Company 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.
In the past, see-through HMDs displayed
the real world using semi-transparent mirrors placed in front of the user’s eyes. These HMDs were large and bulky and as
a result, they had little mass-market appeal. We have developed thin optics, called waveguides, that are fully see-through and
enable miniature display engines to be mounted in the temples of the HMD which allows the form factor of the Smart Glasses to be
comparable to conventional eyeglasses. Our Smart Glasses and AR Glasses are designed for all day use cases and are small enough
to fit in a user’s pocket or purse.
We believe that our waveguide optics and
display engines offer a number of significant advantages over other wearable display solutions, including higher contrast, greater
power efficiency, less weight, more compact size, and high brightness images for use outdoors. We also believe that our waveguide
optics give us a substantial advantage over other competitors’ optics, including other waveguides, because our solution allows
us to produce optics that are fully transparent when off while also delivering the high brightness required for AR and enterprise
Smart Glasses applications.
We believe that a key growth area for us is the consumer electronics, OEM and defense and homeland markets.
Our potential channels to this market include supplying mass production of waveguide optics and display engines to select third
parties to use in their products. We believe that our waveguides and compact display engine technologies are a key differentiator
for enabling next generation AR and Smart Glasses hardware for the consumer and enterprise segments because they will ultimately
allow us to make HMDs nearly indistinguishable from regular eyeglasses.
We have developed our own intellectual property
portfolio that includes patents, over 20 years of manufacturing know-how, proprietary processes, materials and equipment to create
high performance waveguides, and near-eye display products. We believe our technology, intellectual property portfolio and position
in the marketplace give us a leadership position in AR and Smart Glasses products and waveguide optics and display engine technology.
Our History
Historically, we have focused on three markets: the consumer markets for gaming, entertainment and mobile
video, smart glasses products for enterprise, and rugged mobile displays for defense markets. We introduced our first HMD products
over 22 years ago and we have offered numerous product models and versions with ever advancing features and capabilities that have
served the three markets. In June 2012, we sold the assets that produced products and provided services to military organizations
and defense organizations. Accordingly, in recent years our primary focus has been on the enterprise and “prosumer”
consumer markets. Effective October 2018, we renegotiated the exclusivity agreement with the company we sold our defense division
to and as a result we have started marketing and sale initiatives directly into some portions of the defense and homeland security
markets.
Overall Strategy
Our goal is to establish and maintain a leadership position as a worldwide supplier of wearable displays
including AR glasses and Smart Glasses solutions. We offer our products across major markets, platforms and applications.
We strive to be an innovator in designing wearable display devices that can enable enterprise productivity hands-free enhancements,
mobile video viewing, general entertainment, social media, and most importantly, AR applications. We believe our revenue growth
will be driven by the introduction of new AR Smart Glasses, accessories, and software applications.
To maintain and enhance our position as
a leading provider of wearable display products for AR and hands-free computing, we seek to:
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develop products based on our unique technology for both specialized and large enterprise, consumer markets and defense and security;
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improve brand recognition;
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provide excellent products and service;
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broaden and develop strategic relationships and partnerships;
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sell our products or license our technology to third-party companies that would
incorporate and sell them as a new product with their own brand name (OEM partners);
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promote and enhance development of third-party software that can take advantage of our products, including offering apps and software through our own “app store”;
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communicate the advantages of our proprietary waveguide optics and display engine technologies to the relevant customers in target market sectors and encourage their adoption through demonstrations and incorporation in the offerings of world-class companies;
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extend our innovative and proprietary technology leadership;
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enhance and protect our intellectual property portfolio;
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establish multiple revenue sources;
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attract and retain highly qualified personnel; and
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build and maintain strong product design capabilities.
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Our strategy is also to create a
leadership position as a worldwide supplier of waveguide optics and near-eye display technology solutions for applications in
high growth segments of the consumer, enterprise and commercial electronics industry by capitalizing on our experience and
expertise in wearable displays and the move to AR Smart Glasses for delivering AI, entertainment, work, social media and
other applications. We aim to provide waveguides, display engines and complementary optics to enable OEM customers to serve a
variety of markets with new enhanced display electronic products. Some key elements of our OEM strategy to achieve these
objectives include the following:
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Develop OEM and mass production partnerships in the consumer AR Smart Glasses market
. As consumer mobile electronics markets transition to AR glasses, Vuzix technology is positioned well to address the requirements of this segment. Developing customer partners is key to establishing Vuzix as the market leader for next generation display technologies for the consumer AR Smart Glasses market.
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Strengthen our technology leadership
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As one of the first to exploit waveguides with miniature display engines, we believe that we enjoy a significant advantage
in bringing this technology to the OEM market. By continuing to invest in research and development and protecting our
intellectual property, we expect to further develop performance improvements and provide a competitive edge for our customers
who integrate our displays into their end products.
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Optimize waveguide manufacturing efficiencies while protecting proprietary processes
. We intend to further improve our manufacturing yields and lower costs by way of increased automation as well as equipment upgrades. We intend to retain the waveguide design and final mold replication related processes in-house, where we have a core competency and manufacturing expertise. We also believe that by keeping these processes under tight control we can better protect our proprietary technology and process know-how. We believe that this strategy will also enhance our ability to continue to optimize and customize processes and devices to meet customer needs.
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Build and maintain strong design capabilities
. We employ in-house design capabilities supplemented by outsourced design services. Building and maintaining this capability allows us to reduce engineering costs, accelerate the design process and enhance design accuracy to respond to our customers' needs as new markets develop. Given these capabilities, we continue to look for opportunities to add value to our displays to increase revenue.
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Leverage strategic relationships
. External relationships serve an important role in our research and development efforts. Our relationships with suppliers, equipment vendors, contract research groups, external design companies, customer and corporate partners, all enhance our overall research and development effort and bring us new ideas and solutions.
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The Market
The wireless, IT, and entertainment industries
have evolved considerably and continue to do so. The mobile phone has evolved into a ubiquitous, location-aware, smart mobile computing
device. Mobile technology is redefining the way people interact with their world, both at work and play, and it has become an essential
lifestyle management and entertainment tool personalized to users’ unique needs. We believe that interactive AR content,
AI, Edge Computing, and speech-based cloud services will significantly change the way mobile products are used and how content
is delivered to the user. We believe head-worn displays that are hands free can connect the digital world to the real world and
have the ability to change the future of the computing industry. We believe AR based wearable display and Smart Glasses can enable
new experiences that cannot be experienced in any other way.
Current mobile display technology is almost
universally based on direct view screens. These displays are designed to be small and make portability easy. At the same time,
these displays must be held by the user and, depending upon their size, can have difficulty in producing human readable high-resolution
content without magnification zooming, which reduces screen resolution. Our products are aimed at solving these problems by creating
hands-free virtual large screens that are interactive and fit into eyeglasses form factors. VR-based head-worn displays block out
surroundings for a fully immersive experience. AR-based displays are designed to be "see-through" or "see-around"
and allow the user to still see and interact with their surroundings. They may contain one (monocular) or two (binocular) displays.
We have leveraged our experience in developing wearable display products over the last 20 years and believe AR experiences, relative
to our competitors, allows us to more rapidly introduce wearable displays suitable for specialized and mass market consumer AR
and Smart Glasses.
Our business for the last five years has
focused on enterprise and industrial markets and high-end (prosumer) mobile consumer markets. We believe the demand for head-worn
displays in these markets is being driven by such factors and expectations as:
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Increasing demand for Internet, social media, and cloud services’ access “anywhere, anytime”;
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An increasing number of hands-free enterprise, commercial and medical applications for which
our products are well-suited;
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We believe the growing use of AR applications will drive the need for head-worn display solutions to replace the need to hold up handheld devices to use the applications; we believe that AR Smart Glasses, rather than a smart phone, are needed to deliver this experience correctly; and
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More users are migrating a greater portion of their entertainments and information gathering time to mobile devices. We believe that our near-eye display technologies can significantly increase user satisfaction and allow for wide spread AR adoption and applications.
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Target Markets
We offer smart wearable display products
that enable development and deployment of AR applications. AR Smart Glasses enable the wearer to see computer-generated information,
graphics or images projected into the real-world environment or upon an object that the user is observing. Thus, whether in the
warehouse, on the factory floor, or in-the-field, users while wearing the AR Smart Glasses may access a manual, tutorial, or image
that is connected to the task at hand which will assist them in completing that task, while also viewing their current surroundings
and nearby objects. Additional possible applications of AR-enabled Smart Glasses for consumer use include hands-free alerts, messaging,
location and context aware information and social interaction.
Our target markets and applications by major
sector are:
Enterprise
Our Smart Glasses products are currently focused on enterprise, industrial and medical markets. These
Smart Glasses products run native Android applications within the glasses that, for example, allow them to stream video in real-time,
which is very useful for many enterprise applications. We believe that a wide variety of commercial and industrial markets offer
significant opportunities for our products due to increasing demand for instant data accessibility in mobile workplace environments
and due to the benefit of hands-free mobile displays to enhance visual performance and worker productivity. Our Smart Glasses are
being used for numerous applications including: remote service video support, wearable computer displays, viewing of wireless sensor
data, quality assurance, hands-free access to work instructions such as assembly check lists and manuals, in-the-field maintenance,
warehouse pick and place, real-time viewing of remote images, and training and education. Further, Smart Glasses can be used to
enhance vision for many people with visual impairments. We have built an eco-system of Value-Added Resellers (VARs or VIPs –
Vuzix Integration Partners), established relationships with a growing number of system integrators, and have garnered infrastructure
support from leading mobile device management companies.
Prosumer
We believe that the most significant
driver of the longer-term wearable display market adoption is the growing consumer demand for mobile access to ever larger
volumes of information and entertainment in smaller and wearable packages.
We also believe that there is a growing need for active smart phone users to be able to keep their phones
in their pocket and at the same time still receive location-aware content from the web overlaid with their real-world view. For
example, while a user walks down the street, they could get directions and a Yelp score for the restaurant they are looking at;
all within the view of their smart glasses while leaving the phone in their pocket.
As we manufacture our waveguides and display
engines in higher volumes at reduced costs and capitalize on our waveguide manufacturing expertise, we believe that our products
will be increasingly well-positioned to compete with other see-through optics and displays and cell phone size displays in the
rapidly growing consumer market, particularly as demand expands for sophisticated mobile personal viewers offering higher resolution
and better image quality for AR and Smart Glasses applications. We believe our waveguide and display engine technology addresses
the critical performance parameters for next generation AR products, including higher brightness, sharper resolution, true see-through
capabilities, compact size, lower power consumption and longer life.
Products
We now produce and sell AR Smart Glasses
for a variety of enterprise, commercial, and prosumer uses and applications. Our products are available with varying features and
are currently offered as monocular display systems. Our AR Smart Glasses have many of the capabilities of a smartphone such as
cameras and computer processors that can allow applications to be run directly in the AR Smart Glasses, enabling cloud connected
applications through a wireless link directly with the glasses.
Our AR Smart Glasses are an intelligent
wearable computing system specifically designed to enable computing and connecting AR cloud/internet of things information and
AI to the real world. The embedded cameras in our Smart Glasses are used for recording and/or seeing the real world. Input and
control of our smart glasses consist of using the wirelessly connected smartphone, speech recognition voice control, a series
of built in sensors for head motion and in some cases gesture sensors. We are building an eco-system of developers around these
smart glasses and anticipate that most of the software being developed will be usable on future generations of our smart glasses.
Cloud or internet-connected Smart Glasses applications are being created for manufacturing, medical, field maintenance and repair,
training, gaming and social media uses for both our Smart Glasses product lines.
Our current products include:
M300, M300XL and M400 Smart Glasses
(M
series)
The M300 and M300XL (the “M series”)
products are our monocular smart glasses designed for enterprise, industrial, commercial and medical markets. These products include
an Android-based wearable computer, enhanced with a wearable monocular display and wireless connectivity capabilities. These Smart
Glasses serve up the digital world “hands-free”, offering access to information, data collection and more. Monocular
products, due to their single eye display, are best used for push notifications and “information snacking”. An integrated
head tracking, camera, touchpad, buttons and speech recognition gives versatility to navigate and use these M-series Smart Glasses
in almost any working environment. These products include pre-installed apps that can be used to record and playback still pictures
and video, track timed events, manage a user’s calendar, link to a phone, scan barcodes and much more. These products can
provide enhancements to existing workflows and open new opportunities in industrial, medical, retail, supply chain, remote help
desk, and many more aspects of our customers’ businesses.
In February 2019, the Company announced
at the Mobile World Congress tradeshow a prototype of our M400 Smart Glasses based on the new Qualcomm XR1 platform and runs on
the latest Android OS. This model will have a host of new and more powerful features and it will enter mass production by mid-summer
of 2019, selling at a premium to the existing M-series models.
