Net Loss
Basic and Diluted Loss per Share
Weighted-average Shares Outstanding
Basic and Diluted
For Years Ended December 31,
2014
2013
$
2,474,559 $
557,517
1,856,806
532,247
3,032,076
2,389,053
1,884,678
217,233
1,354,909
227,186
2,101,911
1,582,095
930,165
806,958
1,752,560
1,232,520
2,593,384
279,317
104,716
1,751,397
1,091,514
2,165,341
377,840
73,423
5,962,497
(5,032,332)
5,459,515
(4,652,557)
(83,419)
(2,713)
—
29,262
(2,194,001)
(393,525)
(192,130)
(88,274)
(13,692)
(40,352)
(1,272,296)
(3,575,278)
—
(503,779)
(2,836,526)
(5,493,671)
(7,868,858)
—
(10,146,228)
—
$
(7,868,858) $
(10,146,228)
$
(0.75) $
(1.69)
10,476,971
5,988,595
The accompanying notes are an integral part of these consolidated financial statements.
F-6
VUZIX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash Flows from Operating Activities
Net Loss
Non-Cash Adjustments
Depreciation and Amortization
Impairment of Patents and Trademarks
Stock-Based Compensation Expense
Amortization and Write-off of Term Debt Discount
Interest Converted into Common Stock
Amortization of Term Debt Discount
Loss on Sale of Assets
Gain on Extinguishment of Debt for Note Conversions
Amortization and Write-off of Debt Issuance Costs
Warrants Issued for Debt Extinguishment
Common Stock Issued for Services
Amortization of Software Development Costs
Loss on Derivative Valuation
(Increase) Decrease in Operating Assets
Accounts Receivable
Inventories
Prepaid Expenses and Other Assets
Increase (Decrease) in Operating Liabilities
Accounts Payable
Accrued Expenses
Customer Deposits
Unearned Revenue
Income and Other Taxes Payable
Accrued Compensation
Accrued Interest
For the Years Ended
December 31,
2014
2013
$
(7,868,858) $ (10,146,228)
279,317
104,716
260,747
368,223
—
25,302
—
(29,262)
26,819
—
395,205
71,613
2,194,001
(168,613)
41,679
(208,367)
(237,006)
1,216
(10,528)
13,701
(40,693)
68,116
103,622
377,840
73,423
159,272
732,584
222,032
25,302
40,352
257,692
97,913
—
—
3,575,278
(44,320)
(266,446)
(37,993)
(379,634)
34,592
67,998
39,700
54,365
—
24,728
Net Cash Flows Used in Operating Activities
(4,609,050)
(5,091,550)
Cash Flows from Investing Activities
Purchases of Tooling and Equipment
Investments in Software Development
Investments in Patents and Trademarks
Net Cash Used in Investing Activities
Cash Flows from Financing Activities
Proceeds from Exercise of Warrants
Issuance of Common Stock
Repayment of Capital Leases
Direct Offering Associated Costs
Net Change in Line of Credit
Repayment of Long-Term Debt and Notes Payable
Proceeds from Senior Convertible Debt
Issuance Costs on Senior Convertible Debt
Proceeds from Notes Payable
Net Cash Flows Provided by Financing Activities
Net Increase (Decrease) in Cash and Cash Equivalents
Cash and Cash Equivalents — Beginning of Period
Cash and Cash Equivalents — End of Period
Supplemental Disclosures
(195,903)
(618,790)
(86,647)
(145,929)
(240,561)
(72,704)
(901,340)
(459,194)
2,682,669
—
(24,670)
—
112,500
(345,942)
3,000,000
(139,340)
—
56,250
8,050,000
(55,733)
(1,204,779)
(112,500)
(2,137,983)
1,000,000
(183,809)
382,884
5,285,217
5,794,330
(225,173)
310,140
243,586
66,554
$
84,967 $
310,140
Interest Paid
Common Stock Issued For Services during 2014, Classified as Prepaid Expense
Conversion of Accrued Interest into Common Stock
Warrant Derivative Liability of Common Stock Offering and Debt Conversions
Conversion of Accrued Compensation and Term Debt into Common Stock
Unamortized Discount Upon Conversion of Term Debt
Reclassification of Derivative Liability to Paid-In Capital upon Note Conversions and Warrant Exercises
Discount on senior convertible debt attributed to embedded conversion price adjustment option
Warrants granted for senior convertible debenture issuance costs
88,508
564,873
—
—
625,000
222,580
2,627,666
1,938,988
—
230,112
—
1,076,250
8,236,786
2,882,333
—
—
—
66,603
The accompanying notes are an integral part of these consolidated financial statements.
F-7
VUZIX CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Summary of Significant Accounting Policies
Operations
Vuzix Corporation (the Company) was formed in 1997 under the laws of the State of Delaware and maintains its corporate offices in
Rochester, New York. The Company is engaged in the design, manufacture, marketing and sale of devices that are worn like eyeglasses and
which feature built-in video screens that enable the user to view video and digital content, such as movies, computer data, the Internet or video
games. Our products (known commercially as “Video Eyewear”) are used to view high resolution video and digital information from portable
devices, such as cell phones, portable media players, gaming systems and laptop computers and from personal computers. Our products
provide the user with a virtual viewing experience that emulates viewing a large screen television or desktop computer monitor practically
anywhere, anytime.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Vuzix Europe. All significant
inter-company transactions have been eliminated.
Segment Data, Geographic Information and Significant Customers
The Company is not organized by market and is managed and operated as one business. A single management team that reports to the chief
operating decision maker comprehensively manages the entire business. The Company does not operate any material separate lines of business
or separate business entities. Accordingly, the Company does not accumulate discrete information, other than product revenue and material
costs, with respect to separate product lines and does not have separately reportable segments as defined by FASB ASC Topic 280,
“Disclosures about Segments of an Enterprise and Related Information,”
Shipments to customers outside of the United States approximated 43% and 36% of sales in 2014 and 2013, respectively. No single
international country represented more than 10% of revenues. The Company does not maintain significant amounts of long-lived assets
outside of the United States other than tooling held by its third party manufacturers, primarily in China.
F-8
VUZIX CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company has at times had a concentration of sales to the U.S. government, they amounted to approximately 10% and 17% of sales in
2014 and 2013, respectively. Accounts receivable from the U.S. government accounted for 6% and 79% of accounts receivable at December
31, 2014 and 2013, respectively.
Foreign Currency Transactions
The British Pound is the functional currency of the Company’s foreign subsidiary. Gains and losses arising upon settlement of foreign
currency denominated transactions or balances are included in the determination of net loss.
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at year end and the reported amounts of revenue and expenses during the reporting period. Actual results could differ
from those estimates.
Concentration of Credit Risk
The Company maintains its cash in bank deposit accounts, which at times may exceed federally insured limits.
Cash and Cash Equivalents
The Company’s cash received is applied against its revolving line of credit on a periodic basis based on projected monthly cash flows,
reducing interest expense. Cash and cash equivalents can include highly liquid investments with original maturities of three months or less.
Fair Value of Financial Instruments
The Company’s financial instruments primarily consists of cash and cash equivalents, accounts receivable, accounts payable, lines of credit,
long-term debt and capital leases, customer deposits, accrued expenses, and income taxes payable.
As of the consolidated balance sheet date, the estimated fair values of the financial instruments were not materially different from their carrying
values as presented due to both the short maturities of these instruments and that the interest rates on borrowing approximate those that would
have been available for loans for similar remaining maturity and risk profiles.
Accounts Receivable
The Company carries its trade accounts receivable at invoice amount less an allowance for doubtful accounts. The Company establishes an
allowance for uncollectible trade accounts receivable based on the age of outstanding invoices and management’s evaluation of collectability of
outstanding balances. These provisions are established when the aging of outstanding amounts exceeds allowable terms and are re-evaluated at
each quarter end for adequacy. In determining the adequacy of the provision, the Company considers known uncollectible or at risk
receivables. There was no allowance for doubtful accounts as of December 31, 2014 and 2013. The Company does not accrue interest on past
due accounts receivable unless it goes into collection.
Inventories
Inventories are valued at the lower of cost or market using the weighted average first-in, first-out method. The Company includes direct
overhead costs in its inventory valuation costing. The Company records provisions for excess, obsolete or slow moving inventory based on
changes in customer demand, technology developments or other economic factors. The Company’s products have product life cycles that
range on average from two to three years currently. At both the product introduction and product discontinuation stage, there is a higher degree
of risk of inventory obsolescence. The provision for obsolete and excess inventory is evaluated for adequacy at each quarter end. The estimate
of the provision for obsolete and excess inventory is partially based on expected future product sales, which are difficult to forecast for certain
products.
F-9
VUZIX CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Revenue Recognition
The Company recognizes revenue from product sales in accordance with FASB ASC Topic 605 “Revenue Recognition”. Product sales
represent the majority of the Company’s revenue. The Company recognizes revenue from these product sales when persuasive evidence of an
arrangement exists, delivery has occurred, the sale price is fixed or determinable, and collectability is reasonably assured. The Company sells
its products on terms which transfer title and risk of loss at a specified location, typically shipping point. Accordingly, revenue recognition
from product sales occurs when all factors are met. If these conditions are not met, the Company will defer revenue recognition until such time
as these conditions have been satisfied. The Company collects and remits sales taxes in certain jurisdictions and reports revenue net of any
associated sales taxes. The Company also sells certain products through distributors who are granted limited rights of return for stock
balancing against purchases made within a prior 90 day period, including price adjustments downwards that the Company implements on any
existing inventory. The provision for product returns and price adjustments is assessed for adequacy both at the time of sale and at each
quarter end and is based on recent historical experience and known customer claims and was not material as of December 31, 2014 or 2013.
Revenue from any 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 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. Amounts are generally billed on a monthly basis. To date all such
contracts have been less than one calendar year in duration.
The Company recognizes software license revenue under ASC 985-605 “Software Revenue Recognition” and under ASC 605-25 “Revenue
Arrangements with Multiple Deliverables”, and related interpretations, as amended.
