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 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, 2019 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, 2018, as reported in the Company’s Annual Report on Form 10‑K filed with the SEC on March 15, 2019.

Going Concern

The accompanying unaudited consolidated financial statements have been prepared assuming that we will continue as a going concern. This basis of accounting contemplates the recovery of our assets and the satisfaction of liabilities in the normal course of business. These unaudited consolidated financial statements do not include any adjustments to the specific amounts and classifications of assets and liabilities, which might be necessary should we be unable to continue as a going concern. The Company incurred net losses for the nine months ended September 30, 2019 of $16,892,385 and annual net losses of $21,875,713 in 2018 and $19,633,502 in 2017. As of September 30, 2019, the Company had an accumulated deficit of $135,158,826.

The Company’s cash requirements are primarily for funding operating losses, working capital, research and development, and capital expenditures. Our cash requirements related to funding operating losses depend on numerous factors, including new product development activities, our ability to commercialize our products, our products’ timely market acceptance, selling prices and gross margins, and other factors. Historically, the Company has met its cash needs primarily by the sale of equity securities.

The Company’s management intends to take actions necessary to continue as a going concern, as discussed herein. The Company will need to grow its business significantly to become profitable and self-sustaining on a cash flow basis or it will be required to raise new equity and/or debt capital. Management’s plans concerning these matters and managing our liquidity include, among other things:

the continued sale of our existing M300XL and Blade inventory, of which we have significant levels;

the introduction of our M400 Smart Glasses, our third-generation monocular device for enterprise. We launched the product near the end of the third quarter of 2019;

the commencement of volume manufacturing and sale of the new M100 Smart Swim product in the first quarter of 2020;

new engineering services and product sales to business customers, first responder, defense and governmental entity customers;

greater control of operating costs and reductions in spending growth rates wherever possible;

decrease tradeshow and external PR expenditures;

right-size operations across all areas of the Company, including head-count freezes and overall spending;

delay or curtail discretionary and non-essential capital expenditures not related to near-term new products; and

reduce the rate of research and development spending on new technologies, particularly the use of external contractors.

Historically, the Company has met its cash needs primarily by the sale of equity securities. On July 1, 2019, the Company entered into a securities purchase agreement with certain purchasers for the sale of an aggregate of 5,479,454 shares of the Company’s common stock along with warrants to purchase an aggregate of up to 5,479,454 additional shares of common stock, in a registered direct offering at a combined purchase price of $3.65 per share and warrant for aggregate gross sale proceeds of $20,000,007. The purchase agreement closed on July 2, 2019. The Company received net proceeds after issuance costs and expenses of $18,855,007. The warrants sold in the offering will be exercisable for a period of two years commencing six months from the issuance date at an exercise price of $4.10 per share.

Based upon our current amount of cash on hand, management’s historical ability to raise capital, and our ability to manage our cost structure and adjust operating plans if and as required, we have concluded that substantial doubt of our ability to continue as a going concern has been alleviated.

Customer Concentrations

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 three months ended September 30, 2018, SATS Ltd. represented 31% of product revenue and one customer represented 100% of engineering services revenue.

For the nine months ended September 30, 2019, Foxconn Technology Group, or Foxconn (f/k/a Toshiba Japan) represented 23% of the Company’s product revenue and 21% of the Company’s total revenue. One customer represented 100% of engineering services revenue. For the nine months ended September 30, 2018, Toshiba Japan represented 67% of the Company’s engineering services revenue and 27% of the Company’s total revenue.

As of September 30, 2019, Foxconn represented 76% of accounts receivable and one customer represented 100% of accrued project revenue. As of December 31, 2018, Toshiba Japan and SATS Ltd. represented 32% and 38%, 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 the adoption of this standard will have a material impact on our consolidated financial statements.