Blade Smart Glasses
We introduced the Blade Smart Sunglasses
as a monocular system at CES 2018. We believe the Vuzix Blade™ is the natural evolution of AR glasses providing the user
with the wide range of features and capabilities in a natural glasses form factor that we believe people will want to wear. Delivered
visually right in front of the user, current applications range from basic text messaging and answering the phone to overlaying
mapping directions, menus, weather, events, stock quotes, video conferencing, sports updates, social feeds, bio-metrics and much
more. The intuitive and feature packed Vuzix Blade OS allows the user to simply and intuitively navigate via simple swipes and
taps, or leverage voice controls and external AI systems. This allows users to leave their phones in their pockets for most functions
and adds the ability to connect the information being presented to the real world, including that from cloud-based speech AI platforms
such as Amazon Alexa. We believe the Blade Smart Glasses is the first natural step to replacing the smart phone with a ubiquitous
wearable device for all.
The Vuzix Blade with its fashionable form
factor and all-day wear-ability fills the gap between wearer expectations and actual form factors. For the enterprise user, the
Vuzix Blade pairs with the user’s smart phone or connect directly to a Wi-Fi network, allowing for custom, secure industrial
applications.
Other AR Products
We are currently also developing a binocular AR Smart Glasses product with 3D, stereo cameras, and 3D
camera vision capabilities that we expect to introduce sometime in late 2020. Future AR Smart Glasses versions will include increased
resolutions and fields of view, more powerful computers and our thin waveguide see-through optics. AR wearable displays provide
the user a live, direct or indirect, view of a physical, real-world environment whose elements are “augmented” by computer
generated sensory input such as sound, video, graphics or GPS data. Such systems also contain head tracking technology, which enables
the user to look around the environment being viewed by moving his or her head which in turn sends that information back to the
computer, which then adjusts the computer-generated AR image accordingly.
Applications for Smart Glasses
Our Vuzix Basics product line consists of
out-of-the-box applications optimized for use with the growing lineup of Vuzix AR Smart Glasses, including the Vuzix M300 and M300XL
Smart Glasses and the Vuzix Blade. VUZIX Basics™ are standard applications, designed to be simple to get started, simple
to use, and apps we believe can immediately provide the fundamental benefits of Smart Glasses to novice and expert users alike.
The first application in the platform, VUZIX
Basics Video, provides remote telepresence capabilities, otherwise known as see-what-I-see video collaboration, enabling an operator,
mechanic, field technician or consultant to communicate in a hands-free manner with a remote expert to drive “just in time”
video support of a process or repair. VUZIX Basics Video enables clients to multiply their expert workforce, eliminate the high
costs of travel, improve customer service levels and equipment operation and accelerate knowledge transfer and training. We are
offering VUZIX Basics apps on a monthly or one-year subscription basis.
App Store for Smart Glasses
We also have an App Store on our website
where users can download and purchase Smart Glasses applications, including third-party apps. We are fostering the development
of an ecosystem of third-party developers to offer applications and trials for their smart glasses apps and many will be sold on
an industry common revenue share model, with the publisher receiving approximately 70% of the subscriptions collected. The Vuzix
third-party developer community will be able leverage the open Android platform of the Vuzix M-Series and the Vuzix Blade to bring
new and creative ideas to life. Supported by Vuzix’ new App Store, developers can offer or sell their applications to all
Vuzix Smart Glasses users, expanding into an ecosystem of AR applications for real world use today. The App store supports free,
onetime fee, and paid subscription monetization models.
Waveguide Optics and Design Reference Kits
We selectively offer waveguide optics and
related coupling optics combined with our compact Cobra II display engine to form a see-through display module. We sell our waveguide
optic design reference kits to select qualified potential OEMs/ODMs, which include a Cobra II projector, waveguide optics and associated
electronics, to help these customers evaluate our technologies and to assist their efforts to build and test new products incorporating
our proprietary solutions.
We have shipped these customized modules
to numerous customers, some of whom may soon incorporate our products into their own commercial products. Our strategy for addressing
the consumer mass market includes developing partnerships with both select consumer companies, including wireless communications
carriers and select high volume production manufacturing companies.
Custom Solutions and Engineering Solutions
We have in the past provided fully integrated
wearable display systems, including head mounted displays, human computer interface devices, near-eye display related engineering
services and wearable computers to commercial, industrial and defense customers. As a result of the sale our defense division
in June 2012, we were precluded from pursuing general engineering services work with defense or security organizations. However,
in October 2018 we signed an amendment to our agreement with the purchaser of our defense division that now allows us
to sell our products to defense and security organizations, including business customers and governmental entity customers that
primarily provide security and defense services. Such potential customers include police, fire fighters, EMTs, other first responders,
and homeland and border security.
In February 2017, we entered into a
development agreement with Toshiba to create a customized Window-based USB-C Type C AR Smart Glasses offering for Toshiba,
which is a derivative product of the Vuzix M300 Smart Glasses. Throughout 2017, our design teams created an entirely new
Vuzix product for Toshiba. We have delivered hundreds of engineering and development units and have begun volume
manufacturing for Toshiba to fulfill their initial orders under our 3-year supply agreement, which was previously announced
by Vuzix in December 2017. The near-term realization of commercial orders were initially slowed during the purchase
of Toshiba by Sharp (Foxconn), but have now begun again as a part of the Toshiba integration into Sharp (Foxconn).
Defense and Security Products
In early October 2018, we amended
the 10-year non-compete restrictions with the buyer of our former defense division, TDG Acquisition LLC (DBA – Six15 Technologies
(“Six15”)). This amendment allows us to pursue opportunities related to the Company’s smart glasses
and waveguide optics technologies into these expanded market opportunities related to first responders, US Department of Defense,
Security Organizations and the Military. Additionally, Vuzix is now permitted to perform contract work with and sell its waveguide
optics and display engines to the largest third-party defense suppliers around the world that seek to incorporate Vuzix near-eye
display or HMD technologies into the products and systems that they sell into Military Organizations. And while direct sales of
products and services by us directly to Military Organizations are still precluded pursuant to the original non-compete, these
new markets for Vuzix products should be significant in both the United States and globally.
Product Development
We believe that continued introduction
of new products in our target markets is essential to our growth. Our products tend to have two to three-year life cycles. We
have assembled a group of highly skilled engineers who work internally as well as with external consultants to continue our product
development efforts. Our primary development efforts are focused on waveguide optics (and their manufacture), projection engines,
displays, low-power electronic designs, firmware and wearable software, and the design and ergonomics of wearable displays. Our
display product development efforts are focused towards continually enhancing the resolution, performance and manufacturability
of our display products. During 2018, 2017 and 2016, we invested $10,378,728, $6,706,690, and $6,947,878, respectively, on research
and development activities. We expect to increase our research and development expenditures in the future and as our revenues
grow. We have also acquired and licensed technologies developed by third parties and we may continue to do so in the future.
Technology
We believe that it is important to make
substantial investments in research and development to maintain our competitive advantage. The development and procurement of intellectual
property rights relating to our technologies is a key aspect of our business strategy. We believe that it is now technologically
feasible to improve upon the weight, ergonomics, optical performance, see-through capabilities, luminance, power efficiency, compactness,
field-of-view and resolution of the current generation of virtual displays and display components. “Early technology adopters”
and “prosumer” consumers have been the majority of the purchasers of our consumer wearable display products to date
and similarly within the enterprise customer base for our Smart Glasses. However, our near-eye virtual display technology has been
gradually improving in performance and we believe is starting to meet the high expectations of both the enterprise and the consumer
mass markets with respect to screen resolution, computer power, image size and ergonomics. We expect to continue to improve our
products through our ongoing research and development and advancements made by our third-party suppliers of key components.
We believe that the range of our proprietary technologies gives us a significant competitive advantage.
Our technologies relate to advanced optics systems including passive and active see-through imaging waveguides, micro-projection
display engines, high resolution scanning displays, motion tracking systems, and specialized software drivers and applications
for video eyewear displays. We also have a portfolio of trade secrets and expertise in nano-imprinting using quartz mold substrates,
nano structure embossing, and engineering tool-sets for the design and manufacturing of diffractive waveguide optics.
We believe that display engines are also
important for commercializing wearable displays. We have developed a proprietary micro digital light processing (DLP) based engine
called the Cobra II and are working on laser modulated and LED engines designed specifically for our waveguide optics solutions.
These next generation waveguides and display engines have allowed us to shrink the entire assembly to fit in the space available
in a typical off-the-shelf pair of sports sunglasses.
We entered into a technology license agreement
with Nokia Corporation in August 2011 for their Exit Pupil Expanding (EPE) optics technology. This agreement was amended in October
2017 to allow us greater flexibility with sub-licensing and preferable royalty terms. Under these agreements, we perform on-going
research and development on EPE optics and are expected to manufacture and bring to market components and products containing
the licensed technology. In addition, we will provide Nokia with the ability to purchase products and components which incorporate
the licensed technology. EPE technology is an important foundation of our diffraction-based waveguide optics technology.
In October 2017, we acquired certain IP and patent applications from the inventor/seller related to holographic
optics and display engines for
“
image and wave field projection through a diffusive media”. This technology
is still in active development with a goal of creating a functional demonstrator model by the end of 2019.
Major technologies that we employ in our products include:
Micro-display
optics
represent a significant cost of goods for both us and our competitors. This cost is a function of the physical size of the micro-display
and the cost of the supporting optics. Smaller micro-displays are less expensive to produce but they require larger and more sophisticated
optics to make solutions that have no user adjustments, large fields-of-view, and very low distortion specifications. Larger displays
require less magnification and less complex optics, but these optics become very bulky and the displays are significantly more
expensive to manufacture. We have developed thin and lightweight optics that can be integrated with very small micro-displays
that we expect will closely match conventional eyewear frames in size and weight. These new optics and displays provide what we
believe are significantly improved ergonomics compared to competing wearable display solutions.
See-Through Waveguides:
We
have developed a range of patents and patents pending around our see-through waveguides. We are developing passive, dynamic and
diffractive optics-based waveguides that are the basis for some of our future slim wearable display AR and smart glasses products.
We are striving to develop ultra-compact micro-display engines to magnify and focus the light from a display into a user’s
eye. Our development goal with these waveguides is to create AR-based wearable displays that will appear to others as practically
indistinguishable from today’s conventional sunglasses by most every measure, including comfort, size, weight and ergonomics.
Custom Display Engines:
We have patents
and patents pending on modulated laser-based display engines and IP around micro DLP display engines. Our Cobra II micro DLP engine
is one of the smallest volume engines built around DLPs. We are also performing research and development work on laser engines
to drive scanned images into holograms, with the goal of such systems to offer next generation waveguides capable of 100 plus degree
fields-of-view.
Nanoimprinting:
We
continue to develop a portfolio of trade secrets and expertise in nanoimprinting for use in our waveguide optics. We believe these
technologies are essential to the production of our approximately 1.2 mm thick see-through lenses which we believe are the cornerstone
to making fashionable eyeglass-styled Smart Glasses. We have developed technology for waveguide design and production including:
tool design and creation, custom designed software for grating structures and layout, lithography processes, high index low shrinkage
polymers and other materials, mold treatments, automation equipment and test/QA processes and procedures, to name a few.
Patents and other Intellectual Property
We have an intellectual property policy
which has as its objectives: (i) the development of new intellectual property to further our intellectual property position
in relation to personal display technology; and (ii) the maintenance and protection of our valuable trade secrets and know-how.
We seek to achieve these objectives through the education and training of our engineering staff and the adoption of appropriate
systems, policies and procedures for the creation, identification and protection of intellectual property.
Our general practice is to file patent applications
for our technology in the United States, Europe, Japan, and in additional countries, including Canada and China for inventions
which we believe have the greatest potential. We file and prosecute our patent applications in pursuit of the most extensive fields
of protection possible including, where appropriate, the application of the relevant technology to the broader display industry.
We believe that our intellectual property
portfolio, coupled with our key supplier relationships and accumulated experience in the personal display field, gives us an advantage
over potential competitors. We also believe our copyrights, trademarks, and patents are critical to our success and we intend
to maintain and protect these. We also rely on proprietary technology, trade secrets, and know-how, including manufacturing processes
and procedures, which are not patented. To protect our rights in these areas, we require all employees and, where appropriate,
contractors, consultants, advisors and collaborators, to enter into confidentiality, invention assignment and non-competition
agreements.
Our technologies enable us to provide low-cost, small form factor, high-resolution wearable display products.
To protect our technologies, we have developed a patent portfolio which currently consists of 74 issued U.S. and foreign patents
and 70 pending U.S. and foreign patent applications. We are also currently preparing several invention disclosures for the purposes
of submitting design and utility patent applications. Our U.S. and foreign patents expire on various dates to
July 6, 2041. In addition, in connection with the sale of our defense division in 2012, we received a worldwide, royalty-free,
assignable grant-back license to all the patents and other intellectual property sold for use in the manufacture and sale of products
in the consumer markets.
In addition to our various patents, we have
5 registered U.S. trademarks and 51 trademark registrations worldwide.
Competitors
The near-eye or personal display and mobile
device industry in which we operate is highly competitive and evolving rapidly. We compete against both direct view display technology
in smart phones and tablets and wearable display technology. We believe that the principal competitive factors in the personal
display industry include image size, image quality, image resolution, power efficiency, manufacturing cost, weight and dimension,
feature implementation, AR capabilities, ergonomics, style, hands free capabilities and, finally, the interactive capabilities
of the overall display system.
