Vuzix Corp (VUZI) FY 2024 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 near-eye displays), in the form of Smart Glasses, AI powered Smart Glasses, Waveguides, and Augmented Reality (AR) technologies. Our wearable display devices are worn like eyeglasses or attach to a head worn mount. These devices typically include cameras, sensors, and a computer that enable the user to view, record and interact with video and digital content, such as computer data, the Internet, social media or entertainment applications. Our wearable display products integrate micro-display technology with our advanced optics to produce compact high-resolution display engines, less than half an inch diagonally, which when viewed through our Smart Glasses products create virtual images that appear comparable in size to that of a computer monitor or a large-screen television.

With respect to our Smart Glasses and AI/AR products, we are focused on the enterprise, defense, 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 technology, intellectual property portfolio and position in the marketplace give us a leadership position in AI/AR and Smart Glasses products, waveguide optics, microLEDs and display engine technology.

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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 debt, 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 re-evaluate these accounting policies and estimates and make adjustments when facts and circumstances dictate a change. Historically, we have found our application of accounting policies to be appropriate, and actual results have not differed materially from those determined using necessary estimates.

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

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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 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.

The write-off to our obsolescence provision for finished goods and components totaled $4,167,917, $4,358,062, and $290,405 for the years ended December 31, 2024, 2023, and 2022, respectively. These additional obsolescence provisions are included in Cost of Sales in the Consolidated Statements of Operations.

Going Concern

For all annual and interim periods, management will assess going concern uncertainty in our consolidated financial statements to determine whether there is sufficient cash on hand and working capital, including available borrowings on loans, to operate for a period of at least one year from the date the consolidated financial statements are issued or available to be issued, which is referred to as the “look-forward period”, as defined in U.S. GAAP. As part of this assessment, based on conditions that are known and reasonably knowable to management, management will consider various scenarios, forecasts, projections, estimates and will make certain key assumptions. These assumptions include, among other factors, the expected timing and nature of our programs and projected cash expenditures, our ability to delay or curtail these expenditures or programs and our ability to raise additional capital, if necessary, to the extent management has the proper authority to execute them and considers it probable that those implementations can be achieved within the look-forward period.

The accompanying consolidated financial statements have been prepared assuming that the Company 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 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 year ended December 31, 2024 of $73,538,157; $50,149,077 for the year ended December 31, 2023; and $40,763,573 for the year ended December 31, 2022. The Company had net cash outflows from operations of $23,739,372 for the year ended December 31, 2024; $26,277,824 for the year ended December 31, 2023; and $24,521,082 for the year ended December 31, 2022. As of December 31, 2024, the Company had an accumulated deficit of $367,522,950.

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The ongoing losses and accumulated deficit initially raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans to alleviate the conditions that raise substantial doubt include operational improvements being implemented and the curtailment of certain development programs, both of which the Company expects will preserve cash.

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The Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. (ASU) 2014-15, Presentation of Financial Statements — Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. As a result, management is primarily responsible for assessing if there is a going concern issue when issuing an entity’s financial statements. The going concern assumption underlies all GAAP financial reporting and therefore requires and assumes that the financial statements have been prepared on a going concern basis. It presumes that a Company will continue normal business operations into the future.

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Variable Interest Entities

We determine at the inception of each arrangement whether an entity in which we have made an investment or in which we have other variable interests is considered a variable interest entity (VIE). We consolidate VIEs when we are the primary beneficiary. We are the primary beneficiary of a VIE when we have the power to direct activities that most significantly affect the economic performance of the VIE and have the obligation to absorb the majority of their losses or benefits. If we are not the primary beneficiary in a VIE, we account for the investment or other variable interests in a VIE in accordance with other applicable GAAP. During each reporting period, we assess whether any changes in our interest or relationship with the entity affect our determination of whether the entity is a VIE and, if so, whether we are the primary beneficiary.

Investments in Equity Investments

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Investments in equity securities with a readily determinable fair value, not accounted for under the equity method, are recorded at that value with unrealized gains and losses included in earnings. For equity securities without a readily determinable fair value, the investment is recorded at cost, less any impairment, plus or minus adjustments related to observable transactions for the same or similar securities, with unrealized gains and losses included in earnings.

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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 years ending December 31, 2024 and 2023, there were no indicators of impairment present. For the years ended December 31, 2024, 2023, and 2022, we recorded a loss on fixed asset disposal of $27,654, nil, and $35,350, respectively, upon the retirement of certain tooling and manufacturing equipment assets no longer in use.

