UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended ~~September 30, 2021~~March 31, 2022


☐	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		04-3392453
State or other jurisdiction of incorporation or organization		(I.R.S. Employer Identification No.)


25 Hendrix Road, Suite A West Henrietta, New York		14586
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (585) 359-5900

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:		Trading Symbol(s)		Name of each exchange on which registered:
Common Stock, par value $0.001		VUZI		Nasdaq Capital Market

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 filing requirements for the past 90 days. Yes ☒ No ◻

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ◻

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐☒	Accelerated filer	☐	Non-accelerated filer	☒☐

Smaller reporting company	☒☐	Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). Yes ☐ No ⌧

As of ~~November 8, 2021,~~May 10, 2022, there were ~~63,631,676~~63,667,941 shares of the registrant’s common stock outstanding.

Table of Contents

Vuzix Corporation

INDEX

		Page No.

Part I – Financial Information

Item 1.	Consolidated Financial Statements (Unaudited):	3

	Consolidated Balance Sheets as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021	3

	Consolidated Statements of Changes in Stockholders’ Equity for the Three ~~and Nine~~ Months Ended ~~September 30, 2021~~March 31, 2022 and ~~2020~~2021	4

	Consolidated Statements of Operations for the Three ~~and Nine~~ Months Ended ~~September 30, 2021~~March 31, 2022 and ~~2020~~2021	5

	Consolidated Statements of Cash Flows for the ~~Nine~~Three Months Ended ~~September 30, 2021~~March 31, 2022 and ~~2020~~2021	6

	Notes to the Unaudited Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1514

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2522

Item 4.	Controls and Procedures	2522

Part II – Other Information		2623

Item 1.	Legal Proceedings	2623

Item 1A.	Risk Factors	2623

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2624

Item 3.	Defaults Upon Senior Securities	2624

Item 4.	Mine Safety Disclosure	2724

Item 5.	Other Information	2724

Item 6.	Exhibits	2825

Signatures		2926

Table of Contents

Part 1: FINANCIAL INFORMATION

Item 1: Consolidated Financial Statements

VUZIX CORPORATION

CONSOLIDATED BALANCE SHEETS


	(Unaudited)				(Unaudited)
	September 30,		December 31,		March 31,		December 31,
	2021		2020		2022		2021
ASSETS
Current Assets
Cash and Cash Equivalents	$	128,746,661	$	36,069,508	$	113,329,734	$	120,203,873
Accounts Receivable		1,058,790		1,388,882		1,551,654		2,242,429
Inventories, Net		9,880,337		6,100,824		12,559,066		12,151,982
Licenses, Net		68,109		272,444
Manufacturing Vendor Prepayments		1,902,132		485,032		586,564		504,051
Prepaid Expenses and Other Assets		2,332,049		738,561		1,470,415		2,047,819

Total Current Assets		143,988,078		45,055,251		129,497,433		137,150,154

Long-Term Assets
Fixed Assets, Net		5,339,494		2,837,402		5,042,421		5,190,438
Operating Lease Right-of-Use Asset		1,221,719		1,517,306		968,269		1,117,022
Patents and Trademarks, Net		1,862,016		1,593,049		2,020,099		1,988,370
Licenses, Net		1,446,638		193,687		1,333,236		1,389,936
Intangible Asset, Net		252,275		566,456		42,821		147,548
Other Assets, Net		1,356,535		708,333		1,445,897		1,483,589

Total Assets	$	155,466,755	$	52,471,484	$	140,350,176	$	148,467,057

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable	$	1,482,809	$	1,517,155	$	1,223,741	$	2,054,762
Unearned Revenue		14,251		41,152		29,623		27,797
Accrued Expenses		1,585,325		983,033		1,127,021		1,419,308
Income and Other Taxes Payable		33,763		109,653		45,692		120,242
Operating Lease Right-of-Use Liability		534,146		444,495		514,204		534,146

Total Current Liabilities		3,650,294		3,095,488		2,940,281		4,156,255

Long-Term Liabilities
Operating Lease Right-of-Use Liability		687,573		1,072,811		454,065		582,876

Total Liabilities		4,337,867		4,168,299		3,394,346		4,739,131

Stockholders' Equity
Preferred Stock - $0.001 Par Value, 5,000,000 Shares Authorized; 0 and 49,626 Shares Issued and Outstanding as of September 30, 2021 and December 31, 2020.		—		50
Common Stock - $0.001 Par Value, 100,000,000 Shares Authorized; 63,631,054 and 45,645,166 Shares Issued and Outstanding as of September 30, 2021 and December 31, 2020.		63,631		45,645
Common Stock - $0.001 Par Value, 100,000,000 Shares Authorized; 63,704,626 shares issued and 63,667,941 shares outstanding as of March 31, 2022 and 63,672,268 shares issued and outstanding as of December 31, 2021.						63,705		63,672
Additional Paid-in Capital		337,125,126		210,952,473		350,721,326		346,736,397
Accumulated Deficit		(186,059,869)		(162,694,983)		(213,578,144)		(203,072,143)
Treasury Stock, at cost, 36,685 shares as of March 31, 2022 and 0 shares as of December 31, 2021						(251,057)		—

Total Stockholders' Equity		151,128,888		48,303,185		136,955,830		143,727,926

Total Liabilities and Stockholders' Equity	$	155,466,755	$	52,471,484	$	140,350,176	$	148,467,057

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

VUZIX CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

Preferred Stock

Common Stock

Additional

Accumulated


Shares

Amount

Shares

Amount

Paid-In Capital

Deficit

Total
Balance - January 1, 2021

49,626

$
50

45,645,166

$
45,645

$
210,952,473

$
(162,694,983)

$
48,303,185
Stock-Based Compensation Expense

—

—

368,047

368

8,858,446

—

8,858,814
Stock Option Exercises

—

—

620,784

621

713,083

—

713,704
Stock Warrant Exercises

—

—

7,274,328

7,274

34,697,794

—

34,705,068
Proceeds from Common Stock Offering

—

—

4,768,293

4,768

97,784,270

—

97,789,038
Direct Costs of Common Stock Offering

—

—

—

—

(6,136,420)

—

(6,136,420)
Shares Redeemed to Cover Employee Tax Withholdings

—

—

(83,164)

(83)

(1,144,282)

—

(1,144,365)
Stock Issued for Technology License Purchase

—

—

75,000

75

1,404,675

—

1,404,750
Preferred Stock Converted

(49,626)

(50)

4,962,600

4,963

(10,004,913)

—

(10,000,000)
Net Loss

—

—

—

—

—

(23,364,886)

(23,364,886)
Balance - September 30, 2021

—

$
—

63,631,054

$
63,631

$
337,125,126

$
(186,059,869)

$
151,128,888


	Preferred Stock			Common Stock			Additional		Accumulated				Preferred Stock			Common Stock			Additional		Accumulated		Treasury Stock
	Shares	Amount		Shares	Amount		Paid-In Capital		Deficit		Total		Shares	Amount		Shares	Amount		Paid-In Capital		Deficit		Shares	Amount		Total
Balance - July 1, 2021	—	$	—	63,278,096	$	63,278	$	333,792,844	$	(178,113,803)	$	155,742,319
Balance - January 1, 2022													—	$	—	63,672,268	$	63,672	$	346,736,397	$	(203,072,143)	—	$	—	$	143,727,926
Stock-Based Compensation Expense	—		—	300,000		300		3,292,391		—		3,292,691	—		—	—		—		3,955,738		—	—		—		3,955,738
Stock Option Exercises	—		—	52,958		53		39,891		—		39,944	—		—	32,358		33		29,191		—	—		—		29,224
Purchases of Treasury Stock													—		—	—		—		—		—	(36,685)		(251,057)		(251,057)
Net Loss	—		—	—		—		—		(7,946,066)		(7,946,066)	—		—	—		—		—		(10,506,001)	—		—		(10,506,001)
Balance - September 30, 2021	—	$	—	63,631,054	$	63,631	$	337,125,126	$	(186,059,869)	$	151,128,888
Balance - March 31, 2022													—	$	—	63,704,626	$	63,705	$	350,721,326	$	(213,578,144)	(36,685)	$	(251,057)	$	136,955,830


	Preferred Stock			Common Stock			Additional		Accumulated				Preferred Stock			Common Stock			Additional		Accumulated		Treasury Stock
	Shares	Amount		Shares	Amount		Paid-In Capital		Deficit		Total		Shares	Amount		Shares	Amount		Paid-In Capital		Deficit		Shares	��Amount		Total
Balance - July 1, 2020	49,626	$	50	39,004,106	$	39,004	$	180,438,200	$	(154,343,101)	$	26,134,153
Balance - January 1, 2021													49,626	$	50	45,645,166	$	45,645	$	210,952,473	$	(162,694,983)	—	$	—	$	48,303,185
Stock-Based Compensation Expense	—		—	67,500		67		1,018,065		—		1,018,132	—		—	—		—		2,047,378		—	—		—		2,047,378
Stock Option Exercises													—		—	230,968		231		196,597		—	—		—		196,828
Stock Warrant Exercises													—		—	7,241,028		7,241		34,561,297		—	—		—		34,568,538
Proceeds from Common Stock Offerings	—		—	3,647,059		3,647		15,496,355		—		15,500,002	—		—	4,146,342		4,146		84,995,865		—	—		—		85,000,011
Direct Costs of Common Stock Offerings	—		—	—		—		(882,975)		—		(882,975)	—		—	—		—		(5,396,139)		—	—		—		(5,396,139)
Net Loss	—		—	—		—		—		(4,760,810)		(4,760,810)
Balance - September 30, 2020	49,626	$	50	42,718,665	$	42,718	$	196,069,645	$	(159,103,911)	$	37,008,502
Shared Redeemed to Cover Employee Tax Withholdings													—		—	(83,164)		(83)		(1,144,283)		—	—		—		(1,144,366)
Preferred Stock Converted & Preferred Dividend Settlement													(49,626)		(50)	4,962,600		4,962		(10,004,912)		—	—		—		(10,000,000)
Net Loss (as Restated)													—		—	—		—		—		(9,151,370)	—		—		(9,151,370)
Balance - March 31, 2021 (as Restated)													—	$	—	62,142,940	$	62,142	$	316,208,276	$	(171,846,353)	—	$	—	$	144,424,065

The accompanying notes are an integral part of these consolidated financial statements.

