Vuzix Corp

VUZI
Delayed Nasdaq - 05/24 10:00:00 pm
2.57USD
+6.64%

VUZIX : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-K)

Envoyer par e-mail
03/15/2019 | 11:42 am

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, commercial, and medical markets while our Video Eyewear
products are sold in the consumer markets and are targeted at applications
including video viewing and gaming. 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.




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;
· Carrying value of long-lived assets;
· Going Concern




34






· Software development costs;
· Revenue recognition;
· Product warranty;
· Derivatives and fair value measurements;
· Stock-based compensation; and
· Income taxes.




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 estimates, inventory
adjustments to lower market values would result in a reduction to the carrying
value of inventory, an increase in inventory write-offs and a decrease to gross
margins. The Company wrote down to net realizable value all of its component and
finished goods inventory related to its iWear Video Headphones resulting from
the decision in 2016 to reduce the suggested retail selling price to a price
below the cost. The write down provision totaled $1,124,401 and represented the
estimated net realizable of such existing inventory, net of the costs of
completion of components and work in progress at that time. In 2017, an
additional provision was recorded in the amount of $1,151,482. These provisions
were included in Operating Expenses 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 than
historical results. No impairment charges on tooling and equipment were recorded
in 2018, 2017 or 2016.



We perform a valuation of our patents and trademark assets when events or
circumstances indicate their carrying amounts may be unrecoverable. There was no
impairment charge recorded in 2018 or 2017. We recorded an impairment charge of
$20,506 representing cost of $44,371, less accumulated amortization of $23,865
in 2016 regarding our abandoned patents and trademarks. The value of the
remaining intellectual property, such as patents and trademarks, were valued
(net of accumulated amortization) at $1,164,543 as of December 31, 2018, because
management believes that its 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. Such costs are
accumulated and capitalized. These projects could take several years to
complete. The capitalized costs are then amortized over 3 to 5 years on a
straight-line basis. Unsuccessful or discontinued software projects are written
off and expensed in the fiscal period where the application is abandoned or
discontinued. The value of the unamortized software development costs remaining
were valued (net of accumulated amortization) at $200,000 as of December 31,
2018
, because management believes that its value is recoverable.



Revenue Recognition



The Company adopted the new guidance on Revenue from Contracts with Customers
under Topic 606 as of January 1, 2018. Refer to Note 2 for further discussion on
the impact of this adoption. 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 this
point in time. All of our standard products 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,
2018
, 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 any engineering consulting and other services is recognized at the
time the services are rendered. The Company accounts for its longer-term
development contracts, which to date have all been firm fixed-priced contracts,
on the percentage-of-completion method, whereby income is recognized as work on
contracts progresses, but estimated losses on contracts in progress are charged
to operations immediately. The percentage-of-completion is determined using the
cost-to-cost method. 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.




Derivatives and Fair Value Measurements






FASB ASC Topic 820 Fair Value Measurements and Disclosures (ASC 820) defines
fair value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair value
measurements. ASC 820 clarifies that fair value is an exit price, representing
the amount that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants. ASC 820 permits
an entity to measure certain financial assets and financial liabilities at fair
value with changes in fair value recognized in earnings each period. In
accordance with ASC 815-10-25 Derivatives and Hedging, we measured the
derivative liability using a Monte Carlo Options Lattice pricing model at their
issuance date and subsequently as they are remeasured. Accordingly, at the end
of each quarterly reporting date, the derivative fair market value is remeasured
and adjusted to current market value. Derivatives that have more than one year
remaining in their life are shown as long term.



Significant unobservable inputs are used in the fair value measurement of the
Company's derivative liability. The primary input factors driving the economic
or fair value of the derivatives warrants and convertible notes are the stock
price of the Company's shares, the price volatility of the shares, reset events,
and exercise behavior. An important valuation input factor used in determining
fair value was the expected volatility of observed share prices and the
probability of projected resets in warrant exercise and note conversion prices
from financing before each security's maturity. For exercise behavior, the
Company assumed that without a target price of two times the projected reset
price or higher, the holders of the warrants and convertible notes would hold to
maturity. In determining the fair value of the derivative it was assumed that
the Company's business would be conducted as a going concern and that holding to
maturity was reasonable. Further, the January 2, 2015 Series A Preferred
financing reduced the expected probability to near zero for price resets from
financing events.