Aside from direct view displays, we also have competitors who produce near-eye personal displays or wearable
displays. For the past decade most of these products were mainly low-resolution, bulky in size, poor ergonomically, costly, and
heavy in their power requirements.
Competition - Binocular Wearable Display Products
Vuzix AR Smart Glasses competitors include binocular wearable displays and virtual reality systems, using
micro-displays. Examples of such companies include or have included Carl Zeiss, Seiko Epson (Epson), Sony Corporation, Avegant,
Osterhout Design Group (ODG), Oculus/Facebook, HTC, Razer and many others. Many of these firms have discontinued their efforts
while others have introduced VR viewers themselves. We believe these competitive products have received limited customer acceptance
due to their bulky and non-user-friendly designs. Other companies that have stated their intention to enter this market when their
product development is complete with either finished products or components with optics and display engines are Lumus, Waveoptics,
Digilence, and Microvision Corporation.
As an alternative to micro-display based head worn display systems, most manufacturers have moved to using
larger display panels that are typically found in smart phones. A Facebook unit, Oculus, has been shipping its large field-of-view
VR goggle HMD called the Oculus Rift since 2016. HTC that same year introduced it higher-end VR system called the HTC Vive. Sony,
after dropping their HMZ video viewer product, released in October 2016 its PlayStation VR goggle system specifically for its PlayStation
4 game console. Enhanced versions of these VR goggles systems with improved performance and reduced pricing has been introduced
by HTC and Oculus has offered new models which don’t have to be connected with a PC to operate.
Additionally, numerous manufacturers now offer head worn goggle attachments for smart phones that are
designed to be used for VR applications. These devices contain simple optics that allow the user to insert their smart phone into
the device and view their phone screen very close to their eyes and can offer an inexpensive way for owners of compatible smart
phones to experience virtual reality. These products are generally priced under $100 and include a wireless controller to allow
the wearer to navigate and play VR games. We believe all these units are very bulky relative to the wearer’s head, offer
limited, but improving resolution to each eye, and often have less than clear optical performance across their viewing area. While
acceptable for VR games and 360 videos, they are less than satisfactory as a big-screen video viewer or computer display due to
‘screen-door’ and other optical distortions. We expect that, as the market grows and matures and as the technology
becomes more refined, more companies may compete with us.
Competition – AR Glasses
In the AR markets, there are few competitors with most of this market currently aimed at the high-end
and research markets. Companies either offering products or intending to do so in this area include the Microsoft Hololens, Meta,
Sony, Epson, Atheer, DAQRI, Magic Leap, ODG, Nreal and CastAR. Today many of these products are fairly bulky and tethered to an
external controller. Many are being sold as AR Smart Glasses and are currently targeted at enterprise and academic researchers.
The most complete and functional systems today are the Hololens and the Magic Leap One, both of which cost $2,500 - $3,500 per
unit. Microsoft unveiled their second generation of Hololens in late February 2019.
Magic Leap, a well-funded startup, released its Magic Leap One creator edition system for AR applications
in late 2018 at a price of $2,295. Further, industry bloggers have speculated that companies such as Apple, Google, and Oculus/Facebook
may offer or support AR wearable display products in the future, but, to date, no specific product launch details have been officially
announced.
Competition - Monocular Smart Glasses and Wearable
Display Products
Although several companies produce monocular
wearable displays, we believe that sales of their products to date have been limited. To date, the market opportunity for monocular
products other than night vision products has been limited primarily to trial tests and smaller rollouts in enterprise markets
rather than broad commercial volume purchases. Competitors in these markets include or have included: Liteye Systems, Inc., Lumus,
Shimadzu Corporation, Sony, Kopin, Zebra Technologies (inclusive of business unit formerly part of Motorola), Creative Display
Systems, Brother, Google, Garmin, BAE Systems, Six-15 Technologies, LLC (the purchaser of our defense division), Lenovo, Optinvent,
RealWear, Focals by North, and Rockwell Collins.
Google’s wearable display device,
named Google Glass, was a headset product with similar form and function to our M100 Smart Glasses. In 2015, Google stopped selling
its first version of Glass and then launched a refreshed version called Glass Enterprise. Recent industry rumors indicate that
Google may introduce the Google Glass 2 for Enterprise in 2019.
Several Japanese electronics companies including
Hitachi, Murata, Sony, Westunitis, and Olympus have or had announced monocular smart glass systems for industry. There are also
several Chinese based companies that have been showing monocular smart glasses products, including Lenovo but their sales activities
thus far have been somewhat limited and focused on Asia. We expect that we will encounter competition in the future from major
consumer electronics companies and suppliers of imaging and information products for defense applications.
There is competition in all classes of products we manufacture, from both large and small companies. Our
sales do not represent a significant share of the market for any class of products. The principal points of competition for these
products include, among other factors: price, product performance, the availability of supporting applications, and the experience
and brand name of the particular company and history of its dealings in such products. We believe that our monocular products match
or exceed the display products currently offered by our competitors.
Competition – Waveguides and Display Engines
There are a limited number of manufacturers
of waveguide optics, all targeted at OEM producers of AR and smart glasses. Competitors to our waveguide products include Lumus,
Waveoptics, Digilens, Optivent, WaveOptics, and others. New waveguide manufacturers from China have recently begun demonstrating
their solutions at 2019 trade shows.
Sales and Marketing
Sales
Our strategy is to sell our products and components both directly and through distributors and value-added
resellers (VARs – also referred to Vuzix Integration Partners or VIPs), and on a select basis to OEMs. As a result, we have
distinct strategies for the sales of our products.
In the Smart Glasses and AR markets, we are currently focused on the enterprise space and as such are
building strategic marketing relationships with software firms to address and support enterprise customers. We are, in parallel,
developing a VAR network with leading companies in various vertical markets from warehousing to field service to medical. As these
VARs finish their value-added software and services offerings, we expect them to roll-out their finished solutions to their respective
customer bases. Some VARs, after qualification, are being designated as a Vuzix Integration Partner or VIP. Such VIP partners gain
early access to our new Smart Glasses hardware, receive first access to the initial commercial shipments, and get access to co-marketing
support, discounts and more. We are also supporting select larger key accounts with our in-house direct sales team. For our Smart
Glasses, we are also developing an ecosystem with application developers from around the world. We have introduced our own hosted
application store where our Smart Glasses customers can download and purchase applications and software developer kits.
We currently sell our products internationally
through resellers, online stores and various Vuzix operated web stores in Europe and Japan. Our international focus is currently
on Japan and the European Union (the “EU”). In Japan, we have a branch sales and service office in Tokyo and a small
warehouse outside of Tokyo. We employ two full-time staff in Japan. We have a wholly-owned subsidiary, Vuzix (Europe) Limited,
through which we conduct our business in the EU and Middle Eastern markets. Resellers in 50 countries placed orders with us during
the last two years. We maintain small European sales offices in Oxford, England and Barcelona, Spain, both are staffed by full
time sales consultants. For customer support and warehousing, we have contracted with a third-party end user technical support
firm and fulfillment center to service our customers in the EU.
We intend to primarily provide our waveguide
and miniature display engine modules and optics components to select OEMs to incorporate into their branded products and sell through
their own well-established distribution channels. An OEM/ODM design cycle typically requires between 6 and 24 months, depending
on the uniqueness of the market, and the complexity of the end product. Because our waveguides and display engines are the main
functional component that defines the imaging as well as look and feel of many of our potential OEM customers' end products, we
intend to work closely with these customers to provide technical assistance throughout their product evaluation and any eventual
integration process.
We believe that the technical nature of
our potential OEM products such as waveguides and display projectors with micro-displays, demands close relationships with such
customers. Our sales and marketing staff, assisted by our technical staff and senior management, visit prospective and existing
customers worldwide on a regular basis. We believe these contacts are vital to the development of a close, long-term working relationship
with our OEM customers, and in obtaining regular forecasts, market updates and information regarding technical and market trends.
We also participate in industry specific trade shows and conferences.
Marketing
Our marketing and sales group in conjunction with external firms is responsible for product management,
planning, advertising, marketing communications, and public relations. We have both internal and external public relations efforts
in the U.S. and UK. We also employ marketing firms to help prepare brochures, packaging, tradeshow messaging and advertising campaigns,
again focused on either the consumer or enterprise markets. Most of our products are currently sold under the Vuzix brand name.
Toshiba’s AR100, based on our M300 Smart Glasses is our first co-branded product. We seek to have Vuzix become known as one
of the premier suppliers of wearable display products for video viewing, smart and AR glasses. We currently undertake specific
marketing activities as needed, including, but not limited to:
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product reviews, case studies and promotions in trade publications;
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case studies on successful enterprise uses of Smart Glasses and AR;
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product and technology views for our website and social media;
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internet and search engine advertising and targeted emails;
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trade shows and event sponsorships.
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Prosumer Marketing
We engage in select marketing efforts that
are intended to drive customers to our products and to grow awareness of our AR Smart Glasses and wearable displays in general.
Public relations and product videos are an important aspect of our marketing and we intend to continue to distribute samples of
our products to key industry participants. We intend to focus our marketing efforts for the next 12 months on:
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distinguishing our AR
Smart Glasses products from current competitors and by offering products with superior performance and advanced optics relative
to those of our competitors;
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working with third-party software developers to support the unique capabilities of our new products; and
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creating brand awareness with the press and general public of Vuzix and our products, with particular
emphasis on our new forthcoming waveguide-based products.
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Our wearable display products are currently primarily sold directly to prosumers and at times through
select specialty retailers and online retailers such as Amazon. Our monocular Smart Glasses are sold through valued-added resellers,
direct to end customers, and through our webstore. Our website, www.vuzix.com, is an important part of our direct sales efforts.
Engineering Services and OEM Products
We primarily respond to sales inquiries for our engineering services programs and OEM component requests
directly and usually in response to inbound inquiries. We do not typically offer “works for hire” services at Vuzix
but rather offer our services to opportunities that could result in advancing our technology or end up in a long-term supply or
OEM relationship. We believe we have established a solid reputation for quality, performance, and innovation for wearable virtual
display systems that will be attractive to many types of commercial users that want to leverage our services and products within
their businesses. Our design and engineering staff are actively involved with customers during all phases of prototype design through
production by providing engineering data, up-to-date product application notes, regular follow-up and technical assistance.
We continue to receive an influx of inbound requests for engagement related to our proprietary waveguide
optics and miniature display engines from some of the world’s largest consumer and mobile electronics firms. We are now engaged
with several major consumer electronics companies that have started building and/or are currently evaluating hardware designs and
product roadmaps which incorporate our waveguide optics technology. Our business strategy is to commercialize our waveguide and
display engine technologies and products to permit select ODMs and OEMs to integrate and embed our technologies and products in
a way that best matches their unique capabilities and timeline for bringing their products to market.
Manufacturing
We purchase product components from
our suppliers, engage third-party contract manufacturing firms to perform electronic circuit board and cable assemblies, and
have the final assembly of our products done primarily in China at our contract manufacturer there. In the past, we have
built products ourselves in our West Henrietta, New York based facility. We are experienced in the successful production of
our products in moderate volumes. We expect, at most, to perform the final assembly of our new AR Smart Glasses products
ourselves, in West Henrietta, NY, on a test or start-up basis before considering a move offshore; however, we also expect to
manufacture all our waveguide optics at our West Henrietta, New York facility. We believe that using outsourced manufacturing
enables greater scale and flexibility at lower costs than establishing our own manufacturing facilities. We evaluate our
current contract manufacturers and component suppliers on an ongoing basis, including whether or not to utilize new or
alternative contract manufacturers or component suppliers.
We currently purchase almost all of the micro-displays used in our products from Kopin Corporation and
Texas Instruments. Our relationship with these micro-display suppliers is generally on a purchase order basis and none have a contractual
obligation to provide adequate supply or acceptable pricing to us on a long-term basis, nor do we have any contractual obligation
to purchase micro-displays from them. We have operated this way for over a decade with these suppliers. Our Cobra II display engine
is based on our proprietary design and is exclusively manufactured for us by a firm in Asia and it incorporates a DLP engine from
Texas Instruments. We generally procure our other nonmicro-display components and products from our vendors on a purchase order
basis without any long-term commitments. Many of the raw materials used in our components are standard to the consumer electronics
industry. We provide forecasts that allow our contract manufacturers to stock component parts and other materials and plan capacity.
Our contract manufacturers procure raw materials in volumes consistent with our forecasts, manufacture and/or assemble the products
and perform tests according to our specifications. In some cases, we procure specific components and either sell them or consign
them to our contract manufacturers. Products are either shipped to our customers or shipped to our West Henrietta, New York headquarters
to be inventoried as finished goods. We currently use several manufacturing sources in Asia where we have located some of our tooling.
While we do not manufacture our components, we own the tooling that is used to make our custom components.
Some of our accessory products are sourced from third parties as finished goods. We typically have them print our Vuzix brand name
on these products if they are co-branded. Such third-party products represented less than 5% of our sales in last three fiscal
years.
Our manufacturing is not currently subject
to seasonal variations, but in the future, depending on our customers' product mix, we may be affected by seasonal fluctuations
which could affect working capital demands.
