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Table of Contents

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 June 30, 2020

OR

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: (585359-5900

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 August 10, 2020, there were 39,004,106 shares of the registrant’s common stock outstanding.

Table of Contents

Vuzix Corporation

INDEX

 

 

Page
No.

 

 

 

Part I – Financial Information

3

 

 

 

Item 1.

Consolidated Financial Statements (Unaudited):

3

 

 

 

Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019

3

 

 

 

Consolidated Statements of Changes in Stockholders’ Equity for the Three and Six Months Ended June 30, 2020 and 2019

4

 

 

 

Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2020 and 2019

5

 

 

 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2020 and 2019

6

 

 

 

Notes to the Unaudited Consolidated Financial Statements

7

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

16

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

29

 

 

 

Item 4.

Controls and Procedures

30

 

 

 

Part II – Other Information

30

 

 

 

Item 1.

Legal Proceedings

30

 

 

 

Item 1A.

Risk Factors

30

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

31

 

 

 

Item 3.

Defaults Upon Senior Securities

31

 

 

 

Item 4.

Mine Safety Disclosure

31

 

 

 

Item 5.

Other Information

31

 

 

 

Item 6.

Exhibits

32

 

 

 

Signatures

33

2

Table of Contents

Part 1: FINANCIAL INFORMATION

Item 1: Consolidated Financial Statements

VUZIX CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited)

    

June 30, 

December 31, 

    

2020

    

2019

ASSETS

 

  

 

  

Current Assets

 

  

 

  

Cash and Cash Equivalents

$

13,229,182

$

10,606,091

Accounts Receivable, Net

 

1,021,069

 

1,371,913

Accrued Project Revenue

 

175,005

 

Note Receivable

250,000

250,000

Inventories, Net

 

6,256,333

 

5,707,867

Licenses

471,809

Manufacturing Vendor Prepayments

 

617,330

 

242,539

Prepaid Expenses and Other Assets

 

902,540

 

895,098

Total Current Assets

 

22,923,268

 

19,073,508

Long-Term Assets

 

  

 

  

Fixed Assets, Net

 

3,501,971

 

4,327,676

Operating Lease Right-of-Use Asset

1,726,700

2,096,190

Patents and Trademarks, Net

 

1,370,180

 

1,294,675

Licenses, Net

 

254,051

 

314,416

Intangible Asset, Net

 

775,910

 

990,000

Other Assets, Net

 

550,000

 

350,000

Total Assets

$

31,102,080

$

28,446,465

LIABILITIES AND STOCKHOLDERS' EQUITY

 

  

 

  

Current Liabilities

 

  

 

  

Accounts Payable

$

832,584

$

1,062,785

Unearned Revenue

 

65,216

 

142,463

Accrued Expenses

 

762,926

 

885,897

Taxes Payable

 

24,601

 

18,687

Operating Lease Right-of-Use Liability

444,495

524,825

Current Portion of Debt

684,286

Total Current Liabilities

 

2,814,108

 

2,634,657

Long-Term Liabilities

Operating Lease Right-of-Use Liability

1,282,205

1,571,365

Long-Term Portion of Debt

871,614

Total Long-Term Liabilities

2,153,819

1,571,365

Total Liabilities

 

4,967,927

 

4,206,022

Stockholders' Equity

 

  

 

  

Preferred Stock - $0.001 Par Value, 5,000,000 Shares Authorized; 49,626 Shares Issued and Outstanding as of June 30, 2020 and December 31, 2019.

 

50

 

50

Common Stock - $0.001 Par Value, 100,000,000 Shared Authorized; 39,004,106 and 33,128,620 Shares Issued and Outstanding as of June 30, 2020 and December 31, 2019.