We perform an evaluation of our patents and trademark assets when events or circumstances indicate their carrying amounts may be unrecoverable. For the years ended December 31, 2024, 2023, and 2022, there was an impairment charge of nil, $41,869, and $97,675, respectively. The carrying value of the remaining intellectual property, such as patents and trademarks, was valued (net of accumulated amortization) at $2,998,760 as of December 31, 2024, because management believes that this value is recoverable.

We perform an evaluation of our goodwill and other intangible assets for impairment at least annually, or more frequently if events or changes in circumstances indicate a potential impairment trigger. For the year ending December 31, 2024, the Company recorded an impairment charge of $30,301,355 for the unamortized technology license and equity investment in Atomistic. For the year ended December 31, 2023, the Company recorded an impairment charge of $2,136,993 for the unamortized intangible assets and goodwill regarding its previous acquisition of Moviynt.

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 three 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 $194,445 as of December 31, 2024. Management believes that this value is recoverable.

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Revenue Recognition

The Company adopted the 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 term and revenue is recognized as our products ship to customers, as control is transferred at that 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, 2024 and 2023, 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 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 and up to eighteen (18) months for certain distributors. Customers may also purchase an additional twelve (12) month extended warranty. 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 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 was 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 tranches, which 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.

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Income Taxes

We have historically incurred 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 carryforwards and net operating loss carryforwards 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.

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 based upon 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, 2024 and December 31, 2023

The following table compares the Company’s consolidated statements of operations data for the years ended December 31, 2024 and 2023.

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Sales.   There was a decrease in total sales for the year ended December 31, 2024, compared to 2023 of $6,374,583, or 53%. The following table reflects the major components of our sales:

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Sales of products decreased by 58% for the year ended December 31, 2024, compared to 2023. Reduced smart glasses revenue was the primary driver of this decrease as unit sales of our M400 product decreased substantially compared to the previous year, when two major distributors placed significant stocking orders in the first half of 2023.

Sales of engineering services for the year ended December 31, 2024, was $1,267,354, as compared to $1,368,787 in 2023, a decrease of 7%.

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, the depreciation for our tooling and manufacturing equipment, and amortization of software development costs related to the production of our products and the rendering of engineering services. The following table reflects the components of our cost of goods sold:

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For the year ended December 31, 2024, there was a gross loss from total sales of $5,599,670, or 97% of total sales as compared to a gross loss of $2,634,730, or 22% in 2023.

In addition to its normal Reserve for Obsolescence provision, the Company reserved as of December 31, 2024 additional provisions for expected surplus component parts and obsolescence in excess of its currently planned existing product builds in 2025 and into 2026 on most of its existing smart glasses product models in anticipation of the planned introduction of newer models by 2026, which would logically replace the existing models when introduced. The disposal value of the excess components that could not be used in future models is unknown, so a 100% obsolescence provision has been accrued. During the year ended December 31, 2024, the Company wrote-off gross inventory of $4,167,917 and disposed of $1,998,893 of inventory that was fully provisioned for in the previous year. The total obsolescence provisions totaled $7,944,575 and $5,775,551 for the years ended December 31, 2024 and 2023, respectively. The changes to these provisions are included in Cost of Sales on the Consolidated Statements of Operations.

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Unapplied manufacturing overhead costs, not already added in product cost of sales, increased by $504,208, or 31% for the year ended December 31, 2024 over 2023 and increased as a percentage of total sales to 37% as compared to 13% in 2023 due to lower quarterly product revenue. The increase in the net dollar amount of these unapplied overhead costs in the current period versus the prior period was primarily driven by a decrease in actual production levels during the period and the temporary cessation of M400 smart glasses production in the second half of 2024.

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Depreciation and Amortization included in cost of sales decreased by $151,661, or 17% for the year ended December 31, 2024 versus 2023, due to the full amortization and depreciation of certain manufacturing assets.

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Research and Development.   Our research and development expenses consist primarily of compensation costs for personnel, including non-cash stock-based compensation expenses, third-party services, purchases 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 expenses.

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Research and development expenses for the year ended December 31, 2024, decreased by $2,713,082, or 22% compared to 2023. This decrease was largely due to a $1,565,823 decrease in salary and benefits related expenses due to headcount decreases; a $1,004,415 decrease in external development costs due to the suspension of work on a specific future smart glasses product; and a $81,450 decrease in supplies expenses; partially offset by a $57,603 increase in non-cash stock-based compensation primarily driven by the voluntary salary reduction program.

