UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2020


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-35955

VUZIX CORPORATION

(Exact name of registrant as specified in its charter)


Delaware		04-3392453
State or other jurisdiction of incorporation or organization		(I.R.S. Employer Identification No.)


25 Hendrix Road, Suite A West Henrietta, New York		14586
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (585) 359-5900

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:		Trading Symbol(s)		Name of each exchange on which registered:
Common Stock, par value $0.001		VUZI		Nasdaq Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. Yes ☒ No ◻

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ◻

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☒	Non-accelerated filer	☐

Smaller reporting company	☒	Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). Yes ☐ No ⌧

As of November 9, 2020, there were 42,718,665 shares of the registrant’s common stock outstanding.

Table of Contents

Vuzix Corporation

INDEX

		Page No.

Part I – Financial Information		3

Item 1.	Consolidated Financial Statements (Unaudited):	3

	Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019	3

	Consolidated Statements of Changes in Stockholders’ Equity for the Three and Nine Months Ended September 30, 2020 and 2019	4

	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2020 and 2019	5

	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019	6

	Notes to the Unaudited Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28

Item 4.	Controls and Procedures	28

Part II – Other Information		28

Item 1.	Legal Proceedings	28

Item 1A.	Risk Factors	29

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29

Item 3.	Defaults Upon Senior Securities	29

Item 4.	Mine Safety Disclosure	29

Item 5.	Other Information	29

Item 6.	Exhibits	30

Signatures		31

Table of Contents

Part 1: FINANCIAL INFORMATION

Item 1: Consolidated Financial Statements

VUZIX CORPORATION

CONSOLIDATED BALANCE SHEETS


	(Unaudited)
	September 30,		December 31,
	2020		2019
ASSETS
Current Assets
Cash and Cash Equivalents	$	24,938,858	$	10,606,091
Accounts Receivable, Net		831,377		1,371,913
Accrued Project Revenue		81,714		—
Note Receivable		250,000		250,000
Inventories, Net		6,563,480		5,707,867
Licenses		380,249		—
Manufacturing Vendor Prepayments		171,003		242,539
Prepaid Expenses and Other Assets		1,000,784		895,098

Total Current Assets		34,217,465		19,073,508

Long-Term Assets
Fixed Assets, Net		3,217,176		4,327,676
Operating Lease Right-of-Use Asset		1,622,003		2,096,190
Patents and Trademarks, Net		1,452,997		1,294,675
Licenses, Net		223,869		314,416
Intangible Asset, Net		671,183		990,000
Other Assets, Net		650,000		350,000

Total Assets	$	42,054,693	$	28,446,465

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable	$	909,103	$	1,062,785
Unearned Revenue		52,248		142,463
Accrued Expenses		874,107		885,897
Taxes Payable		32,830		18,687
Operating Lease Right-of-Use Liability		444,495		524,825
Current Portion of Debt		945,009		—

Total Current Liabilities		3,257,792		2,634,657

Long-Term Liabilities
Operating Lease Right-of-Use Liability		1,177,508		1,571,365
Long-Term Portion of Debt		610,891		—

Total Long-Term Liabilities		1,788,399		1,571,365

Total Liabilities		5,046,191		4,206,022

Stockholders' Equity
Preferred Stock - $0.001 Par Value, 5,000,000 Shares Authorized; 49,626 Shares Issued and Outstanding as of September 30, 2020 and December 31, 2019.		50		50
Common Stock - $0.001 Par Value, 100,000,000 Shares Authorized; 42,718,665 and 33,128,620 Shares Issued and Outstanding as of September 30, 2020 and December 31, 2019.		42,718		33,128
Additional Paid-in Capital		196,069,645		168,950,076
Accumulated Deficit		(159,103,911)		(144,742,811)

Total Stockholders' Equity		37,008,502		24,240,443

Total Liabilities and Stockholders' Equity	$	42,054,693	$	28,446,465

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

Table of Contents

VUZIX CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)