 

39,004

 

33,128

Additional Paid-in Capital

 

180,438,200

 

168,950,076

Accumulated Deficit

 

(154,343,101)

 

(144,742,811)

Total Stockholders' Equity

 

26,134,153

 

24,240,443

Total Liabilities and Stockholders' Equity

$

31,102,080

$

28,446,465

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

3

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, 2020

49,626

$

50

 

33,128,620

$

33,128

$

168,950,076

$

(144,742,811)

$

24,240,443

Stock-Based Compensation Expense

 

 

 

875,486

 

876

 

910,815

 

 

911,691

Proceeds from Common Stock Offerings

 

 

 

5,000,000

 

5,000

 

11,245,000

 

 

11,250,000

Direct Costs of Common Stock Offerings

 

 

 

 

 

(667,691)

 

 

(667,691)

Net Loss

 

 

 

 

 

 

(9,600,290)

 

(9,600,290)

Balance - June 30, 2020

 

49,626

$

50

 

39,004,106

$

39,004

$

180,438,200

$

(154,343,101)

$

26,134,153

Preferred Stock

Common Stock

Additional

Accumulated

    

Shares

    

Amount

    

Shares

    

Amount

    

Paid-In Capital

    

Deficit

    

Total

Balance - April 1, 2020

49,626

$

50

 

33,128,620

$

33,128

$

169,160,041

$

(150,104,435)

$

19,088,784

Stock-Based Compensation Expense

 

 

 

875,486

 

876

 

700,850

 

 

701,726

Proceeds from Common Stock Offering

 

 

 

5,000,000

 

5,000

 

11,245,000

 

 

11,250,000

Direct Costs of Common Stock Offering

 

 

 

 

 

(667,691)

 

 

(667,691)

Net Loss

 

 

 

 

 

 

(4,238,666)

 

(4,238,666)

Balance - June 30, 2020

 

49,626

$

50

 

39,004,106

$

39,004

$

180,438,200

$

(154,343,101)

$

26,134,153

Preferred Stock

Common Stock

Additional

Accumulated

    

Shares

    

Amount

    

Shares

    

Amount

    

Paid-In Capital

    

Deficit

    

Total

Balance - January 1, 2019

49,626

$

50

 

27,591,670

$

27,591

$

148,695,775

$

(118,266,441)

$

30,456,975

Stock-Based Compensation Expense

 

 

 

12,496

 

13

 

749,132

 

 

749,145

Net Loss

 

 

 

 

 

 

(11,415,695)

 

(11,415,695)

Balance - June 30, 2019

 

49,626

$

50

 

27,604,166

$

27,604

$

149,444,907

$

(129,682,136)

$

19,790,425

Preferred Stock

Common Stock

Additional

Accumulated

    

Shares

    

Amount

    

Shares

    

Amount

    

Paid-In Capital

    

Deficit

    

Total

Balance - April 1, 2019

49,626

$

50

 

27,597,917

$

27,598

$

149,109,454

$

(124,626,202)

$

24,510,900

Exercise of Warrants

 

 

 

 

 

 

 

Stock-Based Compensation Expense

 

 

 

6,249

 

6

 

335,453

 

 

335,459

Net Loss

 

 

 

 

 

 

(5,055,934)

 

(5,055,934)

Balance - June 30, 2019

 

49,626

$

50

 

27,604,166

$

27,604

$

149,444,907

$

(129,682,136)

$

19,790,425

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

4

Table of Contents

VUZIX CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

The Three Months Ended June 30, 

The Six Months Ended June 30, 

    

2020

    

2019

    

2020

    

2019

Sales:

 

  

 

  

 

  

 

  

Sales of Products

$

2,335,189

$

1,834,915

$

3,706,699

$

3,208,286

Sales of Engineering Services

 

701,654

 

350,946

 

861,860

 

350,946

Total Sales

 

3,036,843

 

2,185,861

 

4,568,559

 

3,559,232

Cost of Sales:

 

  

 

  

 

  

 

  

Cost of Sales - Products Sold

 

2,122,329

 

1,941,350

 

3,548,367

 

3,274,832

Cost of Sales - Engineering Services

 

118,594

 

92,472

 

143,755

 

92,472

Total Cost of Sales

 

2,240,923

 

2,033,822

 

3,692,122

 

3,367,304

Gross Profit (exclusive of depreciation shown separately below)

 

795,920

 

152,039

 

876,437

 

191,928

Operating Expenses:

 

  

 

  

 

  

 

  

Research and Development

 

1,796,268

 

1,987,129

 

3,819,326

 

4,503,228

Selling and Marketing

 

796,857

 

822,749

 

1,949,665

 

2,240,714

General and Administrative

 

1,799,958

 

1,803,590

 

3,337,778

 

3,699,992

Depreciation and Amortization

 

640,711

 

607,965

 

1,289,253

 

1,167,054

Impairment of Patents and Trademarks

 

 

 

57,532

 