Licensed software may be sold as a stand-alone element, with other software elements, or in conjunction with hardware products. When the
Company’s products consists of more than one element, it is considered to be a multiple element arrangement (MEA). When sold as a stand-
alone element, the revenue is recognized upon shipment as discussed above. When sold as part of a MEA, revenue from the licensed software
is recognized when the product and embedded software is shipped to the customer.
For either a single element transaction or a MEA, the Company allocates consideration to all deliverables based on their relative stand-alone
selling prices. Amendments to ASC 605-25, which became effective January 1, 2011, establish a hierarchy to determine the stand-alone
selling price as follows:
·
·
·
Vendor Specific Objective Evidence of the fair value (VSOE),
Third Party Evidence (TPE)
Best Estimate of the Selling Price (ESP)
Sales which constitute a MEA are accounted for by determining if the elements can be accounted for as separate accounting units, and if so, by
applying values to those units, per the hierarchy above. If VSOE is not available, management estimates the fair selling price using historical
pricing for similar items, in conjunction with current pricing and discount policies.
Revenue from licensed software is recognized upon shipment and in accordance with industry-specific software recognition accounting
guidance. Software updates that will be provided free of charge are evaluated on a case-by-case basis to determine whether they meet the
definition of an upgrade and create a multiple element arrangement. The consideration allocated to the unspecified software upgrade rights and
non-software services is deferred and recognized rateably over the 24-month estimated life of the devices. The Company’s BESP for the
unspecified software upgrade right and non-software services is $25 per unit for the M100 Smart Glass.
Fees charged to customers for post-contract Technical Support are recognized ratably over the term of the contract. Costs related to
maintenance obligations are expensed as incurred.
F-10
VUZIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Unearned Revenue
These amounts represent deferred revenue against unfulfilled deliverables of multiple-element products, including unspecified post-delivery
support and software updates.
Tooling and Equipment
Tooling and equipment are stated at cost. Depreciation of tooling and equipment is provided for using the straight-line method over the
following estimated useful lives:
Computers and Software
Manufacturing Equipment
Tooling
Furniture and Equipment
3 years
5 years
3 years
5 years
Repairs and maintenance costs are expensed as incurred. Asset betterments are capitalized.
Patents and Trademarks
The Company capitalizes the costs of obtaining its patents and registration of Trademarks. Such costs are accumulated and capitalized during
the filing periods, which can take several years to complete. Successful applications that result in the granting of a patent or trademark are then
amortized over 15 years on a straight-line basis. Unsuccessful applications are written off and expensed in the fiscal period where the
application is abandoned or discontinued.
Software Development Costs
The Company capitalizes the costs of obtaining its software once technological feasibility has been determined by management. Such costs are
accumulated and capitalized and projects can take several years to complete. Unsuccessful or discontinued software projects are written off and
expensed in the fiscal period where the application is abandoned or discontinued. Costs incurred internally in researching and developing a
computer software product are charged to expense until technological feasibility has been established for the product. Once technological
feasibility is established, all software costs are capitalized until the product is available for general release to customers. Judgment is required
in determining when technological feasibility of a product is established. Once the product is available for general release, accumulated costs
are amortized over the life of the asset. The amortization of these costs is included in cost of revenue over the estimated life of the products,
which currently is estimated as 3 years using a straight-line basis.
Long-Lived Assets
The Company regularly assesses all of its long-lived assets for impairment when events or circumstances indicate their carrying amounts may
not be recoverable, in accordance with FASB ASC Topic 360-10, “Accounting for the Impairment or Disposal of Long-Lived Assets.” In
2014, an impairment charge of $104,716 was recorded related to abandoned patents and trademarks. In 2013, an impairment charge of
$73,423 was recorded related to abandoned patents and trademarks.
Research and Development
Research and development costs, are expensed as incurred consistent with the guidance of FASB ASC Topic 730, “Research and
Development,” and include employee related costs, office expenses, third party design and engineering services, and new product prototyping
costs. Costs incurred internally in researching and developing a computer software product are charged to expense until technological
feasibility has been established for the product.
Shipping and Handling Costs
Amounts charged to customers and costs incurred by the Company related to shipping and handling are included in net sales and cost of
goods sold, respectively, in accordance with FASB ASC Topic 605-45, “Revenue Recognition – Principal Agent Consideration”,
“Accounting for Shipping and Handling Fees and Costs.”
F-11
VUZIX CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Provision for Future Warranty Costs
The Company provides for the estimated returns under warranty and the costs of fulfilling our obligations under product warranties at the time
the related revenue is recognized. The Company estimates the costs based on historical and projected product failure rates, historical and
projected repair costs, and knowledge of specific product failures (if any). The specific warranty terms and conditions vary depending upon
the country in which we do business, but generally include parts and labor over a period generally ranging from one to two years from the date
of product shipment. The Company provides a reserve for expected future warranty returns at the time of product shipment or produces over-
builds to cover replacements. We regularly reevaluate our estimates to assess the adequacy of the recorded warranty liabilities and adjust the
amounts as necessary each quarter end and is based on historical experience of warranty claims and costs.
Customer Deposits
Customer deposits represents money the Company received in advance of providing a product or engineering services to a customer. All such
deposits are short term in nature as the Company delivers the product, unfulfilled portions or engineering services to the customer before the
end of its next annual fiscal period. These deposits are credited to the customer against product deliveries or at the completion of the
customer’s order.
Advertising
Advertising costs are expensed as incurred and recorded in “Selling and Marketing” in the Consolidated Statements of Operations.
Advertising expense for the years ended December 31, 2014 and 2013 amounted to $192,181 and $231,552, respectively.
Income Taxes
The Company accounts for income taxes in accordance with FASB ASC Topic 740-10, “Income Taxes.” Accordingly, the Company provides
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 on currently enacted tax laws. A valuation allowance is established for deferred tax assets in amounts for which realization
is not considered more likely than not to occur.
The Company reports any interest and penalties accrued relating to uncertain income tax positions as a component of the income tax provision.
Earnings Per Share
Basic earnings per share is computed by dividing the net (loss) income less accrued dividends on any outstanding preferred stock by the
weighted average number of common shares outstanding for the period. Diluted earnings per share calculations reflect the assumed exercise of
all dilutive employee stock options and warrants applying the treasury stock method promulgated by FASB ASC Topic 260, “Earnings Per
Share” and the conversion of any outstanding convertible preferred shares or notes payable that are-in-the-money, applying the as-if-converted
method. However, if the assumed exercise of stock options and warrants and the conversion of any preferred shares or convertible notes
payable are anti-dilutive, basic and diluted earnings per share are the same for all periods. As a results of the net loss generated in 2014 and
2013 all outstanding instruments would be antidilutive. As of December 31, 2014 and 2013, there were 7,012,767 and 7,362,293 respectively,
of common stock share equivalents potentially issuable under convertible debt agreements, options, and warrants that could potentially dilute
basic earnings per share in the future. See Note 22 for details of dilutive and potentially dilutive securities issued after December 31, 2014.
Stock-Based Employee Compensation
The Company accounts for share-based compensation to employees and directors in accordance with FASB ASC Topic 718 “Compensation
Stock Expense,” which requires that compensation expense be recognized in the consolidated financial statements for share-based awards
based on the grant-date fair value using a Black-Scholes valuation model of those awards. The Company uses the fair market value of our
common stock on the date of each option grant based on market price of the Company’s common shares. Stock-based compensation expense
includes an estimate of forfeitures and is recognized over the requisite service periods of the awards on a straight-line or graded vesting basis,
which is generally commensurate with the vesting term. Stock-based compensation expense associated with stock option grants for the years
ending December 31, 2014 and 2013 was $260,747 and $159,272, respectively.
The Company issues new shares upon stock option exercises. Please refer to Note 16 Stock Option Plans, for further information.
Derivative Liability and Fair Value Measurements
FASB ASC Topic 820, “Fair Value Measurements and Disclosures” defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair value measurements. ASC 820 clarifies that fair value is an exit
price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants. ASC 820 permits an entity to measure certain financial assets and financial liabilities at fair value with changes in fair value
recognized in earnings each period. In accordance with ASC 815-10-25, we measured the derivative liability using a Lattice pricing model at
their issuance date and subsequently they are remeasured. Accordingly, at the end of each quarterly reporting date the derivative fair market
value is remeasured and adjusted to current market value. Derivatives that have more than one year remaining in their life are shown as long
value is remeasured and adjusted to current market value. Derivatives that have more than one year remaining in their life are shown as long
term derivative liabilities.
Significant unobservable inputs are used in the fair value measurement of the Company’s derivative liability. The primary input factors driving
the economic or fair value of the derivative liabilities related to the warrants and convertible notes are the stock price of the Company’s shares,
the price volatility of the shares, reset events, and exercise behavior. An important valuation input factor used in determining fair value was the
expected volatility of observed share prices and the probability of projected resets in warrant exercise and note conversion prices from
financing events before each security’s maturity. For exercise behavior the Company assumed that without a target price of 2 times the
projected reset price or higher that the holders of the warrants and convertible notes would hold to maturity. In determining the fair value of the
derivatives it was assumed that the Company’s business would be conducted as a going concern and that holding to maturity was reasonable.
Further the January 2, 2015 Series A Preferred financing reduced the expected probably to near zero for price resets from financing events.
ASC 820 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value. Level 1 inputs are
quoted prices in active markets for identical assets or liabilities. Level 2 inputs are inputs other than quoted prices included in Level 1 that are
directly or indirectly observable for the asset or liability. Such inputs include quoted prices in active markets for similar assets and liabilities,
quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the
asset or liability, or inputs derived principally from or corroborated by observable market data by correlation or other means. Level 3 inputs are
unobservable inputs for the asset or liability. Such inputs are used to measure fair value when observable inputs are not available.
