Vuzix Corp

Note 1 — Summary of Significant Accounting Policies

Operations

Vuzix Corporation (the Company) was formed in 1997 under the laws of the State of Delaware and maintains its corporate offices in West Henrietta, New York (a suburb of Rochester). We are engaged in the design, manufacture, marketing and sale of augmented reality wearable display and computing devices also referred to as head mounted displays (or HMDs, but also known as 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. The wearable display products we produce can be used for a variety of enterprise, commercial, medical, and defense uses and applications, including AR for on-the-go users and as mobile displays and remote service support devices. Our products are available with varying features and are offered as monocular and binocular display systems.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Vuzix Europe GmbH, Vuzix Japan Corporation, and Moviynt, Inc. All inter-company transactions have been eliminated.** **

Variable Interest Entities

The Company determines at the inception of each arrangement whether an entity in which it has made an investment or in which the Company has other variable interests is considered a variable interest entity (VIE). The Company consolidates VIEs when it is the primary beneficiary. The Company is the primary beneficiary of a VIE when it has the power to direct activities that most significantly affect the economic performance of the VIE and have the obligation to absorb the majority of their losses or benefits. If the Company is not the primary beneficiary in a VIE, the Company accounts for the investment or other variable interests in a VIE in accordance with applicable GAAP. Each reporting period, the Company assesses whether any changes in our interest or relationship with the entity affect our determination of whether the entity is a VIE and, if so, whether the Company is the primary beneficiary.

We have an investment in a VIE in which we are not the primary beneficiary. This VIE includes a private company investment, described further in Notes 2 and 7. We have determined that the governance and operating structures of this entity do not allow us to direct the activities that would significantly affect their economic performance. Therefore, we are not the primary beneficiary, and the results of operations and financial position of this VIE is not included in our consolidated financial statements. We account for this investment as a technology license and an equity investment. The maximum exposure of this unconsolidated VIE is generally based on the current carrying value of the investment. We have determined that the single source of our exposure to this VIE is our capital investment in them. The carrying value andmaximum exposure of this unconsolidated VIE was $32.6 million as of December 31, 2023.

Segment Data, Geographic Information and Significant Customers

The Company is not organized by market and is managed and operated as one business. A single management team that reports to the chief operating decision maker comprehensively manages the entire business. The Company does not operate any material separate lines of business or separate business entities. Accordingly, the Company does not accumulate discrete information, other than product and engineering services revenue and material engineering services

costs, with respect to separate product lines and does not have separately reportable segments as defined by FASB ASC Topic 280, “Disclosures about Segments of an Enterprise and Related Information”.

Refer to Note 19 — Geographic and Other Financial Information (Unaudited).

Foreign Currency Transactions

The Company considers the US dollar as the functional currency of the Company’s German and Japanese subsidiaries. The Company’s German subsidiary transacts primarily in Euros and the Company’s Japanese subsidiary transacts primarily in Yen. All transactions in foreign currencies are recorded in U.S. dollars at the then current exchange rate(s). Upon settlement of the underlying transaction, all amounts are re-measured to U.S. dollars at the current exchange rate on the date of settlement. All unsettled foreign currency transactions that remain in accounts receivable and trade account payables are re-measured to U.S. dollars at the period-end exchange rates. All re-measurement gains and losses are recorded in the current period net income.

Use of Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at year-end and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Concentration of Credit Risk

The Company maintains its cash in bank deposit accounts, which at times may exceed federally insured limits.

Cash and Cash Equivalents

Cash and cash equivalents can include highly liquid investments with original maturities of three months or less.

Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. This basis of accounting contemplates the recovery of our assets and the satisfaction of liabilities in the normal course of business. These consolidated financial statements do not include any adjustments to the specific amounts and classifications of assets and liabilities, which might be necessary should we be unable to continue as a going concern. The Company incurred net losses of $50,149,077 for the year ended December 31, 2023, $40,763,573 for the year ended December 31, 2022, and $40,377,160 for the year ended December 31, 2021. The Company had net cash outflows from operations of $26,277,824 for the year ended December 31, 2023, $24,521,082 for the year ended December 31, 2022, and $26,980,411 for the year ended December 31, 2021, respectively. As of December 31, 2023, the Company had an accumulated deficit of $293,984,793. The Company’s cash outflows for investing activities was $19,280,966 for the year ended December 31, 2023, $21,170,816 for the year ended December 31, 2022, and $4,852,452 for the year ended December 31, 2021.

These factors initially raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans to alleviate the conditions that raise substantial doubt include operational improvements being implemented and the curtailment of certain development programs, both of which the Company expects will preserve cash. Management estimates the Company will have sufficient liquidity to fund operations at least through the second quarter of 2025.

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. (ASU) 2014- 15, Presentation of Financial Statements — Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. As a result, management is primarily responsible for assessing if there is a going

concern issue when issuing an entity’s financial statements. The going concern assumption underlies all GAAP financial reporting and therefore requires and assumes that the financial statements have been prepared on a going concern basis. It presumes that a Company will continue normal business operations into the future.

Additional disclosure is required when there is substantial doubt about business continuity or substantial doubt that has not been alleviated by management’s mitigation plans. As required under applicable accounting standards, management has concluded that substantial doubt may exist surrounding the Company's ability to meet its obligations within one year of the issuance date of the annual report Form 10-K.

The Company’s cash requirements going forward are primarily for funding operating losses, research and development, working capital, capital expenditures and license investments. The higher cash outflows for investments in the years ending December 31, 2023 and 2022 were mainly for the Company’s technology license and equity investment in microLED technology via Atomisitc (see Notes 2 and 7). A total of $32,500,000 cash has been paid to Atomistic in the last two fiscal years. The Company is in the process of negotiating its final license fee, under which the Company would invest a further $5,000,000 in 2024, after which it would have a 25-year licenses to the Atomistic technology, which management believes will allow Atomistic to reach commercialization of its technology.