Total Operating Expenses

 

5,033,794

 

5,221,433

 

10,453,554

 

11,610,988

Loss from Operations

 

(4,237,874)

 

(5,069,394)

 

(9,577,117)

 

(11,419,060)

Other Income (Expense):

 

  

 

  

 

  

 

  

Investment Income

 

7,089

 

32,739

 

29,246

 

91,052

Other Taxes

 

(9,379)

 

(10,301)

 

(27,065)

 

(62,963)

Foreign Exchange Gain (Loss)

 

1,498

 

(8,978)

 

(25,354)

 

(24,724)

Total Other Income (Expense)

 

(792)

 

13,460

 

(23,173)

 

3,365

Loss Before Provision for Income Taxes

 

(4,238,666)

 

(5,055,934)

 

(9,600,290)

 

(11,415,695)

Provision for Income Taxes

 

 

 

 

Net Loss

 

(4,238,666)

 

(5,055,934)

 

(9,600,290)

 

(11,415,695)

Preferred Stock Dividends

 

(507,315)

 

(477,907)

 

(1,007,153)

 

(943,672)

Loss Attributable to Common Stockholders

$

(4,745,981)

$

(5,533,841)

$

(10,607,443)

$

(12,359,367)

Basic and Diluted Loss per Share

$

(0.13)

$

(0.20)

$

(0.31)

$

(0.45)

Weighted-average Shares Outstanding - Basic and Diluted

 

36,341,616

 

27,602,014

 

34,735,118

 

27,598,909

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

5

Table of Contents

VUZIX CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Six Months Ended June 30, 

    

2020

    

2019

Cash Flows from Operating Activities

 

  

 

  

Net Loss

$

(9,600,290)

$

(11,415,695)

Non-Cash Adjustments

 

  

 

  

Depreciation and Amortization

 

1,289,253

 

1,167,054

Amortization of Software Development Costs in Cost of Sales - Products

 

91,664

 

50,000

Stock-Based Compensation

 

941,933

 

872,250

Impairment of Patents and Trademarks

 

57,532

 

(Increase) Decrease in Operating Assets

 

  

 

  

Accounts Receivable

 

(120,965)

 

(251,810)

Accrued Project Revenue

 

(175,005)

 

(281,783)

Inventories

 

(548,466)

 

(1,146,421)

Vendor Prepayments

 

(374,791)

 

239,558

Prepaid Expenses and Other Assets

 

(7,442)

 

496,613

Increase (Decrease) in Operating Liabilities

 

  

 

  

Accounts Payable

 

(230,201)

 

(1,080,970)

Accrued Expenses

 

(122,971)

 

(223,286)

Customer Deposits

 

 

(151,542)

Unearned Revenue

 

(77,247)

 

17,479

Income and Other Taxes Payable

 

5,915

 

25,432

Net Cash Flows Used in Operating Activities

 

(8,871,081)

 

(11,683,121)

Cash Flows from Investing Activities

 

  

 

  

Purchase of Fixed Assets

 

(253,174)

 

(1,286,811)

Investments in Patents and Trademarks

 

(140,863)

 

(137,755)

Investments in Licenses and Other Intangible Assets

 

(250,000)

 

(796,226)

Net Cash Used in Investing Activities

 

(644,037)

 

(2,220,792)

Cash Flows from Financing Activities

 

  

 

  

Net Proceeds from Sale of Equity

 

10,582,309

 

Proceeds from Term Note

 

1,555,900

 

Net Cash Flows from Financing Activities

 

12,138,209

 

Net Increase (Decrease) in Cash and Cash Equivalents

 

2,623,091

 

(13,903,913)

Cash and Cash Equivalents - Beginning of Period

 

10,606,091

 

17,263,643

Cash and Cash Equivalents - End of Period

$

13,229,182

$

3,359,730

Supplemental Disclosures

 

  

 

  

Unamortized Common Stock Expense included in Prepaid Expenses

$

223,496

$

123,105

Non-Cash Investment in Licenses

$

471,809

$

Stock-Based Compensation Expense - Expensed less Previously Issued

$

31,118

$

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 six months ended June 30, 2020 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, 2019, as reported in the Company’s Annual Report on Form 10-K filed with the SEC on March 16, 2020.