Selling and Marketing.    Selling and marketing expenses 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 expenses for the year ended December 31, 2024, decreased by $4,520,373, or 36% compared to 2023. This decrease was largely due to a decrease of $1,618,667 in advertising and tradeshow expenses; a $1,587,781 decrease in salary and benefits related expenses driven by headcount decreases; a decrease of $605,000 in our allowance for credit losses; a decrease of $456,338 in travel related expenses; a $235,660 decrease in external consulting expenses; and a $133,906 decrease in computer and software subscription expenses; partially offset by a $158,490 increase in non-cash stock-based compensation primarily driven by the voluntary salary reduction program.

General and Administrative.   General and administrative expenses 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 expenses for the year ended December 31, 2024, decreased by $1,361,892, or 7% compared to 2023. This decrease was largely due to a $1,362,386 decrease in non-cash stock-based compensation; a decrease of $1,106,231 in salary and benefits related expenses due to headcount reductions; a decrease of $204,038 in external consulting expenses; a decrease of $201,672 in insurance premiums; a decrease of $47,838 in recruitment and hiring expenses; and a decrease of $72,870 in travel expenses; largely offset by an increase of $977,798 in investor relations expenses; an increase of $437,453 in legal expenses; and an increase of $350,453 in additional accounting and auditing fees related to the finalization of the 2023 audit.

Depreciation and Amortization.  Depreciation and amortization expense, not included in cost of sales, for the year ended December 31, 2024, was $2,994,643, compared to $3,844,428 in 2023 or a decrease of $849,785. This decrease was due to a significant decrease in amortization expense related to our Atomistic technology license, which was written-off as of June 30, 2024; partially offset by increases in depreciation related to leasehold improvements being put into service this year related to our new waveguide manufacturing facility.

Impairment on Intangible Asset and Equity Investment.  For the year ended December 31, 2024 there was a total impairment charge on an intangible and an equity investment of $30,301,355. On July 1, 2024, Atomistic exercised its option to terminate its previously granted license related to certain microLED technologies it was developing, and as a result of the termination of the granted license, which was effective June 30, 2024, the Company determined that the technology license asset of $24,335,554, net book value as of June 30, 2024, was impaired as the Company no longer has exclusive licensing rights to the technology. In addition, in connection with the Atomistic agreements, the Company recorded an additional impairment charge in the amount of $181,676 in August for the issuance of 174,688 shares of common stock at a fair market value of $1.04 per share to the Founders of Atomistic for the achievement of certain technological milestones. The Company had a related equity interest in Atomistic, a private French company, and determined that at this time, the Company is unable to reasonably estimate a value to its future value and therefore recorded a full impairment of its investment in Atomistic resulting in a write-down charge of $5,784,125 for the period ended June 30, 2024.

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Other Income (Expense), Net. Total other income was $433,337 for the year ended December 31, 2024, compared to other income of $2,152,462 in 2023, a decrease of $1,719,125. The overall decrease in other income was primarily the result of a decrease of $1,627,907 in investment income due to lower excess cash on-hand to invest; an increase of $173,255 in foreign exchange losses; partially offset by a decrease in income and other taxes of $290,308; and a decrease of $208,271 from a one-time utility improvement refund in 2023.

Provision for Income Taxes.  There were no provisions for income taxes in 2024 or 2023.

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Results of Operations for Fiscal Years Ended December 31, 2023 and December 31, 2022

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The following table compares the Company’s consolidated statements of operations data for the years ended December 31, 2023 and 2022.

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Sales.   There was an increase in total sales for the year ended December 31, 2023, from those achieved in 2022 of $293,257, or 2%. The following table reflects the major components of our sales:

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Sales of products increased by 2% for the year ended December 31, 2023, compared to the same period in 2022. Smart glasses revenue was the primary driver of this increase as unit sales of our M400 product increased.

Sales of engineering services for the year ended December 31, 2023, were $1,368,787, as compared to $1,330,119 in the same period of 2022, an increase of 3%.

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, the depreciation for our tooling and manufacturing equipment, and 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:

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For the year ended December 31, 2023, gross loss from total sales was $2,634,730, or (22)% of total sales as compared to a gross profit of $1,483,126, or 13% in the same period in 2022. Product Cost of Sales was $7,224,107, or 60% of total sales in 2023 as compared to $7,158,225, or 60% of 2022 total sales.

In addition to its normal Reserve for Obsolescence provision, the Company reserved as of December 31, 2023 additional provisions for expected surplus component parts and obsolescence in excess of its currently planned existing product builds in 2024 and into 2025 on most of its existing smart glass product models in anticipation of the planned introduction of newer models, which would logically replace the existing models when introduced. The disposal value of the excess components that could not be used in future models is unknown, so a 100% obsolescence provision has been accrued. The total reserve write-down recorded at December 31, 2023 was $2,700,000 and the Company increased its standard reserve by $1,658,000. The write-down and obsolescence provisions totaled $5,775,551 and $1,417,489 for the years ended December 31, 2023 and 2022, respectively. These provisions were included in Cost of Sales on the Consolidated Statements of Operations.