Our cash requirements related to funding operating losses depend upon numerous factors, including new product development activities, our ability to commercialize our products, our products’ timely market acceptance, selling prices and gross margins, and other factors. Historically, the Company has met its cash needs primarily 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 Company has in the past sold equity securities and in early 2024 entered into a sales agreement with an investment banking firm for the issuance and sale of up to $50,000,000 of our common stock that may be issued and sold from time to time in an “at the market” offering. Nonetheless, management monitors the capital markets on an ongoing basis and may consider raising capital if favorable market conditions develop. If the Company’s actual results are less than projected or the Company needs to raise capital for additional liquidity, the Company may be required to do additional equity financings, reduce expenses, or enter into a strategic transaction. However, management can make no assurance that the

Company will be able to raise additional capital, reduce expenses sufficiently, or enter into a strategic transaction on terms acceptable to the Company, or at all.

If the Company is unable to achieve and maintain positive cash flows and profitability in the foreseeable future, its financial condition may ultimately be materially adversely affected such that management may be required to reduce operating expenses further, including investments in research and development, or raise additional capital. While there can be no assurance the Company will be able to successfully reduce operating expenses or raise additional capital, management believes its historical success in managing cash flows and obtaining capital will continue in the foreseeable future.

However, as a result of this uncertainty, doubt about the Company continuing as a going concern has not been fully alleviated to the satisfaction of its external auditors.

Fair Value of Financial Instruments

The Company’s financial instruments primarily consist of cash and cash equivalents, accounts receivable, accounts payable, unearned revenue, accrued expenses, and income and other taxes payable. As of the consolidated balance sheet dates, the estimated fair values of the financial instruments were not materially different from their carrying values as presented due to the short maturities of these instruments.

Accounts Receivable

The Company carries its trade accounts receivable at the invoice amount less an allowance for expected credit losses. The Company establishes an allowance for expected credit losses based on the age of outstanding invoices and management’s evaluation of collectability of outstanding balances. These provisions are established when the aging of outstanding amounts exceeds allowable terms and are re-evaluated at each quarter-end for adequacy. In determining the adequacy of the provision, the Company considers known uncollectible or at-risk receivables. The total allowance for expected credit losses as of December 31, 2023, 2022, and 2021 was $1,574,000, nil andnil, respectively. The accounts receivable balance as of December 31, 2021 was $2,242,429. The Company does not accrue interest on any past due accounts receivable unless such receivable goes into collection.

Reclassification of Prior Year Presentation

Certain prior year amounts have been reclassified for consistency with the current year’s presentation. These reclassifications had no effect on the reported results of operations. An adjustment has been made to the Consolidated Balance Sheet for the year ended December 31, 2022 to reclassify prepaid annual equity awards to external members of the Company’s Board of Directors and one member of Senior Management. This change in classification does not affect previously reported Net Loss or reported Cash Flows Used in Operating Activities in the Consolidated Statements of Cash Flows.

The below table is a summary of the impact to this reclassification:

Customer and Supplier Concentrations

Two customers represented 29% and 25%, respectively, of total product revenue andfour customers represented 44%,15%,12% and 11%, respectively, of our engineering services revenue for the year ended December 31, 2023. One customer represented 14% of total product revenue andtwo customers represented 48% and 39%, respectively, of engineering services revenue for the year ended December 31, 2022. One customer represented 10% of

total product revenue andfour customers represented 39%,28%,16%, and 12%, respectively, of our engineering services revenue for the year ended December 31, 2021.

Two customers represented 47% and 26%, respectively, of gross accounts receivable at December 31, 2023. One customer represented 26% of accounts receivable at December 31, 2022. Three customers represented 27%,20% and 10%, respectively, of accounts receivable at December 31, 2021.

No third-party vendors represented more than 10% of material purchases for the year ended December 31, 2023. One third-party vendor represented 15% of purchases for the year ended December 31, 2022. As of December 31, 2022, the net amount due to this vendor was $478,382. Two third-party vendors represented 38% and 24%, respectively, of material purchases for the year ended December 31, 2021. The net amount due to these vendors was $504,073.

Accrued Project Revenue

The Company carries accrued project revenue based on the percentage of completion on the project measured using the input method based upon costs incurred to-date as a percentage of total expected costs to complete the project less amounts invoiced, if any. As of December 31, 2023 and 2022 there was $165,771 and $269,129, respectively, in accrued project revenue andnil as of December 31, 2021.

Inventories

Inventories are valued at the lower of cost or net realizable value using the weighted average first-in, first-out method. The Company includes labor and overhead costs in its inventory valuation costing. The Company records provisions for excess, obsolete or slow-moving inventory based on changes in customer demand, technology developments or other economic factors. The Company’s products have product life cycles that range on average fromtwo tothree years currently. At both the product introduction and product discontinuation stage, there is a higher degree of risk of inventory obsolescence. The provision for obsolete and excess inventory is evaluated for adequacy at each quarter end. The estimate of the provision for obsolete and excess inventory is partially based on expected future product sales, which are difficult to forecast for certain products. The total provision for inventory as of December 31, 2023 and 2022 was $5,775,551 and $1,417,489, respectively.

Revenue Recognition

The Company recognizes revenue from Contracts with Customers under FASB ASC Topic 606, “Revenue from Contracts with Customers”. Product sales represent the majority of the Company’s revenue. The Company recognizes revenue from these product sales as performance obligations are satisfied and transfer of control and ownership to the customer has occurred, typically upon physical shipment. Revenue is recognized in the amount that the Company expects to receive in exchange from the sale of our products. FOB shipping point is our standard shipping term and revenue is generally recognized as our products ship to customers, as control and ownership are transferred at this time. All of our standard product sales include a 30-day money back guarantee and expected returns are estimated at each reporting period date, and a portion of revenue is deferred for all estimated returns. As of December 31, 2023 and 2022, unearned revenue consisting of deferred revenue associated with our expected returns were immaterial. The Company collects and remits sales taxes in certain jurisdictions and reports revenue net of any associated sales taxes.

Revenue from any engineering consulting and other services is recognized at the time the services are rendered. The Company accounts for its longer-term development contracts, which to date have all been firm fixed-priced contracts, on the percentage-of-completion method, whereby income is recognized as work on contracts progresses, but estimated losses on contracts in progress are charged to operations immediately. The percentage-of-completion is determined using the cost-to-cost method. To date, the majority of such contracts have been less than one calendar year in duration.