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VUZIX CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


									Three Months Ended March 31,
	Three Months Ended September 30,				Nine Months Ended September 30,						(as Restated)
	2021		2020		2021		2020		2022		2021
Sales:
Sales of Products	$	3,018,774	$	2,686,166	$	9,657,589	$	6,392,865	$	2,503,051	$	3,805,170
Sales of Engineering Services		—		92,555		193,113		954,415		—		110,219

Total Sales		3,018,774		2,778,721		9,850,702		7,347,280		2,503,051		3,915,389

Cost of Sales:
Cost of Sales - Products Sold		2,435,437		2,393,676		7,578,732		5,942,043		1,863,697		2,819,971
Cost of Sales - Engineering Services		—		37,075		29,669		180,830		—		15,827

Total Cost of Sales		2,435,437		2,430,751		7,608,401		6,122,873		1,863,697		2,835,798

Gross Profit (exclusive of depreciation shown separately below)		583,337		347,970		2,242,301		1,224,407		639,354		1,079,591

Operating Expenses:
Research and Development		3,270,255		1,874,243		8,050,915		5,693,569		3,103,444		2,205,318
Selling and Marketing		1,589,582		936,206		4,167,874		2,885,872		2,023,435		1,303,430
General and Administrative		3,112,059		1,635,076		11,565,816		4,972,854		5,453,833		6,027,757
Depreciation and Amortization		434,277		634,669		1,453,367		1,923,922		422,931		517,412
Loss on Fixed Asset Disposal		—		—		83,908		—		—		83,908
Impairment of Patents and Trademarks		7,544		16,000		66,040		73,532		49,603		27,731

Total Operating Expenses		8,413,717		5,096,194		25,387,920		15,549,749		11,053,246		10,165,556

Loss From Operations		(7,830,380)		(4,748,224)		(23,145,619)		(14,325,342)		(10,413,892)		(9,085,965)

Other Income (Expense):
Investment Income		29,843		4,662		45,448		33,908		6,280		7,838
Income and Other Taxes		(105,526)		(16,802)		(138,034)		(43,867)		(47,632)		(19,725)
Foreign Exchange Loss		(40,003)		(446)		(126,681)		(25,799)		(50,757)		(53,518)

Total Other Expense, Net		(115,686)		(12,586)		(219,267)		(35,758)		(92,109)		(65,405)

Loss Before Provision for Income Taxes		(7,946,066)		(4,760,810)		(23,364,886)		(14,361,100)		(10,506,001)		(9,151,370)
Provision for Income Taxes		—		—		—		—		—		—

Net Loss		(7,946,066)		(4,760,810)		(23,364,886)		(14,361,100)		(10,506,001)		(9,151,370)
Preferred Stock Dividends - Accrued not Paid		—		(520,562)		—		(1,527,716)
Loss Attributable to Common Stockholders	$	(7,946,066)	$	(5,281,372)	$	(23,364,886)	$	(15,888,816)

Basic and Diluted Loss per Common Share	$	(0.13)	$	(0.13)	$	(0.39)	$	(0.44)	$	(0.16)	$	(0.17)
Weighted-average Shares Outstanding - Basic and Diluted		63,520,878		39,837,321		60,278,923		36,448,266		63,695,127		54,141,761

The accompanying notes are an integral part of these consolidated financial statements.

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VUZIX CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


					Three Months Ended March 31,
	Nine Months Ended September 30,						(as Restated)
	2021		2020		2022		2021

Cash Flows from Operating Activities
Net Loss	$	(23,364,886)	$	(14,361,100)	$	(10,506,001)	$	(9,151,370)
Non-Cash Adjustments
Depreciation and Amortization		1,453,367		1,923,922		422,931		517,412
Amortization of Software Development Costs in Cost of Sales - Products		180,296		137,496
Amortization of Software Development Costs and Prepaid Licenses in Cost of Sales - Products						60,099		60,099
Stock-Based Compensation		7,311,278		2,019,006		4,319,748		4,618,213
Impairment of Patents and Trademarks		66,040		73,532		49,603		27,731
Loss on Fixed Asset Disposal		83,908		—		—		83,908
(Increase) Decrease in Operating Assets
Accounts Receivable		330,092		160,287		690,775		91,973
Accrued Project Revenue		—		(81,714)
Revenues in Excess of Billings						—		(40,856)
Inventories		(3,779,513)		(855,613)		(407,084)		(857,695)
Manufacturing Vendor Prepayments		(1,417,100)		71,536		(82,513)		(1,785,763)
Prepaid Expenses and Other Assets		(238,066)		(105,686)		213,394		142,685
Increase (Decrease) in Operating Liabilities
Accounts Payable		(34,346)		(153,682)		(831,021)		(191,028)
Accrued Expenses		602,293		(11,790)		(292,286)		646,048
Unearned Revenue		(26,901)		(90,215)		1,825		(17,698)
Income and Other Taxes		(75,890)		14,144		(74,549)		(65,288)

Net Cash Flows Used in Operating Activities		(18,909,428)		(11,259,877)		(6,435,079)		(5,921,629)

Cash Flows from Investing Activities
Purchase of Fixed Assets		(3,592,703)		(467,595)
Purchases of Fixed Assets						(57,758)		(314,981)
Investments in Patents and Trademarks		(442,582)		(329,347)		(34,469)		(135,674)
Investments in Licenses, Intangible and Other Assets		(305,158)		(365,650)		(125,000)		(200,000)

Net Cash Used in Investing Activities		(4,340,443)		(1,162,592)
Net Cash Flows Used in Investing Activities						(217,227)		(650,655)

Cash Flows from Financing Activities
Proceeds from Exercise of Warrants		34,705,068		—		—		34,568,538
Proceeds from Exercise of Stock Options		713,703		—		29,224		196,828
Proceeds from Common Stock Offering, Net		91,652,617		25,199,336		—		79,603,872
Purchases of Treasury Stock						(251,057)		—
Preferred Dividend Settlement Payment		(10,000,000)		—		—		(10,000,000)
Employee Tax Withholdings Payment		(1,144,364)		—		—		(1,144,366)
Proceeds from Term Note		—		1,555,900

Net Cash Flows Provided from Financing Activities		115,927,024		26,755,236
Net Cash Flows (Used in) Provided from Financing Activities						(221,833)		103,224,872

Net Increase in Cash and Cash Equivalents		92,677,153		14,332,767
Net (Decrease) Increase in Cash and Cash Equivalents						(6,874,139)		96,652,588
Cash and Cash Equivalents - Beginning of Period		36,069,508		10,606,091		120,203,873		36,069,508

Cash and Cash Equivalents - End of Period	$	128,746,661	$	24,938,858	$	113,329,734	$	132,722,096

Supplemental Disclosures
Unamortized Common Stock Expense included in Prepaid Expenses and Other Assets	$	1,729,646	$	277,880	$	1,001,232	$	160,222
Non-Cash Investment in Licenses		1,341,614		380,249
Stock-Based Compensation Expense - Expensed less Previously Issued		(1,547,536)		89,183		364,010		58,828

The accompanying notes are an integral part of these consolidated financial statements.

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VUZIX CORPORATION

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Basis of Presentation

The accompanying unaudited consolidated financial statements of Vuzix Corporation (“the Company”) have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Regulation S-X of the Securities and Exchange Commission (the “SEC”). Accordingly, the unaudited consolidated financial statements do not include all information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Certain re-classifications may have been made to prior periods to conform with current reporting. The results of the Company’s operations for the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 are not necessarily indicative of the results of the Company’s operations for the full fiscal year or any other period.

The accompanying interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto of the Company as of December 31, ~~2020,~~2021, as reported in the Company’s Annual Report on Form 10-K filed with the SEC on March ~~15,~~2, 2022.

Restatement

As described in additional detail in Note 14 to the financial statements included in its 2021 Form 10-K, the Company restated its previous unaudited quarterly results in the Form 10-K for the year ended December 31, 2021. Previously filed 2021 quarterly reports on Form 10-Q for the periods affected by the restatement were not amended. See Note 14, Long-Term Incentive Plan and Note 19, Quarterly Financial Information (Unaudited) of the Notes to the consolidated financial statements in the 2021 Form 10-K for the impact of these adjustments on each of the quarterly periods in fiscal year 2021.

The effect of these changes on non-cash stock-based compensation expense included in 2021 unaudited quarterly operating results was as follows:

		Q1-2021
Additional Paid-in Capital		Increase of $2,512,007
Research and Development Expense		Increase of $125,391
Sales and Marketing		Increase of $62,696
General and Administrative		Increase of $2,323,920
Net Loss		Increase of $2,512,007
Loss per Share		Increase of $0.05

Customer Concentrations

For the three months ended ~~September 30, 2021, 2 customers~~March 31, 2022, 1 customer represented ~~12% and 10%~~11% of total product revenue. For the three months ended ~~September 30, 2020, no~~March 31, 2021, 1 customer represented ~~more than 10%~~11% of total product revenue and 1 customer represented ~~90% of engineering services revenue.~~

~~For the nine months ended September 30, 2021, no 1 customer represented more than 10% of total product revenue and 2 customers represented~~ 100% ~~of engineering services revenue. For the nine months ended September 30, 2020, no 1 customer represented more than 10% of total product revenue and 2 customers represented 90%~~ of engineering services revenue.

As of ~~September 30, 2021,~~March 31, 2022, 3 customers represented ~~29%~~22%, ~~15%~~14% and ~~14%~~13% of accounts receivable. As of December 31, ~~2020, 2~~2021, 3 customers represented ~~21%~~27%, 20% and ~~14%~~10% of accounts receivable.

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Treasury Stock

Treasury stock purchases are accounted for under the cost method whereby the entire cost of the acquired stock is recorded as treasury stock. Gains and losses on the subsequent reissuance of shares will be credited or charged to paid-in capital in excess of par value using the average-cost method.

Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). ASU 2016-13 provides for a new impairment model which requires measurement and recognition of expected credit losses for most financial assets and certain other instruments, including but not limited to accounts receivable. ASU 2016-13 will become effective for the Company on January 1, 2023 and early adoption is permitted. The Company does not anticipate that the adoption of this standard will have a material impact on our consolidated financial statements.

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Note 2 – Revenue Recognition and Contracts with Customers

Disaggregated Revenue

The Company’s total revenue was comprised of ~~two~~2 major product lines: Smart Glasses Sales and Engineering Services. The following table summarizes the revenue recognized by major product line:


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
	2021		2020		2021		2020		2022		2021
Revenues
Smart Glasses Sales	$	3,018,774	$	2,686,166	$	9,657,589	$	6,392,865	$	2,503,051	$	3,805,170
Engineering Services		—		92,555		193,113		954,415		—		110,219

Total Revenue	$	3,018,774	$	2,778,721	$	9,850,702	$	7,347,280	$	2,503,051	$	3,915,389

Significant Judgments

Under Topic 606 “Revenue from Contracts with Customers”, we use judgments that could potentially impact both the timing of our satisfaction of performance obligations and our determination of transaction prices used in determining revenue recognized by major product line. Such judgments include considerations in determining our transaction prices and when our performance obligations are satisfied for our standard product sales that include an end-user 30-day right to return if not satisfied with product and general payment terms that are between Net 30 and 60 days. For our ~~Engineering Services,~~engineering services, performance obligations are recognized over time using the input method and the estimated costs to complete each project are considered significant judgments.