F-12
VUZIX CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09 ("ASU 2014-09"), Revenue from
Contracts with Customers, an updated standard on revenue recognition. ASU 2014-09 provides enhancements to the quality and consistency
of how revenue is reported while also improving comparability in the financial statements of companies reporting using International Financial
Reporting Standards and GAAP. The core principle of the new standard is for companies to recognize revenue to depict the transfer of goods
or services to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or
services. The new standard also will result in enhanced disclosures about revenue, provide guidance for transactions that were not previously
addressed comprehensively, and improve guidance for multiple-element arrangements. ASU 2014-09 will be effective in the first quarter of
fiscal 2017 and may be applied on a full retrospective or modified retrospective approach. The Company is still currently evaluating the impact
of implementation of this standard on its financial statements.
In August 2014, the FASB issued ASU 2014-15, ”Presentation of Financial Statements – Going Concern”, which provides guidance on
determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to
perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements
are issued. An entity will be required to provide certain disclosures if conditions of events raise substantial doubt about the entity’s ability to
continue as a going concern. The ASU applies to all entities and is effective for annual periods ending after December 15, 2016, and interim
periods thereafter, with early adoption permitted. We are currently evaluating the impact of the adoption of ASU 2014-15 on our consolidated
financial statements and have not yet determined when we will adopt the standard.
There are no other recent accounting pronouncements that are expected to have a material impact on the consolidated financial statements.
Note 2 — Inventories, Net
Inventories consisted of the following:
Purchased Parts and Components
Work in Process
Finished Goods
Less: Reserve for Obsolescence
Net
December 31,
2014
December, 31,
2013
$
1,251,224 $
25,974
300,889
(666,138)
1,094,250
153,065
280,279
(573,967)
$
911,949 $
953,627
F-13
VUZIX CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 3 — Tooling and Equipment, Net
Tooling and equipment consisted of the following:
Tooling and Manufacturing Equipment
Computers and Software
Furniture and Equipment
Less: Accumulated Depreciation
Net
December 31,
2014
December 31,
2013
$
$
$
1,374,751 $
581,472
607,327
1,748,006
645,429
749,233
2,563,550 $
(2,146,585)
3,142,668
(2,696,339)
416,965 $
446,329
Total depreciation expense for tooling and equipment for the years ending December 31, 2014 and 2013 was $225,267 and $322,861,
respectively.
Note 4 — Patents and Trademarks, Net
Patents and Trademarks
Less: Accumulated Amortization
Net
December 31,
2014
December 31,
2013
$
$
697,591 $
(274,102)
777,593
(281,985)
423,489 $
495,608
Total amortization expense for patents and trademarks for the years ending December 31, 2014 and 2013 it was $54,050 and $54,979,
respectively. The estimated aggregate annual amortization expense for each of the next five fiscal years is approximately $50,000. We recorded
an impairment charge of $104,716 representing cost of $166,500, less accumulated amortization of $61,784 for the year ending December 31,
2014. We recorded an impairment charge of $73,423 representing cost of $98,788, less accumulated amortization of $25,375 for the year
ending December 31, 2013 regarding our abandoned patents and trademarks.
F-14
VUZIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 5 — Software Development Costs, Net
Software Development Costs
Less: Accumulated Amortization
Net
December 31,
2014
December 31,
2013
$
$
859,351 $
(71,613)
240,561
—
787,738 $
240,561
Total amortization expense for capitalized software development costs for the years ending December 31, 2014 was $71,613 and $-0- for
2013. These costs are being amortized over 3 years. The software was completed in September 2014. No amortization was recorded in 2013
because the related software project was not completed as of December 31, 2013. The estimated aggregate annual amortization expense for
each of the next two fiscal years is approximately $286,000, and approximately $215,000 in the following year.
Note 6 — Debt Issuance Costs
Debt issuance costs consist principally of legal and accounting fees incurred related to the Senior Convertible Note Financing dated June 3,
2014.
Debt Issuance Costs
Less: Accumulated Amortization
Total
December 31,
2014
December 31,
2013
$
$
139,340 $
(26,819)
112,521 $
—
—
—
The estimated aggregate annual amortization expense for each of the next two fiscal years is approximately $46,000 and approximately
$21,000 in the following fiscal year.
Note 7 — Line of Credit
The Company has available a $112,500 line of credit with interest payable at the bank’s prime rate plus 1%. The line is unsecured and
personally guaranteed by an officer of the Company. The outstanding balance on this line of credit amounted to $112,500 and $-0- at
December 31, 2014 and 2013, respectively.
Note 8 — Notes Payable
Notes payable represent promissory notes payable by the Company.
December 31,
2014
December 31,
2013
Note payable to officers and shareholders of the Company. Principal along with accrued interest is payable
on demand and paid on December 31, 2014. The notes bear interest at 18.5% and secured by all the assets
of the Company.
Note payable secured by all the assets of Company and the guarantee of its President and CEO. The
effective interest rate was 31%.The note was repaid in full during the year ended December 31, 2014.
Note payable to an officer of the Company due on December 31, 2014. The note was secured by all the
assets of the Company. The note was repaid in full during the year ended December 31, 2014.
$
37,038 $
229,787
—
—
37,383
11,297
$
37,038 $
278,467
A total of $32,209 and $61,130 in accrued interest was paid during the years ending December 31, 2014 and 2013 respectively, to officers and
stockholders related to various notes described above.
F-15
VUZIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 9 — Accrued Expenses
Accrued expenses consisted of the following:
Accrued Wages and Related Costs
Accrued Compensation
Accrued Professional Services
Accrued Warranty Obligations
Accrued Interest
Other Accrued Expenses
Total
December 31,
2014
December 31,
2013
$
101,445 $
428,786
45,000
39,624
75,471
8,741
91,385
360,670
69,500
31,619
36,935
1,090
$
699,067 $
591,199
Included in the above accrued compensation amounts owed to officers of the Company for services rendered that remain outstanding. These
amounts are not subject to a fixed repayment schedule and they bear interest at a rate of 8% per annum, compounding monthly. The amounts
were $393,536 as of December 31, 2014 and $360,670 as of December 31, 2013. The related interest amounts included in Accrued Interest
were $62,081 and $28,173 respectively at December 31, 2014 and December 31, 2013.
The Company has warranty obligations in connection with the sale of certain of its products. The warranty period for its products is generally
one year except in European countries where it is two years. 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 years ended December 31, 2014 and 2013 were as follows:
Accrued Warranty Obligations at December 31, 2012
Reductions for Settling Warranties
Warranty Issued During Year
Accrued Warranty Obligations at December 31, 2013
Reductions for Settling Warranties
Warranty Issued During Year
Accrued Warranty Obligations at December 31, 2014
Note 10 – Derivative Liability and Fair Value Measurements
$
$
93,788
(74,287)
12,118
31,619
(96,460)
104,465
39,624
The Company recognized a derivative liability for the warrants to purchase shares of its common stock issued in connection with the equity
offering and related debt conversions on August 5, 2013. These warrants have a cashless exercise provision and an exercise price that is
subject to adjustment in the event of subsequent equity sales at a lower purchase price (subject to certain exceptions) along with full-ratchet
anti-dilution provisions. In accordance with ASC 815-10-25, we measured the derivative liability using a Monte Carlo Options Lattice pricing
model at their issuance date and subsequently remeasured the liability on each reporting date.
Accordingly, at the end of each quarterly reporting date the derivative fair market value is remeasured and adjusted to current market value. As
at December 31, 2014 and 2013 a total of 4,730,992 and 6,008,516 warrants were outstanding that contained a full-ratchet anti-dilution
provision.
The Company recognized a derivative liability during the year ended December 31, 2014 for the $3,000,000 of senior convertible notes with a
conversion price that is subject to adjustment in the event of subsequent equity sales at a lower purchase price (subject to certain exceptions).
In accordance with ASC 815-10-25, we measured the derivative liability of this embedded conversion option using a Monte Carlo Options
Lattice pricing model at the June 3, 2014 issuance date as $1,938,988. The value of the derivative liability at issuance was recorded as a
discount against the notes in the Long-Term Debt section of the balance sheet. Accordingly, at the end of each quarterly reporting date the
derivative fair market value is remeasured and adjusted to current market value.
The Company has adopted ASC Topic 820 for financial instruments measured at fair value on a recurring basis. ASC Topic 820 defines fair
value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States and
expands disclosures about fair value measurements.
F-16
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. ASC Topic 820 establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring
fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1
measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:
- Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;
- Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted
prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and
- Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own
assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are
unobservable.
We measure certain financial instruments at fair value on a recurring basis. Assets and liabilities measured at fair value on a recurring basis are
as follows at December 31, 2014:
Total
(Level 1)
(Level 2)
Level (3)
Assets
Total assets measured at fair value
Liabilities
$
— $
—
Note Conversion Feature Liability in 2014
Warrant Liability
Total liabilities measured at fair value (Long-Term)
2,806,942
10,734,196
13,541,138 $
$
— $
—
—
—
— $
— $
—
—
—
—
—
— $
2,806,942
10,734,196
13,541,138
We measure certain financial instruments at fair value on a recurring basis. Assets and liabilities measured at fair value on a recurring basis are
as follows at December 31, 2013
Total
(Level 1)
(Level 2)
Level (3)
Assets
Total assets measured at fair value
Liabilities
$
— $
—
Warrant Liability
Total liabilities measured at fair value (Long-Term)
12,035,816
12,035,816 $
$
— $
—
—
— $
— $
—
—
—
—
— $
12,035,816
12,035,816
F-17
Fair value – December 31,2012
Warrants issue during period
Reclassification (reset expiration) of warrant liabilities to Additional Paid-in Capital
Reclassification of warrant exercises to Additional Paid-in Capital
Change in fair value for the period of warrant derivative liability
Fair value – December 31, 2013
Reclassification of warrant exercises to Additional Paid-in Capital
Change in fair value for the period of warrant derivative liability
Convertible debt issued with an embedded conversion price adjustment provision
Extinguishment of liability upon conversion of debt
Change in fair value of debt conversion price adjustment for the period
Fair value – December 31, 2014
$
—
9,067,283
(526,245)
(80,500)
(3,575,278)
12,035,816
(2,127,405)
825,786
1,938,988
(500,261)
1,368,215
$ 13,541,138
For period ending December 31, 2014, the Monte Carlo Options Lattice pricing model was used to estimate the fair value of the embedded
conversion option on the convertible notes issued during this period. The following summary table shows the assumptions used to compute
the fair value of the embedded conversion option when granted at issuance and as of December 31, 2014:
Assumptions for Pricing Model:
Expected term in years
Volatility range for years 1 to 5
Expected annual dividends
December 31, 2014
At Issuance – June 3,
2014
2.67
81%
None
3.00
57%
None
Value of convertible debt price adjustment:
Fair value of debt embedded conversion price adjustment option
$
2,806,942
$
1,938,988
The Monte Carlo Options Lattice pricing model was used to estimate the fair value of warrants outstanding:
Assumptions for Pricing Model:
Expected term in years
Volatility range for years
Risk-free interest rate
Expected annual dividends
Value of warrants outstanding:
Fair value of warrants
December 31,
2014
December 31,
2013
At Issuance
Aug 5, 2013
3.47 to 4.04
72 to 81%
0.93 to
1.83%
None
4.2 to 4.6
4.62 to 5.0
56 to 62% 61 to 110%
0.77 to
1.41%
None
1.75%
None
$
10,734,196 $
12,035,816 $
9,067,283
F-18
VUZIX CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 11 — Long-Term Debt
Long-term debt consisted of the following at December 31:
Note payable for research and development equipment. The principal is subject to a fixed semi-annual
repayment schedule commencing October 31, 2013 over 48 months. The note carries a 0% interest rate.