Unearned Revenue

These amounts represent deferred revenue against our expected product sales returns for all December 2023 and 2022 products sales that are subject to the Company’s 30-day money back guarantee return policy.

Cost of Product Sales

Cost of product sales includes the direct and allocated indirect costs of products sold to customers. Direct costs include labor, materials, reserves for estimated warranty expenses, and other costs incurred directly, or charged to us by our contract manufacturers in the manufacturing of these products. Indirect costs include labor, manufacturing overhead, and other costs associated with operating our manufacturing facility and capacity. Manufacturing overhead includes the costs of procuring, inspecting and storing material, facility and other costs, and is allocated to cost of product revenue based on the proportion of indirect labor which supported production activities. Depreciation of manufacturing tools and equipment and amortization of software development costs are included in our cost of product sales. The cost of product sales can fluctuate significantly from period to period, depending upon the product mix and volume, the level of manufacturing overhead expense and the volume of direct cost of materials.

Cost of Engineering Services Sales

Cost of engineering services revenues includes both the direct and allocated indirect costs of performing on contracts and producing prototype units. Direct costs include labor, materials and other costs incurred directly in performing under the contract. Direct costs also include labor and other costs associated with operating our research and development department based on the level of effort supporting the development activity. Cost of engineering sales is determined by the level of direct and indirect costs incurred, which can fluctuate substantially from period to period.

Fixed Assets

Fixed assets are stated at cost. Depreciation of fixed assets is provided for using the straight-line method over the following estimated useful lives:

Repair and maintenance costs are expensed as incurred. Asset betterments are capitalized and depreciated over their expected useful life.

Patents and Trademarks

The Company capitalizes the costs of obtaining its patents and registration of trademarks. Such costs are accumulated and capitalized during the filing periods, which can take several years to complete. Successful applications that result in the granting of a patent or trademark are then amortized over 15 years on a straight-line basis. Unsuccessful applications are written-off and expensed in the fiscal period where the application is abandoned or discontinued. Ongoing maintenance and legal fees for issued patents and trademarks are expensed as incurred.

Software Development Costs

The Company capitalizes the costs of obtaining or developing its software once technological feasibility has been determined by management or of purchased software solutions when placed into service. Such costs are accumulated and capitalized. Projects can take several years to complete. Unsuccessful or discontinued software projects are written-off and expensed in the fiscal period when the software development effort is abandoned or discontinued. Costs incurred internally in researching and developing a computer software product are charged to expense until

technological feasibility has been established for the product. Once technological feasibility is established, all software costs are capitalized until the product is available for general release to customers. Judgment is required in determining when technological feasibility of a product is established. Once the product is available for general release, accumulated costs are amortized over the life of the asset. The amortization of these costs is included in cost of product sales over the estimated life of the products, which currently is estimated atthree years using a straight-line basis. As of December 31, 2023, 2022 and 2021, we had $361,111, $500,000 and $541,666, respectively, of net software development costs included in Other Assets. For the years ended December 31, 2023, 2022 and 2021, there wasnil in impairment of software development costs.

Licenses

The Company capitalizes the costs of acquiring licenses and prepaid royalties. They are amortized on either a per unit basis or straight line over the expected life of the license. In some cases, future royalties are subject to annual limits.

Long-Lived Assets, Goodwill and Other Acquired Intangible Assets

The Company, at least annually, assesses all of its long-lived assets and intangibles, excluding goodwill, for impairment and when events or circumstances indicate their carrying amounts may not be recoverable. For the years ended December 31, 2023, 2022 and 2021, there was an impairment charge of $41,869, $97,675, and $80,163, respectively, to Patents and Trademarks. For the years ended December 31, 2023, 2022, and 2021, we recorded a loss on fixed asset disposal ofnil, $35,350 and $183,614, respectively, upon the retirement of certain tooling and manufacturing equipment assets no longer in use. Intangible assets with definite lives are amortized over their estimated useful lives on a straight-line basis over afive-year period.

We test our goodwill for impairment at least annually, or more frequently if events or changes in circumstances indicate that the asset may be impaired.

There was goodwill and acquired intangible asset impairment in the amount of $2,136,993 recognized for the year ended December 31, 2023. Theses assets with definite lives were being amortized over their estimated useful lives on a straight-line basis over a five-year period.

Research and Development

Research and development costs are expensed as incurred consistent with the guidance of FASB ASC Topic 730, “Research and Development,” and include employee related costs, office expenses, third-party design and engineering services, and new product prototyping costs. Costs incurred internally in researching and developing a computer software product are charged to expense until technological feasibility has been established for the product.

Shipping and Handling Costs

Amounts charged to customers and costs incurred by the Company related to shipping and handling are included in net sales and cost of sales, respectively.

Provision for Future Warranty Costs

The Company provides for the estimated returns under warranty and the costs of fulfilling our obligations under product warranties at the time the related revenue is recognized. The Company estimates the costs based on historical and projected product failure rates, historical and projected repair costs, and knowledge of specific product failures (if any). The specific warranty terms and conditions vary depending upon the country in which we do business, but generally include parts and labor over a period generally ranging fromone totwo years from the date of product shipment. The Company provides a reserve for expected future warranty returns at the time of product shipment or produces over-builds to cover replacements. We regularly re-evaluate our estimates to assess the adequacy of the

recorded warranty liabilities and adjust the amounts as necessary each quarter end, based upon historical experience of warranty claims and costs.

Advertising

Advertising costs are expensed as incurred and recorded in “Selling and Marketing” in the Consolidated Statements of Operations. Advertising expense for the years ended December 31, 2023, 2022 and 2021 was $2,279,797, $1,668,910 and $1,263,897, respectively.

Income Taxes

The Company accounts for income taxes in accordance with FASB ASC Topic 740-10, “Income Taxes.” Accordingly, the Company provides deferred income tax assets and liabilities based on the estimated future tax effects of differences between the financial and tax bases of assets and liabilities based on currently enacted tax laws. A valuation allowance is established for deferred tax assets in amounts for which realization is not considered more likely than not to occur.

The Company reports any interest and penalties accrued relating to uncertain income tax positions as a component of the income tax provision.