Going Concern

The accompanying unaudited consolidated financial statements have been prepared assuming that we will continue as a going concern. This basis of accounting contemplates the recovery of our assets and the satisfaction of liabilities in the normal course of business. These unaudited consolidated financial statements do not include any adjustments to the specific amounts and classifications of assets and liabilities, which might be necessary should we be unable to continue as a going concern. The Company incurred net losses for the six months ended June 30, 2020 of $9,600,290 and annual net losses of $26,476,370 in 2019 and $21,875,713 in 2018. As of June 30, 2020, the Company had an accumulated deficit of $154,343,101.

The Company’s cash requirements are primarily for funding operating losses, research and development, working capital, and capital expenditures. Our cash requirements related to funding operating losses depend upon numerous factors, including new product development activities, our ability to commercialize our products, our products’ timely market acceptance, selling prices and gross margins, and other factors. Historically, the Company has met its cash needs primarily by the sale of equity securities.

On May 10, 2020, the Company entered into a securities purchase agreement with certain purchasers for the sale of an aggregate of 5,000,000 shares of the Company’s common stock in a registered direct offering at a purchase price of $2.25 per share for aggregate gross sale proceeds of $11,250,000. The purchase agreement closed on May 13, 2020. The Company received net proceeds after issuance costs and expenses of $10,582,309.

The Company’s management intends to take actions necessary to continue as a going concern, as discussed herein. The Company will need to grow its business significantly to become profitable and self-sustaining on a cash flow basis or it will be required to raise new equity and/or debt capital. Management’s plans concerning these matters and managing our liquidity include, among other things:

the expected growing success of our third-generation monocular device for enterprise, the M400 Smart Glasses, which entered production near the end of the third quarter of 2019, and to date customer interest and adoption of the M400 has been more rapid than earlier models;

the introduction of the M4000 in the Fall of 2020 which will be the Company’s next generation see-through waveguide-based product specifically designed for the enterprise market;

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the continued sale of our existing M300XL finished goods and Blade component inventory, of which we have significant levels;

increased efforts to further promote our engineering services programs, which result in overall higher gross margins since such programs enable the absorption of some of our operating costs by utilizing a significant portion of our internal engineering fixed salary costs;

continued to pursue licensing and strategic opportunities around our waveguide technologies with potential OEMs, which would include the receipt of upfront licensing fees and on-going supply agreements;

implementation of a Company-wide voluntary payroll reduction program where employees could take salary reductions between 5% to 50% of their base salary for the period from May to December 2020 in exchange for shares of common stock at a value of 150% of the net cash wage reduction. The cash savings under this program will be approximately $888,000. The issuance of the related stock awards is further explained in Note 12;

decreased tradeshow and external PR expenditures;

right-sized operations and implemented greater control of operating costs across all areas of the Company, including head-count freezes or reductions;

delayed or curtailed discretionary and non-essential capital expenditures not related to near-term new products;

reduced the rate of new product introductions and leveraged existing platforms to reduce new product development and engineering costs; and

further reduced the rate of research and development spending on new technologies, particularly the use of external contractors.

Based upon our current amount of cash on hand, management’s historical ability to raise capital, and our ability to manage our cost structure and adjust operating plans if and as required, we have concluded that substantial doubt of our ability to continue as a going concern has been alleviated.

Customer Concentrations

For the three months ended June 30, 2020, no one customer represented more than 10% of total product revenue and two defense customers represented 100% of engineering services revenue. For the three months ended June 30, 2019, one customer represented 48% of total product revenue and one defense customer represented 100% of engineering services revenue.

For the six months ended June 30, 2020, no one customer represented more than 10% of total product revenue and two defense customers represented 100% of engineering services revenue. For the six months ended June 30, 2019, one customer represented 30% of total product revenue.

As of June 30, 2020, three customers represented 36%, 20% and 12% of accounts receivable, respectively, and one defense customer represented 100% of accrued project revenue. As of December 31, 2019, three customers represented 32%, 26% and 13%, respectively, of accounts receivable.

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

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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.