35







ASC 820 establishes a fair value hierarchy which prioritizes the inputs to
valuation techniques used to measure fair value. Level 1 inputs are quoted
prices in active markets for identical assets or liabilities. Level 2 inputs are
inputs other than quoted prices included in Level 1 that are directly or
indirectly observable for the asset or liability. Such inputs include quoted
prices in active markets for similar assets and liabilities, quoted prices for
identical or similar assets or liabilities in markets that are not active,
inputs other than quoted prices that are observable for the asset or liability,
or inputs derived principally from or corroborated by observable market data by
correlation or other means. Level 3 inputs are unobservable inputs based on our
own assumptions used to measure assets and liabilities at fair value.



Stock Compensation Expense



Our Board of Directors approves grants of stock awards and options to employees
to purchase our common stock. Stock 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.



Income Taxes



We have historically incurred domestic operating losses from both a financial
reporting and tax return standpoint. Accordingly, we provide deferred income tax
assets and liabilities based on the estimated future tax effects of differences
between the financial and tax bases of assets and liabilities based on currently
enacted tax laws. Any future recorded value of our deferred tax assets will be
dependent upon our ability to generate taxable income in the jurisdictions in
which we operate. These assets consist primarily of credit carry-forwards and
net operating loss carry-forwards and the future tax 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 within the interpretation. The first step is to evaluate the tax
position for recognition by determining if the weight of available evidence
indicates that it is more likely than not that the position will be sustained on
audit, including resolution of related appeals or litigation processes, if any.
The second step requires us to estimate and measure the tax benefit as the
largest amount that is more than 50% likely of being realized upon ultimate
settlement. It is inherently difficult and subjective to estimate such amounts,
as this requires us to determine the probability of various possible outcomes.
We re-evaluate these uncertain tax positions on a quarterly basis. This
evaluation is based on factors including, but not limited to, changes in facts
or circumstances, changes in tax law, effectively settled issues under audit and
new audit activity. Such a change in recognition or measurement would result in
the recognition of a tax benefit or an additional charge to the tax provision in
the period. The Company currently has no uncertain tax positions.




Off Balance Sheet Arrangements



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






36







Recent Accounting Pronouncements






Refer to Note 1




Results of Operations for Fiscal Years Ended December 31, 2018 and December 31,
2017



The following table compares the Company's consolidated statements of operations
data for the years ended December 31, 2018 and 2017.






Years Ended December 31,
Dollar % Increase
2018 2017 Change (Decrease)
Sales:



Sales of Products $ 7,692,102 $ 4,548,689 $ 3,143,413 69 %
Sales of Engineering Services 402,266 989,064



(586,798 ) (59 )%

Total Sales 8,094,368 5,537,753 2,556,615 46 %

Cost of Sales:
Cost of Sales - Products 6,072,476 5,269,900 802,576 15 %



Cost of Sales - Engineering Services 253,610 944,451



(690,841 ) (73 )%

Total Cost of Sales 6,326,086 6,214,351 111,735 2 %

Gross Profit (Loss) (exclusive of



depreciation shown separately below) 1,768,282 (676,598 ) 2,444,880 (361 )%
Gross Profit (Loss) % 22 % (12 )%

Operating Expenses:
Research and Development 10,378,728 6,706,690 3,672,038 55 %
Selling and Marketing 4,822,639 3,694,913 1,127,726 31 %



General and Administrative 6,973,238 6,126,335 846,903 14 %
Depreciation and Amortization 1,469,664 998,528 471,136 47 %
Impairment of Software Development
Cost 196,223 - 196,223 NM
(Gain) Loss on Inventory Revaluation
and Product Discontinuance (211,416 ) 1,151,482