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Manufacturing overhead costs, not already added in Cost of Sales or ending inventory, increased by $35,545, or 2% for the year ended December 31, 2023 over the 2022 comparable period to 13% as a percentage of total sales as compared to 13% in 2022.

Depreciation and amortization expense increased by $86,800, or 11% for the year ended December 31, 2023, over the 2022 comparable period to 7% as a percentage of total sales as compared to 7% in 2022. The increase was due to depreciation on capitalized equipment for our new waveguide facility that was placed into service in the fourth quarter of 2023.

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Research and Development.   Our research and development expenses consist primarily of compensation costs for personnel, including non-cash stock-based compensation expenses, third-party services, purchases 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 expenses.

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Research and development expenses for the year ended December 31, 2023, decreased by $337,154, or 3%, compared to the comparable period in 2022. This decrease was largely due to a $923,933 reduction in external development expenses and consultant expenses; and a decrease of $136,186 in recruiting and hiring expenses; partially offset by an increase of $789,186 in salary and benefits related expenses, including $422,051 in severance-related expenses for staff reductions which took place in early January 2024.

Selling and Marketing.    Selling and marketing expenses 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 expenses for the year ended December 31, 2023, increased by $4,633,262 or 57%, compared to the comparable period in 2022. This increase was largely due to a $2,117,503 increase in salary, commissions and benefits related expenses driven by headcount increases, including $265,101 in severance related expenses for staff reductions which took place in early January 2024; a reserve for bad debt of $1,574,000; an increase of $610,845 in advertising and tradeshow expenses; an increase of $322,071 in travel related expenses; and an increase of $167,794 in consulting fees; partially offset by a decrease of $121,835 in website development and maintenance costs; and a decrease of $101,001 in recruiting and hiring expenses for new hires in the latter part of 2022.

General and Administrative.   General and administrative expenses 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 expenses for the year ended December 31, 2023 decreased by $2,446,377, or 12% compared to the comparable period in 2022. This decrease was largely due to a decrease of $2,877,423 in non-cash

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stock-based compensation; a decrease of $210,678 in external accounting, advisory and tax services expenses; a decrease of $199,456 in shareholder and IR related expenses; a $91,254 decrease in supplies and consumables expenses; and a $56,807 decrease in recruiting and hiring expenses; partially offset by an increase of $281,363 in various consulting fees; an increase of $128,949 in travel related expenses; and an increase of $88,804 in insurance premiums.

Depreciation and Amortization.  Depreciation and amortization expense, not included in cost of sales, for the year ended December 31, 2023, was $3,844,428, compared to $1,788,584 in the comparable period in 2022, an increase of $2,055,844. The increase in this expense is primarily due to the amortization of our technology license related to the Atomistic Agreements, which began on May 12, 2022.

Other Income (Expense), Net. Total other income was $2,152,462 for the year ended December 31, 2023, as compared to $1,468,698 in the same period in 2022, an increase of $683,764. This overall increase was primarily the result of an increase of $823,647 in investment income resulting from the rise in interest rates earned on the Company’s excess cash period-over-period; and decrease of $136,527 in foreign exchange losses; partially offset by a $258,434 reduction in government and utility incentives, primarily related to the employee retention refunds received in 2022.

Provision for Income Taxes.  There were no provisions for income taxes in 2023 or 2022.

Liquidity and Capital Resources

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Capital Resources: As of December 31, 2024, we had cash and cash equivalents of $18,186,506, a decrease of $8,369,086 from $26,555,592 as of December 31, 2023.

As of December 31, 2024, we had current assets of $26,722,490 as compared to current liabilities of $2,112,273, which resulted in a positive working capital position of $24,610,217. As of December 31, 2023, we had a working capital position of $36,284,259. 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 Flow:

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The following table summarizes our select cash flows for the years ended:

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During the year ended December 31, 2024 we used $23,739,372 of cash for operating activities. Net changes in working capital items were $1,171,047 for the year ended December 31, 2024, with the largest factors resulting from a $2,503,100 decrease in trade accounts payables and accrued expenses; a $941,149 decrease in trade accounts and other receivables; and a $271,399 decrease in other prepaid expenses. For the year ended December 31, 2023, we used a total of $26,277,824 in cash for operating activities.