The note carries a 0% interest, but imputed interest has been accrued based on a 12% discount rate and is
reflected as a reduction in the principal.
Note payable for which the principal and interest is subject to a fixed blended repayment schedule of 36
months, commencing July 15, 2013. The loan bears interest at 12% per annum and is secured by a
subordinated position in all the assets of the Company.
Convertible, Senior Secured Notes payable. The principal is due June 3, 2017 and no principal payments
are required. The notes carry a 5% interest, payable upon the note’s maturity. Both the interest plus
accrued interest is convertible into shares of the Company’s common shares at $2.25, subject to normal
adjustments. The notes are secured by a first security position in all the assets of the Company. Most of
the notes are held by existing stockholders of the Company.
Unamortized debt discount related to derivative liability associated with above notes’ conversion price that
is subject to adjustment in the event of subsequent equity sales at a lower purchase price (subject to
certain exceptions). Upon issuance on June 3, 2014 the discount was $1,938,988. As of December 31,
2014 a net of $368,223 of the discount was recognized as interest expense and $222,580 was reversed
due to conversions of the notes into shares of common stock. A net gain of $29,262 was recorded on
the conversion of $625,000 in notes for the year ending December 31, 2014 resulting from the
extinguishment of the debt and the related derivative liability.
Less: Amount Due Within One Year
Amount Due After One Year
December 31,
2014
December 31,
2013
186,131
256,727
(46,399)
(71,701)
50,874
84,790
2,375,000
—
(1,348,185)
—
$
1,217,421 $
(128,425)
269,816
(99,320)
$
1,088,996 $
170,496
The calendar year aggregate maturities for all long-term borrowings exclusive of discounts as of December 31, 2014 are as follows:
Total Aggregate Maturity For Period
2015
2016
2017
Total Required Principal Payments Exclusive of Debt Discounts
Total Unamortized Debt Discounts
Total Net Long-Term Borrowings as of December 31, 2014
F-19
$
Amounts
153,727
83,278
2,375,000
2,612,005
(1,394,584)
$
1,217,421
VUZIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
On June 3, 2014, we entered into and closed a securities purchase agreement (the “June 2014 Purchase Agreement”) with various accredited
investors (the “June 2014 Investors”) pursuant to which we issued and sold to the June 2014 Investors a total of $3,000,000 principal amount
of 5% Senior Secured Convertible Notes (the “June 2014 Notes”). The Company granted the June 2014 Investors a first priority security
interest in all of the present and future assets of the Company and its subsidiaries, including the equity interests of its subsidiaries. There are
no scheduled payments on the June 2014 Notes, which are due on June 3, 2017, prior to maturity. Interest on the June 2014 Notes accrues at
the rate of 5% per year, compounded annually, and is payable at maturity in cash, or (provided certain conditions are met) in shares of
common stock valued at the then effective conversion price. The June 2014 Notes are convertible into common stock at an initial conversion
price of $2.25 per share, subject to adjustment in the event of stock splits, stock dividends, and similar transactions, and, and under their initial
terms, in the event of subsequent sales of common stock or securities convertible or exercisable for common stock, at a price per share lower
than the then effective conversion price, subject to certain exceptions. The Company is not permitted to prepay any portion of the principal
amount of the June 2014 Notes without the prior written consent of the June 2014 Investors unless certain conditions are met.
Pursuant to a registration rights agreement, dated June 3, 2014, between the Company and the June 2014 Investors, the Company agreed to
file a registration statement, relating to the resale of common stock issuable upon conversion of the June 2014 Notes and payable as interest on
the June 2014 Notes. The Company filed such registration statement on July 2, 2014, and the registration statement was declared effective by
the Securities and Exchange Commission on July 10, 2014.
Since these notes were originally issued to December 31, 2014, a total of $625,000 of the June 2014 Notes were converted into 277,777
shares of common stock.
In connection with the sale of the TDG Assets in June 2012, certain of the Company’s lenders entered into Loan Modification and Consent
agreements pursuant to which each consented to the sale, as required by the loan agreements between the Company and each such lender, and
released their security interests in the TDG Assets sold. Pursuant to a Loan Modification and Consent Agreement regarding the Company’s
Convertible, Senior Secured Term Debt Loan, which was in default at the time of the sale, the Company paid this Senior Lender $4,450,000 in
reduction of the obligations of the Company to the Senior Lender. The obligation of the Company to repay the remaining amount due to the
Convertible Senior Secured Term Debt Lender, $619,122 was represented by a new note in that amount. This new note carried an interest rate
of 13.5%, to be paid monthly. The principal amount of the note was to be repaid over 15 months, with equal principal payments commencing
on October 15, 2012. The Company did not make any of its required principal payments. The note plus accrued interest was repaid in full on
August 5, 2013.
Pursuant to its original transaction with the holder of the Senior Secured Term Debt, the Company issued to that lender warrants to purchase
up to 533,333 shares of common stock (the “Warrants”), at an exercise price of $7.47 per share, exercisable at any time prior to December 23,
2014. The fair value of these Warrants, $1,010,379 was reflected as a discount against the loan amount, but because of the loan’s restructuring
and the early repayment of the principal resulting from the TDG Assets sale, the unamortized discount of $636,678 was fully expensed in the
second quarter of 2012.
Pursuant to the various other Loan Modification and Consent agreements, each secured term note payable holder agreed to defer further
payments on their respective Note Payable due from the Company until July 15, 2013 after which the notes were to be repaid in 24 to 36 equal
monthly installments.
On March 27, 2013, and amended thereafter, the Company entered into several debt conversion agreements with the respective holders of
$2,374,682 of the long-term debt reflected in table above. Pursuant to the agreements, each lender agreed to convert its outstanding secured
promissory note, together with accrued interest thereon into shares of the Company’s common stock, subject to the closing of the Company’s
proposed public stock offering, at a conversion price equal to the public offering price. In connection with the closing of the public offering on
August 5, 2013, $1,755,570 of these loan amounts plus accrued interest were converted to shares of common stock and warrants and the
remainder was repaid.
F-20
On March 21, 2013, the Company entered into a Securities Purchase Agreement with Hillair Capital Management L.P. (Hillair), pursuant to
which, on March 21, 2013, the Company issued to Hillair a $800,000 16% secured convertible debenture due March 21, 2018. The debenture
bore interest at a rate of 16% per year, payable quarterly in cash or shares of common stock at the Company’s option. Commencing on
February 1, 2014, the Company was required to redeem a certain amount under the debenture on a periodic basis in an amount equal to
$200,000 on each of February 1, 2014, May 1, 2014 and August 1, 2014 and $50,000 on each of August 1, 2015, August 1, 2016, August 1,
2017 and March 21, 2018, until the debenture’s maturity date of March 21, 2018; payable in cash or common stock at our option subject to
certain conditions. The debenture was convertible into shares of our common stock at a conversion price of $4.29 per share, subject to certain
conversion price adjustments. In connection with the debenture issuance, the Company also issued to Hillair five-year warrants to purchase
186,480 shares of its common stock at an initial exercise price of $4.72 per share, which was subject to exercise price adjustments for only the
first six months. Upon the closing of the public offering, the warrant exercise was reduced to $2.25. The warrants were reflected as a
derivative liability on the balance sheet and recorded as a discount against the debenture. Upon the closing of the public offering on August 5,
2013, the debenture principal and accrued interest was repaid along with an early repayment penalty of $160,000, and the warrant exercise was
reduced to $2.25.
On July 15, 2013, the Company entered into a Securities Purchase Agreement with Hillair, pursuant to which the Company issued to Hillair a
$200,000 senior secured convertible debenture due March 21, 2018, and (ii) a common stock purchase warrant to purchase up to 38,168
shares of our common stock at an initial exercise price of $5.24 per share, which is subject to exercise price adjustments for the first six
months. The warrants may be exercised at any time on or after July 15, 2013 until March 21, 2018. The warrants were reflected as a derivative
liability on the balance sheet and recorded as a discount against the debenture, The debenture was convertible into shares of common stock at a
conversion price of $5.24 per share, subject to adjustments upon certain events. Interest on the Debenture accrued at the rate of 16% annually
and was payable quarterly on February 1, May 1, August 1 and November 1, beginning on August 1, 2013, on any redemption, conversion
and at maturity. Interest was payable in cash or at the Company’s option in shares of our common stock, provided certain conditions are met.