(1,362,898 ) (118 )%

Loss from Operations (21,860,794 ) (19,354,546 ) (2,506,248 ) 13 %

Other Income (Expense):
Investment Income 191,755 58,530 133,225 228 %
Other Taxes (57,917 ) (28,363 ) (29,554 ) 104 %
Foreign Exchange (Loss) Gain (60,380 ) (65,248 ) 4,868 (7 )%
Loss on asset disposal (55,172 ) (585 ) (54,587 ) NM
(Loss) Gain on Derivative Valuation (13,873 ) 20,204 (34,077 ) (169 )%
Amortization of Term Debt Discount
and Deferred Issuance Costs - (175,260 ) 175,260 (100 )%
Interest Expense (19,332 ) (88,234 ) 68,902 (78 )%

Total Other Income (Expense) (14,919 ) (278,956 ) 264,037 (95 )%

Loss Before Provision for Income
Taxes (21,875,713 ) (19,633,502 ) (2,242,211 ) 11 %
Provision for Income Taxes - -



- 0 %

Net Loss $ (21,875,713 ) $ (19,633,502 ) $ (2,242,211 ) 11 %




37







Sales. There was an overall increase in product sales for the year ended
December 31, 2018 over the same period in 2017 of $3,143,413 or 69%. The
following table reflects the major components of our sales:






% of % of Dollar % Increase
2018 Sales 2017 Sales Change (Decrease)

Sales of Smart Glasses $ 5,940,108 73 % $ 3,840,300 69 % $ 2,099,808 55 %
Sales of OEM Products 994,500 12 % - 0 % 994,500 NM
Sales of Video Eyewear 452,460 6 % 296,752 6 % 155,708 52 %
Sales of Waveguides 185,400 2 % 351,056 6 % (165,656 ) (47 )%
Sales Freight out 119,634 2 % 60,581 1 % 59,053 97 %



Sales of Engineering Services 402,266 5 % 989,064



18 % (586,798 ) (59 )%
Total Sales $ 8,094,368 100 % $ 5,537,753 100 % $ 2,556,615 46 %




The overall increase in total sales was primarily the result of stronger smart
glasses sales, primarily our M300, sales of which for the year ended December
31, 2018
were $5,940,108 as compared to $3,840,300 in the same period in 2017, a
55% increase. Sales of our OEM products under the Toshiba Supply Agreement were
$994,500 in the year ended December 31, 2018 as compared to nil in the same
period in 2017. Our iWear Video Headphones sales rose 52% in the year ended
December 31, 2018 as compared to the same period in 2017. Production of this
product was discontinued as of September 30, 2018 and all remaining stock was
sold in the fourth quarter of 2018. Sales of Waveguides for the year ended
December 31, 2018 were $185,400 versus $351,056 in the same period in 2017.



Sales of engineering services for the year ended December 31, 2018 decreased to
$402,266 from $989,064 in the comparable 2017 period. The 2017 period's revenue
was comprised primarily of the amounts billed to Toshiba under our development
agreement with them and when the development program was active. This Toshiba
program was completed in March 2018.



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:



38






As % As %
Related Related
Component of Cost of Product Product Dollar % Increase



Sales - Products 2018 Sales 2017 Sales Change (Decrease)
Product Cost of
Sales $ 3,638,727 47 % $ 3,152,729 69 % $ 485,998 15 %
Freight Costs 719,062 9 % 610,228 13 % 108,834 18 %
Manufacturing
Overhead 1,176,681 15 % 886,593 19 % 290,088 33 %
Warranty Costs 295,924 4 % 283,402 6 % 12,522 4 %
Amortization of
Software Development
Costs 100,000 1 % 214,838 5 % (114,838 ) (53 )%
Software Royalties 142,082 2 % 122,111 3 % 19,971 16 %

Total Cost of Sales
- Products $ 6,072,476 78 % $ 5,269,900 116 % $ 802,576 15 %

Gross Profit (Loss)
- Product Sales $ 1,619,626 22 % $ (721,211 )



(16 )% $ 2,340,837 (325 )%




For the year ended December 31, 2018, we reported an overall gross profit from
product sales of $1,619,626 as compared to a gross loss of $721,211 in the prior
year's period. On a product cost of sales basis only, product direct costs
decreased to 47% of sales versus 69% in the prior year's period when we recorded
inventory obsolescence provisions of $473,324 related to initial M300 volume
production issues and the move from our contract manufacturer's California site
to their China facility in spring 2017. Manufacturing overhead costs rose by 33%
primarily due to staff additions as part of the commencement of Blade production
in Rochester, NY, as opposed to offshore where our other smart glasses products
are assembled. As a percentage of total product sales, manufacturing overhead
costs declined to 15% for the 2018 period from 33% in the 2017 period.