During the year ended December 31, 2024, we used $2,919,949 of cash for investing activities, which included: $1,358,991 in manufacturing equipment and tooling for our new waveguide manufacturing facility; $1,000,000 final payment made towards our technology license fee commitment with Atomistic; and $560,958 in patent and trademark expenditures. For the year ended December 31, 2023, we used a total of $19,280,966 in cash for investing activities.

During the year ended December 31, 2024, $18,290,235 was provided by financing activities related to: i) $10,000,000 from the sale of common stock under a securities purchase agreement with Quanta Computer Inc. entered into on September 3, 2024 (see Note 11 for further details) and ii) $8,290,235 of net proceeds received from sales of

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common stock under our ATM program in the fourth quarter of 2024 (see Note 11 for further details). For the year ended December 31, 2023, we used $449,561 in net cash for financing activities.

The Company’s cash requirements are primarily for funding operating losses, working capital, research and development and capital expenditures. Our operations have historically been financed primarily through net proceeds from the sale of our equity securities. The Company incurred net losses for the year ended December 31, 2024 of $73,538,157; $50,149,077 for the year ended December 31, 2023; and $40,763,573 for the year ended December 31, 2022. The Company had net cash outflows from operations of $23,739,372 for the year ended December 31, 2024; $26,277,824 for the year ended December 31, 2023; and $24,521,082 for the year ended December 31, 2022. As of December 31, 2024, the Company had an accumulated deficit of $367,522,950. The Company’s cash outflows for investing activities were $2,919,949 for the year ended December 31, 2024; $19,280,966 for the year ended December 31, 2023; and $21,170,816 for the year ended December 31, 2022.

The Company’s cash requirements going forward are primarily for funding operating losses, research and development, working capital and capital expenditures. The higher cash outflows totaling $32,500,000 for investments in the years ending December 31, 2023 and 2022 were mainly for the Company’s exclusive technology license and equity investment in microLED technology via Atomistic. The Company decided not to renew its technology license with Atomistic on June 30, 2024 and the license was terminated on July 1, 2024 by Atomistic. As a result, the Company has no further contractual requirements to pay further licensing development fees to Atomistic.

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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 through the sale of equity securities. 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 cut its operating costs significantly or raise new equity and/or debt capital.

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These historical financial factors initially raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s management intends to continue to take actions necessary to continue as a going concern, as discussed herein. Management’s plans to alleviate the conditions that raise substantial doubt include the implementation of operational improvements and the curtailment of certain development programs, both of which the Company expects will preserve cash.

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Management’s plans and actions completed to date concerning our liquidity include, among other things:

•On September 13, 2024, the Company received $10,000,000 under the closing of the first tranche under a Securities Purchase Agreement for the sale of up to $20,000,000 in common stock and Series B Preferred Stock with Quanta Computer Inc. Under the first closing, the Company sold $10,000,000 of common stock. The second and third tranches, which are subject to achievement of specific milestones, will each be for the sale of $5,000,000 of Series B Preferred Stock. The Company expects that these milestones will be achieved in the first half of 2026;

•Reductions in our cash annual operating expenses across all operating areas, representing a reduction of at least 20% as compared to 2023 levels vs. 2024 levels, including in the areas of Research and Development, Sales and Marketing and General and Administrative;

•Right-sizing of operations across all areas of the Company, including headcount reductions and personnel hiring freezes;

•Reduction in the rate of new product introductions and further leveraging of existing platforms to reduce new product development and engineering costs;

•Delaying or curtailing discretionary and non-essential capital expenditures not related to near-term product and manufacturing needs, now that our waveguide manufacturing plant expansion has substantially been completed and the license fees payments under the Atomistic License have been completed;

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•The expected margin contribution upon the commencement of volume manufacturing and sales of waveguides from our new waveguide manufacturing plant, particularly to OEM and ODM customers such as Quanta;

•Continued pursuit of further licensing and strategic opportunities around our waveguide technologies with potential ODMs/OEMs, which would include the receipt of upfront licensing fees and on-going supply agreements; and

•Reduction in our existing products’ selling prices and higher volume discount levels to turn as much of our inventory of finished products into cash and pursue external manufacturers for Vuzix non-waveguide production needs.

The Company has historically raised capital through the sale of equity securities. The Company has entered into a sales agreement with an investment bank for the issuance and sale of up to $50,000,000 of our common stock that may be issued and sold from time to time in an “at the market” (ATM) offering. The Company raised $8.2 million in the quarter ended December 31, 2024 and $1.3 million to date in 2025 under that ATM.

As a result of management’s plan above, our current amount of cash on hand, and our historical ability to raise capital, management has concluded that substantial doubt of our ability to continue as a going concern has been alleviated.

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Contractual Obligations

The following is a summary of our contractual payment obligations as of December 31, 2024:

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