Net Loss Per Share

Basic earnings per share is computed by dividing the net income (loss) less accrued dividends on any outstanding preferred stock by the weighted average number of common shares outstanding for the period. Diluted earnings per share calculations reflect the assumed exercise of all dilutive employee stock options and warrants applying the treasury stock method promulgated by FASB ASC Topic 260, “Earnings Per Share” and the conversion of any outstanding convertible preferred shares or notes payable that are-in-the-money, applying the as-if-converted method. However, if the assumed exercise of stock options and warrants and the conversion of any preferred shares are anti-dilutive, basic and diluted earnings per share are the same for all periods. As a result of the net losses generated in 2023, 2022 and 2021, all outstanding instruments would be anti-dilutive. As of December 31, 2023, 2022 and 2021, there were 8,695,308,8,589,673 and 8,606,062 common stock share equivalents, respectively, that were potentially issuable under stock options that could potentially dilute basic earnings per share in the future.

Stock-Based Compensation Expense

The Company accounts for stock-based compensation to employees and directors in accordance with FASB ASC Topic 718, “Compensation - Stock Compensation,” which requires that compensation expense be recognized in the consolidated financial statements for stock-based awards based on the grant date fair value. For stock option awards, the Black-Scholes-Merton option pricing model was used to estimate the fair value of share-based awards under FASB ASC Topic 718. The Black-Scholes-Merton option pricing model incorporates various and highly subjective assumptions, including expected term and share price volatility. The expected term of options granted was estimated to be the average of the vesting term, historical exercise and forfeiture rates, and the contractual life of the option. The share price volatility at the grant date is estimated using historical stock prices based upon the expected term of the options granted. The risk-free interest rate assumption is determined using the rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the award being valued.

For common stock awards, the Company uses the fair market value of our common stock on the date of each stock-based award based on the market price of the Company’s common shares and the expense related to these awards is recognized over the requisite service period of the awards on a straight-line or graded vesting basis, which is generally commensurate with the vesting term. Stock-based compensation expense associated with stock awards and stock option grants for the years ended December 31, 2023, 2022 and 2021 was $4,566,253, $4,645,026, and $4,047,444, respectively, excluding awards under the Company’s Long-term Incentive Plan (LTIP). The Company issues new shares upon stock option exercises.

For stock options awarded under the Company's LTIP, options vest only upon the achievement of certain equity market conditions or performance-based milestones. The fair value of options granted under this program were calculated by using a Monte Carlo simulation for the equity market condition tranches and the Black-Scholes-Merton option pricing method on the performance-based tranches. Stock-based compensation expense associated with the Company's LTIP for the years ended December 31, 2023, 2022 and 2021 was $8,144,734, $11,130,527, and $13,255,388, respectively.

Leases

The Company determines if an arrangement is a lease at inception. Our lease agreements generally contain lease and non-lease components. Historically, non-lease components such as utilities have been immaterial. Payments under our lease arrangements are primarily fixed. Lease assets and liabilities are recognized at the present value of the future lease payments at the lease commencement date. The Company has made an accounting policy election to account for lease and non-lease components in its contracts as a single lease component for its real estate leases. The interest rate used to determine the present value of the future lease payments is our incremental borrowing rate, because the interest rate implicit in our leases is not readily determinable. Our incremental borrowing rate is estimated to approximate the interest rate on a collateralized basis with similar terms and payments, and in economic environments where the leased asset is located. Our lease terms include periods under options to extend or terminate the lease when it is reasonably certain that we will exercise that option.

As of December 31, 2023, all of our leases are considered operating leases. Operating lease right-of-use assets and liabilities were included on our Consolidated Balance Sheets beginning January 1, 2019. The Company does not have any finance leases as of December 31, 2023.

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 became effective for the Company on January 1, 2023. The adoption of this new accounting standard did not have a material impact on our consolidated financial statements.

Recent Accounting Guidance Not Yet Adopted

In December 2023, the FASB issued ASU 2023-09 "Income Taxes (Topics 740): Improvements to Income Tax Disclosures" to expand the disclosure requirements for income taxes, specifically related to the rate reconciliation and income taxes paid. ASU 2023-09 is effective for our annual periods beginning January 1, 2025, with early adoption permitted. We are currently evaluating the potential effect that the updated standard will have on our financial statement disclosures.

Note 2 – Investment in Atomistic

In November 2023, Atomistic successfully reached seven oftwelve technological milestones under its technology license agreement (Note 7) with the Company executed on December 16, 2022. As a result of these achievements, the Company issued to the Atomistic Founders 1,397,500 shares of the Company's common stock and paid them $2,500,000 in exchange for 13,682 shares of Series A Preferred stock of Atomistic. The fair market value of the common shares when issued was $2.35 per share or a total of $3,284,126.

The stock of Atomistic does not have a readily determinable fair value, as it’s a private company; therefore, under ASC 321, the investment in Atomistic stock, including the purchase option, is accounted for at cost, unless a transaction occurs, indicating a known fair value or if indications of an impairment of the investment are known. The Company reviewed the investment in Atomistic for impairment and no indicators of impairment have occurred on or before December 31, 2023.

Note 3 – Revenue Recognition and Contracts with Customers

Disaggregated Revenue

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

Significant Judgments

Under Topic 606“Revenue from Contracts with Customers”, we use judgments that 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. 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 considers shipping and handling activities performed to be fulfillment activities and not a separate performance obligation. 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 toward 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 atwelve (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 toeighteen (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 the date of billing, subject to an agreed upon customer acceptance period.

As of December 31, 2023 and 2022, there wereno outstanding performance obligations remaining for extended warranties.

The following table presents a summary of the Company’s net sales by revenue recognition method as a percentage of total net sales:

Remaining Performance Obligations

As of December 31, 2023, the Company had $2,929,709 of remaining performance obligations under three current waveguide development projects, which represents the remainder of transaction prices totaling $3,637,240 under these development agreements, which commenced in 2023, less revenue recognized under percentage of completion to date. The Company expects to recognize the remaining revenue related to these projects, based upon expected due dates, of 66% in 2024 and 34% in 2025. Revenues earned less amounts invoiced at December 31, 2023, in the amount of $165,771 are reflected as Accrued Revenues in Excess of Billings in the accompanying Consolidated Balance Sheet.