We work with a third-party fulfillment partner in the EU that delivers our products to customers in Europe,
the Middle East, and Africa, which allows us to reduce order fulfillment time, reduce shipping costs, and improve inventory flexibility.
Backlog
There is a relatively short cycle between
order and shipment of our sales. Most purchase orders we receive are subject to rescheduling or cancellation by the customer with
no or limited penalties. In regard to sales of custom products and waveguides to our OEM customers, we believe that the backlog
metric is of limited utility in predicting future sales because all these OEM customers operate on a ship-to-order basis. Therefore,
we believe at this time that backlog information is not material to the understanding of our business.
Employees
As of March 15,
2019, we had 80 full-time employees in North America, of which 37 are in research and development and engineering services
support. In Japan we have 2 full-time employees to manage our Asian sales activities. In England we have 2 full-time contractors
and in Spain we have 3 full-time contractors to manage our European sales and marketing activities.
Information about Geographic Revenue
Information about
geographic revenue is described in Note 20, “Geographic and Other Financial Information” in the notes to our consolidated
financial statements.
History - Corporate
We were
incorporated in Delaware in 1997 as VR Acquisition Corp. In 1997, we acquired substantially all of the assets of Forte
Technologies, Inc. (Forte), which was engaged in the manufacture and sale of Virtual Reality headsets and the development of
related technologies. Forte was originally owned and controlled by Kopin Corporation, our main current micro-display supplier. Most of
the technologies developed by Forte are now owned and used by us.
Reference in this
report to “Vuzix”, the “Company”, “we,” “us,” “our” and similar words
refer to Vuzix Corporation and its wholly-owned subsidiaries.
An investment
in our securities involves a high degree of risk. An investor should carefully consider the risks described below, together with
all of the other information included in this annual report, before making an investment decision. Our business, financial condition
or results of operations could suffer as a result of these risks. In that case, the market value of our securities could decline,
and an investor may lose all or part of his or her investment.
Risks Related to Our Business
We have incurred net losses since our inception and may
continue to incur losses.
We reported a net loss of $21,875,713 for the year ended December 31, 2018, a net loss of $19,663,502
for the year ended December 31, 2017, and a net loss of $19,250,082 for the year ended December 31, 2016. We have an accumulated
deficit of $118,266,441 as of December 31, 2018.
We may not achieve or maintain profitability
in the future. We will need to increase sales in order to achieve and maintain profitability. In addition, we expect that our expenses
relating to product development and research, sales and marketing, as well as our general and administrative costs, may increase.
If we do not soon achieve and maintain profitability, our financial condition will ultimately be materially and adversely affected
and we would eventually be required to raise additional capital. We may not be able to raise any necessary capital on commercially
reasonable terms or at all. If we fail to achieve or maintain profitability on a quarterly or annual basis within the timeframe
expected by investors, the market price of our common stock may decline.
If we are unable to achieve profitability over the next
twelve months or raise new capital, we may not be able to continue our current operations.
Our ability to continue current operations
and to execute on our business plan is dependent upon on our ability to generate sufficient cash flows from operations or raise
additional capital to meet our obligations. If adequate funds are not available to us on a timely basis, or at all, we may have
to reduce current operations and delay capital expenditures in order to conserve cash.
Based on our current operating plan, we
anticipate that, given our current working capital levels, and our current financial projections, we will be able to meet our financial
obligations as they become due over the next twelve months. We have no additional committed external sources of funds and additional
financing may not be available when we need it or may not be available on terms that are favorable to us. In addition, we may seek
additional capital due to favorable market conditions or strategic considerations even if we believe we have sufficient funds for
our current or future operating plans.
If additional financing is not available
when required or is not available on acceptable terms, we may need to delay, modify or abandon our current operations and we may
be unable to take advantage of business opportunities or respond to competitive pressures which would likely have a material adverse
effect on our product offerings, revenue, results of operations and financial condition.
If we fail to manage our operating expenses effectively,
our financial performance may suffer.
Our success will depend in part upon our
ability to manage our operating expenses, including but not limited to our cash management, effectively. We incurred significant
operating losses in 2018, 2017 and 2016 and we have an accumulated deficit. Although we plan to seek to operate efficiently and
to manage our costs effectively, including reductions in-force, we may not realize the cost savings expected from these actions.
Aggregate charges for employee terminations and the timing to recognize these charges and other costs associated with any restructuring,
including the estimates of related cash expenditures made in connection with any such restructuring, may exceed estimated amounts
and may not lead to improvements in results of operations at expected levels and in the expected timeframe. If we are unable to
operate efficiently and manage our costs, we may continue to incur significant losses in the future and may not be able to maintain
or achieve profitability.
In the future, in response to unfavorable market conditions
or customer demand, we may again need to strategically realign our resources, adjust our product line and/or enact price reductions
in order to stimulate demand, and implement additional restructurings and workforce reductions. Any such actions may result in
the recording of charges including inventory-related write-offs, or other restructuring costs. Additionally, our estimates with
respect to the useful life or ultimate recoverability of our assets, including purchased intangible assets and tooling, could also
change and result in impairment charges. If we are unable to operate efficiently and manage our costs, we may continue to incur
significant losses in the future and may not be able to achieve or maintain profitability.
We operate in a highly competitive market and the size,
resources and brand name of some of our competitors may allow them to compete more effectively than we can, which could result
in a loss of our market share and a decrease in our revenue and profitability.
The market for head-worn display devices, including AR and Smart Glasses, is highly competitive. Further,
we expect competition to intensify in the future as existing competitors introduce new and more competitive offerings alongside
their existing products, and as new market entrants introduce new products into our markets. We compete against established, well-known
diversified consumer electronics manufacturers such as Samsung Electronics Co., Sony Corporation, LG Electronics (LGE), HTC, Lenovo,
and large software and other products companies such as Alphabet Inc. (Google), Microsoft Corporation, Facebook and Snap. Many of
our current competitors have substantial market share, diversified product lines, well-established supply and distribution systems,
strong worldwide brand recognition and greater financial, marketing, research and development and other resources than we do. In
addition, many of our existing and potential competitors enjoy substantial competitive advantages, such as:
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longer operating histories;
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the capacity to leverage their sales efforts and marketing expenditures across a broader portfolio of products;
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broader distribution and established relationships with channel partners;
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access to larger established customer bases and known branding;
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greater resources to fund research and development and to make acquisitions;
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larger intellectual property portfolios; and
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the ability to bundle competitive offerings with other products and services.
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Moreover, smartphones, tablets,
smart glasses and new wearable devices with ever growing larger video display screens and computing power have significantly
improved the mobile personal computing experience. In the future, the manufacturers of these devices, such as Apple Inc.,
Samsung, LGE, Fitbit, Google, Snap, Garmin, Facebook, Microsoft and others may design or develop products similar to ours. In
addition to competition or potential competition from large, established companies, new companies may emerge and offer
competitive products. Increased competition may result in pricing pressures and reduced profit margins and may impede our
ability to increase the sales of our products, any of which could substantially harm our business and results of
operations.
Our lack of long-term purchase orders and commitments
from our customers may lead to a rapid decline in our sales.
All of our customers issue purchase orders
solely at their own discretion, often shortly before the requested date of shipment. Our customers are generally able to cancel
orders (without penalty) or delay the delivery of products on relatively short notice. In addition, our current customers may decide
not to purchase products from us for any reason. If those customers do not continue to purchase our products, our sales volume
could decline rapidly with little or no warning.
We cannot currently rely on long-term purchase
orders or commitments to protect us from the negative financial effects of a decline in demand for our products. We typically plan
our production and inventory levels based on internal forecasts of customer demand, which are highly unpredictable and can fluctuate
substantially. Our OEM customers are required to give us rolling forecasts and issue non-cancellable purchase orders but they have
options to reschedule or pay cancellation fees. The uncertainty of product orders makes it difficult for us to forecast our sales
and allocate our resources in a manner consistent with our actual sales. Moreover, our expense levels and the amounts we invest
in capital equipment and new product development costs are based in part on our expectations of future sales and, if our expectations
regarding future sales are inaccurate, we may be unable to reduce costs in a timely manner to adjust for sales shortfalls. As a
result of our lack of long-term purchase orders and purchase commitments, we may experience a rapid decline in our sales.
As a result of these and other factors,
investors should not rely on our revenues and our operating results for any one quarter or year as an indication of our future
revenues or operating results. If our quarterly revenues or results of operations fall below expectations of investors or public
market analysts, the price of our common stock could fall substantially.
If we do not effectively maintain and further develop
our sales channels for our products, including developing and supporting our retail sales channel, value added resellers (VARs)
and distributors, our business could be harmed.
We depend upon effective sales channels
to assist us in reaching the customers who are the ultimate purchasers of our Smart Glass and AR products. We primarily sell our
products either from our in-house sales team directly to enterprise and end users or through our website and VARs.
Our distributors, third-party online resellers and VARs generally offer products from several different
manufacturers. Accordingly, we are at risk that these distributors, resellers and VARs may give higher priority to selling other
companies’ products. If we were to lose the services of a distributor, online reseller or VAR, we might need to find another
in that area, and there can be no assurance of our ability to do so in a timely manner or on favorable terms. Further, our resellers
and distributors can at times build inventories in anticipation of future sales, and if such sales do not occur as rapidly as they
anticipate, our resellers and distributors will decrease the size of their future product orders. We are also subject to the risks
of our distributors, resellers and VARs encountering financial difficulties, which could impede their effectiveness and also expose
us to financial risk if they are unable to pay for the products they purchase from us. Any reduction in sales by our current distributors
or VARs, loss of key distributors and VARs or decrease in revenue from our distributors and VARs could adversely affect our revenue,
operating results and financial condition.
Our future growth and profitability may be adversely affected
if our marketing initiatives are not effective in generating sufficient levels of brand awareness.
Our future growth and profitability from
our enterprise and prosumer products will depend in large part upon the effectiveness and efficiency of our marketing efforts,
including our ability to:
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create awareness of our brand and products;
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convert consumer awareness into actual product purchases;
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effectively manage marketing costs (including creative and media) in order to maintain acceptable operating margins and return on marketing investment; and
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successfully
offer to sell our products or license our technology to third-party companies for sale under their own brand name as OEM partners.
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Our planned marketing expenditures may not
result in increased total sales or generate sufficient levels of product and brand name awareness. We may not be able to manage
our marketing expenditures on a cost-effective basis.
Our products require ongoing research and development
and we may experience technical problems or delays, which could lead our business to fail.
Our research and development efforts remain subject to all of the risks associated with the development
of new products based on emerging and innovative technologies, including, for example, unexpected technical problems or the possible
insufficiency of funds for completing development of these products. If we experience technical problems or delays, further improvements
in our products and the introduction of future products could be adversely impacted, and we could incur significant additional
expenses and our business may fail.
We depend on advances in technology by other companies
and if those advances do not materialize, some of our anticipated new products could be delayed or cancelled.
We rely on and will continue to rely on
technologies (including micro-displays) that are developed and produced by other companies. The commercial success of certain of
our planned future products will depend in part on advances in these and other technologies by other companies. We may, from time
to time, contract with and support companies developing key technologies in order to accelerate the development of them for our
specific uses. Such activities might not result in useful technologies or components for us. We are attempting to mitigate this
risk by exploring ways to develop our own micro-display technologies using LED and laser scanning displays, but there can be no
assurance that we will be successful in doing so.
If we fail to keep pace with changing technologies or
are unable to anticipate customer preferences, our business and results of operations may be materially adversely affected.
Rapidly changing customer requirements,
evolving technologies and industry standards characterize the consumer electronics, IT, mobile devices, smart phone, wearables
and display industries. To achieve our goals, we need to enhance our existing products and develop and market new products that
keep pace with continuing changes in industry standards, requirements and customer preferences.
Our success depends on our ability to originate new products and to identify product trends as well as
to anticipate and react to changing customer demands in a timely manner. If we are unable to introduce new products or novel technologies
in a timely manner or our new products or technologies are not accepted by customers, our competitors may introduce more attractive
products, which could hurt our competitive position. Our new products might not receive customer acceptance if customer preferences
shift to other products, and our future success depends in part on our ability to anticipate and respond to these changes. Failure
to anticipate and respond in a timely manner to changing customer preferences could lead to, among other things, lower revenue
and excess inventory levels.
If micro-display-based personal displays do not gain
greater acceptance in the market for mobile displays, our business strategy may fail.
The mobile display market is dominated by
displays larger than one-inch, most of which are based on direct view liquid crystal display, or LCD and organic light emitting
display, or OLED technology. A number of companies have made and continue to make substantial investments in, and are conducting
research to improve characteristics of, small direct view LCDs. Many of the leading manufacturers of these larger direct view LCDs,
including LG Electronics, Royal Philips Electronics, Samsung Electronics Co., Ltd., Sony Corporation, HiMax, Omnivision, Citizen,
and Sharp Corporation, are large, established companies with global marketing capabilities, widespread brand recognition and extensive
financial resources. Advances in direct view LCD and OLED technology or other technologies may overcome their current limitations
and permit them to remain or become more attractive technologies for personal viewing applications, which could limit the potential
market for our Video Eyewear technology and cause our business strategy to fail.