Costs for engineering services for the year ended December 31, 2018 was $253,610
as compared to $944,451 in the prior 2017 period. These amounts represent direct
project costs as well as the reclassification of internal research and
development wage costs related to the Toshiba engineering program which was
completed in March 2018. We earned a gross profit of $148,656 for the year ended
December 31, 2018, versus a gross profit from engineering services of $44,613 in
the same period in 2017.



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



% of % of Dollar % Increase
2018 Sales 2017 Sales Change (Decrease)

Research and



Development $ 10,378,728 128 % $ 6,706,690



121 % $ 3,672,038 55 %




Comparing our research and development costs for the year ended December 31,
2018
versus the same period in 2017: there was an increase in 2018 salary,
benefits and stock compensation expenses of $1,761,178, primarily the result of
additional R&D staff versus the same period in 2017; increased research supplies
costs of $136,120 and increased consulting and contractor fees of $1,622,212,
both primarily related to software development services for our Blade Smart
Glasses; a $94,813 increase in travel costs; and a $75,609 increase in hiring
expenses.



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



% of % of Dollar % Increase
2018 Sales 2017 Sales Change (Decrease)

Selling and Marketing $ 4,822,639 60 % $ 3,694,913



67 % $ 1,127,726 31 %




39






These costs increased overall as compared to the same period in 2017 primarily
due to the following factors: a $251,339 increase in salary, separation
payments, commissions, benefits and stock compensation expenses; an increase of
$350,629 in our app store and website related costs; an increase of $163,509 in
consulting fees; an increase of $243,651 in advertising, marketing and trade
show costs; and an increase of $93,691 in travel costs.



General and Administrative. General and administrative costs include
professional fees, investor relations (IR) costs including shares and warrants
issued for IR services, salaries and related stock compensation, travel costs,
office and rental costs.



% of % of Dollar % Increase
2018 Sales 2017 Sales Change (Decrease)

General and
Administrative $ 6,973,238 86 % $ 6,126,335



111 % $ 846,903 14 %





General and administrative costs rose by 14% or $846,903 for the year ended
December 31, 2018 versus the 2017 period primarily because of: increased salary,
separation and stock compensation costs of $960,100 due to the hiring of new
staff as compared to the prior year's period and separation costs related to the
Company's former COO; an increase of $210,862 in legal fees; an increase in
travel expenses of $106,174; and increased bank, website, insurance, and office
equipment and supplies totaling $245,435; a $650,372 decrease in external IR and
shareholder related costs; and a $55,393 decrease in audit and SOX consultancy
costs from the 2017 period when we had been making significant investments



in
these areas.



Depreciation and Amortization. Depreciation and amortization expense for the
year ended December 31, 2018 was $1,469,664 as compared to $998,528 in the same
period in 2017, an increase of $471,136. The increase in depreciation and
amortization expense is due to new investments in depreciable assets and
investment in an intangible asset (Note 9).



(Gain) Loss on Inventory Revaluation and Product Discontinuance. There was a
gain on inventory valuation for the year ended December 31, 2018 of $211,416 as
compared to a loss of $1,151,482 in the same period in 2017. The 2017 loss
write-down was the result of management's decision to further reduce the
suggested retail selling price of our iWear Video Eyewear inventory on hand and
the remaining contracted production to a price below the product's then current
carrying cost. The 2018 gain was the result of improved net production yields
and other lower discontinuance costs over the prior 2017 estimates that were
realized when production of this product was completely discontinued in
September 2018.



Other Income (Expense). Total other expense was $14,919 for the year ended
December 31, 2018 as compared to an expense of $278,956 in the same period in
2017. The overall decrease of $264,037 in these other expenses was primarily the
result of having $-0- expense for the amortization of senior term debt discounts
and deferred financing costs for the year ended December 31, 2018 as compared to
a 2017 expense of $175,260 and a related reduction in interest expense of
$68,902 due to the conversions and maturity of the debt on June 3, 2017. Other
items reducing the impact of preceding costs savings were a $34,077 increased
loss on the derivative valuation, $54,587 loss on asset disposals and
abandonment, and a $133,225 increase in investment income.