Performance Obligations

Revenues from our performance obligations are typically satisfied at a point in time for Smart Glasses, Waveguides and Display Engines, and our OEM Products, which are recognized when the customer obtains control and ownership, which is generally upon shipment. The Company also records revenue for performance obligations relating to our ~~Engineering Services~~engineering services over time by using the input method measuring progress toward satisfying the performance obligations. Satisfaction of our performance obligations related to our ~~Engineering Services~~engineering services is measured by the Company’s costs incurred as a percentage of total expected costs to project completion as the inputs of actual costs incurred by the Company are directly correlated with progress toward completing the contract. As such, the Company believes that our methodologies for recognizing revenue over time for our ~~Engineering Services~~engineering services correlate directly with the transfer of control of the underlying assets to our customers.

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Our standard product sales include a twelve (12) month assurance-type product warranty. In the case of certain of our OEM products and waveguide sales, some include a standard product warranty of up to eighteen (18) months to allow distribution channels to offer the end customer a full twelve (12) months of coverage. We offer extended warranties to customers, which extend the standard product warranty on product sales for an additional twelve (12) month period. All revenue related to extended product warranty sales is deferred and recognized over the extended warranty period. Our ~~Engineering Services~~engineering services contracts vary from contract to contract but typically include payment terms of Net 30 days from date of billing, subject to an agreed upon customer acceptance period.

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The following table presents a summary of the Company’s sales by revenue recognition method as a percentage of total net sales for the ~~nine~~three months ended ~~September 30, 2021:~~March 31, 2022:


	~~% of Total Sales~~
~~Point-in-Time~~	98	%
~~Over Time – Input Method~~	2	%

~~Total~~	~~100~~	%


	% of Total Net Sales
	2022		2021
Point-in-Time	100	%	97	%
Over Time – Input Method	-	%	3	%

Total	100	%	100	%

Remaining Performance Obligations

As of ~~September 30, 2021,~~March 31, 2022, the Company had 0 outstanding performance obligations ~~under~~for its engineering services and waveguide development ~~projects, as all projects were completed and delivered in the first half of 2021.~~projects. In addition, the Company had no ~~materially~~material outstanding performance obligations related to product sales, other than its standard product warranty.

Note 3 – Loss Per Share

Basic loss per share is computed by dividing the loss attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution from the assumed exercise of stock options and warrants, and the conversion of convertible preferred shares. During periods of net loss, all common stock equivalents are excluded from the diluted EPS calculation because they are anti-dilutive. Since the Company reported a net loss for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ the calculation for basic and diluted earnings per share is considered to be the same, as the impact of potential common shares is anti-dilutive. At ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ there were ~~8,612,869~~8,611,365 and ~~17,775,890~~8,983,727 common stock share equivalents, respectively, potentially exercisable or issuable under conversion or exercise of ~~preferred shares,~~stock options ~~and warrants~~ that could dilute basic earnings per share in the future.

Note 4 – Inventories, Net

Inventories are stated at the lower of cost and net realizable value, and consisted of the following:


	September 30,		December 31,		March 31,		December 31,
	2021		2020		2022		2021

Purchased Parts and Components	$	8,785,171	$	5,252,709	$	11,461,309	$	11,580,766
Work-in-Process		203,103		1,381,677		265,757		226,126
Finished Goods		2,180,435		3,352,057		1,959,141		1,472,534
Less: Reserve for Obsolescence		(1,288,372)		(3,885,619)		(1,127,141)		(1,127,444)

Inventories, Net	$	9,880,337	$	6,100,824	$	12,559,066	$	12,151,982

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Note 5 – Licenses, Net

September 30,

December 31,

2021

2020

Licenses

$
1,038,606

$
493,717
Additions

1,404,750

544,889
Less: Accumulated Amortization / Expensed

(928,609)

(572,475)

1,514,747

466,131
Less: Current Portion

(68,109)

(272,444)

Licenses, Net

$
1,446,638

$
193,687

In December 2020, the Company renewed its global non-exclusive master reseller agreement (MRA) for certain smart glasses software under which it committed to sell a minimum number of new software licenses in 2021, as well as the unsold remainder from 2020. The amount capitalized, included in current assets on the Consolidated Balance Sheets, will be expensed to cost of sales - products sold during the period based upon actual software licenses sold, with any of the remaining prepaid licenses expensed at the end of the term of the MRA.


	March 31,		December 31,
	2022		2021

Licenses	$	2,443,356	$	1,038,606
Additions		—		1,404,750
Less: Accumulated Amortization		(1,110,120)		(1,053,420)
Licenses, Net	$	1,333,236	$	1,389,936

The Company acquired 2 licenses in 2017. The first related to the renegotiation of an existing license at a cost of $114,967, which resulted in lower royalty rates being paid by the Company over the next 10ten years. This license went into effect as of January 1, 2018. The second license was a result of the Company entering into a Technology Purchase and Royalty Agreement where it acquired all the seller’s right, title and interest in certain Transferred Intellectual Property (IP). Pursuant to the agreement, the Company paid approximately $75,702 as reimbursement of related patent application costs incurred by the seller to date, which are included in Patents and Trademarks. The Company also issued 25,000 shares of common stock, valued at $128,750, upon the original closing in October 2017 and agreed to certain further share issuances of 75,000 shares based upon the achievement of certain development milestones as well as per unit royalties once the technology was commercialized for the life of the related patents. In June 2021, the Company assumed or purchased outright the obligations for ongoing royalties under the original license agreement and certain other intellectual property rights in connection with consulting services by the original seller in exchange for the issuance of 75,000 shares with an assigned market value of $18.73 per share, or a total of $1,404,750. The underlying technology is not yet ready for commercialization, but the Company intends to proceed with further research and development work relating to such underlying technology.

Note 6 – Intangible Asset, Net


	September 30,		December 31,		March 31,		December 31,
	2021		2020		2022		2021

Intangible Asset	$	1,500,000	$	1,500,000	$	1,500,000	$	1,500,000
Less: Accumulated Amortization		(1,247,725)		(933,544)		(1,457,179)		(1,352,452)

Intangible Asset, Net	$	252,275	$	566,456	$	42,821	$	147,548

On October 4, 2018, the Company entered into amendment No. 1 to agreements (the “TDG Amendment”) with TDG Acquisition Company, LLC (“TDG”), aka Six15 Technologies, LLC. The TDG Amendment amends certain provisions of prior agreements between Vuzix and TDG, including an asset purchase agreement dated June 15, 2012, and an authorized reseller agreement dated June 15, 2012.

Pursuant to the TDG Amendment, the Company is permitted to engage in sales of heads-up display components or subsystems (and any services to support such sale) for incorporation into a finished good or system for sale to military organizations, subject to certain conditions. The Company is also permitted to sell its products to defense and security organizations that include business customers and governmental entity customers that primarily provide security and defense services, including police, fire fighters, EMTs, other first responders, and homeland and border security. The Company will owe TDG commissions with respect to all such sales until June 15, 2022, when the amendment and

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original non-compete agreements expire, after which the Company will be permitted to sell any product to any customer world-wide without owing any commission to TDG.

Total commissions expense under this agreement for the three months ended ~~September 30,~~March 31, 2022 and 2021 was $25,794 and ~~2020 was $2,550 and NaN. Total commissions expense for the nine months ended September 30, 2021 and 2020 was $59,397 and $176,944.~~$52,655. All commissions expense related to this agreement is included in Selling and Marketing expense.

Total amortization expense for this intangible asset for the three months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~ was $104,727 and $104,727, respectively. ~~Total~~$42,821 of remaining amortization expense will be recognized in the second quarter of 2022, as the non-compete agreement with TDG expires on June 15, 2022.

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Note 7 - Other Assets


	March 31,		December 31,
	2022		2021
Private Corporation Investments (at cost)	$	450,000	$	450,000

Software Development Costs		750,000		500,000
Additions		125,000		250,000
Less: Accumulated Amortization		(250,000)		(208,334)
Software Development Costs, Net		625,000		541,666

Unamortized Common Stock Expense included in Long-Term Prepaid Expenses		370,897		491,923

Total Other Assets	$	1,445,897	$	1,483,589

During 2020, the Company invested $500,000 in Android operating systems upgrades for ~~this intangible~~its CPU platform used on its M400 and M4000 products. This upgrade was finished and placed into service in the beginning of the fourth quarter of 2020. This capitalized asset is being amortized on a straight-line over its expected product life cycle of 36 months, which began on October 1, 2020. In October 2021, the Company invested $250,000 and in the first quarter of 2022 the Company invested an additional $125,000 for further Android operating systems version upgrades to the ~~nine months ended September 30, 2021~~CPU platform it uses on its M400 and ~~2020 was $314,181~~M4000 products. This development work has not yet been completed and ~~$318,817, respectively. Future monthly amortization expense for~~will ultimately be amortized once placed into service which the ~~remaining 8.5 months is approximately $30,000 per month.~~Company expects to occur by early 2023.

Note 78 – Accrued Expenses

Accrued expenses consisted of the following:


	September 30,		December 31,		March 31,		December 31,
	2021		2020		2022		2021

Accrued Wages and Related Costs	$	587,961	$	582,924	$	484,980	$	683,044
Accrued Professional Services		218,506		187,323		318,231		551,220
Accrued Warranty Obligations		194,092		143,898		156,192		185,044
Other Accrued Expenses		584,766		68,888		167,618		—

Total	$	1,585,325	$	983,033	$	1,127,021	$	1,419,308

The Company has warranty obligations in connection with the sale of certain of its products. The warranty period for its products is generally twelve (12) months. The costs incurred to provide for these warranty obligations are estimated and recorded as an accrued ~~liability~~expense at the time of sale. The Company estimates its future warranty costs based upon product-based historical performance rates and related costs to repair.

The changes in the Company’s accrued warranty obligations for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 and the balance as of December 31, ~~2020~~2021 were as follows:


Accrued Warranty Obligations at December 31, 2020	$	143,898
Accrued Warranty Obligations at December 31, 2021			$	185,044
Reductions for Settling Warranties		(239,534)		(103,943)
Warranties Issued During Period		289,728
Warranties Issued During Year				75,091

Accrued Warranty Obligations at September 30, 2021	$	194,092
Accrued Warranty Obligations at March 31, 2022			$	156,192

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Note 89 – Income Taxes

The Company’s effective income tax rate is a combination of federal, state and foreign tax rates and differs from the U.S. statutory rate due to taxes on foreign income, permanent differences including tax-exempt interest, and the resolution of tax uncertainties, offset by a valuation allowance against U.S. deferred income tax assets.

Note 910 – Capital Stock

Preferred stock

The Board of Directors is authorized to establish and designate different series of preferred stock and to fix and determine their voting powers and other ~~special~~ rights and terms. A total of 5,000,000 shares of preferred stock with a par value of $0.001 are authorized as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021. Of this total, 49,626 shares are

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designated as Series A Preferred Stock. There were NaN ~~and 49,626~~ shares of Series A Preferred Stock issued and outstanding on ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively.