It is difficult to assess or predict with
any certainty the potential size, timing and viability of market opportunities for our micro-display-based AR Smart Glasses products
or their level of market acceptance. Market acceptance of AR and Smart Glasses technology will depend, in part, upon end-user
acceptance of near-to-eye displays and upon micro-display technology providing benefits comparable to or greater than those provided
by alternative direct view display technology at a competitive price. Smart Glasses and AR products work best when used close
to the eye, which may not be acceptable to consumers. Such acceptance may depend on the relative complexity, reliability, usefulness
and cost-effectiveness of our near-eye display products compared to other display products available in the market or that may
be developed by our competitors. In addition, our products are not designed for a shared experience amongst multiple viewers at
the same time. Potential customers may be reluctant to adopt our Smart Glasses and AR products because of concerns surrounding
perceived risks relating to use and the fact that it is a new technology. If end-users fail to accept near-to-eye displays in
the numbers we anticipate or as soon as we anticipate, the sales of our Smart Glasses and AR products and our results of operations
would be adversely affected and our business strategy may fail.
There are a number of competing providers of micro-display-based
personal display technology, including smart glasses, and we may fail to capture a substantial portion of the personal display
market.
In addition to competing with direct view
displays, we also compete with micro-display-based personal display technologies that have been developed by other companies. Our
primary personal display competitors include Carl Zeiss, Inc., Sony, Epson, Alphabet (Google), Brother International, 5DT Inc.,
eMagin Corporation, Facebook (Oculus), Avegant, Kopin Corporation, Magic Leap, Lenovo, HTC, MicroVision, Inc., Lumus Ltd., Kaiser
Electro Optics Inc., Garmin, Optinvent, HTC Valvue, LGE, and Accupix of Korea. Numerous other start-up companies have announced
their intentions to offer AR smart glass and VR products and developer kits in the near future. Further, industry blogs have speculated
that companies such as Apple may offer or support VR and AR Video Eyewear products in the near future. In 2015, Microsoft introduced
its Hololens project, a head worn AR smart glass helmet with transparent holographic optics.
Most of our competitors have greater financial, marketing, distribution and technical resources than we
do. Moreover, our competitors may succeed in developing new micro-display-based personal display technologies and near-eye products
that are more affordable or have more desirable features than our technology. If our products are unable to capture a reasonable
portion of the personal display market, our business strategy may fail.
Our business and products are subject to government regulation
and we may incur additional compliance costs or, if we fail to comply with applicable regulations, may incur fines or be forced
to suspend or cease operations.
In our current business and as we expand into new markets and product categories, we must comply with
a wide variety of laws, regulations, standards and other requirements governing, among other things, electrical safety, wireless
emissions, health and safety, e-commerce, consumer protection, export and import requirements, hazardous materials usage, product-related
energy consumption, packaging, recycling and environmental matters. Compliance with these laws, regulations, standards and other
requirements may be onerous and expensive, and they may be inconsistent from jurisdiction to jurisdiction (including from country
to country), further increasing the cost of compliance and doing business. Our products may require regulatory approvals or satisfaction
of other regulatory concerns in the various jurisdictions in which they are manufactured, sold or both. These requirements create
procurement and design challenges that require us to incur additional costs identifying suppliers and manufacturers who can obtain
and produce compliant materials, parts and products. Failure to comply with such requirements can subject us to liability, additional
costs and reputational harm and, in extreme cases, force us to recall products or prevent us from selling our products in certain
jurisdictions. If there is a new regulation, or change to an existing regulation, that significantly increases our costs of manufacturing
or causes us to significantly alter the way that we manufacture our products, this would have a material adverse effect on our
business, financial condition and results of operations. Additionally, while we have implemented policies and procedures designed
to ensure compliance with applicable laws and regulations, there can be no assurance that our employees, contractors and agents
will not violate such laws and regulations or our policies and procedures.
Our products must comply with certain requirements
of the U.S. Federal Communications Commission (FCC) regulating electromagnetic radiation in order to be sold in the United States
and with comparable requirements of the regulatory authorities of the EU, Japan, China and other jurisdictions in order to be sold
in those jurisdictions. Our AR smart glasses products include wireless radios and receivers which require additional emission testing.
We are also subject to various environmental laws and governmental regulations related to toxic, volatile, and other hazardous
chemicals used in the third-party components incorporated into our products, including the Restriction of Certain Hazardous Substances
Directive, or RoHS and the EU Waste Electrical and Electronic Equipment Directive, or the WEEE Directive, as well as the implementing
legislation of the EU member states. This directive restricts the distribution of products within the EU that exceed very low maximum
concentration amounts of certain substances, including lead. Similar laws and regulations have been passed or are pending in China,
Japan, and numerous countries around the world and may be enacted in other regions, including in the United States, and we are,
or may in the future be, subject to these laws and regulations.
From time to time, our products are subject
to new domestic and international requirements. Compliance with regulations enacted in the future could substantially increase
our cost of doing business or otherwise have a material adverse effect on our results of operations and our business. Any inability
by us to comply with regulations in the future could result in the imposition of fines or in the suspension or cessation of our
operations or sales in the applicable jurisdictions. Any such inability by us to comply with regulations may also result in our
not being permitted, or limit our ability, to ship our products which would adversely affect our revenue and ability to achieve
or maintain profitability.
Although we have policies and procedures in place requiring our contract manufacturers and major component
suppliers to comply with the RoHS Directive requirements, we cannot provide assurance that our manufacturers and suppliers consistently
comply with these requirements. In addition, if there are changes to these or other laws (or their interpretation) or if new related
laws are passed in other jurisdictions, we may be required to re-engineer our products to use components compatible with these
regulations. This re-engineering and component substitution could result in additional costs to us or disrupt our operations or
logistics.
The WEEE Directive requires electronic goods
producers to be responsible for the collection, recycling and treatment of such products. Changes in interpretation of the directive
may cause us to incur costs or have additional regulatory requirements to meet in the future in order to comply with this directive,
or with any similar laws adopted in other jurisdictions. Our failure to comply with past, present and future similar laws could
result in reduced sales of our products, substantial product inventory write-offs, reputational damage, penalties and other sanctions,
which could harm our business and financial condition. We also expect that our products will be affected by new environmental laws
and regulations on an ongoing basis. To date, our expenditures for environmental compliance have not had a material impact on our
results of operations or cash flows and, although we cannot predict the future impact of such laws or regulations, they will likely
result in additional costs and may increase penalties associated with violations or require us to change the content of our products
or how they are manufactured, which could have a material adverse effect on our business and financial condition.
Product quality issues and a higher-than-expected number
of warranty claims or returns could harm our business and operating results.
The products that we sell could contain defects in design or
manufacture. Defects could also occur in the products or components that are supplied to us. There can be no assurance we will
be able to detect and remedy all defects in the hardware and software we sell, which could result in product recalls, product redesign
efforts, loss of revenue, reputational damage and significant warranty and other remediation expenses. Similar to other consumer
electronics, our products have a risk of overheating and fire in the course of usage or upon malfunction. Any such defect could
result in harm to property or in personal injury. If we determine that a product does not meet product quality standards or may
contain a defect, the launch of such product could be delayed until we remedy the quality issue or defect. The costs associated
with any protracted delay necessary to remedy a quality issue or defect in a new product could be substantial.
We generally provide a one-year warranty
on all of our products, except in certain European countries where it can be two years for some consumer-focused products. The
occurrence of any material defects in our products could expose us to liability for damages and warranty claims in excess of our
current reserves, and we could incur significant costs to correct any defects, warranty claims or other problems. In addition,
if any of our product designs are defective or are alleged to be defective, we may be required to participate in a recall campaign.
In part due to the terms of our warranty policy, any failure rate of our products that exceeds our expectations may result in unanticipated
losses. Any negative publicity related to the perceived quality of our products could affect our brand image and decrease retailer,
VAR, distributor and consumer confidence and demand, which could adversely affect our operating results and financial condition.
Further, accidental damage coverage and extended warranties are regulated in the United States at the state level and are treated
differently within each state. Additionally, outside the United States, regulations for extended warranties and accidental damage
vary from country to country. Changes in interpretation of the regulations concerning extended warranties and accidental damage
coverage on a federal, state, local or international level may cause us to incur costs or have additional regulatory requirements
to meet in the future in order to continue to offer our support services. Our failure to comply with past, present and future similar
laws could result in reduced sales of our products, reputational damage, penalties and other sanctions, which could harm our business
and financial condition.
Regulations related to conflict minerals may cause us
to incur additional expenses and could limit the supply and increase the costs of certain materials used in the manufacturing
of our products.
As a public company, we are subject to requirements under the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010, or the Dodd-Frank Act, that require us to determine, disclose and report whether or not our products contain
conflict minerals. These requirements could adversely affect the sourcing, availability and pricing of the materials used in the
manufacture of components used in our products. In addition, we have and will continue to incur additional costs to comply with
the disclosure requirements, including costs related to conducting diligence procedures to determine the sources of conflict minerals
that may be used in, or necessary for the production of our products and, if applicable, potential changes to products, processes
or sources of supply as a consequence of such verification activities. We also may face reputational harm if we determine that
certain of our products contain minerals not determined to be conflict free or if we are unable to alter our products, processes
or sources of supply to avoid such materials.
Our products will likely experience declining unit prices
and we may not be able to offset that decline with production cost decreases or higher unit sales.
In the markets in which we compete, prices
of established consumer electronics displays, personal computers, and mobile products tend to decline significantly over time or
new enhanced versions are introduced frequently every 12 to 24 months. In order to maintain adequate product profit margins over
the long term, we believe that we will need to continuously develop product enhancements and new technologies that will either
slow price declines of our products or reduce the cost of producing and delivering our products. While we anticipate many opportunities
to reduce production costs over time, we may not be able to reduce our component costs. We expect to attempt to offset the anticipated
decrease in our average selling price by introducing new products, increasing our sales volumes or adjusting our product mix. If
we fail to do so, our results of operations will be materially and adversely affected.
Our products could infringe on the intellectual property
rights of others.
Companies in the consumer electronics, wireless communications, semiconductor, IT and display industries
steadfastly pursue and protect intellectual property rights, often times resulting in considerable and costly litigation to determine
the validity of patents and claims by third parties of infringement of patents or other intellectual property rights. Our products
could be found to infringe on the intellectual property rights of others. Other companies may hold or obtain patents or inventions
or other proprietary rights in technology necessary for our business. Periodically, other companies inquire about our products
and technology in their attempts to assess whether we violate their intellectual property rights. If we are forced to defend against
infringement claims, we may face costly litigation, diversion of technical and management personnel, and product shipment delays,
even if the allegations of infringement are unwarranted. If there is a successful claim of infringement against us and we are unable
to develop non-infringing technology or license the infringed or similar technology on a timely basis, or if we are required to
cease using one or more of our business or product names due to a successful trademark infringement claim against us, it could
adversely affect our business.
Our intellectual property rights and proprietary rights
may not adequately protect our products.
Our commercial success will
depend substantially on our ability to obtain patents and other intellectual property rights and maintain adequate legal
protection for our products in the United States and other countries. We will be able to protect our intellectual property
from unauthorized use by third parties only to the extent that these assets are covered by valid and enforceable
patents, trademarks, copyrights or other intellectual property rights, or are effectively maintained as trade secrets. As of
the date of this filing, we have 74 issued U.S. and foreign patents and 70 pending U.S. and foreign patent applications. We
apply for patents covering our products, services, technologies and designs, as we deem appropriate. We may fail to apply for
patents on important products, services, technologies or designs in a timely fashion, or at all. We do not know whether any
of our patent applications will result in the issuance of any patents. Even if patents are issued, they may not be sufficient
to protect our products, services, technologies, or designs. Our existing and future patents may not be sufficiently broad
to prevent others from developing competing products, services technologies, or designs. Intellectual property protection
and patent rights outside of the United States are even less predictable. As a result, the validity and enforceability of
patents cannot be predicted with certainty. Moreover, we cannot be certain whether:
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we were the first to conceive of or invent the inventions covered by each of our issued patents and pending patent applications;
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we were the first to reduce to practice inventions covered by each of our issued patents and pending patent applications;
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we were the first to file patent applications for these inventions;
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others will independently develop similar or alternative products, technologies, services or designs or duplicate any of our products, technologies, services or designs;
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any patents issued to us will provide us with any competitive advantages, or will be challenged by third parties;
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we will develop additional proprietary products, services, technologies or designs that are patentable; or
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the patents of others will have an adverse effect on our business.
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The patents we own or license and those
that may be issued to us in the future may be challenged, invalidated, rendered unenforceable or circumvented, and the rights granted
under any issued patents may not provide us with proprietary protection or competitive advantages. Moreover, third parties could
practice our inventions in territories where we do not have patent protection or in territories where they could obtain a compulsory
license to our technology where patented. Such third parties may then try to import products made using our inventions into the
United States or other territories. We cannot ensure that any of our pending patent applications will result in issued patents,
or even if issued, predict the breadth, validity and enforceability of the claims upheld in our and other companies’ patents.
Unauthorized parties may attempt to copy
or otherwise use aspects of our processes and products that we regard as proprietary. Policing unauthorized use of our proprietary
information and technology is difficult and can be costly, and our efforts to do so may not prevent misappropriation of our technologies.