As of December 31, 2022, the Company had approximately $187,000 of remaining performance obligations under a current waveguide development project, which represents the remainder of the total transaction price of approximately $896,000 under this development agreement, less revenue recognized under percentage of completion to date. The Company did recognize the remaining revenue related to this project in the first quarter of 2023. Revenues earned less amounts invoiced at December 31, 2022 in the amount of $269,129 are reflected as Accrued Revenues in Excess of Billings in the accompanying Consolidated Balance Sheet.

The Company had no material outstanding performance obligations related to product sales, other than its standard product warranty.

Note 4 — Inventories, Net

Inventories consisted of the following:

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

For the year ended December 31, 2022, the Company increased its standard Reserve for Obsolescence provision by $290,405 related to some of its accessories. The total write-down and obsolescence provision for finished goods and components recorded for the year ended December 31, 2021 was $519,950.

Note 5 — Fixed Assets, Net

Fixed Assets consisted of the following:

Total depreciation expense for fixed assets for the years ended December 31, 2023, 2022 and 2021 was $1,036,578, $869,502, and $1,306,479, respectively.

During the twelve months ended December 31, 2023, the Company invested $5,323,483 in tooling and manufacturing equipment and leasehold improvements, mostly attributable to the Company’s new waveguide expansion project. Construction on the Company’s new waveguide facility in a leased building began late in December 2022 and was completed and placed into service in November 2023.

Note 6 — Patents and Trademarks, Net

Total amortization expense for patents and trademarks for the years ended December 31, 2023, 2022 and 2021 was $183,690, $149,700 and $145,072, respectively. The estimated aggregate annual amortization expense for each of thenext five fiscal years is approximately $248,000. For the years ended December 31, 2023, 2022 and 2021, we recorded $41,869, $97,675 and $80,163, respectively, in patent impairment charges.

Note 7 — Technology Licenses, Net

Total amortization expense related to these intangible technology licenses in the years ended December 31, 2023, 2022 and 2021 was $3,307,737, $1,231,197, and $480,945, respectively.

These intangible technology license assets are being amortized over aten-year period, which began on May 12, 2022 and, as modified, on December 16, 2022. During the year ended December 31, 2023, the Company paid $10,500,000 towards its licensing commitment liability with Atomistic. The Atomistic technology license represents $30,000,000 of the total licenses on-hand and the Company recorded a total of $3,307,737 in amortization relating to these intangible assets and other licenses. The remaining funding commitment of $1,000,000 associated with these licenses was paid in January 2024.

Until the Company achieves a near 100% ownership in Atomistic by the issuance of Vuzix shares (see Note 12) for the completion of all development milestones, or is permitted to waive them and accelerate the share issuances for 100% ownership of Atomistic, the Company and the current owners of Atomistic must negotiate every 12 to 24 months new funding contributions for the extension of its exclusive license. If such amounts cannot be reasonably negotiated or would be considered too large by Vuzix in the future, failure to pay the additional license fees would result in the termination of Vuzix existing license to the Atomistic technologies.

Note 8 — Goodwill and Acquired Intangible Assets, Net

On October 20, 2022, the Company acquired Moviynt, a US-based SAP Certified ERP platform software solution provider, that supports handheld mobile phones and scanners used in logistics, warehousing and manufacturing applications. Moviynt, a boutique specialized software firm which was founded in 2018 by three principals, has developed a logistics mobility software platform (Mobilium®) which eliminates traditional middleware, and is device agnostic. With the acquisition, Moviynt became a wholly-owned subsidiary of Vuzix.

The Moviynt acquisition was completed pursuant to an agreement and plan of merger by and among the Company and Moviynt, Inc. (the Sellers), a Delaware corporation. Total purchase price consideration paid to the Sellers was$2,469,574, which included$2,300,000 in base merger consideration and$169,574 in net working capital adjustments, in exchange for all shares outstanding. The acquisition agreements contained customary terms and conditions including representations, warranties and indemnification provisions. A portion of the consideration paid to the Sellers was held in escrow for indemnification purposes, which was subsequently released to the Sellers upon the Company completing a 90-day post close review.

The Moviynt acquisition was accounted for in accordance with the accounting treatment of a business combination pursuant to FASB ASC Topic 805, Business Combinations (“ASC 805”). Accordingly, the purchase price was allocated to the tangible and intangible assets acquired and the liabilities assumed based on their estimated fair values on the acquisition date. The excess of the purchase price over the estimated fair value of the separately identifiable assets acquired and liabilities assumed was allocated to goodwill. Management was responsible for determining the acquisition date fair value of the assets acquired and liabilities assumed, which requires the use of various assumptions and judgments that are inherently subjective. The purchase price allocation presented below reflects all known information about the fair value of the assets acquired and liabilities assumed as of the acquisition date.

The following table represents the preliminary assets acquired and liabilities assumed on October 20, 2022:

The goodwill included in the Company’s purchase price allocation presented above represented the value of Moviynt’s assembled and trained workforce and the incremental value of Moviynt’s technology and deployment efforts that were in place at the date of acquisition. No amount of goodwill is considered deductible for tax purposes.

Intangible assets were valued using various income methods based upon management’s approved projections of future cash flows. The following table summarizes the estimated fair value and annual amortization for each of the identifiable intangible assets acquired:

During the year ended December 31, 2022,* *the Company incurred acquisition-related costs and other non-recurring expenses of $74,723 directly attributable to the acquisition, including one-time accounting, legal and due diligence services, which amounts were expensed as incurred.

In 2023, Moviynt generated $120,158 of subscription-based revenue and $19,238 of engineering revenue which was applied against $6,347 related to Cost of Sales, generating a gross margin of $133,049. In 2022, Moviynt generated $76,952 of engineering revenue which was applied against $24,819 related to Cost of Sales, generating a gross margin of $52,133.

The following table represents goodwill and acquired intangible assets activity. Due to slower than originally expected revenue growth by Moviynt, the Company took an impairment charge of $2,136,993 for the unamortized intangible assets and goodwill of Moviynt.

Note 9 – Other Assets

The Company’s other assets consists of the following:

During the year ended December 31, 2021, the Company acquired, for a purchase price of $200,000, an ownership interest of 3%, in the form of preferred stock, in a private corporation developing smart glasses software for

use by retailers in the stockkeeping of inventory, amongst other uses. In the year ended December 31, 2023, the Company purchased an additional $100,000 of preferred stock in this corporation through a subsequent round of funding in order to retain a 2% ownership interest.