On January 28, 2021, Intel Corporation (“Intel”) (which was the holder of all of the outstanding shares of Series A Preferred Stock) converted all of its 49,626 shares of Series A Preferred Stock into 4,962,600 shares of common stock and the shares of Series A Preferred Stock have been retired and cannot be reissued. In connection with the foregoing, Intel and the Company entered into an agreement pursuant to which Intel agreed to accept $10,000,000 in full payment of all accrued Series A Preferred Stock dividends in the approximate amount of $10,800,000.

Common Stock

The Company’s authorized common stock consists of 100,000,000 shares, par value of $0.001. There were ~~63,631,054~~63,704,626 shares issued and ~~45,645,166~~63,667,941 shares outstanding as of March 31, 2022 and 63,672,268 shares issued and outstanding as of December 31, 2021.

Treasury Stock

On March 2, 2022, our Board of Directors approved the repurchase by the Company of up to an aggregate of $25 million of our common stock by open market or privately negotiated transactions under the Share Buyback Program. This program is in effect for one year, does not obligate the Company to acquire any particular amount of common stock ~~issued~~and may be suspended or discontinued at any time at the Company’s sole discretion.~~outstanding~~ ~~as of September 30, 2021 and December~~During the three months ended March 31, ~~2020, respectively.~~

~~On March 25, 2021,~~2022, the Company ~~entered into an underwriting agreement with BTIG, LLC for the sale~~repurchased 36,685 shares of ~~the Company’s~~our common stock at an average cost of $6.84. As of March 31, 2022, 36,685 shares of our common stock were held in an underwritten public offering at a public offering price of $20.50 per share. The Company closed on this public offering (including the full exercise of the over-allotment option granted to the underwriters), receiving total gross proceeds of $97,789,037. The Company received net proceeds after the underwriting discount and issuance costs and expenses of $91,652,618.treasury.

~~Note 10 – Stock Warrants~~

~~A summary of the various changes in warrants during the nine months ended September 30, 2021 is as follows:~~


		~~September 30,~~
		~~2021~~
~~Warrants Outstanding at December 31, 2020~~		~~7,276,928~~
~~Exercised During the Period~~		~~(7,274,328)~~
~~Issued During the Period~~		—
~~Expired During the Period~~		—

~~Warrants Outstanding at September 30, 2021~~		~~2,600~~

~~The outstanding warrants as of September 30, 2021, expire on January 2, 2022. The average remaining term of the warrants is approximately 3 months. The exercise price is $4.10 per share.~~

~~During the three months ended September 30, 2021 and 2020, there were 0 warrants exercised.~~

During the nine months ended September 30, 2021, a total of 7,274,328 warrants were exercised on a cash basis resulting in the issuance of 7,274,328 shares of common stock and proceeds to the Company of $34,705,068. During the nine months ended September 30, 2020, there were 0 warrants exercised.

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Note 11 – Stock-Based Compensation

A summary of stock option activity related to the Company’s standard employee incentive plan, excluding options awarded under the ~~Long-term~~Long-Term Incentive Plan (LTIP), for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 is as follows:


		Weighted			Weighted
	Number of	Average		Number of	Average
	Options	Exercise Price		Options	Exercise Price
Outstanding at December 31, 2020	2,633,175	$	3.09
Outstanding at December 31, 2021				2,823,634	$	7.67
Granted	1,020,500		17.99	98,500		5.78
Exercised	(678,892)		3.50	(43,040)		3.94
Expired or Forfeited	(148,514)		7.97	(51,729)		8.60

Outstanding at September 30, 2021	2,826,269	$	8.06
Outstanding at March 31, 2022				2,827,365	$	7.74

The weighted average remaining contractual term for all options as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 was ~~8.1~~7.74 years and ~~6.5~~7.95 years, respectively.

As of ~~September 30, 2021,~~March 31, 2022, there were ~~964,039~~1,183,727 options that were fully-vested and exercisable at a weighted average exercise price of ~~$5.28~~$6.04 per share. The weighted average remaining contractual term of the vested options is ~~6.5~~6.6 years.

As of ~~September 30, 2021,~~March 31, 2022, there were ~~1,862,230~~1,643,638 unvested options exercisable at a weighted average exercise price of ~~$9.50~~$9.83 per share. The weighted average remaining contractual term of the unvested options is ~~9.0~~8.6 years.

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The weighted average fair value of option grants was calculated using the Black-Scholes-Merton option pricing method. At ~~September 30, 2021,~~March 31, 2022, the Company had ~~$12,439,473~~$8,353,781 of unrecognized stock compensation expense, which will be recognized over a weighted average period of ~~3.4~~3.0 years.

During the nine months ended September 30, 2021, the Company issued 68,047 shares of common stock to its independent board members as part of their annual retainer for services covering the period of July 2021 to June 2022 and for the onboarding of the 3 new directors. The fair market value on the date of award of the stock issued was $16.90, resulting in an aggregate fair value of approximately $1,150,000. The unamortized portion is included in Prepaid Expenses and Other Assets on our consolidated balance sheet. The fair market value of these awards is expensed over twelve (12) months for 59,170 shares and twenty-four (24) months for 8,877 shares beginning on July 1, 2021.

During the nine months ended September 30, 2021, the Company awarded 300,000 shares of restricted common stock to the new managing director of its newly established Vuzix Custom Solutions (VCS) business unit, also formerly referred to as Integrated Solutions Business Unit. These restricted shares are subject to vesting, including 50,000 shares that may be earned over 3 years based upon continued employment with the Company, and 250,000 shares that are being held in escrow, and which may be earned upon achievement of revenue and EBITDA operational milestones for VCS within specified periods of time over 5 years. Any such milestone shares will be cancelled if not earned within the appropriate milestone time period. The fair market value on the date of award of the restricted stock issued was $15.58, resulting in an aggregate fair value of approximately $4,674,000, of which, $779,000 has been recorded in Prepaid Expenses and Other Assets associated with the time vesting option, to be amortized over 36 months ~~beginning October 1, 2021. The balance of shares held in escrow related to the performance-based milestones, representing a fair market value of~~ ~~$3,895,000, is not being amortized until such time as the performance milestones are considered probable to be achieved or have been achieved.~~

For the three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ the Company recorded total stock-based compensation expense, including stock awards but excluding awards under the Company’s LTIP, of ~~$1,137,862~~$1,350,610 and ~~$1,077,073, respectively. For the nine months ended September 30, 2021 and 2020, the Company recorded total stock-~~

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~~based compensation expense, including stock awards but excluding awards under the Company’s LTIP, of $2,606,700 and $2,019,006,~~$456,745, respectively.

Note 12 – ~~Long-term~~Long-Term Incentive Plan

On March 17, 2021, the Company granted options to purchase a total of 5,784,000 shares of common stock to its officers and certain other members of its management team. The options were granted under the Company’s existing 2014 Incentive Stock Plan. The options have an exercise price of $19.00, with 375,000 options vesting immediately and the remaining portion vesting upon the achievement of certain equity market capitalization milestones, and revenue and EBITDA operational milestones. For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021, the Company recorded non-cash stock-based compensation expense of ~~$489,825~~$2,969,138 and ~~$4,704,578,~~$4,161,468, respectively, for options that vested or are probable to vest. ~~There was 0 stock-based compensation expense related to the Company’s LTIP in the comparable periods in 2020.~~

The fair value of option grants was calculated using a Monte Carlo simulation on the equity market capitalization tranches and the Black-Scholes-Merton option pricing method on the operational milestone tranches. As of ~~September 30, 2021,~~March 31, 2022, we had ~~$13,834,299~~$25,371,320 of total unrecognized stock-based compensation expense for the portion of options tied to equity market capitalization milestones and the portion of options tied to operational milestones that were considered probable of achievement, all of which will be recognized over a service period of 7up to 10six years. The probabilities of the milestone achievements are subject to catch-adjustments in each instance where an equity market capitalization milestone is achieved or when an operational milestone becomes probable to be achieved or is achieved. ~~The fair~~Compensation costs could be reversed in subsequent periods if an awardee leaves the Company prior to the expiration of the option life for market ~~value of these option grants changed in~~capitalization milestone or the ~~current period as certain assumptions were adjusted by management.~~performance awards are no longer determined to be probable. If such milestones are achieved earlier in their expected service periods, the remaining unrecognized compensation expense related to that particular milestone would be accelerated and recognized in full during the period where that achievement is affirmed by the Board of Directors. As of ~~September 30, 2021,~~March 31, 2022, and going forward, should all of the operational milestones which are currently not yet deemed probable of achievement become probable of achievement or are achieved, then the Company could ultimately recognize up to an additional ~~$32.9~~$34.1 million in non-cash stock-based compensation expense at such time.

The unvested remaining equity market capitalization and operational milestones under the LTIP with their total related option grants and criteria achievement weightings of the options available for meeting a target are shown in the following table. Of the total 5,409,000 unvested options outstanding as of ~~September 30,~~March 31, 2022 and December 31, 2021, there are 2,704,500 options unvested for the achievement of ~~Equity Market Capitalization~~equity market capitalization targets, 1,893,150 unvested options

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for the achievement of annual ~~Revenue~~revenue targets, and 811,350 unvested options for the achievement of annual EBITDA ~~Margins Before Non-Cash Charges~~margins before non-cash charges targets.


Award Potential	Criteria Achievement Weighting			Criteria Achievement Weighting
	50% of Options Available	35% of Options Available	15% of Options Available	50% of Options Available	35% of Options Available	15% of Options Available
Options Available (Subject to Vesting)	Equity Market Capitalization Target	LTM Revenue Target	LTM EBITDA Margin before Non-Cash Charges Target	Equity Market Capitalization Target	Last Twelve Months Revenue Target	Last Twelve Months EBITDA Margin before Non-Cash Charges Target


686,000	$ 2,000,000,000	$ 25,000,000	0.0%	$ 2,000,000,000	$ 25,000,000	0.0%
686,000	3,000,000,000	50,000,000	2.0%	3,000,000,000	50,000,000	2.0%
686,000	4,000,000,000	100,000,000	4.0%	4,000,000,000	100,000,000	4.0%
686,000	5,000,000,000	200,000,000	6.0%	5,000,000,000	200,000,000	6.0%
586,000	6,000,000,000	300,000,000	8.0%	6,000,000,000	300,000,000	8.0%
586,000	7,000,000,000	450,000,000	10.0%	7,000,000,000	450,000,000	10.0%
561,000	8,000,000,000	675,000,000	12.0%	8,000,000,000	675,000,000	12.0%
491,000	9,000,000,000	1,000,000,000	14.0%	9,000,000,000	1,000,000,000	14.0%
441,000	10,000,000,000	1,500,000,000	16.0%	10,000,000,000	1,500,000,000	16.0%
5,409,000

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Note 13 – Litigation

We are not currently involved in any actual or pending legal proceeding or litigation and we are not aware of any such material proceedings contemplated by or against us or involving our property.