We may become engaged in litigation to protect or enforce our patent and other intellectual property rights or in International
Trade Commission proceedings to abate the importation of goods that would compete unfairly with our products and, if unsuccessful,
these actions could result in the loss of patent or other intellectual property rights protection for the key technologies on
which our business strategy depends.
We rely in part on unpatented proprietary
technology, and others may independently develop the same or similar technology or otherwise obtain access to our unpatented technology.
We require employees, contractors, consultants, financial advisors, suppliers and strategic partners to enter into confidentiality
and intellectual property assignment agreements (as appropriate), but these agreements may not provide sufficient protection for
our trade secrets, know-how or other proprietary information.
We have registered and applied to register
certain of our trademarks in several jurisdictions worldwide. In some jurisdictions where we have applied to register our trademarks,
other applications or registrations exist for the same, similar or otherwise related products or services. If we are not successful
in arguing that there is no likelihood of confusion between our marks and the marks that are the subject of the other applications
or registrations owned by third parties, our applications may be denied, preventing us from obtaining trademark registrations and
adequate protection for our marks in the relevant jurisdictions, which could impact our ability to build our brand identity and
market our products and services in those jurisdictions. Whether or not our application is denied, third parties may claim that
our trademarks infringe their rights. As a result, we could be forced to pay significant settlement costs or cease the use of these
trademarks and associated elements of our brand in the United States or other jurisdictions.
Even in those jurisdictions where we are
able to register our trademarks, competitors may adopt or apply to register similar trademarks to ours, may register domain names
that mimic ours or incorporate our trademarks, or may purchase keywords that are identical or confusingly similar to our brand
names as terms in Internet search engine advertising programs, which could impede our ability to build our brand identity and lead
to confusion among potential customers of our products and services. If we are not successful in proving that we have prior rights
in our marks and arguing that there is a likelihood of confusion between our marks and the marks of these third parties, our inability
to prevent these third parties from use may negatively impact the strength, value and effectiveness of our brand names and our
ability to market our products and prevent consumer confusion.
The laws of certain countries do not protect
intellectual property and proprietary rights to the same extent as the laws of the United States and, therefore, in certain jurisdictions,
we may be unable to protect our products, services, technologies and designs adequately against unauthorized third-party copying,
infringement or use, which could adversely affect our competitive position. To protect or enforce our intellectual property rights,
we may initiate proceedings or litigation against third parties. Such proceedings or litigation may be necessary to protect our
trade secrets or know-how, products, technologies, designs, brands, reputation, likeness, authorship works or other intellectual
property rights. Such proceedings or litigation also may be necessary to determine the enforceability, scope and validity of the
proprietary rights of others. Any proceedings or lawsuits that we initiate could be expensive, take significant time and divert
management’s attention from other business concerns. Additionally, we may provoke third parties to assert claims against
us. These claims could invalidate or narrow the scope of our own intellectual property rights. We may not prevail in any proceedings
or lawsuits that we initiate and the damages or other remedies awarded, if any, may be commercially valuable. The occurrence of
any of these events may adversely affect our business, financial condition and operating results.
If we lose our rights under our third-party technology
licenses, our operations could be adversely affected
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Our business depends in part on technology
rights and software licensed from third parties. We could lose our exclusivity or other rights to use the technology under our
licenses if we fail to comply with the terms and performance requirements of the licenses. In addition, certain licensors may terminate
a license upon our breach and have the right to consent to sublicense arrangements. If we were to lose our rights under any of
these licenses, or if we were unable to obtain required consents to future sublicenses, we could lose a competitive advantage in
the market, and may even lose the ability to commercialize certain products or technologies completely. Either of these results
could substantially decrease our revenues.
In addition, Microsoft, Apple, Alphabet (Google), Amazon or other competitors may be able to control distribution
channels or offer pricing advantages on bundled hardware and software products that we may not be able to offer, and may possess
financial resources that could be utilized to exert significant downward pressure on product prices and upward pressure on promotional
incentives in order to gain market share.
Our business depends in part on access to third-party
platforms or technologies, and if the access is withdrawn, denied, or is not available on terms acceptable to us, or if the platforms
or technologies change without notice to us, our business and operating results could be adversely affected.
With the growth of mobile devices and personal
voice assistants, the number of platforms has grown, and with it the complexity and increased need for us to have business and
contractual relationships with the platform owners in order to produce products compatible with these platforms and enable access
to and use of these platforms with our products. Our product strategy includes current and future products designed for use with
third-party platforms or software, such as iPhone, Android phones, Google Assistant and Amazon Alexa. Our business in these categories
relies on our access to the platforms of third parties, some of whom are our competitors. Platform owners that are competitors
may limit or decline access to their platforms, and in any case have a competitive advantage in designing products for their own
platforms and may produce products that work better, or are perceived to work better, than our products in connection with those
platforms. As we expand the number of platforms and software applications with which our products are compatible, we may not be
successful in launching products for those platforms or software applications, we may not be successful in establishing strong
relationships with the new platform or software owners, which could negatively impact our ability to develop and produce high-quality
products on a timely basis for those platforms and software applications. We may otherwise fail to navigate various new relationships,
which could adversely affect our relationships with existing platform or software owners.
Our access to third-party platforms may
also require paying a royalty, which lowers our product margins or may otherwise be on terms that are not acceptable to us. In
addition, the third-party platforms or technologies used to interact with our product portfolio can be delayed in production or
can change without prior notice to us, which can result in our having excess inventory or lower margins.
If we are unable to access third-party platforms or technologies,
or if our access is withdrawn, denied, or is not available on terms acceptable to us, or if the platforms or technologies are delayed
or change without notice to us, our business and operating results could be adversely affected.
If our customers are not satisfied with our technical
support, firmware or software updates on some of our products, they may choose not to purchase our products, either of which would
adversely impact our business and operating results.
Our business relies, in part, on our customers’ satisfaction with the technical support and firmware
or software updates we provide to support our products. If we fail to provide technical support services that are responsive, satisfy
our customers’ expectations and resolve issues that they encounter with our products, customers may choose not to purchase
additional products and we may face brand and reputational harm, which could adversely affect our operating results.
Our use of open source software could negatively affect
our ability to sell our products and could subject us to possible litigation.
We incorporate open source software into
our products. Open source software is generally licensed by its authors or other third parties under open source licenses. Some
of these licenses contain requirements that we make available source code for modifications or derivative works we create based
upon the open source software, and that we license such modifications or derivative works under the terms of a particular open
source license or other license granting third parties certain rights of further use. Additionally, if a third-party software provider
has incorporated open source software into software that we license from such provider, we could be required to disclose any of
our source code that incorporates or is a modification of our licensed software. If an author or other third-party that distributes
open source software that we use or license were to allege that we had not complied with the conditions of the applicable license,
we could be required to incur significant legal expenses defending against those allegations and could be subject to significant
damages, enjoined from offering or selling our products that contained the open source software and be required to comply with
the foregoing conditions. Any of the foregoing could disrupt and harm our business and financial condition.
Our dependence on sales to VARs, resellers, and distributors
increases the risks of managing our supply chain and may result in excess inventory or inventory shortages.
The majority of our various reseller relationships
for our Smart Glasses and AR products and their accessories could involve them taking inventory positions and reselling to multiple
customers. Under some typical distributor relationships, we would not recognize revenue until the distributors sells the product
through to their end user customers and receive payment thereon; however, at this time we do not currently enter into these types
of arrangements. Our distributor and VAR relationships may reduce our ability to forecast sales and increase risks to our business.
Since our distributors and VARs would act as intermediaries between us and the end user customers or resellers, we would be required
to rely on our distributors to accurately report inventory levels and production forecasts. This may require us to manage a more
complex supply chain and monitor the financial condition and credit worthiness of our distributors and VARs and their major end
user customers. Our failure to manage one or more of these risks could result in excess inventory or shortages that could adversely
impact our operating results and financial condition.
Our operating results may be adversely impacted by worldwide
political and economic uncertainties and specific conditions in the markets we address.
Any worsening of global economic and financial
conditions could materially adversely affect (i) our ability to raise, or the terms of needed capital, and (ii) demand for our
current and future products. We cannot predict the timing, strength, or duration of any economic slowdown or subsequent economic
recovery, worldwide, or in the display industry.
Our results of operations may suffer if we are not able
to successfully manage our increasing exposure to foreign exchange rate risks.
A substantial majority of our sales and
cost of components are denominated in U.S. dollars. As our business grows, both our sales and production costs may increasingly
be denominated in other currencies. Where such sales or production costs are denominated in other currencies, they are converted
to U.S. dollars for the purpose of calculating any sales or costs to us. Our sales may decrease as a result of any appreciation
of the U.S. dollar against these other currencies.
The majority of our current expenditures are incurred in U.S. dollars and many of our components come
from countries that currently peg their currency against the U.S. dollar. If the pegged exchange rates change adversely or are
allowed to float up, additional U.S. dollars will be required to fund our purchases of these components.
Although we do not currently enter into
currency option contracts or engage in other hedging activities, we may do so in the future. There is no assurance that we will
undertake any such hedging activities or that, if we do so, they will be successful in reducing the risks to us of our exposure
to foreign currency fluctuations.
Due to our significant level of international operations,
including the use of foreign contract manufactures, we are subject to international operational, financial, legal and political
risks which could harm our operating results.
We purchase product components from our
suppliers and engage third-party contract manufacturing firms to perform electronic circuit board and cable assemblies. We expect
to have final assembly of most of our mature products performed externally; however, we intend to use our new West Henrietta, New
York facility primarily for the production of waveguides and their related display engines. Some final assembly initial production
runs of new products may also continue at our Henrietta plant and, by way of example, our Blade Smart Glasses are being assembled
in our West Henrietta plant. Accordingly, a substantial part of our operations, including manufacturing of certain components used
in our products, are outside of the United States and many of our customers and suppliers have some or all of their operations
in countries other than the United States. Risks associated with our doing business outside of the United States include:
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compliance burdens and costs with a wide variety of foreign laws and regulations, particularly labor, environmental and other laws and regulations that govern our operations in those countries;
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legal uncertainties regarding foreign taxes, tariffs, border taxes, quotas, export controls, export licenses, import controls and other trade barriers;
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economic instability and high levels of inflation in the countries of our suppliers and customers, particularly in the Asia-Pacific region, causing delays or reductions in orders for their products and therefore our sales;
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political instability in the countries in which our suppliers operate;
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changes or volatility in currency exchange rates;
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difficulties in collecting accounts receivable and longer accounts receivable payment cycles; and
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potentially adverse tax consequences.
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Any of these factors could harm our own,
our suppliers’ and our customers’ international operations and businesses and impair our and/or their ability to continue
expanding into international markets.
We could be adversely affected by violations of the U.S.
Foreign Corrupt Practices Act, the U.K. Bribery Act or similar anti-bribery laws in other jurisdictions in which we operate.
The global nature of our business and the
significance of our international revenue create various domestic and local regulatory challenges and subject us to risks associated
with our international operations. We operate in areas of the world that experience corruption by government officials to some
degree and, in certain circumstances, compliance with anti-bribery and anticorruption laws may conflict with local customs and
practices. Our global operations require us to import and export to and from several countries, which geographically expands our
compliance obligations. In addition, changes in such laws could result in increased regulatory requirements and compliance costs
which could adversely affect our business, financial condition and results of operations.
The U.S. Foreign Corrupt Practices Act (FCPA), the U.K. Bribery Act 2010 (U.K. Bribery Act), and similar
anti-bribery and anticorruption laws in other jurisdictions generally prohibit U.S.-based companies and their intermediaries from
making improper payments to non-U.S. officials for the purpose of obtaining or retaining business, directing business to another,
or securing an advantage. In addition, U.S. public companies are required to maintain records that accurately and fairly represent
their transactions and have an adequate system of internal accounting controls. Under the FCPA, U.S. companies may be held liable
for the corrupt actions taken by directors, officers, employees, agents, or other strategic or local partners or representatives.
As such, if we or our intermediaries fail to comply with the requirements of the FCPA or similar legislation, governmental authorities
in the United States and elsewhere could seek to impose substantial civil and/or criminal fines and penalties which could have
a material adverse effect on our business, reputation, operating results and financial condition.
We are subject to governmental export and import controls
and economic sanctions laws that could subject us to liability and impair our ability to compete in international markets.
The U.S. and various foreign governments
have imposed controls, export license requirements and restrictions on the import or export of some technologies. Our products
are subject to U.S. export controls, including the Commerce Department’s Export Administration Regulations and various economic
and trade sanctions regulations established by the Treasury Department’s Office of Foreign Assets Controls, and exports of
our products must be made in compliance with these laws. Furthermore, U.S. export control laws and economic sanctions prohibit
the provision of products and services to countries, governments, and persons targeted by U.S. sanctions. Even though we take precautions
to prevent our products from being provided to targets of U.S. sanctions, our products, including our firmware updates, could be
provided to those targets or provided by our customers despite such precautions. Any such provision could have negative consequences,
including government investigations, penalties and reputational harm. Our failure to obtain required import or export approval
for our products could harm our international and domestic sales and adversely affect our revenue.