	Preferred Stock			Common Stock			Additional		Accumulated
	Shares	Amount		Shares	Amount		Paid-In Capital		Deficit		Total
Balance - January 1, 2020	49,626	$	50	33,128,620	$	33,128	$	168,950,076	$	(144,742,811)	$	24,240,443
Stock-Based Compensation Expense	—		—	942,986		943		1,928,880		—		1,929,823
Proceeds from Common Stock Offerings	—		—	8,647,059		8,647		26,741,355		—		26,750,002
Direct Costs of Common Stock Offerings	—		—	—		—		(1,550,666)		—		(1,550,666)
Net Loss	—		—	—		—		—		(14,361,100)		(14,361,100)
Balance - September 30, 2020	49,626	$	50	42,718,665	$	42,718	$	196,069,645	$	(159,103,911)	$	37,008,502


	Preferred Stock			Common Stock			Additional		Accumulated
	Shares	Amount		Shares	Amount		Paid-In Capital		Deficit		Total
Balance - July 1, 2020	49,626	$	50	39,004,106	$	39,004	$	180,438,200	$	(154,343,101)	$	26,134,153
Stock-Based Compensation Expense	—		—	67,500		67		1,018,065		—		1,018,132
Proceeds from Common Stock Offering	—		—	3,647,059		3,647		15,496,355		—		15,500,002
Direct Costs of Common Stock Offering	—		—	—		—		(882,975)		—		(882,975)
Net Loss	—		—	—		—		—		(4,760,810)		(4,760,810)
Balance - September 30, 2020	49,626	$	50	42,718,665	$	42,718	$	196,069,645	$	(159,103,911)	$	37,008,502


	Preferred Stock			Common Stock			Additional		Accumulated
	Shares	Amount		Shares	Amount		Paid-In Capital		Deficit		Total
Balance - January 1, 2019	49,626	$	50	27,591,670	$	27,591	$	148,695,775	$	(118,266,441)	$	30,456,975
Stock-Based Compensation Expense	—		—	57,496		58		1,173,232		—		1,173,290
Proceeds from Common Stock Offerings	—		—	5,479,454		5,479		19,994,528		—		20,000,007
Direct Costs of Common Stock Offerings	—		—	—		—		(1,145,000)		—		(1,145,000)
Net Loss	—		—	—		—		—		(16,892,385)		(16,892,385)
Balance - September 30, 2019	49,626	$	50	33,128,620	$	33,128	$	168,718,535	$	(135,158,826)	$	33,592,887


	Preferred Stock			Common Stock			Additional		Accumulated
	Shares	Amount		Shares	Amount		Paid-In Capital		Deficit		Total
Balance - July 1, 2019	49,626	$	50	27,604,166	$	27,604	$	149,444,907	$	(129,682,136)	$	19,790,425
Stock-Based Compensation Expense	—		—	45,000		45		424,100		—		424,145
Proceeds from Common Stock Offerings	—		—	5,479,454		5,479		19,994,528		—		20,000,007
Direct Costs of Common Stock Offerings	—		—	—		—		(1,145,000)		—		(1,145,000)
Net Loss	—		—	—		—		—		(5,476,690)		(5,476,690)
Balance - September 30, 2019	49,626	$	50	33,128,620	$	33,128	$	168,718,535	$	(135,158,826)	$	33,592,887

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

Table of Contents

VUZIX CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Sales:
Sales of Products	$	2,686,166	$	1,059,207	$	6,392,865	$	4,267,494
Sales of Engineering Services		92,555		99,675		954,415		450,621

Total Sales		2,778,721		1,158,882		7,347,280		4,718,115

Cost of Sales:
Cost of Sales - Products Sold		2,393,676		1,360,457		5,942,043		4,635,289
Cost of Sales - Engineering Services		37,075		29,882		180,830		122,354

Total Cost of Sales		2,430,751		1,390,339		6,122,873		4,757,643

Gross Profit (Loss) (exclusive of depreciation shown separately below)		347,970		(231,457)		1,224,407		(39,528)

Operating Expenses:
Research and Development		1,874,243		2,336,778		5,693,569		6,840,006
Selling and Marketing		936,206		775,975		2,885,872		3,016,689
General and Administrative		1,635,076		1,548,927		4,972,854		5,248,919
Depreciation and Amortization		634,669		628,728		1,923,922		1,795,782
Impairment of Patents and Trademarks		16,000		—		73,532		—