Note 14 – Right-of-Use Assets and Liabilities

Future lease payments under operating leases as of ~~September 30, 2021~~March 31, 2022 were as follows:


Remainder of 2021	$	157,050
2022		549,270	$	417,750
2023		536,270		546,916
2024		44,689		45,576
Total Future Lease Payments		1,287,279		1,010,242
Less: Imputed Interest		(65,560)		(41,973)
Total Lease Liability Balance	$	1,221,719	$	968,269

Operating lease costs under the operating leases totaled ~~$172,014~~$162,365 and ~~$162,119~~$124,215 for the three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020, respectively. Operating lease costs under the operating leases were $460,434 and $468,725 for the nine months ended September 30, 2021 and 2020,~~ respectively.

As of ~~September 30, 2021,~~March 31, 2022, the weighted average discount rate was 4.5% and the weighted average remaining lease term was ~~2.3~~1.8 years.

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of financial condition and results of operations in conjunction with the financial statements and related notes appearing elsewhere in this quarterly report and in our ~~annual report~~Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021.

As used in this report, unless otherwise indicated, the terms “Company,” “Vuzix”, “management,” “we,” “our,” and “us” refer to Vuzix Corporation.

Critical Accounting Policies and Significant Developments and Estimates

The discussion and analysis of our financial condition and results of operations is based on our unaudited consolidated financial statements and related notes appearing elsewhere in this quarterly report. The preparation of these

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statements in conformity with ~~generally accepted accounting principles~~GAAP requires the appropriate application of certain accounting policies, many of which require us to make estimates and assumptions about future events and their impact on amounts reported in our consolidated financial statements, including the statement of operations, balance sheet, cash flow and related notes. We continually evaluate our estimates used in the preparation of our financial statements, including those related to revenue recognition, bad debts, inventories, warranty reserves, product warranty, carrying value of long-lived assets, fair value measurement of financial instruments, valuation of stock compensation awards, ~~probabilities~~achievement of equity market capitalization and probability of operational milestones being achieved under our LTIP, and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not apparent from other sources. Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from our estimates. Such differences could be material to the consolidated financial statements.

We believe that our application of accounting policies, and the estimates inherently required therein, are reasonable. We periodically re-evaluate these accounting policies and estimates and make adjustments when facts and

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circumstances dictate a change. Historically, we have found our application of accounting policies to be appropriate, and actual results have not differed materially from those determined using necessary estimates.

Management believes certain factors and trends are important in understanding our financial performance. The critical accounting policies, judgments and estimates that we believe have the most significant effect on our consolidated financial statements are:

●

Valuation of inventories;

●

Carrying value of long-lived assets;

●

Software development costs;

●

Revenue recognition;

●

Product warranty;

●

Stock-based compensation; and

●

Income taxes.

Our accounting policies are more fully described in the notes to our consolidated financial statements included in this quarterly report and in our ~~annual report~~Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021. There have been no significant changes in our accounting policies for the three months ended ~~September 30, 2021.~~March 31, 2022.

~~Off Balance~~Off-Balance Sheet Arrangements

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

Business Matters

We are engaged in the design, manufacture, marketing and sale of wearable computing devices and augmented reality wearable display devices, also referred to as head mounted displays (or HMDs), heads-up displays (HUDs) or near-eye displays, in the form of Smart Glasses and Augmented Reality (AR) glasses. Our wearable display devices are worn like eyeglasses or attach to a head-worn mount. These devices typically include cameras, sensors, and a computer that enable the user to view, record and interact with video and digital content, such as computer data, the Internet, social media or entertainment applications. Our wearable display products integrate display technology with our advanced optics to produce compact high-resolution display engines, less than half an inch diagonally, which when viewed

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through our Smart Glasses products create virtual images that appear comparable in size to that of a computer monitor or a large-screen television.

With respect to our Smart Glasses and AR products, we are focused on the enterprise, industrial, commercial, security, first responder, medical markets, and, to a lesser degree, defense markets. We also provide custom solutions and engineering services to third parties, including OEMs, of waveguides to enable fully integrated wearable display systems, including ~~head mounted displays~~HMDs to commercial, industrial and defense customers. We do not offer “work for hire” services per se but rather offer our engineering services for projects that we expect could result in advancing our technology and potentially ~~leading~~lead to long-term supply or OEM relationships.

All of the mobile ~~display~~displays and wearable and mobile electronics markets in which we compete, including mobile and wearable displays and electronics, have been and continue to be subject to consistent and rapid technological change, with ever greater capabilities and performance, including mobile devices with larger screen sizes and improved display resolutions as well as, in many cases, declining prices on mobile devices. As a result, we must continue to improve our products’ performance and lower our costs. We believe our intellectual property portfolio gives us a

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leadership position in the design and manufacturing of micro-display projection engines, waveguides, mechanical packaging, ergonomics, and optical systems.

Recent Accounting Pronouncements

See Note 1 to the consolidated financial statements.

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Results of Operations

Comparison of Three Months Ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~

The following table compares the Company’s consolidated statements of operations data for the three months ended ~~September 30, 2021~~March 31, 2022 and ~~2020:~~2021:


											Three Months Ended March 31,
	Three Months Ended September 30,																Dollar		% Increase
							Dollar		% Increase		2022			2021			Change		(Decrease)
	2021			2020			Change		(Decrease)						(as Restated)
Sales:
Sales of Products	$	3,018,774		$	2,686,166		$	332,608	12	%	$	2,503,051		$	3,805,170		$	(1,302,119)	(34)	%
Sales of Engineering Services		—			92,555			(92,555)	(100)	%		—			110,219			(110,219)	(100)	%

Total Sales		3,018,774			2,778,721			240,053	9	%		2,503,051			3,915,389			(1,412,338)	(36)	%

Cost of Sales:
Cost of Sales - Products		2,435,437			2,393,676			41,761	2	%
Cost of Sales - Products Sold												1,863,697			2,819,971			(956,274)	(34)	%
Cost of Sales - Engineering Services		—			37,075			(37,075)	(100)	%		—			15,827			(15,827)	(100)	%

Total Cost of Sales		2,435,437			2,430,751			4,686	0	%		1,863,697			2,835,798			(972,101)	(34)	%

Gross Profit (exclusive of depreciation shown separately below)		583,337			347,970			235,367	68	%		639,354			1,079,591			(440,237)	(41)	%
Gross Profit %		19	%		13	%						26	%		28	%

Operating Expenses:
Research and Development		3,270,255			1,874,243			1,396,012	74	%		3,103,444			2,205,318			898,126	41	%
Selling and Marketing		1,589,582			936,206			653,376	70	%		2,023,435			1,303,430			720,005	55	%
General and Administrative		3,112,059			1,635,076			1,476,983	90	%		5,453,833			6,027,757			(573,924)	(10)	%
Depreciation and Amortization		434,277			634,669			(200,392)	(32)	%		422,931			517,412			(94,481)	(18)	%
Impairment of Patents and Trademarks		7,544			16,000			(8,456)	(53)	%		49,603			27,731			21,872	79	%
Loss on Fixed Asset Disposal												—			83,908			(83,908)	(100)	%

Loss from Operations		(7,830,380)			(4,748,224)			(3,082,156)	65	%		(10,413,892)			(9,085,965)			(1,327,927)	15	%

Other Income (Expense):
Investment Income		29,843			4,662			25,181	540	%		6,280			7,838			(1,558)	(20)	%
Income and Other Taxes		(105,526)			(16,802)			(88,724)	528	%		(47,632)			(19,725)			(27,907)	141	%
Foreign Exchange Loss		(40,003)			(446)			(39,557)	8,869	%		(50,757)			(53,518)			2,761	(5)	%

Total Other Income (Expense), Net		(115,686)			(12,586)			(103,100)	819	%

Loss Before Provision for Income Taxes		(7,946,066)			(4,760,810)			(3,185,256)	67	%
Provision for Income Taxes		—			—			—	—	%
Total Other Expense, Net												(92,109)			(65,405)			(26,704)	41	%

Net Loss	$	(7,946,066)		$	(4,760,810)		$	(3,185,256)	67	%	$	(10,506,001)		$	(9,151,370)		$	(1,354,631)	15	%

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Sales. There was ~~an increase~~a decrease in total sales ~~of $240,053 or 9%~~ for the three months ended ~~September 30, 2021~~March 31, 2022 compared to the same period in ~~2020.~~2021 of $1,412,338 or 36%. The following table reflects the major components of our sales:


	Three Months Ended		% of		Three Months Ended		% of		Dollar		% Increase		Three Months Ended		% of		Three Months Ended		% of		Dollar		% Increase
	September 30, 2021		Total Sales		September 30, 2020		Total Sales		Change		(Decrease)		March 31, 2022		Total Sales		March 31, 2021		Total Sales		Change		(Decrease)
Sales of Smart Glasses	$	3,018,774	100	%		2,686,166	97	%	$	332,608	12	%	$	2,379,398	95	%	$	3,772,481	96	%	$	(1,393,083)	(37)	%
Sales of Waveguides & Display Engines														108,250	4	%		—	—	%		108,250	N/M
Sales Freight out														15,403	1	%		32,689	1	%		(17,286)	(53)	%
Sales of Engineering Services		—	0	%		92,555	3	%		(92,555)	(100)	%		—	—	%		110,219	3	%		(110,219)	(100)	%
Total Sales	$	3,018,774	100	%	$	2,778,721	100	%	$	240,053	9	%	$	2,503,051	100	%	$	3,915,389	100	%	$	(1,412,338)	(36)	%

Sales of Smart Glasses products ~~rose~~decreased by ~~$332,608~~37% or ~~12%~~$1,393,083 in the three months ended ~~September 30, 2021, primarily as a result of continued growth of our M400 model and the new M4000 Smart Glasses sales, as~~March 31, 2022 compared to the same period in 2020. Sales revenues from our M-Series Smart Glasses were $2,409,988, a 12% increase of $255,233 over the prior year’s quarter. Revenues of Blade Smart Glasses decreased by $160,5143 or 33% in the three months ended ~~September 30, 2021 versus 2020 primarily driven by component shortages required to make Blade projector engines this last~~March 31, 2021. Historically, product revenues in the 1^st quarter ~~and higher unit sales~~of each fiscal year have been noticeably lower than that of the previous three quarters in the prior ~~year’s comparable quarter when we offered lower selling prices on the previous Blade model, which we discontinued~~fiscal year. Product revenues of $2,503,051 in the ~~fall~~first quarter of ~~2020.~~2022 were significantly higher than comparable periods, with the exception of 2021, which reflected abnormally higher growth over most first quarter comparable periods.

Sales of ~~Engineering Services~~engineering services for the three months ended ~~September 30, 2021~~March 31, 2022 were nil as compared to ~~$92,555~~$110,219 in the ~~2020~~2021 period.