Note 2 – Revenue Recognition and Contracts with Customers

Disaggregated Revenue

The Company’s total revenue was comprised of four major product lines: Smart Glasses Sales, OEM Product Sales, Waveguide and Display Engine Sales, and Engineering Services. The following table summarizes the revenue recognized by major product line:

Three Months Ended

Six Months Ended

June 30, 

June 30, 

    

2020

    

2019

    

2020

    

2019

Revenues

 

  

 

  

 

  

 

  

Smart Glasses Sales

$

2,335,189

$

835,847

$

3,706,699

$

2,114,218

OEM Product Sales

 

 

951,570

 

 

951,570

Waveguide and Display Engine Sales

 

 

47,498

 

 

142,498

Engineering Services

 

701,654

 

350,946

 

861,860

 

350,946

Total Revenue

$

3,036,843

$

2,185,861

$

4,568,559

$

3,559,232

Significant Judgments

Under Topic 606 “Revenue from Contracts with Customers”, there are judgments used that could potentially impact both the timing of our satisfaction of performance obligations and our determination of transaction prices used in determining revenue recognized by major product line. Judgments made include considerations in determining our transaction prices 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 our product and include general payment terms that are between Net 30 and 60 days. For our Engineering Services, performance obligations are recognized over time using the input method and the estimated costs to complete each project are considered significant judgments.

Performance Obligations

Revenues from our performance obligations 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 over time by using the input method measuring progress toward satisfying the performance obligations. Satisfaction of our performance obligations related to our Engineering Services is measured by the Company’s 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 of completing the contract. As such, the Company believes that our methodologies for recognizing revenue over time for our Engineering Services correlate directly with the transfer of control of the underlying assets to our customers.

Our standard product sales include a twelve (12) month assurance-type product warranty. 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 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 net sales by revenue recognition method as a percentage of total net sales for the six months ended June 30, 2020:

    

% of Total Net Sales

 

Point-in-Time

 

77

%

Over Time – Input Method

 

23

%

Total

 

100

%

Remaining Performance Obligations

As of June 30, 2020, the Company had less than $10,000 of remaining performance obligations under two current waveguide development projects with two global aerospace and defense firms, which represents the remainder of the total transaction price of these development agreements of $855,000, less revenue recognized under percentage of completion in the six months ended June 30, 2020. The Company currently expects to recognize the remaining revenue relating to these existing performance obligations of $10,000 in the third quarter of 2020. Revenues earned less amounts invoiced at June 30, 2020 in the amount of $175,005 are reflected as Accrued Project Revenue in the accompanying Consolidated Balance Sheets.

As of June 30, 2020, the Company had $43,000 of remaining performance obligations related to its extended warranties, which are included in deferred revenue on our Consolidated Balance Sheets. The Company is recognizing this deferred revenue on a straight-line basis ending on September 30, 2020.

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 six months ended June 30, 2020 and 2019, the calculation for basic and diluted earnings per share is considered to be the same, as the impact of potential common shares is anti-dilutive. As of June 30, 2020 and 2019, there were 14,147,580 and 7,390,669 common stock share equivalents, respectively, potentially issuable under conversion of preferred shares, options, and warrants that could dilute basic earnings per share in the future.

Note 4 – Inventories, Net

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

June 30, 

December 31, 

    

2020

    

2019

Purchased Parts and Components

$

5,351,135

$

5,985,214

Work-in-Process

 

2,072,466

 

2,414,142

Finished Goods

 

2,734,039

 

2,096,744

Less: Reserve for Obsolescence

 

(3,901,307)

 

(4,788,233)

Inventories, Net

$

6,256,333

$

5,707,867

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Note 5 – Licenses, Net

June 30, 

December 31, 

    

2020

    

2019

Licenses

$

493,717

$

493,717

Less: Accumulated Amortization

 

(312,746)

 

(179,301)

Additions

 

544,889

 

725,860

314,416

Less: Current Portion

(471,809)

Licenses, Net

$

254,051

$

314,416

In January 2020, the Company entered into a global non-exclusive master reseller agreement for certain smart glasses software under which it committed to sell a minimum number of software licenses in 2020. The amount capitalized, included in current assets on the Consolidated Balance Sheets, will be expensed to cost of goods 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 master reseller agreement.

Note 6 – Debt

Long-term debt consisted of the following:

June 30, 

December 31, 

 

    

2020

    

2019

Unsecured Term Note - Two-year term beginning on April 22, 2020. The note bears an annual interest rate of 1%, with no principal or interest payments for six (6) months.