Commencing on February 1, 2014, the Company would have been obligated to redeem a certain amount under the debenture on a periodic
basis in an amount equal to $50,000 on each of February 1, 2014, May 1, 2014 and August 1, 2014 and $12,500 on each of August 1, 2015,
August 1, 2016, August 1, 2017 and March 21, 2018, until the debenture’s maturity date of March 21, 2018. Upon the closing of the public
offering on August 5, 2013, the debenture principal and accrued interest was repaid along with an early repayment penalty of $40,000, and the
warrant exercise was reduced to $2.25.
Upon closing of the debenture transaction, the Company retained Gentry Capital Advisors LLC (Gentry) as a financial advisor and agreed to
pay Gentry a fee of $50,000 over a period of 4 months commencing upon the closing. The Company also issued to Gentry five-year warrants
to purchase 20,000 shares of common stock at an exercise price of $4.72 per share. The fair value of these warrants upon grant was calculated
as $66,603 and was reflected in the deferred debenture issuance costs. In connections with the issuance of the two debentures the Company
incurred issuance costs which totaled $257,691, inclusive of the financial advisor’s warrant discussed above. These costs were amortized on a
straight-line basis over the five year life of the debenture, until the debt was repaid on August 5, 2013, after which it was expensed and
included in debt extinguishment costs for the year ended December 31, 2013.
The Company used cash from the August 5, 2013 offering for the repurchases and cancellation of the two debentures. As a result of the two
debt repayments above, the Company incurred a loss on debt extinguishment of $1,272,296 which also includes $240,637 of unamortized
capitalized debt issuance costs and $685,965 of unamortized debt discounts which were written-off.
F-21
VUZIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 12 — Capital Lease Obligations
The Company maintains equipment held under capital lease obligations due in monthly installments of $2,049 including interest at rates of
26.71%. The related equipment is collateral to the leases. Final payments are due through September 2015.
Total Principal Payments
Less: Amount Due Within One Year
Amount Due After One Year
Annual requirements for retirement of the capital lease obligations are as follows:
2015
Total Minimum Lease Payments
Less: Amount Representing Interest
Present Value of Minimum Lease Payments
The following is a summary of assets held under capital leases:
December 31,
Computers and Software
Furniture and Equipment
Less: Accumulated Depreciation
Net
December 31,
2014
December 31,
2013
$
$
16,882 $
(16,882)
41,552
(24,670)
— $
16,882
Amount
$
$
18,445
18,445
(1,563)
$
16,882
2014
2013
$
$
$
16,200 $
35,083
30,692
35,083
51,283
(42,230)
65,775
(52,275)
9,053 $
13,500
Depreciation expense related to the assets under capital lease amounted to $12,417 and $17,247 for years ended December 31, 2014 and 2013,
respectively.
F-22
VUZIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 13 — Income Taxes
The Company files U.S. federal and various state and foreign tax returns.
Pre-tax earnings consisted of the following for the years ended December 31, 2014 and 2013:
December 31,
Pre-Tax (Loss) Earnings
U.S.
Outside the U.S.
Total Pre-Tax (Loss) Earnings
2014
2013
$
(7,868,858) $ (10,146,228)
—
—
$
(7,868,858) $ (10,146,228)
The provision (benefit) for income taxes for the years ended December 31, 2014 and 2013 was as follows:
U.S. Income Taxes
Current Provision
Deferred Provision
Income Taxes Outside the U.S.
Current Provision
Deferred Provision
State Income Taxes
Current Provision
Deferred Provision
Total Provision
2014
2013
$
$
— $
—
—
—
—
—
— $
—
—
—
—
—
—
—
A reconciliation of the statutory U.S. federal income tax rate to the effective rates for the years ended December 31, 2014 and 2013 is as
follows:
Federal Income Tax at Statutory Rate
State Tax Provision, Net of Federal Benefit
Foreign Income Taxed at Other Than 34%
Loss on Derivative Valuation
Change in Rate Assumptions
Other
Effective Tax Rate
Change in Valuations Allowance
Net Effective Tax Rate
F-23
2014
2013
34.0%
0.2%
(0.0)%
(11.1)%
0.0%
(2.2)%
20.9%
(20.9)%
34.4%
0.5%
(0.2)%
(12.2)%
41.0%
(0.3)%
63.2%
(63.2)%
0.0%
0.0%
VUZIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Deferred tax assets (liabilities) for the years ended December 31, 2014 and 2013 consist of the following:
Deferred Tax Assets
Net Operating Loss Carry-forwards
Tax Credit Carry-forwards
Other
Total Deferred Tax Assets
Deferred Tax Liabilities
Other
Net Deferred Tax Assets Before Valuation Allowance
Valuation Allowance
Net Deferred Tax Assets
2014
2013
11,418,496
1,433,229
876,606
9,739,496
1,466,429
486,497
$ 13,728,331 $ 11,692,422
614,027
226,344
$ 13,114,304 $ 11,466,078
(13,114,304) (11,466,078)
$
— $
—
As of December 31, 2014, the Company has approximately $33.3 million in net operating loss carry-forwards and approximately $1.4 million
of credit carry-forwards which will begin to expire in 2018 if not utilized.
As the result of the assessment of the FASB ASC 740-10 (Prior Authoritative Literature: FASB Interpretation No. 48 (“FIN 48”),
Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109), the Company has no unrecognized tax
benefits. By statute, tax years 2011-2014 are open to examination by the major taxing jurisdictions to which the Company is subject.
FASB ASC 740 (Prior Authoritative Literature: SFAS No. 109, Accounting for Income Taxes), requires recognition of deferred tax assets
and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based on differing treatment of items for financial reporting and income tax reporting
purposes. The deferred tax balances are adjusted to reflect tax rates by tax jurisdiction, based on currently enacted tax laws, which will be in
effect in the years in which the temporary differences are expected to reverse. In light of the historic losses of the Company, a 100% valuation
allowance has been recorded to fully offset any benefit associated with the net deferred tax assets.
Note 14 — Capital Stock
Preferred stock
Shares of undesignated preferred stock may be issued in one or more series. The Board of Directors is authorized to establish and designate
the different series and to fix and determine the voting powers and other special rights and qualifications. A total of 5,000,000 shares of
preferred authorized are authorized as of December 31, 2014 and December 31, 2013. There were 0 shares issued or outstanding on
December 31, 2014 and 2013. There were no preferred dividends owing as of December 31, 2014 or 2013. See Subsequent Event Note 22.
Common Stock
All per share amounts, outstanding shares, warrants, options and shares issuable pursuant to convertible securities for all periods reflect the
Company’s 1-for-75 reverse stock split, which was effective February 6, 2013.
On August 5, 2013, the Company consummated a public offering of 4,025,000 shares of common stock, and warrants to purchase up to an
aggregate of 4,025,000 shares of common stock, at a public offering price of $2.00 per share and $0.0001 per warrant. The warrants have a
per share exercise price of $2.25, are exercisable immediately, and expire 5 years from the date of issuance. Total gross proceeds from the
public offering were $8,050,000, before underwriting discounts and commissions and other offering expenses of $1,358,641 payable by the
Company. Upon the closing of this offering, the Company repaid $2,137,984 in term debt and $200,000 in early repayment penalties. Overall
the Company netted approximately $4,350,000 from the public offering.
Simultaneous with the closing of this public offering $2,316,007 in outstanding secured debt and accrued interest thereon, converted into
common stock and warrants at a conversion price equal to the offering price of $2.00. Additionally $1,642,569 in outstanding long-term
accrued compensation and accrued interest owed to our officers was converted into common stock and warrants at a conversion price equal to
the offering price of $2.00.
F-24
VUZIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 15 — Stock Warrants
The following table shows the various changes in warrants for the years December 31, 2014 and 2013.
Warrants Outstanding, Beginning of Year
Exercised During the Year
Issued During the Year
Forfeited During the Year
Warrants Outstanding, End of Year
December 31,
2014
December 31,
2013
7,147,775
(1,285,746)
—
(625,369)
656,641
(59,300)
6,551,654
(1,220)
5,236,660
7,147,775
The outstanding warrants as of December 31, 2014 expire from May 21, 2015 to August 5, 2018. The weighted average remaining term of the
warrants is 3.6 years. The weighted average exercise price is $2.28 per share.
A total of 206,420 warrants were re-priced to $2.25 from $4.72 and 38,168 warrants were re-priced to $2.25 from $5.24 upon the closing of
the public offering on August 5, 2013.
Note 16 — Stock Option Plans
The Company has the following Stock Option Plans (“Plans”) that allow for the granting of both statutory and incentive stock options or
ISOs, which can result in potentially favorable tax treatment to the participant, and non-statutory stock options. The Company’s 2014 Equity
Incentive Plan (the “2014 Plan”) was approved by the stockholders of the Company on June 26, 2014. The Company will no longer issue any
options under the 2007 and 2009 Plans. The 2014 Plan has an “evergreen provision”, under which the maximum number of shares of
common stock that may be issued under the 2014 Plan was initially 1,000,000 and shall automatically be increased each time the Company
issues additional shares of common stock so that the total number of shares issuable hereunder shall at all times equal 10% of the then
outstanding shares of common stock, unless in any case the Board of Directors adopts a resolution providing that the number of shares
issuable under the 2014 Plan shall not be so increased.
The exercise price per share subject to an option is determined by the administrator, but in the case of an ISO must not be less than the fair
market value of a share of our common stock on the date of grant and in the case of a non-statutory stock option must not be less than 100%
of the fair market value of a share of our common stock on the date of grant.
Under the 2014 Plan, the Company may grant stock options, stock appreciation rights, performance awards of stock and/or cash, and stock
awards of restricted stock.
Outstanding as of December 31, 2014
Available for future issuance under plan
Totals authorized by plan
2007 Plan
2009 Plan 2014 Plan
57,209
—
57,209
120,842
—
120,842
542,500
457,500
1,000,000
Total
720,551
457,500
1,178,051
The 2014 Plan gives the Board of Directors of the Company the ability to determine vesting periods for all stock incentives granted under the
2014 Plan, and allows option terms to be up to ten years from the original grant date. Employees’ incentive stock options must vest at a
minimum rate of 20% per year over a five year period, commencing on the date of grant. Most vest ratably over four years commencing on the
date of the option grant. In the case of directors, such options are granted annually and they expire ten years after the date of their grant and
vest ratably, on a monthly basis, over the next 12 months. Non-employee directors have vesting of 50% immediately on grant and the balance
vest ratably, on a monthly basis, over the next 12 months. Advisors or consultants can have vesting range from 100 percent of the option
grants vesting immediately to ratably, on a monthly basis, up to 48 months.