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


	Three Months Ended		As % Related		Three Months Ended		As % Related		Dollar		% Increase		Three Months Ended		As % Related		Three Months Ended		As % Related		Dollar		% Increase
	September 30, 2021		Product Sales		September 30, 2020		Product Sales		Change		(Decrease)		March 31, 2022		Product Sales		March 31, 2021		Product Sales		Change		(Decrease)
Product Cost of Sales	$	1,193,483	40	%	$	1,428,215	53	%	$	(234,732)	(16)	%	$	1,215,736	49	%	$	1,998,514	53	%	$	(782,778)	(39)	%
Freight Costs		244,311	8	%		213,774	8	%		30,537	14	%		208,280	8	%		190,345	5	%		17,935	9	%
Manufacturing Overhead		794,703	26	%		454,820	17	%		339,883	75	%		396,853	16	%		546,673	14	%		(149,820)	(27)	%
Warranty Costs		83,448	3	%		34,855	1	%		48,593	139	%		(28,852)	(1)	%		(32,848)	(1)	%		3,996	(12)	%
Inventory Reserve for Obsolescence		—	—	%		193,000	7	%		(193,000)	(100)	%
Amortization of Software Development Costs		65,384	2	%		45,833	2	%		19,551	43	%		65,880	3	%		64,999	2	%		881	1	%
Software Royalties		54,108	2	%		23,179	1	%		30,929	133	%		5,800	0	%		52,288	1	%		(46,488)	(89)	%

Total Cost of Sales - Products	$	2,435,437	81	%	$	2,393,676	89	%	$	41,761	2	%		1,863,697	74	%		2,819,971	74	%		(956,274)	(34)	%

Gross Profit - Product Sales	$	583,337	19	%	$	292,490	11	%	$	290,847	99	%	$	639,354	26	%	$	985,199	26	%	$	(345,845)	(35)	%

For the three months ended ~~September 30, 2021,~~March 31, 2022, we reported an overall gross profit from product sales of ~~$583,337~~$639,354 or 26% as compared to ~~$292,490~~$985,199 or 26% in the same period in ~~2020.~~2021. On a product cost of sales basis only, product direct costs were ~~40%~~49% of sales in the ~~2021~~2022 period as compared to 53% in ~~2020.~~2021.

Manufacturing overhead costs, ~~increased $339,883~~while decreasing by $149,820 or ~~75%~~27% for the three months ended ~~September 30, 2021~~March 31, 2022 over the ~~2020~~2021 comparable period, increased to ~~26% from 17%~~16% as a percentage of total product sales as compared to 14% in 2021. The decrease in the dollar amount of these overhead costs in the current period versus the prior period is primarily due to more absorption of fixed costs being allocated to inventory as a result of improved efficiencies in our manufacturing ~~supply chain additional personnel and increased non-cash stock-based compensation expense.~~processes.

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Costs for engineering services for the three months ended ~~September 30, 2021~~March 31, 2022 were nil as compared to ~~$37,075~~$15,827 in ~~2020.~~

~~Research and Development.~~ ~~Our research and development expenses consist primarily of compensation costs for personnel, related non-cash stock-based compensation expenses, third party~~2021. There was no gross profit from engineering services purchase of research supplies and materials, and consulting fees related to research and development. Software development expenses to determine technical feasibility before final development and ongoing maintenance are not capitalized and are included in research and development costs.

Three Months Ended

% of

Three Months Ended

% of

Dollar

% Increase

September 30, 2021

Total Sales

September 30, 2020

Total Sales

Change

(Decrease)

Research and Development

$
3,270,255

108
%
$
1,874,243

67
%
$
1,396,012

74
%

~~Research and development costs~~ for the three months ended September 30, 2021 increased by $1,396,012 or 74% as compared to the same period in 2020. This increase in costs was due to the following factors: an increase in external development expenses related to our Next Generation Smart Glasses of $546,984; an increase of $504,205 in salary, benefits and non-cash stock-based compensation; an increase of $175,939 in research and development compliance and consulting fees; and an increase of $47,352 in research and development software subscriptions.

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

Three Months Ended

% of

Three Months Ended

% of

Dollar

% Increase


September 30, 2021

Total Sales

September 30, 2020

Total Sales

Change

(Decrease)

Selling and Marketing

$
1,589,582

53
%
$
936,206

34
%
$
653,376

70
%

Selling and marketing costs for the three months ended September 30, 2021 increased by $653,376 or 70% as compared to the same period in 2020. This increase in costs was due to the following factors: an increase of $202,734 in salary, benefits, and non-cash stock-based compensation expense; an increase of $186,934 in sales consulting and marketing fees; a $96,969 increase in advertising expense; a $65,971 increase in website costs; and a $37,260 increase in software subscription costs.

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

Three Months Ended

% of

Three Months Ended

% of

Dollar

% Increase

September 30, 2021

Total Sales

September 30, 2020

Total Sales

Change

(Decrease)

General and Administrative

$
3,112,059

103
%
$
1,635,076

59
%
$
1,476,983

90
%

General and administrative costs for the three months ended September 30, 2021 increased by $1,476,983 or 90% as compared to the same period in 2020. This increase in costs was due to the following factors: a net increase in salary and salary benefits related expenses of $1,077,954, of which $418,125 was related to non-cash stock-based compensation; an increase of $290,645 in legal fees; and an increase of $136,458 in insurance premiums.

~~Depreciation and Amortization.~~ ~~Depreciation and amortization expense for the three months ended September 30, 2021 was $434,277 as compared to $634,669~~March 31, 2022 versus $94,392 in the same period in ~~2020, a decrease of $200,392. The decrease in depreciation expense is primarily due to leasehold improvements in our West Henrietta, New York location, which became fully amortized in October 2020.~~

~~Other Expense~~. Total other expense was $115,686 for the three months ended September 30, 2021 as compared to an expense of $12,586 in the same period in 2020, a net increase of $103,100. The overall increase in other expenses was primarily the result of an increase in income and other taxes of $88,724. Investment income increased to $29,843 as compared to $4,662 in same period in 2020 as a result of increased cash available to invest in short-term deposits.

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~~Provision for Income Taxes.~~ ~~There was not a provision for income taxes in the respective three-month periods ending September 30, 2021 and 2020.~~

~~Results of Operations~~

~~Comparison of Nine Months Ended September 30, 2021 and 2020~~

~~The following table compares the Company’s consolidated statements of operations data for the nine months ended September 30, 2021 and 2020:~~

Nine Months Ended September 30,






Dollar

% Increase

2021

2020

Change

(Decrease)

Sales:









Sales of Products

$
9,657,589

$
6,392,865

$
3,264,724

51
%
Sales of Engineering Services

193,113

954,415

(761,302)

(80)
%

Total Sales

9,850,702

7,347,280

2,503,422

34
%

Cost of Sales:









Cost of Sales - Products Sold

7,578,732

5,942,043

1,636,689

28
%
Cost of Sales - Engineering Services

29,669

180,830

(151,161)

(84)
%

Total Cost of Sales

7,608,401

6,122,873

1,485,528

24
%

Gross Profit (exclusive of depreciation shown separately below)

2,242,301

1,224,407

1,017,894

83
%
Gross Profit %

23
%

17
%





Operating Expenses:









Research and Development

8,050,915

5,693,569

2,357,346

41
%
Selling and Marketing

4,167,874

2,885,872

1,282,002

44
%
General and Administrative

11,565,816

4,972,854

6,592,962

133
%
Depreciation and Amortization

1,453,367

1,923,922

(470,555)

(24)
%
Impairment of Patents and Trademarks

66,040

73,532

(7,492)

(10)
%
Loss on Fixed Asset Disposal

83,908

—

83,908

NM

Loss from Operations

(23,145,619)

(14,325,342)

(8,820,277)

62
%

Other Income (Expense):









Investment Income

45,448

33,908

11,540

34
%
Income and Other Taxes

(138,034)

(43,867)

(94,167)

215
%
Foreign Exchange Loss

(126,681)

(25,799)

(100,882)

391
%

Total Other Expense, Net

(219,267)

(35,758)

(183,509)

513
%

Net Loss

$
(23,364,886)

$
(14,361,100)

$
(9,003,786)

63
%

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~~Sales.~~ There was an increase in total sales for the nine months ended September 30, 2021 compared to the same period in 2020 of $2,503,422 or 34%. The following table reflects the major components of our sales:

Nine Months Ended

% of

Nine Months Ended

% of

Dollar

% Increase

September 30, 2021

Total Sales

September 30, 2020

Total Sales

Change

(Decrease)

Sales of Smart Glasses

$
9,657,589

98
%
$
6,392,865

87
%
$
3,264,724

51
%
Sales of Engineering Services

193,113

2
%

954,415

13
%

(761,302)

(80)
%
Total Sales

$
9,850,702

100
%
$
7,347,280

100
%
$
2,503,422

34
%

Sales of Smart Glasses products rose by 51% or $3,264,724 in the nine months ended September 30, 2021, primarily as a result of the continued growth of our M400 model and the new M4000 Smart Glasses sales, as compared to the same period in 2020. Sales revenues from our M-Series Smart Glasses were $7,676,860, a 44% increase of $2,329,702, over the prior year’s period. Revenues of Blade Smart Glasses increased by $139,763 or 15% in the nine months ended September 30, 2021 versus 2020, which has been impacted by component shortages in 2021 and higher selling prices versus the original Blade model which was discontinued in the fall of 2020.

Sales of Engineering Services for the nine months ended September 30, 2021 were $193,113 as compared to $954,415 in the 2020 period. The revenue recognized in the nine months ended September 30, 2021 for engineering services was substantially a result of a waveguide and projector development project for a micro-display organization, which we commenced in the third quarter of 2020 and completed in the second quarter of 2021.

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

Nine Months Ended

As % Related

Nine Months Ended

As % Related

Dollar

% Increase

September 30, 2021

Product Sales

September 30, 2020

Product Sales

Change

(Decrease)

Product Cost of Sales

$
4,536,378

47
%
$
3,343,346

52
%
$
1,193,032

36
%
Freight Costs

607,264

6
%

520,966

8
%

86,298

17
%
Manufacturing Overhead

2,048,865

21
%

1,344,320

21
%

704,545

52
%
Warranty Costs

53,574

1
%

47,731

1
%

5,843

12
%
Inventory Reserve for Obsolescence

—

—
%

500,600

8
%

(500,600)

(100)
%
Amortization of Software Development Costs

231,282

2
%

137,500

2
%

93,782

68
%
Software Royalties

101,369

1
%

47,580

1
%

53,789

113
%

Total Cost of Sales - Products Sold

7,578,732

78
%

5,942,043

92
%

1,636,689

28
%

Gross Profit - Product Sales

$
2,078,857

22
%
$
450,822

7
%
$
1,628,035

361
%

~~For the nine~~ months ended September 30, 2021, we reported an overall gross profit from product sales of $2,078,857 or 22% as compared to $450,822 or 7% in the same period in 2020. On a product cost of sales basis only, product direct costs were 47% of sales in the 2021 period as compared to 52% in 2020. Positively impacting overall product sales margin was the absorption of our relatively fixed overhead costs over a larger sales base.