In June 2023, the Company purchased $100,000 of preferred stock, along with warrants, in a UK-based public company developing new semiconductor materials for displays. The investment represents less than a 1% ownership interest.

During 2020, the Company invested $500,000 in Android operating systems upgrades for its CPU platform used in its M400 and M4000 products, which was recorded as Software Development Costs. This upgrade was completed and placed into service in the beginning of the fourth quarter of 2020. This capitalized asset is being amortized on a straight-line basis over its expected product life span ofthirty-six (36) months, which began on October 1, 2020 and became fully amortized in 2023. In October 2021, the Company invested $250,000 and in the first quarter of 2022 the Company invested an additional $125,000 for further Android operating systems version upgrades to the CPU platform it uses in its M400 and M4000 products. During the year ended December 31, 2023, the Company made a final investment of $125,000 to these software system upgrades, which were placed into service during the second quarter of 2023. These additional upgrades of $500,000 are being amortized on a straight-line basis over thirty-six (36) months.

Total amortization expense for capitalized software development costs for the years ended December 31, 2023, 2022 and 2021 was $263,549, $166,667 and $240,395, respectively, and are included in Cost of Sales – Products in the Consolidated Statements of Operations.

Note 10 — Accrued Expenses

Accrued expenses consisted of the following:

Included in Accrued Wages and Related Costs was $1,033,859 in severance costs for staff reductions that took place in January as part of the Company’s cost reduction initiative, which was approved on December 18, 2023 and announced on January 17, 2024.

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, unless the customer purchases an extended warranty for an additional 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 years ended December 31, 2023, 2022 and 2021 were as follows:

Note 11 — Income Taxes

The Company files U.S. federal and various state and foreign tax returns.

Pre-tax earnings consisted of the following for the years ended:

The provision expense/(benefit) for income taxes for the years ended December 31, 2023, 2022 and 2021 was as follows:

A reconciliation of the statutory U.S. federal income tax rate to the effective rates for the years ended December 31, 2023, 2022 and 2021 is as follows:

Significant components of the Company’s deferred tax assets and liabilities at year end are as follows:

As December 31, 2023, the Company has approximately $196 million in US federal net operating loss (NOL) carryforwards. Some of these NOL carryforwards will expire beginning in 2025 and others are not subject to expiration. Specifically, $75.2 million of the NOL carryforward will begin to expire in 2025 and as a result of the Tax Cuts and Jobs Act, the remaining NOL carryforwards have no expiration. In addition to the US Federal NOL carryforwards, the Company has state NOL carryforwards of approximately $11.1 million in various jurisdictions in which it files that will begin to expire in 2034. The Company also has approximately $4.2 million of federal and state credit carryforwards. The credit carryforwards will begin to expire in 2024 and will be fully expired by 2042 if not utilized. Utilization of the NOL carryforwards may be subject to an annual limitation in the case of sufficient equity ownership changes under Section 382 of the tax law or the NOL's may expire unutilized.

In addition to the US Federal and state attributes noted above, for tax years ending prior to December 31, 2023, Vuzix owned a Japanese branch that had NOL carryforwards of $3.4 million. In 2023, the Company converted its legal designation from a branch to a Japanese corporation, wholly-owned by the Company. With the legal conversion to an incorporation, the Japan branch NOLs will no longer be accessible for utilization. Further, Vuzix Europe GmbH, a wholly-owned subsidiary incorporated in Germany, has NOLs as of December 31, 2023 of$0.4 million that have no expiration.

As the result of the assessment of the FASB ASC 740-10 (Prior Authoritative Literature: FASB Interpretation

No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109, the Company hasno unrecognized tax benefits.

The Company’s U.S. Federal and state tax matters for the years 2019 through 2022 remain subject to examination by the respective tax authorities.

FASB ASC 740 (Prior Authoritative Literature: SFAS No. 109, Accounting for Income Taxes), requires

recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on differing treatment of items for financial reporting and income tax reporting purposes. The deferred tax balances are adjusted to reflect tax rates by tax jurisdiction, based on currently enacted tax laws, which will be in effect in the years in which the temporary differences are expected to reverse. In light of the historic losses of the Company, a 100% valuation allowance has been recorded to fully offset any benefit associated with the net deferred tax assets, for which realization is not considered more likely than not to occur.

Note 12 — Capital Stock

Preferred stock

The Board of Directors are authorized to establish and designate different series of preferred stock and to fix and determine their voting powers and other rights and terms. A total of 5,000,000 shares of preferred stock with a par value of $0.001 are authorized as of December 31, 2023 and December 31, 2022. Of this total,49,626 shares are designated as Series A Preferred Stock. There wereno shares of Series A Preferred Stock issued and outstanding on December 31, 2023 and 2022.

Common Stock

The Company’s authorized common stock consists of 100,000,000 shares, par value of $0.001 as of December 31, 2023, and December 31, 2022. There were 65,304,780 shares of common stock issued and 64,725,108 shares of common stock outstanding as of December 31, 2023 and there were 63,783,779 shares of common stock issued and 63,319,107 shares of common stock outstanding as of December 31, 2022

In connection with the Atomistic Technology Licenses discussed in Note 7, on November 20, 2023, the Company issued a total of 1,397,500 shares of common stock to the Founders of Atomistic SAS (“Atomistic”) for the achievement of certain technological milestones under a license agreement entered into between the Company, Atomistic and such founders, along with cash consideration in exchange for equity in Atomistic (see Note 2). Pursuant to the Stock Purchase Agreement with Atomistic and its Founders, the Company will, upon completion of certain deliverables and the achievement of further milestones contained in the Atomistic Agreements, be committed to issue, depending on the Company’s share price within a $13.00 to $8.00 range at the time of their issuance, a further minimum of approximately 900,000 up to a maximum of 1,446,254 common shares to the stockholders of Atomistic (as a portion of the consideration for certain shares of Atomistic) which would result in Vuzix owning Series A Preferred shares in Atomistic that could ultimately be converted into ordinary shares of Atomistic and Vuzix ultimately owning 100% of Atomistic, with Atomistic becoming a subsidiary of the Company. The remaining Milestones and the Company’s related further issuances of common stock are expected to be completed over the next 6 to 21 months.