F-25
VUZIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes stock option activity for the years ended December 31, 2014 and 2013:
Number of
Shares
Weighted
Average
Exercise Price
Weighted Average
Remaining Life
(years)
Outstanding at December 31, 2012
Granted
Exercised
Expired or Forfeited
Outstanding at December 31, 2013
Granted
Exercised
Expired or Forfeited
Outstanding at December 31, 2014
192,729 $
45,000
—
(23,211)
214,518 $
548,000
(10,819)
(31,148)
720,551 $
10.68
2.00
—
2.71
9.72
2.63
1.71
2.71
4.46
4.52
6.11
8.56
As of December 31, 2014, there were 257,786 options that were fully vested and exercisable at weighted average exercise price of $7.72 per
share. The weighted average remaining contractual term on the vested options is 6.8 years.
The unvested balance of 462,384 options as of December 31, 2014, are exercisable at a weighted average exercise price of $2.63 per share.
The weighted average remaining contractual term on the vested options is 9.6 years.
The aggregate intrinsic value of the options outstanding as of December 31, 2014 was approximately $268,000.
The Black-Scholes-Merton option pricing model was used to estimate the fair value of share-based awards under FASB ASC Topic 718. The
Black-Scholes-Merton option pricing model incorporates various and highly subjective assumptions, including expected term and expected
volatility. For valuation purposes, stock option awards were categorized into two groups, stock option grants to employees and stock option
grants to members of the Board of Directors.
The expected term of options granted was estimated to be the average of the vesting term, historical exercise and forfeiture rates, and the
contractual life of the option. The expected volatility at the grant date is estimated using historical stock prices based upon the expected term of
the options granted. The risk-free interest rate assumption is determined using the rates for U.S. Treasury zero-coupon bonds with maturities
similar to those of the expected term of the award being valued. Cash dividends have never been paid and are not anticipated to be paid in the
foreseeable future. Therefore, the assumed expected dividend yield is zero.
The following summary table shows the assumptions used to compute the fair value of stock options granted during 2014 and 2013 and their
estimated value:
December 31,
Assumptions for Black-Scholes:
Expected term in years
Volatility
Risk-free interest rate
Expected annual dividends
Value of options granted:
Number of options granted
Weighted average fair value/share
Fair value of options granted
2014
5.6 to 10 .0
118.6 to 119.7%
1.70 to 2.42%
None
2013
10.0
128.8%
2.81%
None
$
$
548,000
2.63 $
1,241,904 $
45,000
$2.00
81,884
FASB ASC Topic 718 requires pre-vesting option forfeitures at the time of grant to be estimated and periodically revised in
subsequent periods if actual forfeitures differ from those estimates. Stock-based compensation expense is recorded only for those awards
expected to vest using an estimated forfeiture rate based on historical pre-vesting forfeiture data.
Unrecognized stock-based compensation expense was approximately $1,100,000 as of December 31, 2014, relating to a total of 462,765
unvested stock options under the Company’s stock option plans. This stock-based compensation expense is expected to be recognized over a
weighted average period of approximately 2.1 years.
F-26
VUZIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 17 — Commitments
The Company leases office and manufacturing space under operating leases that expires on September 30, 2015. It requires monthly payments
of $4,200 plus insurance, taxes and common charges.
Rent expense for the years ended December 31, 2014 and 2013 totaled $116,743 and $104,766, respectively.
Future minimum payments required under operating lease obligations as of December 31, 2014 were as follows:
Total Minimum
Lease Payments
2015
$
81,080 $
81,080
For the lease agreements described above, the Company is required to pay the pro rata share of the real property taxes and assessments,
expenses and other charges associated with these facilities.
Note 18 — Employee Benefit Plans
The Company has a Section 401(k) Savings Plan which covers employees who meet certain age and length of service requirements. To date
the plan is comprised of 100% employee deferrals.
Note 19 — Litigation
We are not currently involved in any pending legal proceeding or litigation.
Note 20 — Concentrations
For 2014 and 2013, sales to the U.S. government accounted for approximately 10% and 17%, respectively.
Accounts receivable from the U.S. government accounted for 6%, and 79% of accounts receivable at December 31, 2014 and 2013,
respectively.
F-27
VUZIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 21 — Related Party Transactions
Pursuant to a debt conversion agreement of March 2013 and in connection with the closing of the public offering on August 5, 2013, two
notes payable to an officer of the Company entire principal amounts plus accrued interest were converted into shares of common stock based
on the offering price of $2.00 per share and warrants exercisable at $2.25 per share. Interest expense related to the note payable amounted to
$32,507 for the period it was outstanding in 2013.
On March 27, 2013, the Company entered into deferred compensation deferral and conversion option agreements with two officers, which
agreements were subject to the closing of the Company’s public stock offering and which agreements were effective upon such closing on
August 5, 2013. Pursuant to those agreements the officers each converted the entire long-term portion their deferred compensation amounts
plus accrued interest in connection with the closing of the public offering on August 5, 2013 a total of $1,126,763 of their deferred
compensation amounts plus accrued interest totaling $515,806 into shares of the Company’s common stock based on the offering price of
$2.00 per share and warrants exercisable at $2.25 per share. Interest expense related to accrued current and long-term accrued compensation
amounts to $0 and $107,209 for the years ended December 31, 2014 and 2013, respectively.
Note 22 — Subsequent Events
Series A Preferred Stock sale of $24,813,000 to Intel Corporation:
On January 2, 2015 (the “Series A Closing Date”), we entered into and closed a Series A Preferred Stock Purchase Agreement (the “Series A
Purchase Agreement”) with Intel Corporation (the “Series A Purchaser”), pursuant to which we issued and sold to the Series A Purchaser, 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 (the “Series A Private Placement”). Each share of Series A Preferred Stock is convertible, at the option of the Series A
Purchaser, into 100 shares of the Company’s common stock (determined by dividing the Series A Original Issue Price of $500 by the Series
A Conversion Price. The Series A Conversion Price is $5.00, subject to adjustment in the event of stock splits, dividends or other
combinations). Total costs incurred connection with this offering were approximately $150,000.
Each share of Series A Preferred Stock is entitled to receive dividends at a rate of 6% per annum, compounded quarterly and payable in cash
or in kind, at the Company’s sole discretion. In the event of the liquidation, dissolution or winding up of the Company, each share of Series A
Preferred Stock is entitled to a liquidation preference equal to one times (1x) the Series A Purchaser’s original per share purchase price, plus a
right to receive an additional liquidation distribution together with the common stock holders pro rata on an as converted basis, but not in
excess of $1,000 per share in the aggregate (subject to adjustment for accrued but unpaid dividends and in the event of stock splits, dividends
or other combinations). Each share of Series A Preferred Stock is entitled to vote with the holders of the Company’s common stock on matters
presented to its stockholders, and is entitled to cast such number of votes equal to the whole number of shares of common stock into which
such shares of Series A Preferred Stock are convertible. The holders of record of the Series A Preferred Stock will be entitled to nominate and
elect 2 directors to the Company’s Board of Directors (the “Board Election Right”), at least one of whom will be required to qualify as an
“independent” director, as that term is used in applicable exchange listing rules. The Board Election Right with respect to the independent
director will terminate on such date as the number of shares of Series A Preferred Stock then outstanding is less than 40% of the original
amount purchased by the Series A Purchaser. The Board Election Right with respect to the second director shall terminate on such date as the
number of shares of Series A Preferred Stock then outstanding is less than 20% of the original amount purchased by the Series A Purchaser.
The Company also granted the Series A Purchaser the right to have a board observer at meetings of the Company’s Board of Directors and
committees thereof.
F-28
For as long as at least 25% (or 12,406 shares) of the Series A Preferred Stock is outstanding, the Company may not, without the consent of
holders of at least 60% of the then outstanding shares of Series A Preferred Stock, take certain actions, including but not limited to: (i)
liquidate, dissolve, or wind up the business and affairs of the Company; (ii) amend, alter or repeal any provision of its charter or bylaws in a
manner that adversely effects the rights of the Series A Preferred Stock; (iii) create or issue any capital stock that is equal to or senior to the
Series A Preferred Stock with respect to preferences; (iv) create or issue any debt security, subject to certain exceptions; (v) pay off any debt
obligation prior to its stated maturity date; or (vi) enter into any stockholders rights plan or similar arrangement or take other actions that may
limit actions that holders of a majority of the Series A Preferred Stock can take under Section 203 (“Section 203”) of the Delaware General
Corporation Law, as well as such other customary provisions protecting the rights of the holder of the Series A Preferred Stock, as are
outlined in the Certificate of Designation.
The Series A Purchaser has the right to participate in any proposed issuance by the Company of its securities, subject to certain exceptions (the
“Participation Right”). In the event the Series A Purchaser is not afforded the opportunity to exercise its Participation Right, the Series A
Purchaser will have the right, but not the obligation, up to two times per calendar year, to acquire additional securities from the Company 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.
In connection with the Series A Private Placement, the Company entered into an investor’s rights agreement (the “Rights Agreement”) with
the Series A Purchaser, pursuant to which the Company agreed to file a “resale” registration statement with the Securities and Exchange
Commission (the “SEC”) covering all shares of common stock issuable upon conversion of the Series A Preferred Stock sold in the Series A
Private Placement on or before February 14, 2015 (the “Filing Date”). The registration statement was declared effective on February 17,
2015.
In connection with the Series A Private Placement, each of the holders of notes issued by the Company on June 3, 2014 (the “June 2014
Notes”) agreed to irrevocably waive their rights to anti-dilution protection under Section 5(b) of the June 2014 Notes in the event the
Company issues additional securities at a per share price lower than the conversion price of the June 2014 Notes (the “June 2014 Note
Waiver”). The obligations of the holder of the June 2014 Notes under the June 2014 Note Waiver will be binding on all assignees of the June
2014 Notes. Additionally, holders of the June 2014 Notes waived their rights of participation with respect to the June 2014 Private Placement
and agreed to subordinate their participation rights to the Series A Purchaser’s Participation Right.
