Vuzix Corp (VUZI) FY 2021 MD&A

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

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

Overview

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

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

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Critical Accounting Policies and Significant Developments and Estimates

The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements and related notes appearing elsewhere in this annual report. The preparation of these statements in conformity with generally accepted accounting principles requires the appropriate application of certain accounting policies, many of which require us to make estimates and assumptions about future events and their impact on amounts reported in our consolidated financial statements, including the statement of operations, balance sheet, cash flow and related notes. We continually evaluate our estimates used in the preparation of our consolidated financial statements, including those related to revenue recognition, bad debts, inventories, warranty reserves, product warranty, carrying value of long-lived assets, derivatives, valuation of stock compensation awards, and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not apparent from other sources. Since we cannot determine future events and their impact with certainty, the actual results may differ from our estimates. Such differences could be material to the consolidated financial statements.

We believe that our application of accounting policies, and the estimates inherently required therein, are reasonable. We periodically reevaluate these accounting policies and estimates and make adjustments when facts and circumstances dictate a change. Historically, we have found our application of accounting policies to be appropriate, and actual results have not differed materially from those determined using necessary estimates.

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

Valuation of Inventories

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

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estimates, inventory adjustments to net realizable values would result in a reduction to the carrying value of inventory, an increase in inventory write-offs and a decrease to gross margins.

During the year ended December 31, 2021, the Company reserved for (i) an additional twenty-five percent of its remaining M300XL finished goods and related accessory inventory on-hand as of December 31, 2021and (ii) all of its Blade 1.5 excess components that will not be used in current planned builds of the Blade in 2022, due to end-of-life availability of some required components. The total reserve write-down recorded at December 31, 2021 was $519,950. The write-down and obsolescence provision for finished goods and components totaled $1,273,835 and $4,572,659 for the years ended December 31, 2020 and 2019, respectively. These provisions are included in Cost of Sales on the Consolidated Statements of Operations.

Carrying Value of Long-Lived Assets

If facts and circumstances indicate that a long-lived asset, including a products’ mold tooling and equipment, may be impaired, the carrying value is reviewed in accordance with FASB ASC Topic 360-10 Accounting for the Impairment or Disposal of Long-Lived Assets. If this review indicates that the carrying value of the asset will not be recovered as determined based on projected undiscounted cash flows related to the asset over its remaining life, the carrying value of the asset is reduced to its estimated fair value. Impairment losses are dependent on a number of factors such as general economic trends and major technology advances, and thus could be significantly different from historical results. For the year ended December 31, 2021, we recorded a loss on fixed asset disposal of $183,614 upon the retirement of certain tooling and manufacturing equipment assets no longer in use. No loss on fixed asset disposal charges on tooling and equipment were recorded in 2020 or 2019.

We perform a valuation of our patents and trademark assets when events or circumstances indicate their carrying amounts may be unrecoverable. For the years ended December 31, 2021 and 2020, there was an impairment charge of $80,163 and $73,532, respectively, and nil in 2019. The value of the remaining intellectual property, such as patents and trademarks, were valued (net of accumulated amortization) at $1,988,370 as of December 31, 2021, because management believes that this value is recoverable.

Software Development Costs

The Company capitalizes the costs of obtaining and developing its software once technological feasibility has been determined by management or of purchased software solutions when placed into service. Such costs are accumulated and capitalized. These projects could take several years to complete. The capitalized costs are then amortized over 3 years on a straight-line basis. Unsuccessful or discontinued software projects are written off and expensed in the fiscal period where the application is abandoned or discontinued. The unamortized software development costs remaining were valued (net of accumulated amortization) at $541,666 as of December 31, 2021, because management believes that this value is recoverable.

Revenue Recognition

The Company adopted the new guidance on Revenue from Contracts with Customers under FASB ASC Topic 606, “Revenue from Contracts with Customers”, as of January 1, 2018. Product sales represent the majority of the Company’s revenue. The Company recognizes revenue from these product sales as performance obligations are satisfied and transfer of control to the customer has occurred, typically upon physical shipment. Revenue is recognized in the amount that the Company expects to receive in exchange from the sale of our products. FOB shipping point is our standard shipping terms and revenue is recognized as our products ship to customers, as control is transferred at that point in time. All of our standard product sales include a 30-day money back guarantee and expected returns are estimated at each reporting period date and a portion of revenue is deferred for all estimated returns. As of December 31, 2021 and 2020, deferred revenue associated with our expected returns was immaterial. The Company collects and remits sales taxes in certain jurisdictions and reports revenue net of any associated sales taxes.