$

1,555,900

$

Less: Amount Due Within One Year

 

(684,286)

 

Amount Due After One Year

$

871,614

$

On April 21, 2020, the Company entered into a Paycheck Protection Program (“PPP”) Term Note (“PPP Note”) under the Paycheck Protection Program of the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the U.S. Small Business Administration (the “US SBA”). The Company received total proceeds of $1,555,900 from the PPP Note. The PPP Note bears interest at the annual rate of 1%, with the first six months of interest deferred, has a term of two years, and is unsecured and guaranteed by the US SBA. The Company intends to apply for forgiveness of the PPP Note once rules are finalized, with the amount which may be forgiven expected to equal the sum of payroll costs, covered rent obligations, and covered utility payments incurred by the Company during the twenty four-week period beginning on April 21, 2020, calculated in accordance with the terms of the CARES Act.

Note 7 – Intangible Asset, Net

    

June 30, 

    

December 31, 

2020

2019

Intangible Asset

$

1,500,000

$

1,500,000

Less: Accumulated Amortization

 

(724,090)

 

(510,000)

Intangible Asset, Net

$

775,910

$

990,000

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.

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Pursuant to the TDG Amendment, the Company will be permitted to engage in sales of heads-up display components or subsystems (and any services to support such sale) for incorporation into a finished good or system for sale to military organizations, subject to certain conditions. The Company will also be permitted to sell its products to defense and security organizations that include business customers and governmental entity customers that primarily provide security and defense services, including police, fire fighters, EMTs, other first responders, 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 original non-compete agreements expire, after which the Company will be free to sell any product to any customer world-wide with no commission liability to TDG.

Total commissions expense under this agreement for the three months ended June 30, 2020 and 2019 was $140,364 and nil, respectively. Total commissions expense under this agreement for the six months ended June 30, 2020 and 2019 was $176,944 and nil, respectively. All commissions expense related to this agreement are included in Selling and Marketing expense.

Total amortization expense for this intangible asset for the three months ended June 30, 2020 and 2019 was $112,090 and $102,000. Total amortization expense for this intangible asset for the six months ended June 30, 2020 and 2019 was $214,090 and $204,000. Future monthly amortization expense for the next 23 months is approximately $34,000 per month or $408,000 per year.

Note 8 – Accrued Expenses

Accrued expenses consisted of the following:

June 30, 

December 31, 

    

2020

    

2019

Accrued Wages and Related Costs

$

299,607

$

394,669

Accrued Professional Services

 

109,480

 

217,721

Accrued Warranty Obligations

 

111,769

 

98,893

Other Accrued Expenses

 

242,070

 

174,614

Total

$

762,926

$

885,897

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 at the time of sale. The Company estimates its future warranty costs based on product-based historical performance rates and related costs to repair.

The changes in the Company’s accrued warranty obligations for the six months ended June 30, 2020 and the balance as of December 31, 2019 were as follows:

Accrued Warranty Obligation at December 31, 2019

$

98,893

Reductions for Settling Warranties

 

(59,780)

Warranties Issued During Period

 

72,656

Accrued Warranty Obligations at June 30, 2020

$

111,769

Note 9 – 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.

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Note 10 – Capital Stock

Preferred stock

The Board of Directors is authorized to establish and designate different series of preferred stock and to fix and determine their voting powers and other special rights and qualifications. A total of 5,000,000 shares of preferred stock with a par value of $0.001 are authorized as of June 30, 2020 and December 31, 2019, 49,626 of which are designated as Series A Preferred Stock. There were 49,626 shares of Series A Preferred Stock issued and outstanding on June 30, 2020 and December 31, 2019.

On January 2, 2015, the Company closed a sale of Series A Preferred Stock to Intel Corporation (the "Series A Purchaser"), pursuant to which we issued and sold an aggregate of 49,626 shares of the Company's Series A Preferred Stock, at a purchase price of $500 per share, for an aggregate purchase price of $24,813,000. Each share of Series A Preferred Stock is convertible, at the option of the Series A holder, into 100 shares of the Company's common stock (determined by dividing the Series A Original Issue Price of $500 by the Series A Conversion Price, which is equal to $5.00).

Each share of Series A Preferred Stock is entitled to receive dividends at a rate of 6% per year, compounded quarterly and payable in cash or in kind, at the Company’s sole discretion. As of June 30, 2020, total accumulated and unpaid preferred dividends were $9,608,245. As of December 31, 2019, total accumulated and unpaid preferred dividends were $8,601,092. There were no declared preferred dividends owed as of June 30, 2020 or December 31, 2019.