In connection with the Series A Private Placement, holders of approximately 86% of outstanding warrants issued by the Company in its
public offering on July 30, 2013 and in connection with the conversion by certain holders of the Company’s outstanding debt in connection
with the Company’s public offering (collectively, the “July 2013 Warrants”) agreed to irrevocably waive their rights to anti-dilution protection
under Section 2(b) of the July 2013 Warrants in the event the Company issues additional securities at a per share price lower than the exercise
price of the July 2013 Warrants (the “July 2013 Warrant Waiver”). The obligations of the holder of the July 2013 Warrants under the July
2013 Warrant Waiver will be binding on all assignees of the July 2013 Warrants.
As a result of the foregoing, the Company’s cash balances would have increased to approximately $24,750,000, the stockholder’s equity
(deficit) would have increased from ($14,398,011) to approximately $22,400,000 and the $13,541,138 in derivative liability on the
Company’s balance sheet was reduced to approximately $1,390,880, if the January 2, 2015 transaction described herein had closed on
December 31, 2014.
Additionally it should be noted that the Company’s financial statements for the years ending December 31, 2013 were prepared on the basis
the Company would continue as a going concern but there was substantial doubt regarding this assumption expressed by our auditors. As a
result of this January 2, 2015 financing, this note regarding doubt about the Company’s ability to continue as a going concern for at least the
next 12 months has been deleted.
Recent Common Stock Issuances:
Since January 1, 2015, the Company has issued a total of 295,000 shares of its restricted common stock as stock awards under the
Company’s 2014 Stock Plan and 40,000 shares of its restricted common stock for investor relations services.
F-29
Recent Warrant Exercises:
Since January 1, 2015, the Company has received requests to exercise 4,665,892 warrants that were associated with its August 2013 stock
offering which were exercisable into common stock at $2.25 per share. A total of 504,500 of these warrants have been exercised for cash,
netting proceeds of $1,135,125 to the Company. The balance of 4,161,392 warrants was exercised on a cashless basis resulting in the issuance
of 3,551,281 common shares. The Company did not offer the holders of warrants any inducement to exercise. There are currently 65,100
warrants outstanding from the August 2013 offering and the total warrants outstanding as of the date of the filing of this Annual Report are
537,102.
Recent Note Conversions:
Since January 1, 2015, $337,500 in convertible notes have been converted to 150,000 shares of common stock during this same time period in
2015. Total convertible notes outstanding as of the date of the filing of this Annual Report, excluding accrued interest is $2,037,500, which is
convertible into 905,556 shares.
F-30
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on the 31 day of March, 2015.
SIGNATURES
VUZIX CORPORATION
/s/ Paul J. Travers
Paul J. Travers
Chief Executive Officer
POWER OF ATTORNEY
KNOW BY ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints jointly
and severally, Paul J. Travers and Grant Russell, and each one of them, his or her attorneys-in-fact, each with the power of substitution, for
him or her in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that
each said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated:
Signature
/s/ Paul J. Travers
Paul J. Travers
/s/ Grant Russell
Grant Russell
/s/ William Lee
William Lee
/s/ Michael Scott
Michael Scott
/s/ Alexander Ruckdaeschel
Alexander Ruckdaeschel
Title
President, Chief Executive Officer
and Director
(Principal Executive Officer)
Chief Financial Officer, Executive Vice-
President and Director
(Principal Financial and
Accounting Officer)
Director
Director
Director
50
Date
March 31, 2015
March 31, 2015
March 31, 2015
March 31, 2015
March 31, 2015
Exhibit Index
2.1 (13)
3.1(2)
3.2(2)
3.3(15)
3.4 (26)
3.5 (29)
4.1(2)
4.2(4)
4.3(5)
4.4 (20)
10.1(1)
10.2(1)
10.3(2)
10.4(1)
10.5(1)
10.6(1)
10.7(2)†
10.8(1)
10.9(1)
10.10(1)
10.11(1)
10.12(2)
10.13(4)
10.14(4)
10.15(5)
Asset Purchase Agreement, dated as June 15, 2012, by and between the registrant and TDG Acquisition Company LLC
Amended and Restated Certificate of Incorporation
Amended and Restated Bylaws
Amendment to Amended and Restated Certificate of Incorporation
Amendment to Amended and Restated Certificate of Incorporation
Certificate of Designation of Series A Preferred Stock
Specimen certificate evidencing shares of common stock
Common Stock Purchase Warrant dated as of May 21, 2010 issued by the registrant to Kopin Corporation
Common Stock Purchase Warrant dated as of October 21, 2010 issued by the registrant to Kopin Corporation
Form of Warrant
2007 Amended and Restated Stock Option Plan
2009 Stock Option Plan
Form of Option Agreement under 2009 Stock Plan
Form of Indemnification Agreement by and between the registrant and each director and executive officer
Employment Agreement dated as of August 1, 2007 by and between the registrant and Paul J. Travers
Employment Agreement dated as of August 1, 2007 by and between the registrant and Grant Russell
Technology Purchase and Royalty Agreement dated as of December 23, 2005 between the registrant and New Light
Industries, Ltd.
Warrant to purchase common stock dated as of December 23, 2005 issued by the registrant to New Light Industries, Ltd.
Rights Agreement dated as of December 23, 2005 by and between the registrant and New Light Industries, Ltd.
Demand Note in the original principal amount of $247,690.92 by the registrant to the order of Paul J. Travers
Loan Agreement dated as of October 2008 by and between the registrant and Paul J. Travers
Promissory Note dated as of October 2008 by the registrant to the order of Paul J. Travers
Revolving Line of Trade Credit Agreement dated as of May 21, 2010 by and between the registrant and Kopin Corporation
Security Agreement dated as of May 21, 2010 by and between the Company and Kopin Corporation
Amendment to Revolving Line of Trade Credit Agreement dated as of October 8, 2010 by and between the registrant and Kopin
Corporation
10.16(6)
Convertible Loan and Security Agreement, dated as of December 23, 2010 by and between the registrant and LC Capital Master
Fund Ltd.
10.17(6)
Intellectual Property Security Agreement dated as of December 23, 2010 by and between the registrant and LC Capital Master
Fund Ltd.
10.18(6)
10.19(6)
10.20(7)
10.21(7)
10.22(7)
10.23(7)
10.24(7)
Warrant to Purchase Stock dated December 23, 2010 issued by the Vuzix Corporation to LC Capital Master Fund Ltd.
Convertible Promissory Note issued by the registrant to LC Capital Master Fund Ltd.
Letter Agreement dated as of December 23, 2010 by and between the registrant and Kopin Corporation
Letter Agreement dated as of December 23, 2010 by and between the registrant and Vast Technologies Inc.
Letter Agreement dated as of December 23, 2010 by and between the registrant and Paul J. Travers
Letter Agreement dated as of December 23, 2010 by and between the registrant and John Burtis
Warrant issued by the registrant to Vast Technologies Inc. entitling Vast to purchase up to 1,662,274 shares of Common Stock
at an exercise price of $.09965 per share
10.25 (21)
10.26(7)
10.27(7)
Warrant issued by the registrant to Kopin Corporation
Warrant issued by the registrant to Paul J. Travers
Warrant issued by the registrant to John Burtis
51
10.28(16)
10.29(16)
Loan and Security Agreement dated as of March 21, 2011 by and between the registrant and Bridge Bank National Association
Intellectual Property Security Agreement dated as of March 21, 2011 by and between the registrant and Bridge Bank National
Association
10.30(16)
10.31(16)
Intercreditor Agreement dated as of March 21, 2011 by and between the registrant and Bridge Bank National Association
Subordination Agreement dated as of March 21, 2011 by and between Kopin Corporation and Bridge Bank National
Association
10.32(16)
10.33(16)
Subordination Agreement dated as of March 21, 2011 by and between Vast Corporation and Bridge Bank National Association
Subordination Agreement dated as of March 21, 2011 by and between Paul J. Travers and John Burtis, on the one hand, and
Bridge Bank National Association on the other hand
10.34(8)
10.35(9)
10.36(10)
10.37(11)
10.38 (12)
Supplemental Agreement, dated as of December 8, 2011, by and between the registrant and LC Capital Master Fund Ltd.
Second Supplement Agreement, dated as of January 23, 2012, by and between the registrant and LC Capital Master Fund Ltd.
Third Supplemental Agreement, dated as of February 23, 2012 by and between the registrant and LC Capital Master Fund Ltd.
Fourth Supplemental Agreement, dated as of March 23, 2012, by and between the registrant and LC Capital Master Fund Ltd.
Promissory Note and Security Agreement, dated as of May 19, 2012, by and between the registrant and LC Capital Master
Fund Ltd.
10.39 (13)
Shared Services Agreement, dated as of June 15, 2012, by and between Vuzix Corporation and TDG Acquisition Company
LLC
10.40 (13)
10.41 (13)
10.42 (13)
Reseller Agreement, dated as June 15, 2012, by and between Vuzix Corporation and TDG Acquisition Company LLC.
Restrictive Covenants Agreement, dated as June 15, 2012, by and between Paul Travers and TDG Acquisition Company LLC
Kopin Loan Modification Agreement dated as June 15, 2012, by and among the Company, Kopin Corporation, TDG
Acquisition Company LLC and Chu, Ring & Hazel, LLP
10.43 (13)
LC Master Fund Loan Modification Agreement, dated as June 15, 2012, by and between the Company and LC Master Fund,
LLC
10.44 (14)
Amended and Restated Convertible Loan and Security Agreement, dated as of June 15, 2012, by and between the Company and
LC Capital Master Fund Ltd.
10.45 (14)
Convertible Promissory Note, dated as of June 15, 2012, in the principal amount of $619,122 issued by the Company in favor
of LC Capital Master Fund Ltd.