If significant tariffs or other restrictions are placed
on Chinese imports or any related counter-measures are taken by China, our revenue and results of operations may be materially
harmed.
If significant tariffs or other restrictions
are placed on Chinese imports or any related counter-measures are taken by China, our revenue and results of operations may be
materially harmed. In July 2018, the Trump Administration introduced a list of thousands of categories of goods that begun facing
tariffs of 10%, which may be increased to 25% in 2019 if a new trade deal with China is not concluded. These tariffs currently
affect some of our products and we may be required to raise our prices on those products due to the tariffs, which may result in
a loss of customers and harm our operating performance. If the existing tariffs are expanded or interpreted by a court or governmental
agency to apply to any of our other products, we may be required to raise our prices on those products, which may further result
in a loss of customers and harm our operating performance. It is possible further tariffs will be imposed on imports of our products,
or that our business will be impacted by retaliatory trade measures taken by China or other countries in response to existing or
future tariffs, causing us to raise prices or make changes to our operations, any of which could materially harm our revenue or
operating results.
The SEC is conducting an informal inquiry relating to
us.
On May 24, 2016, we received a letter from
the SEC, dated May 19, 2016, notifying us that the SEC is conducting an informal inquiry relating to us, and requesting that we
produce certain documents relating to our internal control over financial reporting. Additionally, in late November 2017 we held
a teleconference with the SEC regarding the Company’s further progress on our controls over financial reporting. If, in connection
with this informal inquiry, the SEC determines to take action against us, our financial position could be adversely affected.
Since our November 2017 meeting with the
SEC, we have not received any additional requests for documents relating to our internal control over financial reporting. As
reported in our Form 10-K for the years ended December 31, 2018 and 2017, the Company has maintained, in all material respects,
effective internal control over financial reporting.
Any significant disruption to our ecommerce business could
result in lost sales.
Our sales through our ecommerce channel
have been growing. Sales through vuzix.com and our related EU, UK and Japanese web stores generally have higher profit margins
than sales through resellers, VARs and distributors. Online sales are subject to a number of risks. System interruptions or delays
could cause potential customers to fail to purchase our products and could harm our brand. The operation of our direct to consumer
ecommerce business through vuzix.com depends on our ability to maintain the efficient and uninterrupted operation of online order-taking
and fulfillment operations. Our ecommerce operations subject us to certain risks that could have an adverse effect on our operating
results, including risks related to the computer systems that operate our website and related support systems, such as system failures,
viruses, denial of services attacks, computer hackers and similar disruptions. If we are unable to continually add software and
hardware, effectively upgrade our systems and network infrastructure and take other steps to improve the efficiency of our systems,
system interruptions or delays could occur that would adversely affect our operating results.
We utilize third-party vendors for our customer-facing ecommerce technology, portions of our order management
system and fulfillment internationally. We depend on our technology vendors to manage “up-time” of the front-end ecommerce
store, manage the intake of our orders, and export orders for fulfillment. Any failure on the part of our third-party ecommerce
vendors or in our ability to transition third-party services effectively could result in lost sales and harm our business.
We collect, store, process and use our customers’
personally identifiable information and other data, which subjects us to governmental regulation and other legal obligations related
to privacy, information security and data protection. Any cybersecurity breaches or our actual or perceived failure to comply with
such legal obligations by us, or by our third-party service providers or partners, could harm our business.
We collect, store, process and use our customers’
personally identifiable information and other data, and we rely on third parties that are not directly under our control to do
so as well. While we take reasonable measures intended to protect the security, integrity and confidentiality of the personal information
and other sensitive information we collect, store or transmit, we cannot guarantee that inadvertent or unauthorized use or disclosure
will not occur, or that third parties will not gain unauthorized access to this information. While our privacy policies currently
prohibit such activities, our third-party service providers or partners may engage in such activity without our knowledge or consent.
If we or our third- party service providers were to experience a breach, disruption or failure of systems compromising our customers’
data, or if one of our third-party service providers or partners were to access our customers’ personal data without our
authorization, our brand and reputation could be adversely affected, use of our products could decrease and we could be exposed
to a risk of loss, litigation and regulatory proceedings.
Regulatory scrutiny of privacy, data collection, use of data
and data protection is intensifying globally, and the personal information and other data we collect, store, process and use is
increasingly subject to legislation and regulations in numerous jurisdictions around the world, especially in Europe. These laws
often develop in ways we cannot predict and may materially increase our cost of doing business, particularly as we expand the nature
and types of products we offer. For example, the General Data Protection Regulation (the "GDPR"), which came into effect
in the EU in May 2018 and superseded prior EU data protection legislation, imposes more stringent data protection requirements
and provides for greater penalties for noncompliance.
Further, data protection legislation is
also becoming increasingly common in the United States at both the federal and state level. For example, in June 2018, the State
of California enacted the California Consumer Privacy Act of 2018 (the "CCPA"), which will come into effect on January
1, 2020. The CCPA requires companies that process information on California residents to make new disclosures to consumers about
their data collection, use and sharing practices, allows consumers to opt out of certain data sharing with third parties and provides
a new cause of action for data breaches. Additionally, the Federal Trade Commission and many state attorneys general are interpreting
federal and state consumer protection laws to impose standards for the online collection, use, dissemination and security of data.
The burdens imposed by the CCPA and other similar laws that may be enacted at the federal and state level may require us to modify
our data processing practices and policies and/or to incur substantial expenditures in order to comply.
Cybersecurity risks could adversely affect our business
and disrupt our operations.
The threats to network and data security are increasingly diverse
and sophisticated. Despite our efforts and processes to prevent breaches, our devices, as well as our servers, computer systems,
and those of third parties that we use in our operations are vulnerable to cybersecurity risks, including cyber-attacks such as
viruses and worms, phishing attacks, denial-of-service attacks, physical or electronic break-ins, employee theft or misuse, and
similar disruptions from unauthorized tampering with our servers and computer systems or those of third parties that we use in
our operations, which could lead to interruptions, delays, loss of critical data, unauthorized access to user data, and loss of
consumer confidence. In addition, we may be the target of email scams that attempt to acquire personal information or company assets.
Despite our efforts to create security barriers to such threats, we may not be able to entirely mitigate these risks. Any cyber-attack
that attempts to obtain our or our users’ data and assets, disrupt our service, or otherwise access our systems, or those
of third parties we use, if successful, could adversely affect our business, operating results, and financial condition, be expensive
to remedy, and damage our reputation. In addition, any such breaches may result in negative publicity, adversely affect our brand,
decrease demand for our products and services, and adversely affect our operating results and financial condition.
We may lose the services of key management personnel and
may not be able to attract and retain other necessary personnel.
Changes in our management could have an
adverse effect on our business, and in particular while our staff is relatively small. We are dependent upon the active participation
of several key management personnel, including Paul J. Travers, our President and Chief Executive Officer. Mr. Travers
is critical to the strategic direction and overall management of our company as well as our research and development process. The
loss of Mr. Travers could adversely affect our business, financial condition and operating results. We do not carry key person
life insurance on any of our senior management or other key personnel other than our CEO. Our Executive Vice President and Chief
Financial Officer, Grant Russell, a Canadian citizen, currently has his principal residence in Vancouver, Canada and a second residence
in West Henrietta, New York. If he becomes unable to legally or efficiently travel to and work in the United States, his ability
to perform some of his duties could be materially adversely affected.
We will need to hire and retain highly skilled technical personnel as employees and as independent contractors
in order to develop our products. The competition for highly skilled technical, managerial and other personnel is at times intense.
Our recruiting and retention success is substantially dependent on our ability to offer competitive salaries and benefits to our
employees. We must compete with companies that possess greater financial and other resources than we do and that may be more attractive
to potential employees and contractors. To be competitive, we may have to increase the compensation, bonuses, stock options and
other fringe benefits we offer to employees in order to attract and retain such personnel. The costs of retaining or attracting
new personnel may have a material adverse effect on our business and operating results. If we fail to attract and retain the technical
and managerial personnel required to be successful, our business, operating results and financial condition could be materially
adversely affected.
We may acquire other businesses or receive offers to be
acquired, which could require significant management attention, disrupt our business, dilute stockholder value and adversely affect
our operating results.
As part of our business strategy, we may
make investments in complementary businesses, products, services or technologies. We have not made any material acquisitions to
date and, as a result, our ability as an organization to successfully acquire and integrate other companies, products, services
or technologies is unproven. We may not be able to find suitable acquisition candidates and we may not be able to complete acquisitions
on favorable terms, if at all. If we do complete acquisitions, we may not ultimately strengthen our competitive position or achieve
our goals, and any acquisitions we complete could be viewed negatively by customers or investors. In addition, if we fail to integrate
successfully such acquisitions, or the technologies associated with such acquisitions, into our company, the revenue and operating
results of the combined company could be adversely affected. Any integration process will require significant time and resources,
and we may not be able to manage the process successfully. We may not successfully evaluate or utilize the acquired technology
and accurately forecast the financial impact of an acquisition transaction, including accounting charges. We may have to pay cash,
incur debt or issue equity securities to pay for any such acquisition, each of which could affect our financial condition or the
value of our capital stock. The sale of equity or issuance of debt to finance any such acquisitions could result in dilution to
our stockholders. The incurrence of indebtedness would result in increased fixed obligations and could also include covenants
or other restrictions that would impede our ability to manage our operations. Additionally, we may receive indications of interest
from other parties interested in acquiring some or all of our business. The time required to evaluate such indications of interest
could require significant attention from management, disrupt the ordinary functioning of our business and adversely affect our
operating results.
Our failure to effectively manage growth could harm our
business.
We intend to expand the number and types of products we sell. We will need to replace and regularly introduce
on a timely basis new products and technologies, enhance existing products, and effectively stimulate customer demand for new products
and upgraded or enhanced versions of our existing products.
The replacement and expansion of our products
places a significant strain on our management, operations and engineering resources. Specifically, the areas that are strained
most by these activities include the following:
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New Product Launch
: With the growth of our product portfolio, we will experience
increased complexity in coordinating product development, manufacturing, and shipping. As this complexity increases, it places
a strain on our ability to accurately coordinate the commercial launch of our products with adequate supply to meet anticipated
customer demand and effectively market to stimulate demand and market acceptance. We have experienced delays in the past.
If we are unable to scale and improve our product launch coordination, we could frustrate our customers and lose possible
retail shelf space and product sales;
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Existing Products Impacted by New Introductions
: The introduction of new products
or product enhancements may shorten the life cycle of our existing products, or replace sales of some of our current products,
thereby offsetting the benefit of even a successful product introduction and may cause customers to defer purchasing our existing
products in anticipation of the new products and potentially lead to challenges in managing inventory of existing products.
We may also provide price protection to some of our retailers as a result of our new product introductions. If we fail to
effectively manage new product introductions, our revenue and profitability may be harmed; and
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Forecasting, Planning and Supply Chain Logistics
: With the growth of our product
portfolio, we will experience increased complexity in forecasting customer demand, in planning for production, and in transportation
and logistics management. If we are unable to scale and improve our forecasting, planning, production, and logistics management,
we could frustrate our customers, lose product sales or accumulate excess inventory.
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Our facilities and information systems and those of our
key suppliers could be damaged as a result of disasters or unpredictable events, which could have an adverse effect on our business
operations.
We operate the majority of our business
from one location in the West Henrietta, a suburb of the Rochester, New York area. We also rely on third-party manufacturing plants
in the US and Asia and third-party logistics, sales and marketing facilities in Japan and England, and in other parts of the world
to provide key components for our products and services. If major disasters such as earthquakes, fires, floods, wars, terrorist
attacks, computer viruses, transportation disasters or other events occur in any of these locations, or our information systems
or communications network or those of any of our key component suppliers breaks down or operates improperly as a result of such
events, our facilities or those of our key suppliers may be seriously damaged, and we may have to stop or delay production and
shipment of our products. We may also incur expenses relating to such damages. If production or shipment of our products or components
is stopped or delayed or if we incur any increased expenses as a result of damage to our facilities, our business, operating results
and financial condition could be materially adversely affected.
Risks Related to Manufacturing
We do not control our contract manufacturers or suppliers
or require them to comply with a formal code of conduct, and actions that they might take could harm our reputation and sales.
We do not control our contract manufacturers
or suppliers, including their labor, environmental or other practices, or require them to comply with a formal code of conduct.
Though we conduct periodic visits to some of our contract manufacturers and suppliers, these visits are not so frequent or thorough
enough to detect non-compliance with applicable laws and good industry practices. A violation of labor, environmental or other
laws by our contract manufacturers or suppliers, or a failure of these parties to follow ethical business practices, could lead
to negative publicity and harm our reputation. In addition, we may choose to seek alternative manufacturers or suppliers if these
violations or failures were to occur. Identifying and qualifying new manufacturers or suppliers can be time consuming and we might
not be able to substitute suitable alternatives in a timely manner or at an acceptable cost. Other consumer products companies
have faced significant criticism for the actions of their manufacturers and suppliers, and we could face such criticism ourselves.
Any of these events could adversely affect our brand, harm our reputation, reduce demand for our products and harm our ability
to meet demand if we need to identify alternative manufacturers or suppliers.