Within five years of the commencement of the Atomistic Agreements, the Company has agreed to issue up to a 15% equity bonus of the previously issued common shares to Atomistic stockholders, if: (i) the Company engages in a change-of-control transaction for an implied equity value of at least $3.5 billion or (ii) the Company’s market valuation exceeds $3.5 billion. This could result in the issuance of an additional 291,346 to 473,438 shares of the Company’s common stock when that valuation target is exceeded. None of these share commitments have been issued to date.

Treasury Stock

On March 2, 2022, our Board of Directors approved the Company to repurchase up to an aggregate of $25 million of our common stock by open market or privately negotiated transactions under the Share Buyback Program. This program was in effect forone year and expired on March 2, 2023. During the year ended December 31, 2023, the Company repurchased 115,000 shares of our common stock at an average cost of $4.06, before commission of $0.03 per share. As of December 31, 2023,579,672 shares of our common stock were held in treasury.

During the year ended December 31, 2022, the Company repurchased 464,672 shares of our common stock at an average cost of $4.32 per share. As of December 31, 2022,464,672 shares of our common stock were held in treasury.

Note 13 — Stock Warrants

The following table shows the various changes in warrants for the years ended:

As of December 31, 2023, there wereno outstanding warrants remaining.

During the year ended December 31, 2021, a total of 7,276,928 warrants were exercised on a cash basis resulting in the issuance of 7,276,928 shares of common stock and proceeds to the Company of $34,715,728.

Note 14 — Stock-Based Compensation

The Company has the following Stock Option Plans (“Plans”) that allow for the grants of both incentive stock options or ISOs, which can result in potentially favorable tax treatment to the participant, and non-statutory stock options. The Company’s 2023 Equity Incentive Plan (the “2023 Plan”) was approved by the stockholders of the Company on June 15, 2023. The Company no longer issues any options under its prior 2014 Plan. The 2023 Plan no longer contains an “evergreen provision”. As of December 31, 2023, the authorized shares of common stock under the 2023 Plan, as amended, were 12,641,637.

The exercise price per share subject to an option is determined by the administrator, but in the case of an ISO must not be less than the fair market value of a share of our common stock on the date of grant and in the case of a non-statutory stock option must not be less than 100% of the fair market value of a share of our common stock on the date of grant.

Under the 2023 Plan, the Company may grant stock options, stock appreciation rights, performance awards of stock and/or cash, and stock awards of restricted stock.

Options issued or outstanding under the Stock Options Plans are as follows:

The 2023 Plan gives the Board of Directors of the Company the ability to determine vesting periods for all stock incentives granted under the 2023 Plan and allows option terms to be up toten years from the original grant date. Employees’ incentive stock options typically vest at a minimum rate of 25% per year over afour-year period, commencing on the date of grant.

The following table summarizes stock option activity related to the Company’s standard employee incentive plan, excluding options awarded under the Long-term Incentive Plan (LTIP), for the years ended December 31, 2023, 2022 and 2021:

As of December 31, 2023, there were 2,093,850 options that were fully-vested and exercisable at a weighted average exercise price of $7.18 per share. The weighted average remaining contractual term on the vested options is 5.6 years. The unvested balance of 817,458 options as of December 31, 2023 were exercisable at a weighted average exercise price of $8.65 per share. The weighted average remaining contractual term on the vested options was 8.11 years.

As of December 31, 2022, there were 1,493,707 options that were fully-vested and exercisable at a weighted average exercise price of $6.88 per share. The weighted average remaining contractual term on the vested options is 6.3 years. The unvested balance of 1,311,966 options as of December 31, 2022, are exercisable at a weighted average exercise price of $8.83 per share. The weighted average remaining contractual term on the unvested options is 8.4 years.

As of December 31, 2021, there were 1,069,639 options that were fully-vested and exercisable at a weighted average exercise price of $5.70 per share. The weighted average remaining contractual term on the vested options is 6.6 years. The unvested balance of 1,753,995 options as of December 31, 2021, are exercisable at a weighted average exercise price of $9.62 per share. The weighted average remaining contractual term on the unvested options is 8.8 years.

The aggregate intrinsic value of the options exercised during the year ended December 31, 2023, 2022 and 2021 was approximately $85,263, $627,876 and $13,325,035, respectively.

The aggregate intrinsic value of the options outstanding as of December 31, 2023, 2022 and 2021 was approximately $563,874, $2,093,164 and $9,314,887, respectively.

The Black-Scholes-Merton option pricing model was used to estimate the fair value of share-based awards under FASB ASC Topic 718. The Black-Scholes-Merton option pricing model incorporates various and highly subjective assumptions, including expected term and share price volatility.

The expected term of options granted was estimated to be the average of the vesting term, historical exercise and forfeiture rates, and the contractual life of the option. The share price volatility at the grant date is estimated using historical stock prices based upon the expected term of the options granted. The risk-free interest rate assumption is determined using the rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the award being valued. We have never paid cash dividends on our common stock and do not anticipate paying cash dividends on our common stock in the foreseeable future. Therefore, the assumed expected dividend yield iszero.

The following summary table shows the assumptions used to compute the fair value of stock options granted, excluding LTIP, during 2023, 2022 and 2021 and their estimated value:

Under FASB ASC Topic 718, “Compensation – Stock Compensation”, the Company has elected to account for forfeitures as they occur.

Unrecognized stock-based compensation expense was $5,036,891 as of December 31, 2023, relating to a total of 817,458 unvested stock options under the Company’s stock option plans. This stock-based compensation expense is expected to be recognized over a weighted average period of approximately 1.8 years.

During the year ended December 31, 2023, the Company issued 96,525 shares of common stock to the independent members of its Board of Directors as part of their annual retainer for services covering the period of July 2023 to June 2024. The fair market value on the date of award of the stock issued was $5.18, resulting in an aggregate fair value of approximately $500,000. The fair market value of these awards is expensed over twelve (12) months, beginning on July 1, 2023.