Manufacturing overhead costs while increasing by $704,545 or 52% for the nine months ended September 30, 2021 over the 2020 comparable period, remained at 21% as a percentage of total product sales. The increase in the dollar amount of these overhead costs in the current period versus the prior period is primarily due to additional manufacturing supply chain and quality assurance personnel and non-cash stock-based compensation expense.

~~Table of Contents~~

Costs for engineering services for the nine months ended September 30, 2021 were $29,669 as compared to $180,830 in 2020. The majority of the 2021 period amounts represented the reclassification of our internal R&D wage costs associated with one recently completed waveguide development project. There was a gross profit of $163,444 from engineering services for the nine months ended September 30, 2021 versus $773,585 in the same period in 2020

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


																	(as Restated)
	Nine Months Ended		% of		Nine Months Ended		% of		Dollar		% Increase		Three Months Ended		% of		Three Months Ended		% of		Dollar		% Increase
	September 30, 2021		Total Sales		September 30, 2020		Total Sales		Change		(Decrease)		March 31, 2022		Total Sales		March 31, 2021		Total Sales		Change		(Decrease)
Research and Development	$	8,050,915	82	%	$	5,693,569	77	%	$	2,357,346	41	%	$	3,103,444	124	%	$	2,205,318	56	%	$	898,126	41	%

Research and development ~~costs~~expenses for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 increased by ~~$2,357,346,~~$898,126, or 41% as compared to the same period in ~~2020.~~2021. This increase was largely due to ~~a $1,275,677 increase in salary and salary benefits related expenses, of which $537,177 was related to non-cash stock-based compensation;~~ an increase of ~~$546,984~~$435,356 in external development expenses related to our Next Generation Smart ~~Glasses; an~~Glasses (Shield); a $358,797 increase in salary and benefits expenses, of ~~$163,136 in software subscriptions; an increase of $105,697 in other research and development consulting fees;~~which $137,399 was related to non-cash stock-based compensation; and an increase of ~~$103,718~~$52,167 in ~~research~~recruitment and ~~development supplies.~~

hiring fees.

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


																	(as Restated)
	Nine Months Ended		% of		Nine Months Ended		% of		Dollar		% Increase		Three Months Ended		% of		Three Months Ended		% of		Dollar		% Increase
	September 30, 2021		Total Sales		September 30, 2020		Total Sales		Change		(Decrease)		March 31, 2022		Total Sales		March 31, 2021		Total Sales		Change		(Decrease)
Selling and Marketing	$	4,167,874	42	%	$	2,885,872	39	%	$	1,282,002	44	%	$	2,023,435	81	%	$	1,303,430	33	%	$	720,005	55	%

Selling and marketing ~~costs~~expenses for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 increased by ~~$1,282,002~~$720,005 or ~~44%~~55% as compared to the same period in ~~2020.~~2021. This increase was largely due to a ~~$695,784~~$470,857 increase in salary and salary benefits related ~~expenses,~~expense, of which ~~$258,918~~$93,631 was related to non-cash stock-based compensation; an increase of ~~$382,148~~$278,897 in ~~sales consulting and marketing fees;~~trade show expenses, which was a ~~$379,377~~direct result of attending tradeshows post COVID-19 lockdowns that had benn enforced in 2021; a $100,455 increase in advertising costs; an increase of ~~$192,017~~$27,292 in travel related expenses; partially offset by decreases of $141,829 in website development and maintenance ~~costs;~~costs and ~~an increase of $42,537 in software subscriptions; partially offset by decreases of $309,997 in trade show expenses; a decrease of $74,292~~$30,987 in commissions largely due to a reduction in commissions payable to TDG (as described in Note 6 of the financial statements) for defense related engineering ~~services; and a decrease of $54,241 in travel related expenses.~~services.

General and Administrative. General and administrative ~~costs~~expenses include professional fees, investor relations (IR) costs, salaries and related non-cash stock-based compensation, travel costs, office and rental costs.


																	(as Restated)
	Nine Months Ended		% of		Nine Months Ended		% of		Dollar		% Increase		Three Months Ended		% of		Three Months Ended		% of		Dollar		% Increase
	September 30, 2021		Total Sales		September 30, 2020		Total Sales		Change		(Decrease)		March 31, 2022		Total Sales		March 31, 2021		Total Sales		Change		(Decrease)
General and Administrative	$	11,565,816	117	%	$	4,972,854	68	%	$	6,592,962	133	%	$	5,453,833	218	%	$	6,027,757	154	%	$	(573,924)	(10)	%

General and administrative ~~costs~~expenses for the ~~nine~~three months ended ~~September 30, 2021 increased~~March 31, 2022 decreased by ~~$6,592,962~~$573,924 or ~~133%~~10% as compared to the same period in ~~2020.~~2021. This ~~increase~~decrease was largely due to a ~~$5,337,998 increase~~$594,460 decrease in salary and ~~salary~~ benefits expenses, related ~~expenses, of which $4,630,089 was related~~primarily to non-cash stock-based ~~compensation; an increase~~compensation which was significantly higher the first quarter of ~~$479,599~~2021 due to the vesting of equity market capitalization milestones under the LTIP; a decrease of $101,388 in ~~legal expenses; an increase of $210,893~~shareholder related expenses, a $70,111 decrease in recruitment and hiring expenses; a $31,770 decrease in regulatory filings fees; ~~an increase~~and a $30,384 decrease in legal expenses; partially offset by increases of ~~$236,218~~$177,159 in audit and tax advisory fees and $118,297 in insurance ~~premiums; an increase in shareholder related expenses of $191,005; an increase of $114,562 in regulatory filing fees; and an increase of $87,296 in software subscription expenses.~~

premiums.

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Depreciation and Amortization. Depreciation and amortization expense for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 was ~~$1,453,367~~$422,931 as compared to ~~$1,923,922~~$517,412 in the same period in ~~2020,~~2021, a decrease of ~~$470,555.~~$94,481. The decrease in depreciation expense is primarily due to ~~leasehold improvements in our West Henrietta, New York location, which~~certain fixed assets related to machinery and tooling that became fully ~~amortized~~depreciated in ~~October 2020.~~2021.

Other Expense. Total other expense was ~~$219,267~~$92,109 for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 as compared to ~~$35,758~~$65,405 in the same period in ~~2020,~~2021, an increase of ~~$183,509.~~$26,704. The overall increase in other expenses was primarily the result of an increase ~~in foreign exchange losses~~ of ~~$100,882 and an increase of $94,167~~$27,907 in income and other taxes.

Provision for Income Taxes. There was not a provision for income taxes in the respective ~~nine-month~~three month periods ending ~~September 30, 2021~~March 31, 2022 and ~~2020.~~2021.

Liquidity and Capital Resources

Capital Resources: As of ~~September 30, 2021,~~March 31, 2022, we had cash and cash equivalents of ~~$128,746,661, an increase~~$113,329,734, a decrease of ~~$92,677,153~~$6,874,139 from ~~$36,069,508~~$120,203,873 as of December 31, ~~2020.~~2021.

As of ~~September 30, 2021,~~March 31, 2022, we had current assets of ~~$143,988,078~~$129,497,433 as compared to current liabilities of ~~$3,650,294~~$2,940,319 which resulted in a positive working capital position of ~~$140,337,784.~~$126,557,114. As of December 31, ~~2020,~~2021, we had a working capital position of ~~$41,959,763.~~$132,993,899. Our current liabilities are comprised principally of accounts payable, accrued expenses and operating lease right-of-use liabilities.

Summary of Cash Flow:

The following table summarizes our select cash flows for the ~~nine~~three months ended:


	September 30,		September 30,		March 31,		March 31,
	2021		2020		2022		2021
Net Cash Provided by (used in)
Net Loss less Non-Cash Operating Expenses							$	(5,653,620)	$	(3,844,007)
Operating Activities	$	(18,909,428)	$	(11,259,877)	$	(6,435,079)	$	(5,921,629)
Investing Activities		(4,340,443)		(1,162,592)		(217,227)		(650,655)
Financing Activities		115,927,024		26,755,236		(221,833)		103,224,872

During the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, we used ~~a net $18,909,428~~$6,435,042 of cash for operating activities as compared to ~~$11,259,877~~$5,921,629 for the comparable period in ~~2020.~~2021. For the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, we incurred a net loss of ~~$23,364,886,~~$10,506,001, which, after adding back non-cash operating expenses of ~~$9,094,889,~~$4,852,381, resulted in a net cash loss of ~~$14,269,997~~$5,653,620 before changes in working capital. For the ~~nine~~three months ended ~~September 30, 2020,~~March 31, 2021, we ~~had~~incurred a net loss of $9,151,370, which, after adding back non-cash operating expenses of $5,307,363, resulted in a net cash loss of ~~$10,207,144~~$3,844,007 before changes in working capital. Net changes in working capital items were ~~$4,639,430~~$781,422 for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 with the largest factor resulting from ~~$5,196,613~~a $1,123,307 reduction in trade accounts payables and other accrued expenses, a $489,597 of investments in inventory and vendor ~~prepayments for M400 components;~~prepayments; partially offset by ~~an increase~~decreases in ~~accrued~~accounts receivable of $690,775 and other prepaid expenses of ~~$567,947.~~$213,394.

During the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, we used ~~$4,340,443~~$217,227 of cash for investing activities, which ~~includes $3,592,703~~included $57,758 for purchases of manufacturing equipment and product mold ~~tooling, and chip design and tooling fees; $442,582~~tooling; $34,469 in patent and trademark ~~expenditures~~expenditures; and a ~~$200,000 equity~~further investment of $125,000 in ~~a strategic business partner.~~the purchase of software operating license upgrades for our smart glasses platform. For the ~~nine~~three months ended ~~September 30, 2020,~~March 31, 2021, we used a total of ~~$1,162,592~~$650,655 in cash for investing activities.

During the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, we ~~received $115,927,024~~used $221,833 in net cash from financing activities, which ~~included: (i) $91,652,617 in net proceeds from~~included $251,057 of share repurchases under our ~~sales of equity securities~~Share Buyback Program that ~~closed~~was announced on March ~~30, 2021 and April 1, 2021, (ii) $34,705,068 in proceeds from the exercise of warrants, and (iii) $713,703~~2, 2022; partially offset by $29,224 in proceeds from the exercise of stock options. The proceeds were partially offset by a: (i) $10,000,000 payment to Intel for the settlement of our accrued Series A Preferred Stock dividends, and (ii) a $1,144,366 payment for tax withholdings related to our

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employee stock awards in 2020 that were granted as part of our salary reduction program, which vested in January 2021, whereby the Company paid tax withholding amounts on behalf of the employees in exchange for shares withheld to cover the amounts paid.