Total Operating Expenses		5,096,194		5,290,408		15,549,749		16,901,396

Loss from Operations		(4,748,224)		(5,521,865)		(14,325,342)		(16,940,924)

Other Income (Expense):
Investment Income		4,662		92,004		33,908		183,056
Other Taxes		(16,802)		(26,740)		(43,867)		(89,704)
Foreign Exchange Loss		(446)		(20,089)		(25,799)		(44,813)

Total Other Income (Expense)		(12,586)		45,175		(35,758)		48,539

Loss Before Provision for Income Taxes		(4,760,810)		(5,476,690)		(14,361,100)		(16,892,385)
Provision for Income Taxes		—		—		—		—

Net Loss		(4,760,810)		(5,476,690)		(14,361,100)		(16,892,385)
Preferred Stock Dividends		(520,562)		(490,386)		(1,527,716)		(1,434,058)
Loss Attributable to Common Stockholders	$	(5,281,372)	$	(5,967,076)	$	(15,888,816)	$	(18,326,443)

Basic and Diluted Loss per Common Share	$	(0.13)	$	(0.18)	$	(0.44)	$	(0.62)
Weighted-average Shares Outstanding - Basic and Diluted		39,837,321		32,968,952		36,448,266		29,411,545

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

Table of Contents

VUZIX CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine Months Ended September 30,
	2020		2019

Cash Flows from Operating Activities
Net Loss	$	(14,361,100)	$	(16,892,385)
Non-Cash Adjustments
Depreciation and Amortization		1,923,922		1,795,782
Amortization of Software Development Costs in Cost of Sales - Products		137,496		75,000
Stock-Based Compensation		2,019,006		1,201,867
Impairment of Patents and Trademarks		73,532		—
(Increase) Decrease in Operating Assets
Accounts Receivable		160,287		(193,053)
Accrued Project Revenue		(81,714)		(145,882)
Inventories		(855,613)		(1,526,936)
Vendor Prepayments		71,536		(744,523)
Prepaid Expenses and Other Assets		(105,686)		323,340
Increase (Decrease) in Operating Liabilities
Accounts Payable		(153,682)		(1,815,968)
Accrued Expenses		(11,790)		14,212
Customer Deposits		—		(152,362)
Unearned Revenue		(90,215)		(29,144)
Income and Other Taxes Payable		14,144		38,557

Net Cash Flows Used in Operating Activities		(11,259,877)		(18,051,495)

Cash Flows from Investing Activities
Purchase of Fixed Assets		(467,595)		(1,436,242)
Investments in Patents and Trademarks		(329,347)		(183,228)
Investments in Licenses and Other Intangible Assets		(365,650)		(807,079)

Net Cash Used in Investing Activities		(1,162,592)		(2,426,549)

Cash Flows from Financing Activities
Net Proceeds from Sale of Equity		25,199,336		18,855,007
Proceeds from Term Note		1,555,900		—

Net Cash Flows Provided from Financing Activities		26,755,236		18,855,007

Net Increase (Decrease) in Cash and Cash Equivalents		14,332,767		(1,623,037)
Cash and Cash Equivalents - Beginning of Period		10,606,091		17,263,643

Cash and Cash Equivalents - End of Period	$	24,938,858	$	15,640,606

Supplemental Disclosures
Unamortized Common Stock Expense included in Prepaid Expenses	$	277,880	$	440,193
Non-Cash Investment in Licenses	$	380,249	$	—
Stock-Based Compensation Expense - Expensed less Previously Issued	$	89,183	$	28,577

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

Table of Contents

VUZIX CORPORATION

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Basis of Presentation

The accompanying unaudited consolidated financial statements of Vuzix Corporation (“the Company”) have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Regulation S-X of the Securities and Exchange Commission (the “SEC”). Accordingly, the unaudited consolidated financial statements do not include all information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Certain re-classifications may have been made to prior periods to conform with current reporting. The results of the Company’s operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results of the Company’s operations for the full fiscal year or any other period.

The accompanying interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto of the Company as of December 31, 2019, as reported in the Company’s Annual Report on Form 10-K filed with the SEC on March 16, 2020.

Customer Concentrations

For the three months ended September 30, 2020, no one customer represented more than 10% of total product revenue and one customer represented 90% of engineering services revenue. For the three months ended September 30, 2019, no one customer represented more than 10% of total product revenue and one customer represented 100% of engineering services revenue.