Provision for Income Taxes. There were no provisions for income taxes in 2018
or 2017.






40







Results of Operations for Fiscal Years Ended December 31, 2017 and December 31,
2016



The following table compares the Company's consolidated statements of operations
data for the years ended December 31, 2017 and 2016.






Years Ended December 31,
Dollar % Increase
2017 2016 Change (Decrease)

Sales:



Sales of Products $ 4,548,689 $ 1,987,878 $ 2,560,811 129 %
Sales of Engineering Services 989,064 139,500



849,564 609 %

Total Sales 5,537,753 2,127,378 3,410,375 160 %

Cost of Sales:
Cost of Sales - Products 5,269,900 3,251,906 2,017,994 62 %



Cost of Sales - Engineering Services 944,451 39,060



905,391 2,318 %

Total Cost of Sales 6,214,351 3,290,966 2,923,385 89 %

Gross Profit (Loss) (exclusive of
depreciation shown separately below) (676,598 ) (1,163,588 )



486,990 42 %
Gross Margin % (12 )% (55 )%

Operating Expenses:
Research and Development 6,706,690 6,947,878 (241,188 ) (3 )%
Selling and Marketing 3,694,913 3,394,580 300,333 9 %
General and Administrative 6,126,335 5,114,139 1,012,196 20 %



Depreciation and Amortization 998,528 770,668 227,860 30 %
Loss on Inventory Revaluation 1,151,482 1,124,401 27,081 2 %
Impairment of Patents and Trademarks - 20,506



(20,506 ) (100 )%

Loss from Operations (19,354,546 ) (18,535,760 ) (818,786 ) (4 )%

Other Income (Expense):
Investment Income 58,530 26,693 31,837 119 %
Other Taxes (28,363 ) (52,271 ) 23,908 46 %
Foreign Exchange Loss (65,248 ) (33,079 ) (32,169 ) 97 %



Gain on Derivative Valuation 20,204 34,744 (14,540 ) (42 )%
Loss on Fixed Asset Disposal (585 ) (25,890 ) 25,305 98 %
Amortization of Senior Term Debt
Discount (155,760 ) (486,856 ) 331,096 68 %
Amortization of Deferred Financing
Costs (19,500 ) (46,574 ) 27,074 58 %
Interest Expense (88,234 ) (131,089 ) 42,855 33 %



Total Other Income (Expense) (278,956 ) (714,322 ) 435,366 61 %

Loss Before Provision for Income
Taxes (19,633,502 ) (19,250,082 ) (383,420 ) (2 )%
Provision for Income Taxes - - - -

Net Loss $ (19,633,502 ) $ (19,250,082 ) $ (383,420 ) (2 )%




41







Sales. There was an overall increase in product sales for the year ended
December 31, 2017 over the same period in 2016 of $3,410,375 or 160%. The
following table reflects the major components of our sales:






% of % of Dollar % Increase
2017 Sales 2016 Sales Change (Decrease)

Sales of Smart
Glasses $ 3,840,300 69 % $ 1,433,729



67 % $ 2,406,571 168 %
Sales of Video
Eyewear 296,752 5 % 395,053 19 % (98,301 ) (25 )%
Sales of
Waveguide
Components 351,056 6 % 109,754 5 % 241,302 220 %
Sales Freight
out 60,581 1 % 49,342 2 % 11,239 23 %
Sales of
Engineering
Services 989,064 18 % 139,500 7 % 849,564 609 %



Total Sales $ 5,537,753 100 % $ 2,127,378



100 % $ 3,410,375 160 %




The 168% increase in Smart Glasses 2017 sales was primarily the result of the
volume production release and commencement of sales of the M300 Smart Glasses.
M300 sales increased 495% for the year ended December 31, 2017 as compared to
the 2016 period when the M300 was just commencing its early developer-only
sales. Sales of our original M100 Smart Glasses, which represented 18% of 2017
Smart Glasses revenues, decreased by 24% in 2017 over the same 2016 period as
customers moved over to the newer M300. Our iWear Video Headphones sales were
down 25% for the year ended December 31, 2017 as compared to the same period in
2016. This overall revenue decrease was primarily the result of much lower
selling prices for the year ended December 31, 2017 versus the same period in
2016. Sales of waveguide components in the 2017 period were related to two new
programs with tier-1 consumer electronics firms and others versus a smaller
single program in the comparable 2016 period.