For the ~~nine~~three months ended ~~September 30, 2020,~~March 31, 2021, we received ~~$26,755,236~~$103,224,872 in proceeds from financing activities, primarily from sales of our equity securities.

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As of ~~September 30, 2021,~~March 31, 2022, the Company does not have any current or long-term debt obligations outstanding.

We incurred a net loss for the nine months ended September 30, 2021 of $23,364,886 and annual net losses of $17,952,172 in 2020 and $26,476,370 in 2019. The Company has an accumulated deficit of $186,059,869 as of September 30, 2021.

The Company’s cash requirements are primarily for funding operating losses, working capital, research and development, and capital expenditures. We incurred a net loss for the three months ended March 31, 2022 of $10,506,001 and annual net losses of $40,377,160 (of which $17,302,833 was related to non-cash stock-based compensation, primarily due to our LTIP) in 2021 and $17,952,172 in 2020. The Company has an accumulated deficit of $213,578,144 as of March 31, 2022.

On March 2, 2022, our Board of Directors approved the repurchase by the Company of up to an aggregate of $25 million of our common stock by open market or privately negotiated transactions under the Share Buyback Program. This program is in effect for one year, does not obligate the Company to acquire any particular amount of common stock, and may be suspended or discontinued at any time at the Company’s sole discrestion.During the three months ended March 31, 2022, the Company repurchased 36,685 shares of our common stock at an average cost of $6.84. As of March 31, 2022, 36,685 shares of our common stock were held in treasury.

Our operations are financed primarily through the net proceeds from the sale of our equity securities. As of ~~September 30, 2021,~~March 31, 2022, our principal sources of liquidity consisted of cash and cash equivalents of ~~$128,746,661.~~$113,329,734.

Forward Looking Statements

This quarterly report includes forward-looking statements within the meaning of the ~~safe harbor~~Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on our management’s beliefs and assumptions and on information currently available to our management. Forward-looking statements include, but are not limited to, statements concerning:

●

trends in our operating expenses, including personnel costs, research and development expense, sales and marketing expense, and general and administrative expense;

●

the effect of competitors and competition in our markets;

●

our wearable smart glasses products and their market acceptance and future potential;

●

our ability to develop, timely introduce, and effectively manage the introduction of new products and services or improve our existing products and services;

●

expected technological advances by us or by third parties and our ability to leverage them;

●

our ability to attract and retain customers;

●

our ability to accurately forecast consumer demand and adequately manage our inventory;

●

our ability to deliver an adequate supply of product to meet demand;

●

our ability to maintain and promote our brand and expand brand awareness;

●

our ability to detect, prevent, or fix defects in our products;

●

our reliance on third-party suppliers, contract manufacturers and logistics providers and our limited control over such parties;

●

trends in revenue, costs of revenue, and gross margin and our possible or assumed future results of operations;

●

our ability to attract and retain highly skilled employees;

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●

the impact of foreign currency exchange rates;

●

the effect of future regulations;

●

the sufficiency of our existing cash and cash equivalent balances and cash flow from operations to meet our working capital and capital expenditure needs for at least the next 12twelve (12) months; and

●

general market, political, economic, business and public health conditions.

All statements in this quarterly report that are not historical facts are forward-looking statements. We may, in some cases, use terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would” or similar expressions that convey uncertainty of future events or outcomes to identify forward-looking statements.

All such forward-looking statements are subject to certain risks and uncertainties and should be evaluated in light of important risk factors that may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. These risk factors include, but are not limited to, those that are described in “Risk Factors” in this report and under Item 1A and elsewhere in our ~~annual report~~Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021 and other filings we make with the Securities and Exchange Commission and the following: business and economic conditions, rapid technological changes accompanied by frequent new product introductions, competitive pressures, dependence on key customers, inability to gauge order flows from customers, fluctuations in quarterly and annual results, the reliance on a limited number of third-party suppliers, limitations of our manufacturing capacity and arrangements, the protection of our proprietary technology, the effects of pending or threatened litigation, the dependence on key personnel, changes in critical accounting estimates, potential impairments related to investments, foreign regulations, liquidity issues, and potential material weaknesses in internal control over financial reporting. Further, during weak or uncertain economic periods, customers may delay the placement of their orders. These factors often result in a substantial portion of our revenue being derived from orders placed within a quarter and shipped in the final month of the same quarter.

We caution readers to carefully consider such factors. Many of these factors are beyond our control. In addition, any forward-looking statements represent our estimates only as of the date they are made and should not be relied upon as representing our estimates as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, except as may be required under applicable securities laws, we specifically disclaim any obligation to do so.

Item 3.Quantitative and Qualitative Disclosures about Market Risk

We invest our excess cash in high-quality short-term corporate debt instruments, which bear lower levels of relative risk. We believe that the effect, if any, of ~~reasonably~~ possible near-term changes in interest rates on our financial position, results of operations, and cash flows should not be material to our cash flows or income. It is possible that interest rate movements would increase our unrealized gain or loss on interest rate securities. We are exposed to changes in foreign currency exchange rates primarily through transaction gains and losses as a result of non-U.S. dollar denominated cash flows related to business activities in Japan and Europe. We do not currently hedge our foreign currency exchange rate risk. We estimate that any market risk associated with our international operations is unlikely to have a material adverse effect on our business, financial condition or results of operation.

Item 4.Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Management, with the participation of the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), has performed an evaluation of the effectiveness of our disclosure controls and procedures that are defined in Rule 13a-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this report. This evaluation included consideration of the controls, processes, and procedures that are ~~designed to ensure that~~

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designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is properly recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our ~~management, including our~~ CEO and CFO have concluded that our disclosure controls and procedures were not effective ~~at September 30, 2021.~~because of the material weakness in internal control over financial reporting described below and disclosed on the 2021 Form 10-K.

Changes in Internal Control over Financial Reporting

~~There have not been any changes~~As reported in our assessment of the effectiveness of our internal control over financial reporting as of December 31, 2021, included in “Item 9A. Controls and Procedures” of our Annual Report on Form 10-K for the year ended December 31, 2021, our internal control over financial reporting was considered ineffective as of that date as a result of a material weakness. The material weakness that existed at that time was over the Company’s internal control over financial reporting ~~(as defined~~related to the methodology utilized by the Company to calculate the fair market value of the LTIP stock options issued in ~~13a-15(f)~~March 2021 for the achievement of certain equity market capitalization milestones, and ~~15d-15(f) promulgated under the Exchange Act) that occurred during~~ the Company’s ~~most recent fiscal~~subsequent identification and correction of an error in that calculation.

In the first quarter of 2022, we designed and, to the extent possible, implemented control improvements to remediate the material weakness stated above, which include; (i) a more robust and comprehensive review by management each period to identify unusual and non-routine transactions, (ii) a process to identify and engage resources, including third-party resources, with the technical accounting expertise needed to timely address any complex technical accounting issues that ~~have materially affected, or are reasonably likely~~affect our consolidated financial statements, and (iii) a more robust process for the selection of third-party specialists and management review of their work. As of March 31, 2022, not enough time has passed from the implementation of these new procedures to ~~materially affect, the Company’s internal~~allow for successful control ~~over financial reporting.~~testing that would evidence that this control weakness has been fully remediated. Management expects to show full remediation of this material weakness in 2022.

Part II. OTHER INFORMATION

Item 1.Legal Proceedings

We are not currently involved in any actual or pending legal proceeding or litigation and we are not aware of any such proceedings contemplated by or against us or involving our property.

Item 1A.Risk Factors

In addition to the other information set forth in this report you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our ~~annual report~~Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021. There have been no material changes from those risk factors. The risks discussed in our ~~2020 annual report~~2021 Annual Report could materially affect our business, financial condition and future results.

Impact of COVID-19 and Geo-political Actions

The implications of COVID-19 and Geo-political actions on our results from operations going forward remain uncertain. ~~The COVID-19 pandemic still has~~These have the ongoing potential to cause adverse effects to our customers, suppliers or business partners in locations that have or will experience more pronounced disruptions, which could result in a reduction to future revenue and manufacturing output as well as delays in our new product development activities. Recent increases in demand for certain chips within various technology sectors and other industries has been one of the ripple effects of the ~~COVID~~COVID-19 crisis and Geo-political actions that isare causing shortages of certain chips and negatively impacting many companies’ supply chains and their ability to maintain or increase their production to meet market demands. At this time, we are operating successfully with our existing products but are seeing longer component lead times which is increasing risk in our supply chain as well as the need to carry more component inventories and make earlier purchase commitments for ~~components.~~components, which could have an impact on future products.

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Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

Sale of Unregistered Securities – On July 28, 2021, the Company issued 300,000 shares of restricted common stock to the new managing director of its newly established VCS business unit. These restricted shares are subject to vesting, including 50,000 shares that may be earned over 3 years based upon continued employment with the Company, and 250,000 shares that are being held in escrow, and which may be earned upon achievement of revenue and EBITDA operational milestones for VCR within specified periods of time over 5 years. In connection with the foregoing, we relied upon the exemption from registration provided by Section 4(a)(2) under the Securities Act of 1933, as amended, for transactions not involving a public offering.none

Purchase of Equity ~~Securities – none~~Securities:


Period	Total number of shares purchased (1)	Average price paid per share (1)		Total number of shares purchased under the Company's Share Buyback Program (1)	Maximum dollar value that may yet be purchased (1)
March 1 - 31, 2022	36,685	$	6.84	36,685	$	24,748,906

(1)

Item 3.Defaults Upon Senior Securities

None

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Item 4.Mine Safety Disclosures

Not Applicable

Item 5.Other Information

None

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Item 6.Exhibits


Exhibit No.		Description

31.1		Certification of the Chief Executive Officer of the Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

31.2		Certification of the Chief Financial Officer of the Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

32.1		Certification of the Chief Executive Officer of the Registrant pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

32.2		Certification of the Chief Financial Officer of the Registrant pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

101.INS		Inline XBRL Instance Document

101.SCH		Inline XBRL Taxonomy Extension Schema Document

101.CAL		Inline XBRL Taxonomy Extension Calculation Link base Document

101.DEF		Inline XBRL Taxonomy Extension Definition Link base

101.LAB		Inline XBRL Taxonomy Extension Label Link base Document

101.PRE		Inline XBRL Taxonomy Extension Presentation Link base Document

104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)*

* Filed herewith.

** Furnished herewith

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SIGNATURES

Pursuant to the requirements 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.


	VUZIX CORPORATION

Date: ~~November 8, 2021~~May 10, 2022	By:	/s/ Paul Travers
		Paul Travers
		President, Chief Executive Officer
		(Principal Executive Officer)

Date: ~~November 8, 2021~~May 10, 2022	By:	/s/ Grant Russell
		Grant Russell
		Executive Vice President and Chief Financial
		Officer
		(Principal Financial and Accounting Officer)

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