We rely on third-party suppliers, some of which are sole-source
suppliers, to provide components for our products which may lead to supply shortages, long lead times for components, and supply
changes, any of which could disrupt our supply chain and may increase our costs.
Our ability to meet customer demand depends, in part, on our
ability to obtain timely and adequate delivery of components for our products. All of the components that go into the manufacturing
of our smart glasses products and accessories, other than waveguide optics, are sourced from third-party suppliers.
Some of the key components used to manufacture our products
come from a limited or single source of supply, or by a supplier that could potentially become a competitor. Our contract manufacturers
generally purchase these components on our behalf from approved suppliers. We are subject to the risk of shortages and long lead
times in the supply of these components and the risk that our suppliers discontinue or modify components used in our products.
In addition, the lead times associated with certain components are lengthy and preclude rapid changes in quantities and delivery
schedules. We have in the past experienced and may in the future experience component shortages, and the availability of these
components may be unpredictable.
If we lose access to components from a particular supplier or
experience a significant disruption in the supply of products and components from a current supplier, we may be unable to locate
alternative suppliers of comparable quality at an acceptable price, or at all, and our business could be materially and adversely
affected. In addition, if we experience a significant increase in demand for our products, our suppliers might not have the capacity
or elect not to meet our needs as they allocate components to other customers. Developing suitable alternate sources of supply
for these components may be time-consuming, difficult and costly, and we may not be able to source these components on terms that
are acceptable to us, or at all, which may adversely affect our ability to meet our development requirements or to fill our orders
in a timely or cost-effective manner. Identifying a suitable supplier is an involved process that requires us to become satisfied
with the supplier’s quality control, responsiveness and service, financial stability, labor and other ethical practices,
and if we seek to source materials from new suppliers, there can be no assurance that we could do so in a manner that does not
disrupt the manufacture and sale of our products.
Our reliance on single source, or a small number of suppliers
involves a number of additional risks, including risks related to supplier capacity constraints, price increases, timely delivery,
component quality, failure of a key supplier to remain in business and adjust to market conditions, delays in, or the inability
to execute on, a supplier roadmap for components and technologies; and natural disasters, fire, acts of terrorism or other catastrophic
events.
We do not currently own or operate any manufacturing
facilities for micro-displays, one of the key components in our products. Certain other components and services necessary for the
manufacture of our products are available from only a limited number of sources, and other components and services are only available
from a single source. We currently purchase almost all of the micro-displays used in our Smart Glasses products from Kopin Corporation
or Texas Instruments. Our relationship with these companies generally is on a purchase order basis and neither firm has a contractual
obligation to provide adequate supply or acceptable pricing to us on a long-term basis. Either firm could discontinue sourcing
merchandise for us at any time. If one or both of these firms were to discontinue its relationship with us, or discontinue providing
specific products to us, and we are unable to contract with a new supplier that can meet our requirements, or if they or such other
supplier were to suffer a disruption in their production, we could experience disruption of our inventory flow, a decrease in sales
and the possible need to re-design our products. Any such event could disrupt our operations and have an adverse effect on our
business, financial condition and results of operations. Recently, several new LCOS and alternative OLED suppliers have begun offering
micro-displays suitable for use in our products. These manufacturers include Syndiant, HiMax, eMagin, Silicon Micro-display, Sony,
Citizen and others. With new tooling and electronics, any one of these alternative displays could be incorporated into our products
but our costs of production could be higher, they may offer less performance, and make our products too costly and less desirable.
In addition, our products also require passive components such
as resistors and multi-layer ceramic capacitors which can experience supply shortages and lengthening lead-times within the consumer
electronics industry and may impact our supply chain. In the event that any of our key suppliers are unable to supply the components
that we need to produce our products to meet anticipated customer demand, our business would be materially and adversely affected.
The manufacture of waveguides encompasses several complex
processes and several steps of our production processes are dependent upon certain critical machines and tools which could result
in delivery interruptions, which could adversely affect our operating results.
Our product technology and manufacturing
processes are evolving which can result in production challenges and difficulties. We may be unable to produce our products in
sufficient quantity and quality to maintain existing customers and attract new customers. In addition, we may experience manufacturing
problems which could result in delays in delivery of orders or product introductions.
Several steps of our production processes are dependent
upon certain critical machines and tools which could result in delivery interruptions and foregone revenues.
We currently have little equipment redundancy in our manufacturing facility. If we experience any significant
disruption in the operation of our manufacturing facility or a serious failure of a critical piece of equipment, we may be unable
to supply micro-displays to our customers in a timely manner. Interruptions in our manufacturing could be caused by equipment problems,
the introduction of new equipment into the manufacturing process or delays in the delivery of new manufacturing equipment. Lead-time
for delivery, installation, testing, repair and maintenance of manufacturing equipment can be extensive. We have experienced production
interruptions in the past and no assurance can be given that we will not lose potential sales or be able to meet production orders
due to future production interruptions in our manufacturing line.
Our waveguide and display engine products are subject
to lengthy OEM development periods.
We sell some of our waveguide and display
engines micro-displays to OEMs with the objective that they then incorporate them into products they sell. OEMs determine during
their product development phase whether they will incorporate our products. The time elapsed between initial sampling of our products
by OEMs, the custom design of our products to meet specific OEM product requirements, and the ultimate incorporation of our products
into OEM products is significant, often with a duration of between one to two years. If our products fail to meet our OEM customers’
cost, performance or technical requirements or if unexpected technical challenges arise in the integration of our products into
OEM consumer products, our operating results could be significantly and adversely affected. Long delays in achieving customer qualification
and incorporation of our products also could adversely affect our business.
We depend on third parties to provide integrated circuit
chip sets and other critical components for use in our products.
We do not manufacture the integrated circuit
chip sets, optics, micro-displays, backlights, projection engines, printed circuit boards or other electronic components which
are used in our products. Instead, we purchase them from third-party suppliers or rely on third-party independent contractors for
these integrated circuit chip sets and other critical components, some of which are customized or custom made for us. We also may
use third parties to assemble all or portions of our products. Some of these third-party contractors and suppliers are small companies
with limited financial resources. If any of these third-party contractors or suppliers were unable or unwilling to supply these
integrated circuit chip sets or other critical components to us, we would be unable to manufacture and sell our products until
a suitable replacement supplier could be found. We may be unable to find, if and when needed a replacement third-party contractor
or supplier on reasonable terms or in a timely manner. Any interruption in our ability to manufacture and distribute our products
could cause our display business to be unsuccessful.
The consumer electronics and IT industries are subject
to significant fluctuations in the availability of components. If we do not properly anticipate the need for critical components,
we may be unable to meet the demands of our customers and end-users on a timely basis.
The availability of certain of the components
that we require to produce our AR Smart Glasses and other near-eye display products may decrease. As the availability of components
decreases, the cost of acquiring those components ordinarily increases. High growth product categories such as the consumer electronics
and mobile phone markets have experienced chronic shortages of components during periods of exceptionally high demand. If we do
not properly anticipate the need for or procure critical components, we may pay higher prices for those components, our gross margins
may decrease and we may be unable to meet the demands of our customers and end-users, which could reduce our competitiveness, cause
a decline in our market share and have a material adverse effect on our results of operations.
Risks Related to Our Common Stock
Additional stock offerings in the future may dilute then
existing stockholders’ percentage ownership of our company.
Given our plans and expectations that we
may need additional capital, we may need to issue additional shares of common stock or securities convertible or exercisable for
shares of common stock, including convertible preferred stock, convertible notes, stock options or warrants. The issuance of additional
securities in the future will dilute the percentage ownership of then existing stockholders.
The rights of holders of common stock may be impaired
by the possible future issuance of additional preferred stock.
Our Board of Directors has the right, without
approval of the holders of our common stock, to issue additional preferred stock with voting, dividend, conversion, liquidation
and other rights which could adversely affect the voting power and equity interest of the holders of common stock, which could
be issued with the right to more than one vote per share, and could be utilized as a method of discouraging, delaying or preventing
a change of control. The possible negative impact on takeover attempts could adversely affect the price of our common stock. Although
we have no present intention to issue any shares of preferred stock other than the Series A Preferred Stock currently outstanding
or to create any additional series of preferred stock, we may issue these shares in the future.
We have not paid dividends in the past and do not expect
to pay dividends in the future on our common stock.
We have never paid cash dividends on our
common stock and do not anticipate paying cash dividends in the foreseeable future. The payment of dividends on our common stock
will depend on earnings, financial condition, and other business and economic factors affecting us at such time as our Board of
Directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on a stockholders’
investment will only occur if our stock price appreciates. In addition, the holder of our outstanding shares of Series A Preferred
Stock is entitled to certain dividends prior to payments of dividends to holders of common stock.
If securities analysts do not publish research or publish
inaccurate or unfavorable research about our business, our stock price and trading volume could decline.
The trading market for our common stock
depends in part on the research and reports that securities or industry analysts publish about us or our business. If one or more
of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price
would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly,
demand for our stock could decrease, which might cause our stock price and trading volume to decline.
If our estimates or judgments relating to our critical
accounting policies prove to be incorrect, our operating results could be adversely affected.
The preparation of financial statements
in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that
we believe to be reasonable under the circumstances, as provided in “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” in this Annual Report on Form 10-K. The results of these estimates form the basis for
making judgments about the carrying values of assets, liabilities, and equity, and the amount of revenue and expenses that are
not readily apparent from other sources. Significant assumptions and estimates used in preparing our consolidated financial statements
include those related to revenue recognition, inventories, product warranty reserves, accounting for income taxes, and stock-based
compensation expense. Our operating results may be adversely affected if our assumptions change or if actual circumstances differ
from those in our assumptions, which could cause our operating results to fall below the expectations of securities analysts and
investors, resulting in a decline in the price of our common stock.
Our issuance of common stock upon conversion of preferred
stock or exercise of warrants or options may depress the price of our common stock.
As of March 15, 2019, we have issued and
outstanding 27,597,917 shares of common stock, 49,626 shares of Series A Preferred Stock convertible into 4,962,600 shares of common
stock, warrants to purchase 1,033,062 shares of common stock, and options to purchase 1,546,521 shares of common stock. The issuance
of shares of common stock upon conversion of preferred stock, or exercise of outstanding warrants or options could result in substantial
dilution to our stockholders, which may have a negative effect on the price of our common stock.
The interests of the holder of our Series A Preferred
Stock, which holds shares representing approximately 15% of the voting power of our stock and has the right to nominate and elect
two directors to our board, may conflict with the interests of our other stockholders.
On January 2, 2015, we entered into and
closed a Series A Preferred Stock Purchase Agreement, pursuant to which we issued and sold to Intel Corporation (the “Series
A Purchaser”) 49,626 shares of Series A Preferred Stock. Each share of Series A Preferred Stock is convertible into 100 shares
of common stock and votes on an as-converted basis with the common stock. As of the date of this filing, the shares issuable upon
conversion of the Series A Preferred Stock represent approximately 15% of the total voting power of our outstanding stock. The
Series A Purchaser may vote these shares with respect to any matter submitted to stockholders for a vote. In addition, the
Series A Purchaser is entitled to nominate and elect two additional directors to the Company’s Board of Directors (the “Board
Election Right”), one of whom is required to qualify as an “independent” director, as that term is used in applicable
exchange listing rules. The Series A Purchaser has not yet exercised the Board Election Right, but if it does so, the Series
A Purchaser will have increased influence over matters considered by the Board of Directors. The Series A Purchaser may exercise
its stockholder rights in a way that it believes is in its best interests, which may conflict with the interests of our other stockholders.
Pursuant to a letter we received from the Series A Purchaser on November 10, 2016, the Series A Purchaser stated, among other things,
that for the time being they would continue to refrain from designating any directors to the Vuzix Board of Directors and would
not exercise its board observer rights and that the Company should not provide them with any board materials or correspondence.
The Series A Purchaser has notified us that it no longer
desires to pursue a strategic relationship with us.
On November 10, 2016, we received a letter
from the Series A Purchaser stating that it had been evaluating its alternatives with respect to its significant investment in
and strategic relationship with us and that it has concluded that it no longer desires to pursue a strategic relationship with
us. While the Series A Purchaser stated it had high regard for the Company’s team and its technology, the technology did
not fit into its strategic plans. Furthermore, the Series A Purchaser added that it wanted to work with us to undertake an orderly
disposition of its stock, subject to pricing and other conditions, that would minimize disruption in the markets, although it has
not made any final decisions regarding its stock or the timing of a disposition. Resale of such conversion shares by the Series
A Purchaser may depress the price of our common stock.
Our stock price may be volatile in the future.
The trading price of our common stock has
been subject to wide fluctuations in response to quarter-to-quarter variations in results of operations, announcements of technological
innovations or new products by us or our competitors, general conditions in the wireless communications, semiconductor and display
markets, changes in earnings estimates by analysts or other events or factors. In addition, the public stock markets recently have
experienced extreme price and trading volatility. This volatility has significantly affected the market prices of securities of
many technology companies for reasons frequently unrelated to the operating performance of the specific companies. These broad
market fluctuations may adversely affect the market price of our common stock.