Sales of engineering services for the period increased to $989,064 in 2017 from
$139,500 in 2016, due to work on the Toshiba smart glasses development program
that commenced in February 2017. The amount recorded for the year ended
December 31, 2017, represents accrued billings recognized on a
percentage-of-completion basis.



Cost of Sales and Gross Profit (Loss). Cost of product revenues and engineering
services is 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 the
rendering of engineering services. The following table reflects the components
of our cost of goods sold for products:



42






Year Ended As % Year Ended As % of
December 31, Related December 31, Related Dollar



Component of Cost of Sales 2017 Sales 2016 Sales Change
Product Cost of Sales $ 3,152,729 69 % $ 1,473,277 74 % $ 1,679,452
Freight Costs 610,228 13 % 482,010 24 % 128,218
Manufacturing Overhead 886,593 19 % 795,835 40 % 90,758
Warranty Costs 283,402 6 % 80,395 4 % 203,007
Amortization of Software
Costs 214,837 5 % 286,450 14 % (71,613 )
Software Royalties 122,111 3 % 133,939 7 % (11,828 )

Total Cost of Sales -
Products $ 5,269,900 116 % $ 3,251,906 164 % $ 2,017,994

Gross Profit (Loss) -
Product Sales $ (721,211 ) (16 )% $ (1,264,028 ) (64 )% $ 542,817




For the year ended December 31, 2017, we reported a reduced gross loss from
product sales as compared to the prior year's period. On a direct product cost
of sales only basis, product direct costs were 69% of sales for the 2017 period
versus 74% for the same period in 2016. These product costs, while improved for
2017 as a percentage of sales, were negatively impacted by four main factors:
(i) the near zero margin being earned on our written down iWear Video Headphones
sales, which are now effectively being sold at their net realizable value,
pursuant to our write-down at end of fiscal 2016 and again as of September 30,
2017
; (ii) higher startup M300 manufacturing costs, a product not offered in the
2016 comparative period; (iii) an increase in the inventory obsolescence
provisions related to our first M300 smart glasses production runs and the move
from our contract manufacturer's California site to their China facility; and
(iv) the provision of additional obsolescence provisions resulting from cable
and component quality issues, and lower initial production yields of the M300
and its accessories, some of which were deemed not saleable. Most of these
factors occurred in the first 6 months of 2017. As a result, we increased our
provisions for possible future warranty costs to 8% versus 4% of products sales
in the same period of 2016. Manufacturing Overhead costs rose as a result of
additional staff in the area over the 2016 period. Freight costs rose in
absolute dollar terms in 2017 versus the 2016 period but decreased as a
percentage of product sales to 13% from 24% in 2016.



Costs for engineering services accrued for the year ended December 31, 2017
represent direct project costs as well as the reclassification of internal
research and development wage costs related to the Toshiba engineering program,
plus accruals for the expected overall program's completion costs as a
percentage of accrued expenses. There was one small project in the 2016 period,
however we earned substantially more in gross profit in 2016 than we earned on
the larger Toshiba 2017 project.



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



% of % of Dollar % Increase
2017 Sales 2016 Sales Change (Decrease)

Research and
Development $ 6,706,690 121 % $ 6,947,878



327 % $ (241,188 ) (3 )%






Comparing research and development costs for the year ended December 31, 2017
versus the same period in 2016, there was a decrease in project development and
research costs of $241,188 primarily related to the fact that the new M300 Smart
Glasses entered into production in early 2017 as compared to 2016 when they were
in active development; an overall net increase in 2017 salary, benefits and
stock compensation expenses of $302,228, primarily the result of additional R&D
staff versus the same period in 2016, which was offset by a $743,489
reclassification of internal salary costs to cost of sales for engineering
services related to the Toshiba engineering services project; and an increase of
$840,824 in external research related to additional use of software contractors
for the M300 and Blade Smart Glasses and consulting fees related to our optics
and waveguide research.