For the nine months ended September 30, 2020, no one customer represented more than 10% of total product revenue and two customers represented 90% of engineering services revenue. For the nine months ended September 30, 2019, one customer represented 23% of total product revenue and one customer represented 100% of engineering services revenue.

As of September 30, 2020, two customers represented 25% and 23% of accounts receivable and one customer represented 100% of accrued project revenue. As of December 31, 2019, three customers represented 32%, 26% and 13%, respectively, of accounts receivable.

Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). ASU 2016-13 provides for a new impairment model which requires measurement and recognition of expected credit losses for most financial assets and certain other instruments, including but not limited to accounts receivable. ASU 2016-13 will become effective for the Company on January 1, 2023 and early adoption is permitted. The Company does not anticipate that the adoption of this standard will have a material impact on our consolidated financial statements.

Table of Contents

Note 2 – Revenue Recognition and Contracts with Customers

Disaggregated Revenue

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Revenues
Smart Glasses Sales	$	2,686,166	$	1,049,207	$	6,392,865	$	3,163,425
OEM Product Sales		—		—		—		951,570
Waveguide and Display Engine Sales		—		10,000		—		152,499
Engineering Services		92,555		99,675		954,415		450,621

Total Revenue	$	2,778,721	$	1,158,882	$	7,347,280	$	4,718,115

Significant Judgments

Under Topic 606 “Revenue from Contracts with Customers”, we use judgments used could potentially impact both the timing of our satisfaction of performance obligations and our determination of transaction prices used in determining revenue recognized by major product line. Such judgments include considerations in determining our transaction prices and when our performance obligations are satisfied for our standard product sales that include an end-user 30-day right to return if not satisfied with product and include general payment terms that are between Net 30 and 60 days. For our Engineering Services, performance obligations are recognized over time using the input method and the estimated costs to complete each project are considered significant judgments.

Performance Obligations

Revenues from our performance obligations are typically satisfied at a point in time for Smart Glasses, Waveguides and Display Engines, and our OEM Products, which are recognized when the customer obtains control and ownership, which is generally upon shipment. The Company also records revenue for performance obligations relating to our Engineering Services over time by using the input method measuring progress toward satisfying the performance obligations. Satisfaction of our performance obligations related to our Engineering Services is measured by the Company’s costs incurred as a percentage of total expected costs to project completion as the inputs of actual costs incurred by the Company are directly correlated with progress of completing the contract. As such, the Company believes that our methodologies for recognizing revenue over time for our Engineering Services correlate directly with the transfer of control of the underlying assets to our customers.

Our standard product sales include a twelve (12) month assurance-type product warranty. In the case of certain of our OEM products and waveguide sales, some include a standard product warranty of up to eighteen (18) months to allow distribution channels to offer the end customer a full twelve (12) months of coverage. We offer extended warranties to customers, which extend the standard product warranty on product sales for an additional twelve (12) month period. All revenue related to extended product warranty sales is deferred and recognized over the extended warranty period. Our Engineering Services contracts vary from contract to contract but typically include payment terms of Net 30 days from date of billing, subject to an agreed upon customer acceptance period.

Table of Contents

The following table presents a summary of the Company’s net sales by revenue recognition method as a percentage of total net sales for the nine months ended September 30, 2020:


	% of Total Net Sales
Point-in-Time	87	%
Over Time – Input Method	13	%

Total	100	%

Remaining Performance Obligations

As of September 30, 2020, the Company had approximately $120,000 of remaining performance obligations under a current waveguide development project with a rapidly developing micro-display organization, which represents the remainder of the total transaction price of these development agreements of $200,000, less revenue recognized under percentage of completion in the nine months ended September 30, 2020. The Company currently expects to recognize the remaining revenue relating to this existing performance obligation of $120,000 in the fourth quarter of 2020. Revenues earned less amounts invoiced at September 30, 2020 in the amount of $81,714 are reflected as Accrued Project Revenue in the accompanying Consolidated Balance Sheets.