The Series A Purchaser has the right, but not the obligation, to participate in any proposed issuance by the Company of its securities, subject to certain exceptions and in such amount as is sufficient to maintain the Series A Purchaser’s ownership percentage in the Company, calculated immediately prior to such applicable financing, at a purchase price equal to the per share price of the Company’s securities in such applicable financing.

Common Stock

The Company’s authorized common stock consists of 100,000,000 shares, par value of $0.001. There were 39,004,106 and 33,128,620 shares of common stock issued and outstanding as of June 30, 2020 and December 31, 2019, respectively.

Historically, the Company has met its cash needs primarily by the sale of equity securities. On May 10, 2020, the Company entered into a securities purchase agreement with certain purchasers for the sale of an aggregate of 5,000,000 shares of the Company’s common stock in a registered direct offering at a purchase price of $2.25 per share for aggregate gross sale proceeds of $11,250,000. The purchase agreement closed on May 13, 2020. The Company received net proceeds after issuance costs and expenses of $10,582,309.

On May 4, 2020, the Company implemented a Company-wide voluntary payroll reduction program for all employees, pursuant to which they could take salary reductions between of 5% to 50% for the period from May to December 2020 in exchange for shares of common stock at a value of 150% of the net cash wage reduction. The cash savings under this program will be approximately $888,000 and resulted in the issuance of stock awards under the Company’s 2014 Stock Incentive Plan of 830,486 shares. These awards are subject to vesting and resale rules as disclosed in Note 12.

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Note 11 – Stock Warrants

A summary of the various changes in warrants during the six months ended June 30, 2020 is as follows:

Number of

Warrants

Warrants Outstanding at December 31, 2019

 

6,512,516

Exercised During the Period

 

Issued During the Period

 

Expired During the Period

 

Warrants Outstanding at June 30, 2020

 

6,512,516

Of the outstanding warrants as of June 30, 2020, 1,033,062 expire on June 18, 2021 and the remaining 5,479,454 expire on January 2, 2022. The weighted average remaining term of the warrants was 1.4 years. The weighted average exercise price was $4.56 per share.

Note 12 – Stock-Based Compensation

A summary of stock option activity for the six months ended June 30, 2020 is as follows:

Weighted

Number of

Average

    

Options

    

Exercise Price

Outstanding at December 31, 2019

 

1,383,591

$

4.77

Granted

 

1,370,000

 

1.36

Exercised

 

 

Expired or Forfeited

 

(81,127)

 

2.97

Outstanding at June 30, 2020

 

2,672,464

$

3.08

The weighted average remaining contractual term for all options as of June 30, 2020 and December 31, 2019 was 7.7 years and 6.3 years, respectively.

As of June 30, 2020, there were 1,135,945 options that were fully vested and exercisable at a weighted average exercise price of $4.51 per share. The weighted average remaining contractual term on the vested options is 5.2 years.

As of June 30, 2020, there were 1,536,519 unvested options exercisable at a weighted average exercise price of $2.02 per share. The weighted average remaining contractual term on the unvested options is 9.5 years.

The weighted average fair value of option grants was calculated using the Black-Scholes-Merton option pricing method. At June 30, 2020, the Company had approximately $2,236,787 of unrecognized stock compensation expense, which will be recognized over a weighted average period of approximately 2.8 years.

On May 4, 2020, the Company implemented a Company-wide voluntary payroll reduction program for all employees, pursuant to which they could take salary reductions between of 5% to 50% for the period from May to December 2020 in exchange for shares of common stock at a value of 150% of the net cash wage reduction. The cash savings under this program will be approximately $888,000 and resulted in the issuance of stock awards under the Company’s 2014 Stock Incentive Plan. The fair market value of these stock awards has been determined to be $1.53 per share and a total of 830,486 shares were issued for a total fair market value of $1,270,641. These awards are subject to vesting and resale rules. The total expense of $1,270,641 will be amortized over the salary reduction period or eight months, which began in May.

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For the three months ended June 30, 2020 and 2019, the Company recorded total stock-based compensation expense, including stock awards, of $639,358 and $382,000, respectively. For the six months ended June 30, 2020 and 2019, the Company recorded total stock-based compensation expense, including