Selling and Marketing. Selling and marketing costs consist of trade show



costs, advertising, travel costs, sales staff compensation costs including stock
compensation expense, consulting fees, PR agency fees, website costs and sales
commissions paid to full-time staff and outside consultants.



% of % of Dollar % Increase
2017 Sales 2016 Sales Change (Decrease)

Selling and Marketing $ 3,694,913 67 % $ 3,394,580 160 % $ 300,333 9 %




43






These costs increased due to the following factors: higher salary, commissions,
benefits and stock compensation expenses related to new staff additions totaling
$222,310 in North America; a net increase of $106,263 in advertising costs,
consisting primarily of an increase of $386,150 in product sample costs,
increased trade show costs of $18,899, less a decrease of $305,364 in marketing
agency fees and reduced spending on product videos; a $40,770 increase in
computer and software subscription expenses; and a $61,537 decrease in website
maintenance and development costs.



General and Administrative. General and administrative costs include
professional fees, investor relations (IR) costs including shares and warrants
issued for IR services, salaries and related stock compensation, travel costs,
office and rental costs.



% of % of Dollar % Increase
2017 Sales 2016 Sales Change (Decrease)

General and
Administrative $ 6,126,335 111 % $ 5,114,139



240 % $ 1,012,196 20 %




General and administrative costs were $6,126,335 for the year ended December 31,
2017
as compared to $5,114,139 for the year ended December 31, 2016, an increase
of $1,012,196, or 20%. These costs were higher overall primarily because of:
increased salary and stock compensation costs of $998,488 due to the hiring of
new accounting and internal IR personnel and the Company's new COO; an increase
of $42,836 in hiring expenses for new accounting staff; an increase of $145,658
in board and stock compensation costs due an increase in the number of external
board members from 3 to 4; a $39,725 increase in IT consulting fees; a $65,707
increase in auditor fees; a $63,366 increase in travel costs; a $26,961 increase
in bad debt expense; and partially offset by reduced spending of $428,359 for IR
and stockholder communications activities.



Depreciation and Amortization. Depreciation and amortization expense for the
year ended December 31, 2017 was $998,528 as compared to $770,668 in the same
period in 2016, an increase of $227,860. The increase in depreciation and
amortization expense is due to new investments in depreciable assets over the
last two years.



Loss on Inventory Revaluation. There was a loss on inventory revaluation for
the year ended December 31, 2017 of $1,151,482 as compared to $1,124,401 in the
same period in 2016. These write-downs are the result of management's decision
in early 2017 to reduce the suggested retail selling price of its iWear Video
Eyewear inventory on hand and again in September 2017 to a price well below



the
product's cost.



Other Income (Expense). Total other expense was $278,956 for the year ended



December 31, 2017 compared to an expense of $714,322 in the same period in 2016,
a reduction of $435,366. The overall decrease in these other expenses was
primarily due to reduced costs of $358,170 for the amortization of senior term
debt discounts and deferred financing costs for the 2017 period as compared to
2016 period, and a related reduction in interest expense of $42,855 and $31,837
increase in investment income. All of the senior term debt was converted to
common stock prior to its maturity on June 3, 2017.




Provision for Income Taxes.There were no provisions for income taxes in 2017 or
2016.






44







Liquidity and Capital Resources



As of December 31, 2018, we had cash and cash equivalents of $17,263,643, an
increase of $2,374,007 from $14,889,636 as of December 31, 2017.






At December 31, 2018, we had current assets of $27,383,095 compared to current
liabilities of $4,676,665, which resulted in a positive working capital position
of $22,706,430. At December 31, 2017, we had a working capital position of
$15,789,033. Our current liabilities are comprised principally of accounts
payable and accrued expenses.