Note 3 – Loss Per Share

Basic loss per share is computed by dividing the loss attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution from the assumed exercise of stock options and warrants, and the conversion of convertible preferred shares. During periods of net loss, all common stock equivalents are excluded from the diluted EPS calculation because they are anti-dilutive. Since the Company reported a net loss for the three and nine months ended September 30, 2020 and 2019, the calculation for basic and diluted earnings per share is considered to be the same, as the impact of potential common shares is anti-dilutive. At September 30, 2020 and 2019, there were 17,775,890 and 12,852,207 common stock share equivalents, respectively, potentially issuable under conversion of preferred shares, options, and warrants that could dilute basic earnings per share in the future.

Note 4 – Inventories, Net

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


	September 30,		December 31,
	2020		2019

Purchased Parts and Components	$	6,029,814	$	5,985,214
Work-in-Process		1,505,403		2,414,142
Finished Goods		3,102,953		2,096,744
Less: Reserve for Obsolescence		(4,074,690)		(4,788,233)

Inventories, Net	$	6,563,480	$	5,707,867

Table of Contents

Note 5 – Licenses, Net


	September 30,		December 31,
	2020		2019

Licenses	$	493,717	$	493,717
Less: Accumulated Amortization / Expensed		(434,488)		(179,301)
Additions		544,889		—
		604,118		314,416
Less: Current Portion		(380,249)		—

Licenses, Net	$	223,869	$	314,416

In January 2020, the Company entered into a global non-exclusive master reseller agreement for certain smart glasses software under which it committed to sell a minimum number of software licenses in 2020. The amount capitalized, included in current assets on the Consolidated Balance Sheets, will be expensed to cost of sales - products sold during the period based upon actual software licenses sold, with any of the remaining prepaid licenses expensed at the end of the term of the master reseller agreement.

Note 6 – Debt

Long-term debt consisted of the following:


	September 30,		December 31,
	2020		2019
Unsecured Term Note - Two-year term beginning on April 22, 2020. The note bears an annual interest rate of 1%, with no principal or interest payments for six (6) months.	$	1,555,900	$	—
Less: Amount Due Within One Year		(945,009)		—

Amount Due After One Year	$	610,891	$	—

On April 21, 2020, the Company entered into a Paycheck Protection Program (“PPP”) Term Note (“PPP Note”) under the Paycheck Protection Program of the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the U.S. Small Business Administration (the “US SBA”). The Company received total proceeds of $1,555,900 from the PPP Note. The PPP Note bears interest at the annual rate of 1%, with the first six months of interest deferred, has a term of two years, and is unsecured and guaranteed by the US SBA. The Company has applied for forgiveness of the PPP Note in its entirety.

Note 7 – Intangible Asset, Net


	September 30,		December 31,
	2020		2019

Intangible Asset	$	1,500,000	$	1,500,000
Less: Accumulated Amortization		(828,817)		(510,000)

Intangible Asset, Net	$	671,183	$	990,000

On October 4, 2018, the Company entered into amendment No. 1 to agreements (the “TDG Amendment”) with TDG Acquisition Company, LLC (“TDG”), aka Six15 Technologies, LLC. The TDG Amendment amends certain provisions of prior agreements between Vuzix and TDG, including an asset purchase agreement dated June 15, 2012, and an authorized reseller agreement dated June 15, 2012.

Pursuant to the TDG Amendment, the Company is permitted to engage in sales of heads-up display components or subsystems (and any services to support such sale) for incorporation into a finished good or system for sale to military

Table of Contents

organizations, subject to certain conditions. The Company is also permitted to sell its products to defense and security organizations that include business customers and governmental entity customers that primarily provide security and defense services, including police, fire fighters, EMTs, other first responders, and homeland and border security. The Company will owe TDG commissions with respect to all such sales until June 15, 2022, when the amendment and original non-compete agreements expire, after which the Company will be free to sell any product to any customer world-wide with no commission liability to TDG.

Total commissions expense under this agreement for the three months ended September 30, 2020 and 2019 was nil and $76,453. Total commissions expense under this agreement for the nine months ended September 30, 2020 and 2019 was $176,944 and $76,453, respectively. All commissions expense related to this agreement are included in Selling and Marketing expense.