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

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

Product Warranty

Warranty obligations are generally incurred in connection with the sale of our products. The warranty period for these products is generally one year except in certain European countries where it can be two years for some consumer-focused products. Warranty costs are accrued, to the extent that they are not recoverable from third-party manufacturers, for the estimated cost to repair or replace products for the balance of the warranty periods. We provide for the costs of expected future warranty claims at the time of product shipment or over-builds to cover replacements. The adequacy of the provision is assessed at each quarter end and is based on historical experience of warranty claims and costs. The costs incurred to provide for these warranty obligations are estimated and recorded as an accrued liability at the time of sale. Future warranty costs are estimated based on historical performance rates and related costs to repair given products. The accounting estimate related to product warranty is considered a “critical accounting estimate” because judgment is exercised in determining future estimated warranty costs. Should actual performance rates or repair costs differ from estimates, revision to the estimated warranty liability would be required.

Stock-Based Compensation Expense

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

Income Taxes

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

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

Off-Balance Sheet Arrangements

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

Recent Accounting Pronouncements

Refer to Note 1

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

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

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

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Sales of Smart Glasses products rose by $2,722,320 or 27% in the year ended December 31, 2021, primarily as a result of continued growth of our M400 model and M4000 Smart Glasses sales, as compared to the same period in 2020. Sales revenues from our M-Series Smart Glasses were $10,254,905, a 22% increase of $1,848,282 over the prior year. Revenues of Blade Smart Glasses decreased by $395,529 or 23% in the year ended December 31, 2021 versus the comparable period in 2020 primarily driven by component shortages required to make Blade projector engines in the second half of 2021 and higher unit sales in the prior year’s comparable quarter when we offered lower selling prices on the previous Blade model, which we discontinued in the fall of 2020

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

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Cost of Sales and Gross Profit (Loss).  Cost of product revenues and engineering services are comprised of materials, components, labor, warranty costs, freight costs, manufacturing overhead, software royalties, 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:

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For the year ended December 31, 2021, we reported an overall gross profit from product sales, before inventory obsolescence, of $2,636,220 as compared to $1,983,195 in 2020. On a product cost of sales basis only, product direct costs were 49% of sales in 2021, as compared to 54% in 2020.

Manufacturing overhead costs increased $781,857 or 48% for the year ended December 31, 2021 as compared to 2020, to 19% from 16% as a percentage of total product sales, primarily due to manufacturing supply chain additional personnel and increased non-cash stock-based compensation expense.

In addition to its normal Reserve for Obsolescence provision, the Company reserved for (i) an additional twenty-five percent of its remaining M300XL finished goods and related accessory inventory on-hand as of December 31, 2021and (ii) all of its Blade 1.5 excess components that will not be used in current planned builds of the Blade in 2022, due to end-of-life availability of some required components. The total reserve write-down recorded at December 31, 2021 was $519,950. The write-down and obsolescence provision for finished goods and components totaled $1,273,835 and $4,572,659 for the years ended December 31, 2020.

Costs for engineering services for the year ended December 31, 2021 were $45,758 as compared to $282,038 in 2020. The majority of the 2021 period amounts represented the reclassification of our internal R&D wage costs associated with waveguide development projects. There was a gross profit of $334,575 from engineering services for the year ended December 31, 2021 versus $1,218,249 in 2020.

Research and Development.   Our research and development expenses consist primarily of compensation costs for personnel, related stock-based compensation expenses, third-party services, purchase of research supplies and

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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.

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

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

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Selling and marketing costs for the year ended December 31, 2021 increased by $2,079,157 or 51% as compared to 2020. This. increase was largely due to a $1,089,571 increase in salary and salary benefits related expenses, of which $420,661 was related to non-cash stock-based compensation; an increase of $578,621 in sales consulting and marketing fees, primarily for foreign full-time contractors; a $595,263 increase in advertising costs; an increase of $242,570 in website development and maintenance costs; partially offset by decreases of $316,319 in trade show expenses; a decrease of $102,215 in commissions largely due to a reduction in commissions payable to TDG (as described in Note 7 of the financial statements) for defense related engineering services; and a decrease of $35,670 in travel related expenses.