Operating Activities. We used $22,542,574 of cash for operating activities for
the year ended December 31, 2018 and $16,465,706 in the same period in 2017. The
net cash operating loss after adding back non-cash adjustments for the year
ended December 31, 2018 was $17,979,716, along with the following changes in
operating assets and liabilities for the period: a $497,784 decrease in accrued
project revenue, a $3,429,485 increase in net inventory, a $600,502 increase in
vendor prepayments, a $846,399 decrease in accounts payable, and a $327,469
decrease in accrued compensation. The major working capital operating items for
2017 resulted from a $15,260,991 loss from operations after non-cash
adjustments, and a $2,352,581 increase in inventory, a $870,858 increase in
accounts receivable, a $497,784 increase in accrued project revenue, a $401,748
decrease in unearned revenues, a $321,250 decrease in accrued compensation, and
a $2,640,584 increase in accounts payable.



Investing Activities. Cash used in investing activities was $3,147,794 for the
year ended December 31, 2018 as compared to $2,689,425 for the same period in
2017. During the year ended December 31, 2018, $1,365,388 was used primarily for
the purchase of manufacturing equipment, product mold tooling, and computer
equipment as compared to spending of $1,681,258 for the same period in 2017. The
costs of registering our intellectual property rights and license purchases,
included in the investing activities totals described above, were $444,906 in
the year ended December 31, 2018 and $599,444 in the same period in 2017. During
the year ended December 31, 2018, a total of $87,500 in software development
costs were capitalized, versus $408,723 for the same period in 2017. During the
2018 period, the Company invested a total of $500,000 in two private
corporations operating in the low vision near-eye display market and AR software
tool market, respectively. In addition, during 2018 the Company invested a total
of $1,500,000 to re-acquire certain rights that were subject to a non-compete
agreement executed in 2012, $750,000 of which was paid in 2018 and the remaining
$750,000 will be paid in 2019.



Financing Activities. We generated $28,064,375 of cash from financing
activities for the year ended 2018 as compared to $19,510,823 in the same period
in 2017. For the 2018 period, financing activities consisted primarily of a
public offering of 3,000,000 shares of common stock along with warrants to
purchase an aggregate of up to 1,200,000 shares of common stock in January 2018,
resulting in proceeds after commissions and offering expenses of $28,025,000.
During the year ended December 31, 2017 we generated $21,128,502 of cash from
financing activities in 2017 from the sale of 3,566,116 common shares in public
offerings in August and December 2017, less their combined direct offering



costs
of $1,617,679.




Capital Resources. As of December 31, 2018, we had a cash and cash equivalents
balance of $17,263,643.



We incurred a net loss for the year ended December 31, 2018 of $21,875,713 and
annual net losses of $19,633,502 in 2017 and $19,250,082 in 2016. The Company
has an accumulated deficit of $118,266,441 as of December 31, 2018.



The Company's cash requirements are primarily for funding operating losses,
working capital, research and development, and capital expenditures. 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. The Company's management intends to
take actions necessary to continue as a going concern, and accordingly our
condensed consolidated financial statements included in this report 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. The consolidated financial
statements included in this report 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.



Historically, the Company has met its cash needs by the sale of equity,
borrowings under notes, and sales of convertible debt. On January 29, 2018, the
Company closed a public offering of 3,000,000 shares of common stock along with
warrants to purchase an aggregate of up to 1,200,000 shares of common stock
resulting in net proceeds of $28,025,000 after commissions and offering
expenses.



If the Company raises additional funds by these methods, the ownership interests
of existing shareholders may be diluted. The amount of such dilution could
increase due to the issuance of new warrants or securities with other dilutive
characteristics, such as full ratchet anti-dilution clauses or price resets.



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. To the extent that we are unable to raise sufficient
additional capital, we will be required to substantially modify our business
plan and our plans for operations, which could have a material adverse effect on
us and our financial condition.



45






Contractual Obligations




The following is a summary of our contractual payment obligations for operating
leases as of December 31, 2018:






Less than More than
Contractual Obligations Total 1 Year 1-3 Years 3-5 Years 5 Years
Operating Lease Obligations $ 1,080,494 $ 562,529 $ 517,965 - -
Open Purchase Obligations 6,500,000 6,500,000 - - -

© Edgar Online, source Glimpses

Acquiremedia 2019
Envoyer par e-mail