10.46 (17)
10.47 (17)
10.48 (17)
Securities Purchase Agreement, dated as of March 21, 2013, by and between the registrant and Hillair Capital Investments L.P.
16% Senior Secured Convertible Debenture, dated as of March 27, 2013, issued to Hillair Capital Investments L.P.
Security Agreement, dated as of March 27, 2013, by and between the registrant, subsidiaries of the registrant and Hillair Capital
Investments L.P.
10.49 (17)
Subsidiary Guarantee, dated as of March 21, 2013, by and between the guarantors named therein in favor of Hillair Capital
Investments L.P.
10.50 (17)
10.51 (17)
Common Stock Purchase Warrant, dated as of March 27, 2013, issued to Hillair Capital Investments L.P.
Pledge and Security Agreement, dated as of March 27, 2013, by and between the registrant, Travers Family LLC, Paul Travers,
and Hillair Capital Investments L.P.
10.52 (17)
10.53 (18)
10.54 (18)
Form of Subordination Agreement
Debt Conversion Agreement by and between the registrant and Paul Travers
Debt Conversion Agreement by and between the registrant and Vast Technologies
52
10.55 (18)
10.56 (18)
10.57 (18)
10.58 (18)
10.59 (18)
10.60 (18)
10.61 (18)
10.62 (22)
10.63 (22)
10.64 (22)
10.65 (22)
10.66 (22)
10.67 (22)
10.68 (19)
10.69 (19)
10.70 (19)
10.71 (20)
10.72 (23)
10.73 (20)
10.74 (20)
Debt Conversion Agreement by and between the registrant and Kopin Corporation
Conversion/Exchange Agreement by and between the registrant and LC Capital Master Fund Ltd
Deferred Compensation and Conversion Option Agreement by and between the registrant and Paul Travers
Deferred Compensation and Conversion Option Agreement by and between the registrant and Grant Russell
Amendment to Debt Conversion Agreement by and between the registrant and Vast Technologies, Inc.
Amendment to Debt Conversion Agreement by and between the registrant and Kopin Corporation
Amendment to Debt Conversion Agreement by and between the registrant and Paul Travers
Amendment No. 2 to Debt Conversion Agreement by and between the registrant and Paul Travers
Amendment No.2 to Debt Conversion Agreement by and between the registrant and Vast Technologies
Amendment No.2 to Debt Conversion Agreement by and between the registrant and Kopin Corporation
Amendment to Conversion/Exchange Agreement by and between the registrant and LC Capital Master Fund Ltd
Amendment to Deferred Compensation and Conversion Option Agreement by and between the registrant and Paul Travers
Amendment to Deferred Compensation and Conversion Option Agreement by and between the registrant and Grant Russell
Securities Purchase Agreement, dated July 15, 2013
16% Senior Secured Convertible Debenture due March 21, 2018
Common Stock Warrant, dated July 15, 2013
Amendment No. 3 to Debt Conversion Agreement between the registrant and Vast Technologies, Inc.
Amendment No. 3 to Debt Conversion Agreement between the registrant and Kopin Corporation
Amendment No. 3 to Debt Conversion Agreement between the registrant and Paul Travers
Amendment No. 2 to Deferred Compensation and Conversion Option Agreement by and between the registrant and Paul
Travers
10.75 (20)
Amendment No. 2 to Deferred Compensation and Conversion Option Agreement by and between the registrant and Grant
Russell
10.76 (24)
10.77 (24)
10.78 (24)
10.79 (24)
10.80 (25)
10.81(28)
10.82 (29)
10.83 (29)
10.84 (29)
10.85 (29)
16.1 (27)
21.1 (21)
23.1*
23.2*
31.1*
31.2*
32.1*
32.2*
101*
Securities Purchase Agreement, dated June 3, 2014
5% Senior Secured Convertible Note due June 3, 2017
Security Agreement dated June 3, 2014
Registration Rights Agreement dated June 3, 2014
2014 Equity Incentive Plan
Letter Agreement with Chardan Capital Markets, LLC
Series A Preferred Stock Purchase Agreement dated January 2, 2015
Series A Preferred Stock Investor’s Rights Agreement, dated January 2, 2015
Form of Waiver and Consent (June Notes)
Form of Waiver and Consent (July 2013 Warrants)
EFPR letter to the SEC dated October 8, 2014
Subsidiaries
Consent of EFP Rotenberg, LLP
Consent of Freed Maxick, CPAs, P.C.
Certification of CEO as required by Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes Oxley Act of 2002
Certification of CFO as required by Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes Oxley Act of 2002
Section 1350 CEO Certification
Section 1350 CFO Certification
The following materials, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii)
Consolidated Statements of Income, (iii) Consolidated Statements of Cash Flows, and (iv) Notes to Consolidated Financial
Statements, tagged as blocks of text
†
Confidential treatment granted as to certain portions.
* Filed herewith.
(1)Filed as an exhibit to the Registration Statement on Form S-1 filed on July 2, 2009 and incorporated herein by reference.
53
(2)Filed as an exhibit to Amendment No. 3 to the Registration Statement on Form S-1 filed October 16, 2009 and incorporated herein by
reference.
(3)Filed as an exhibit to Amendment No. 4 to the Registration Statement on Form S-1 filed November 10, 2009 and incorporated herein by
reference.
(4)Filed as an exhibit to the Current Report on Form 8-K filed June 2, 2010 and incorporated herein by reference.
(5)Filed as an exhibit to the Current Report on Form 8-K filed October 27, 2010 and incorporated herein by reference.
(6)Filed as an exhibit to the Current Report on Form 8-K filed December 30, 2010 and incorporated herein by reference.
(7)Filed as an exhibit to the Current Report on Form 8-K filed December 30, 2010 and incorporated herein by reference.
(8)Filed as an exhibit to the Current Report on Form 8-K filed December 19, 2011 and incorporated herein by reference.
(9)Filed as an exhibit to the Current Report on Form 8-K filed January 27, 2012 and incorporated herein by reference.
(10)Filed as an exhibit to the Current Report on Form 8-K filed February 29, 2012 and incorporated herein by reference.
(11)Filed as an exhibit to the Current Report on Form 8-K filed March 27, 2012 and incorporated herein by reference.
(12)Filed as an exhibit to the Current Report on Form 8-K filed May 24, 2012 and incorporated herein by reference.
(13)Filed as an exhibit to the Current Report on Form 8-K filed June 21, 2012 and incorporated herein by reference.
(14)Filed as an exhibit to the Current Report on Form 8-K filed July 3, 2012 and incorporated herein by reference.
(15)Filed as an exhibit to the Current Report on Form 8-K filed February 7, 2013 and incorporated herein by reference.
(16)Filed as an exhibit to the Current Report on Form 8-K filed March 25, 2011 and incorporated herein by reference.
(17)Filed as an exhibit to the Current Report on Form 8-K filed March 27, 2013 and incorporated herein by reference.
(18)Filed as an exhibit to the Current Report on Form 8-K filed April 2, 2013 and incorporated herein by reference.
(19)Filed as an exhibit to the Current Report on Form 8-K filed July 16, 2013 and incorporated herein by reference.
(20)Filed as an exhibit to the S-1/A filed July 29, 2013 and incorporated herein by reference.
(21)Filed as an exhibit to the S-1 filed December 21, 2012 and incorporated herein by reference.
(22)Filed as an exhibit to the S-1/A filed June 10, 2013 and incorporated herein by reference.
(23)Filed as an exhibit to the S-1/A filed July 30, 2013 and incorporated herein by reference.
(24)Filed as an exhibit to the Current Report on Form 8-K filed June 4, 2014 and incorporated herein by reference.
(25)Filed with Definitive Proxy Statement on April 30, 2014 and incorporated herein by reference.
54
(26)Filed as an exhibit to the Current Report on Form 8-K filed June 30, 2014 and incorporated herein by reference.
(27)Filed as an exhibit to the Current Report on Form 8-K filed October 9, 2014 and incorporated herein by reference.
(28)Filed as an exhibit to the Post-Effective Amendment to Form S-1 filed December 4, 2014 and incorporated herein by reference.
(29)Filed as an exhibit to the Current Report on Form 8-K filed January 2, 2015 and incorporated herein by reference
55
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23.1
Vuzix Corporation
2166 Brighton-Henrietta Townline Road
Rochester, New York 14623
We hereby consent to the incorporation by reference in the Registration Statement on Form S-3 (No. 333-202045) of Vuzix Corporation and
its subsidiary of our report dated April 9, 2014 relating to the consolidated financial statements for the year ended December 31, 2013, which
appear in this Form 10-K.
/s/ EFP Rotenberg, LLP
EFP Rotenberg, LLP
Rochester, New York
March 31, 2015
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23.2
We consent to the incorporation by reference in Registration Statement (No. 333-202045) of Vuzix Corporation of our report dated March 31,
2015, relating to our audit of the consolidated financial statements, which appear in the Annual Report on Form 10-K of Vuzix Corporation
for the year ended December 31, 2014.
/s/ Freed Maxick CPAs, P.C.
Rochester, New York
March 31, 2015
Exhibit 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Paul J. Travers, certify that:
1. I have reviewed this Annual Report on Form 10-K of Vuzix Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 31, 2015
/s/ Paul J. Travers
Paul J. Travers
Chief Executive Officer
Exhibit 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Grant Russell, certify that:
1. I have reviewed this Annual Report on Form 10-K of Vuzix Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 31, 2015
/s/ Grant Russell
Grant Russell
Chief Financial Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Vuzix Corporation (“Vuzix”) on Form 10-K for the fiscal year ended December 31,
2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Paul J. Travers, Chief Executive Officer of
Vuzix, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of Vuzix.
Date: March 31, 2015
/s/ Paul J. Travers
Paul J. Travers
Chief Executive Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report of Vuzix Corporation (“Vuzix”) on Form 10-K for the fiscal year ended December 31,
2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Grant Russell, Chief Financial Officer of
Vuzix, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of Vuzix.
Date: March 31, 2015
/s/ Grant Russell
Grant Russell
Chief Financial Officer