During the year ended December 31, 2022, the Company issued 200,000 shares of common stock to its Chief Operating Officer. The fair market value on the date of award of the stock issued was $5.64, resulting in an aggregate fair value of approximately $1,128,000. The fair market value of this award is expensed over a forty-two (42) month vesting period, which began June 15, 2022.

For the years ended December 31, 2023, 2022 and 2021, the Company recorded total stock-based compensation expense, including stock awards but excluding awards under the Company’s LTIP of $4,566,253, $4,645,026, and $4,047,444, respectively.

Note 15 – Long-term Incentive Plan

On March 17, 2021, the Company granted options to purchase a total of 5,784,000 shares of common stock to its officers and certain other members of its management team. The options were granted under the Company’s existing 2014 Incentive Stock Plan. The options have an exercise price of $19.00, with 375,000 options vesting immediately and the remaining portion vesting upon the achievement of certain equity market capitalization milestones, and revenue and EBITDA operational milestones. For the years ended December 31, 2023, 2022 and 2021, the Company recorded non-cash stock-based compensation expense of $8,352,700, $11,130,527 and $13,255,388, respectively, for options that vested or are probable to vest.

The fair value of option grants was calculated using a Monte Carlo simulation for the equity market capitalization tranches and the Black-Scholes-Merton option pricing method for the operational milestone tranches. As of December 31, 2023, we had $8,857,231 of total unrecognized stock-based compensation expense for the portion of options tied to equity market capitalization milestones and the portion of options tied to operational milestones that were considered probable of achievement, all of which will be recognized over a service period of up tothree tofour years. The probabilities of the milestone achievements are subject to catch-up adjustments in each instance where an equity market capitalization milestone is achieved or when an operational milestone becomes probable to be achieved or is achieved. Compensation costs could be reversed in subsequent periods if an awardee leaves the Company prior to the expiration of the option life for market capitalization milestone or performance award vesting of a performance award no longer determined to be probable. If such milestones are achieved earlier in their expected service periods, the remaining unrecognized compensation expense related to that particular milestone would be accelerated and recognized in full during the period where that achievement is affirmed by the Board of Directors. As of December 31, 2023, and going forward, should all of the operational milestones which are currently not yet deemed probable of achievement become probable of achievement or are achieved, then the Company could ultimately recognize up to an additional $34 million in non-cash stock-based compensation expense at such time.

The unvested remaining equity market and operational milestones under the LTIP with their total related option grants and criteria achievement weightings of the options available for meeting a target are shown in the following table. Of the total 5,409,000 unvested options outstanding as of December 31, 2023, there are 2,679,750 options unvested for the achievement of Equity Market Capitalization targets,1,875,825 unvested options for the achievement of annual Revenue targets, and 803,925 unvested options for the achievement of annual EBITDA Margins Before Non-Cash Charges targets.

Note 16 — Right-of-Use Assets and Liabilities

The Company has signed lease agreements, with the largest being for its office and manufacturing facility in the West Henrietta, New York area under an operating lease that commenced October 3, 2015, and was set to expire on October 3, 2020. This lease has an original five-year term with anoption by the Company to renew for two additional three-year terms at pre-agreed to lease rates. On June 25, 2020, the Company exercised the first of two renewal terms, extending our current lease term to January 31, 2024. On January 16, 2024, the Company exercised the second renewal extending our current lease term to November 30, 2025. This lease renewal was not recorded in our Consolidated Balance Sheets as its renewal was not reasonably certain as of December 31, 2023.

In October 2022, we leased an additional 12,000 square feet for our new waveguide manufacturing facility adjacent to our existing facility in West Henrietta, New York. This lease has an original three-year term, expiring on November 30, 2025, with anoption by the Company to renew fortwo additionalone-year terms at pre-agreed to lease rates. This lease commenced on December 1, 2022, and monthly base rent lease payments are $9,503 plus additional rent of $2,587.

Operating lease costs under our operating leases totaled $828,007, $659,045 and $630,085 for the years ended December 31, 2023, 2022 and 2021, respectively.

Certain leases provide for increases in future minimum annual rental payments as defined in the lease agreements. The leases generally also include real estate taxes and common area maintenance charges in the annual rental payments. Short-term leases are leases having a term of twelve (12) months or less. The Company recognizes short-term leases on an as-incurred basis and does not record a related lease asset or liability for such leases.

As none of our leases provide an implicit interest rate, we use our incremental borrowing rate to determine our discount rate at lease inception based upon the information available at commencement in determining the present value of lease payments. As of December 31, 2023, the weighted average discount rate was 8.3% and the weighted average remaining lease term was 1.9 years. As of December 31, 2022, the weighted average discount rate was 7.1% and the weighted average remaining lease term was 1.8 years.

Future lease payments under operating leases as of December 31, 2023 were as follows:

Note 17 — Employee Benefit Plans

The Company has a Section 401(k) Savings Plan which covers employees who meet certain age and length of service requirements. Effective July 1, 2018, the Company’s Plan was amended to include a 100% match by the Company on all eligible employee salary deferrals. The Company’s matching contribution is limited to 3% of covered employee’s annual salary. Total 401(k) matching expense for the years ended December 31, 2023, 2022 and 2021 totaled $332,717, $262,726 and $280,660, respectively.

Note 18 — Litigation

We are not currently involved in any actual or pending legal proceedings or litigation that we consider to be material, and we are not aware of any such material proceedings contemplated by or against us or involving our property.

Note 19 — Geographic and Other Financial Information (Unaudited)

Geographic Financial Information (Unaudited)

Geographical revenue information, based on ship-to destination of the customers for the three years ended December 31, 2023, 2022 and 2021 is as follows (in thousands):

By Continent and Region:

By Country:

Countries listed in the above table were those with revenues greater than 10% for the year ended December 31, 2023. The Company does not maintain significant amounts of long-lived assets outside of the United States.

Note 20 — Quarterly Financial Information (Unaudited)

The following table summarizes our unaudited quarterly financial information for the periods shown below (in thousands, except per share data):

Schedule II — Valuation and Qualifying Accounts (in thousands)

Exhibit Index

† Confidential treatment granted as to certain portion

• Filed herewith.

** Indicates management contract or compensatory arrangement.

*** Furnished herewith.