Total amortization expense for this intangible asset for the three months ended September 30, 2020 and 2019 was $104,727 and $102,000. Total amortization expense for this intangible asset for the nine months ended September 30, 2020 and 2019 was $318,817 and $306,000. Future monthly amortization expense for the next 20 months is approximately $34,000 per month or $408,000 per year.

Note 8 – Accrued Expenses

Accrued expenses consisted of the following:


	September 30,		December 31,
	2020		2019

Accrued Wages and Related Costs	$	409,320	$	394,669
Accrued Professional Services		164,282		217,721
Accrued Warranty Obligations		146,623		98,893
Other Accrued Expenses		153,882		174,614

Total	$	874,107	$	885,897

The Company has warranty obligations in connection with the sale of certain of its products. The warranty period for its products is generally twelve (12) months. The costs incurred to provide for these warranty obligations are estimated and recorded as an accrued liability at the time of sale. The Company estimates its future warranty costs based upon product-based historical performance rates and related costs to repair.

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


Accrued Warranty Obligation at December 31, 2019	$	98,893
Reductions for Settling Warranties		(77,586)
Warranties Issued During Period		125,316

Accrued Warranty Obligations at September 30, 2020	$	146,623

Note 9 – Income Taxes

The Company’s effective income tax rate is a combination of federal, state and foreign tax rates and differs from the U.S. statutory rate due to taxes on foreign income, permanent differences including tax-exempt interest, and the resolution of tax uncertainties, offset by a valuation allowance against U.S. deferred income tax assets.

Table of Contents

Note 10 – Capital Stock

Preferred stock

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

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

Each share of Series A Preferred Stock is entitled to receive dividends at a rate of 6% per year, compounded quarterly and payable in cash or in kind, at the Company’s sole discretion. As of September 30, 2020, total accumulated and unpaid preferred dividends were $10,128,808. As of December 31, 2019, total accumulated and unpaid preferred dividends were $8,601,092. There were no declared preferred dividends owed as of September 30, 2020 or December 31, 2019.

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

Common Stock

The Company’s authorized common stock consists of 100,000,000 shares, par value of $0.001. There were 42,718,665 and 33,128,620 shares of common stock issued and outstanding as of September 30, 2020 and December 31, 2019, respectively.

Historically, the Company has met its cash needs primarily by the sale of equity securities. On September 4, 2020, the Company entered into a securities purchase agreement with certain purchasers for the sale of an aggregate of 3,647,059 shares of the Company’s common stock along with warrants to purchase an aggregate of up to 3,647,059 additional shares of common stock, in a registered direct offering at a combined purchase price of $4.25 per share and warrant for aggregate gross proceeds of $15,500,002. The purchase agreement closed on September 9, 2020. The Company received net proceeds after issuance costs and expenses of $14,617,027. The warrants sold in the offering are exercisable for a period commencing upon issuance and expiring March 19, 2021 at an exercise price of $5.25 per share.

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

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

Table of Contents

Note 11 – Stock Warrants

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


		Number of
		Warrants
Warrants Outstanding at December 31, 2019		6,512,516
Exercised During the Period		—
Issued During the Period		3,647,059
Expired During the Period		—

Warrants Outstanding at September 30, 2020		10,159,575

Of the outstanding warrants as of September 30, 2020, 3,647,059 expire on March 19, 2021, 1,033,062 expire on June 18, 2021 and the remaining 5,479,454 expire on January 2, 2022. The weighted average remaining term of the warrants was 0.9 years. The weighted average exercise price was $4.81 per share.

Note 12 – Stock-Based Compensation

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


		Weighted
	Number of	Average
	Options	Exercise Price
Outstanding at December 31, 2019	1,383,591	$	4.77
Granted	1,400,000		1.42
Exercised	—		—
Expired or Forfeited	(129,876)		3.66

Outstanding at September 30, 2020	2,653,715	$	3.06

The weighted average remaining contractual term for all options as of September 30, 2020 and December 31, 2019 was 7.5 years and 6.3 years, respectively.

As of September 30, 2020, there were 1,225,654 options that were fully vested and exercisable at a weighted average exercise price of $4.29 per share. The weighted average remaining contractual term on the vested options is 5.5 years.

As of September 30, 2020, there were 1,428,061 unvested options exercisable at a weighted average exercise price of $