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

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

Depreciation and Amortization.  Depreciation and amortization expense for the year ended December 31, 2021 was $1,870,459 as compared to $2,458,482 in the same period in 2020, a decrease of $588,023. The decrease in depreciation expense is primarily due to leasehold improvements in our West Henrietta, New York location, which became fully amortized in October 2020.

Other Income (Expense), Net. Total other expense, net was $397,053 for the year ended December 31, 2021 as compared to income of $1,175,292 in the period in 2020. The overall decrease of $1,572,345 in other income was

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primarily the result of no gain from debt extinguishment in the year ended December 31, 2021, whereas we had a net gain on debt extinguishment of $1,305,900 in 2020; an increase of $203,535 in income, foreign enterprise and other taxes; and an increase of $75,301 in foreign exchange losses.

Provision for Income Taxes.  There were no provisions for income taxes in 2021 or 2020.

Results of Operations for Fiscal Years Ended December 31, 2020 and December 31, 2019

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The following table compares the Company’s consolidated statements of operations data for the years ended December 31, 2020 and 2019.

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Sales.   There was an increase in total sales for the year ended December 31, 2020 from those in 2019 of $4,910,892 or 74%. The following table reflects the major components of our sales:

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Sales of Smart Glasses products for the year ended December 31, 2020 rose by 107% over the same period in 2019, primarily the result of stronger customer demand for our new M-Series models, which were not available for sale for the entire comparable period in 2019. Sales revenues from our M-Series Smart Glasses were $8,406,623, a 112% increase of $4,432,628 over the prior year’s comparable period. Total M-Series unit sales increased by 109% for the year ended December 31, 2020 versus the same period in 2019. Revenues of Blade Smart Glasses decreased by $240,747 or 14%, primarily driven by lower average sales price as compared to 2019.

Sales of OEM Products were nil for the year ended December 31, 2020 as compared to $951,570 in the 2019 period. No new further customer orders for those particular OEM products have been received since the Spring of 2019 and none are currently contemplated from that customer going forward.

Sales of Standalone Waveguides and Display Engines for the year ended December 31, 2020 were nil versus $152,499 in the prior year’s comparable period. These are made-to-order products and no new orders were received in the 2020 period, outside of small deliveries under our current engineering services programs.

Sales of Engineering Services for the year ended December 31, 2020 were $1,500,287 as compared to $673,151 in the 2019 comparable period. The revenue recognized in the year ended December 31, 2020 for engineering services was primarily a result of several waveguide and display engine development projects which commenced in the first and second quarters of 2020. The majority, all but two, of these projects were completed and delivered in 2020.

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Cost of Sales and Gross Profit (Loss).  Cost of product revenues and engineering services are comprised of materials, components, labor, warranty costs, freight costs, manufacturing overhead, software royalties, 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:

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For the year ended December 31, 2020, we reported an overall gross profit from product sales, before inventory obsolescence, of $1,983,195 as compared to a gross loss of $336,880 in the same period in 2019. On a product cost of sales basis only, product direct costs were 54% of sales in the 2020 period as compared to 64% in 2019, primarily driven by higher margins earned on the M400 in 2020 versus that of the M300 series in the same period in 2019, a period when the M400 was not yet available for sale until the fourth quarter. Product margin was also positively impacted by the sales of some older M-series products that were fully reserved for obsolescence in prior periods.

Manufacturing overhead costs for the year ended December 31, 2020 decreased by $129,533 or 7% and, as a percentage of total product sales, decreased to 16% from 29% over the same period in 2019. There was warranty expense of $45,005 for the year ended December 31, 2020 as compared to a gain of $119,154 in the same period in 2019, as in 2019 warranty returns were substantially less than the amounts that had been previously provisioned for.

In addition to its normal Reserve for Obsolescence provision, for the year ended December 31, 2020, the Company reserved for (i) fifty percent of its finished goods inventory and all of its component parts related to its M300XL Smart Glasses product, as they are at a disadvantaged selling position against our newer, improved M400 product introduced in September 2019 and our new M4000 product introduced in the fourth quarter of 2020 and (ii) all of its finished goods inventory related to its Smart Swim product, as sales of this product have been negligible largely due to decreased venues for its use due to the current pandemic. The total reserve write-down recorded for the fourth quarter ending December 31, 2020 was $773,235. In addition, the Company had previously written-down $500,600 through the third quarter of 2020 for the component parts related to its original Blade and Smart Swim products. The

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write-down and obsolescence provision totaled $1,273,835 and $4,572,659 for the years ended December 31, 2020 and 2019, respectively. These provisions were included in Cost of Sales on the Consolidated Statements of Operations.

Costs for engineering services for the year ended December 31, 2020 were $282,038 as compared to $171,733 in 2019. The majority of the 2020 period amounts represented the reclassification of our internal R&D wage costs associated with several waveguide development projects. There was a gross profit of $1,218,249 from engineering services for the year ended December 31, 2020 versus $501,418 in the same period in 2019.

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

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Research and development costs for the year ended December 31, 2020 decreased by $1,332,763 or 15% as compared to the same period in 2019. This reduction was largely driven by decreases of $1,074,669 in external consulting fees related to our M400 Smart Glasses development work in 2019 and Blade software development, which was completed in 2019; $157,232 in net salary, stock-based compensation and hiring costs as a result of reclassifying research and development wages to engineering services costs of sales; $86,794 in research and development supplies expenses; $83,297 in travel related expenses; $56,916 in rental expenses; partially offset by an increase in external consulting fees of $160,494 related our M4000 development as we brought that product to market in the fourth quarter.

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

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Selling and marketing costs for the year ended December 31, 2020 decreased by $175,839 or 4% as compared to the same period in 2019. This reduction in costs was due to the following factors: a decrease in trade shows of $387,459; a $232,607 decrease in external consulting fees paid to foreign sales staff, which were terminated in 2019; a $149,219 decrease in travel related expenses due to 2020 pandemic conditions, partially offset by a $276,007 increase in salary and stock-based compensation expenses; a $192,751 increase in commissions largely due to commissions payable to TDG pursuant to our non-compete agreement amendment (as described in Note 7 of the financial statements); a $59,844 increase in advertising costs; and a $93,399 increase in computer software subscriptions.

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

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General and administrative costs for the year ended December 31, 2020 increased by $315,121 or 5% as compared to the same period in 2019. This increase in costs was due to a: net increase in salary and stock-based compensation expenses of $616,466. The net increase was due to a reduction in cash salaries paid of $230,598, offset by an increase of $847,064 in stock-based compensation, which resulted from the voluntary salary reduction program that the Company implemented in May 2020; an increase in IR and shareholder related expenses of $184,468; an increase in insurance premiums of $87,106; and an increase of $32,628 in computer and software related expenses; partially offset

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by a decrease in legal fees of $319,831; a decrease in IT and security consulting fees of $150,000; and a decrease in travel related expenses of $184,300 due to 2020 pandemic conditions.

Depreciation and Amortization.  Depreciation and amortization expense for the year ended December 31, 2020 was $2,458,482 as compared to $2,441,581 in the same period in 2019, an increase of $16,901. The increase in depreciation expense is due to new investments in depreciable assets, including manufacturing equipment and molds placed into service from construction-in-progress, largely offset by a reduction in depreciation expense related to our leasehold improvements in our West Henrietta, New York location, which became fully amortized in October 2020.

Other Income (Expense), Net. Total other income, net was $1,175,292 for the year ended December 31, 2020 as compared to income of $89,872 in the comparable period in 2019. The overall increase of $1,085,420 in other income was primarily the result of a net increase in Gain on Debt Extinguishment, net of Loss on Note Receivable of $1,305,900. This net gain resulted from our $1,555,900 gain realized on the forgiveness of our Paycheck Protection Program Loan by the SBA, partially offset by our $250,000 loss on a term note we purchased in 2019; an increase of $15,620 in foreign exchange losses; and a decrease of $211,296 in investment interest income, as interest rates decreased significantly in 2020, as compared to interest rates in 2019.

Provision for Income Taxes.  There were no provisions for income taxes in 2020 or 2019.

Liquidity and Capital Resources

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Capital Resources.   As of December 31, 2021, we had a cash and cash equivalents balance of $120,203,873, an increase of $84,134,365 from $36,069,508 as of December 31, 2020.

As of December 31, 2021, we had current assets of $137,150,154 as compared to current liabilities of $4,155,965, which resulted in a positive working capital position of $132,994,189. As of December 31, 2020, we had a working capital position of $41,959,763. Our current liabilities are comprised principally of accounts payable, accrued expenses and operating lease right-of-use liabilities.

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Summary of Cash Flows:

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The following table summarizes our select cash flows for the periods indicated:

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During the year ended December 31, 2021, we used $26,980,411 of cash for operating activities as compared to $13,964,053 in 2020. For the year ended December 31, 2021 we incurred a net loss of $40,377,160, partially offset by non-cash operating expenses of $20,396,131, for a net cash loss of $19,981,029. Net changes in working capital items were $6,999,382 for 2021, which included (i) $6,590,127 of investments in inventory and vendor prepayments for M400 components; (ii) a $853,547 increase in customer receivables and (iii) a $526,825 increase in other prepaid expenses, partially offset by an increase in trade payables and accrued expenses of $973,883.

For the year ended December 31, 2021, the net loss after adding back non-cash operating expenses, such as depreciation and amortization, stock-based compensation, inventory reserve for obsolescence and net gain on debt extinguishment, was $19,981,029 versus $12,463,053 in the same period of 2020.

During the year ended December 31, 2021, we used $4,852,452 of cash for investing activities, which includes $3,809,268 for purchases of manufacturing equipment, product mold tooling, and chip design and tooling fees, $593,184

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of investments in patents and trademarks, $250,000 in the purchase of software operating system license upgrades for our smart glasses platform, and a $200,000 equity investment in a strategic business partner. For the year ended December 31, 2020, we used a total of $1,485,513 in cash for investing activities.

During the year ended December 31, 2021, we received $115,967,228 in net cash from financing activities, which included: (i) $91,613,587 in net proceeds from our sales of equity securities that closed on March 30, 2021 and April 1, 2021, (ii) $34,715,728 in proceeds from the exercise of warrants, and (iii) $782,277 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 $1,144,364 payment for tax withholdings related to our 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 year ended December 31, 2020, we received $40,912,983 in proceeds from financing activities, primarily from sales of our equity securities and the exercise of stock warrants.

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As of December 31, 2021, the Company does not have any current or long-term debt obligations outstanding.

We incurred a net loss for the year ended December 31, 2021 of $40,377,160 and annual net losses of $17,952,172 in 2020 and $26,476,370 in 2019. The Company has an accumulated deficit of $203,072,143 as of December 31, 2021.

The Company’s cash requirements are primarily for funding operating losses, working capital, research and development, and capital expenditures. Our operations are financed primarily through the net proceeds from the sale of our equity securities. As of December 31, 2021, our principal sources of liquidity consisted of cash and cash equivalents of $120,203,873.

In response to the impacts of COVID-19 and its impact on supply chain time lines and component shortages, we increased the pace of the Company’s investment in inventory in 2021. We anticipate that rate of growth to moderate or decline in 2022 and beyond.

On January 28, 2021, the sole holder 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. The Company and holder also entered into an agreement on the conversion date pursuant to which the holder agreed to accept $10,000,000 in full payment of all accrued Series A Preferred Share dividends in the approximate amount of $10,800,000.

The Company needs to grow its business significantly to become profitable and self-sustaining on a cash flow basis or it will be required to raise new capital. Our cash requirements related to funding operating losses depend on numerous factors, including new product development activities, our ability to commercialize our products, our products’ timely market acceptance, selling prices and gross margins, and other factors.

We believe our existing cash and cash equivalent balances will be sufficient to meet our long-term working capital and capital expenditure needs for at least the next 12 months. We intend to increase our levels of investing activities for our 2022 fiscal year as compared to 2021, primarily on new product development as well as increase our R&D spending over that of 2021. Our future capital requirements may vary materially from those currently planned and will depend on many factors, including our rate of revenue growth, the timing and extent of spending on research and development efforts and other business initiatives, our planned sales and marketing activities, the timing of new product introductions, market acceptance of our products and overall economic conditions.

To the extent that current and anticipated sources of liquidity are insufficient to fund our future business activities and requirements, we may be required to seek additional equity financing. The sale of additional equity would result in increased dilution to our stockholders. However, there can be no assurance that we will be able to raise capital in the future or that if we raise additional capital it will be sufficient to execute our business plan in place at the time

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Contractual Obligations

The following is a summary of our contractual payment obligations for operating leases as of December 31, 2021:

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