VUZI 10-K & 10-Q changes, risk factors and insider trading

We may not achieve or maintain profitability in the future. We will need to increase sales in order to achieve and maintain profitability. In addition, we expect that our expenses relating to product development and research, sales and marketing, as well as our general and administrative costs, may increase as our business grows. If we do not achieve and maintain profitability, our financial condition will ultimately be materially and adversely affected, and we would eventually be required to raise additional capital. We may not be able to raise any necessary capital on commercially reasonable terms or at all. If we fail to achieve or maintain profitability, the market price of our common stock may decline.

The following factors could present difficulties tofor us:

The size, resources and brand name of some of our competitors may allow them to compete more effectively than we can, which could result in a loss of our market share and a decrease in our revenue and profitability.revenue.

The market for head-worn display devices, including AR and AI Smart Glasses, is highly competitive. Further, we expect competition to intensify in the future as existing competitors introduce new and more competitive offerings alongside their existing products, and as new market entrants introduce new products into our markets. To date, the market for smart glasses is in its early stages, with no single company achieving a dominant or leading position. We compete against established, well-known diversified consumer electronics manufacturers including Samsung Electronics Co., Sony Corporation, Meta, LG Electronics (LGE), HTC, TCL, and Lenovo, and many of our current competitors have substantial market share, longer operating histories, larger intellectual property portfolios, diversified product lines, ability to bundle competitive offerings withincluding oursoftware products and services,cloud services with their products, well-established supply and distribution systems, strong worldwide brand recognition and greater financial, marketing, research and development and other resources than we do.

Moreover, smartphones, tablets, and new wearable devices with ever-expanding video display screens, including foldable and expandable screens, and ever-increasing computing power have significantly improved the mobile personal computing experience. In the future, large consumer electronics manufacturers of those devices, such as Apple Inc.,Apple, Samsung, LGE, Lenovo, Alphabet/Google, Snap, Garmin, Meta/Facebook, Microsoft and others may design or develop products similar to ours. In addition to competition or potential competition from large, established companies, new companies may emerge and offer competitive products. Further, our current and prospective competitors may consolidate with each other or acquire companies that will allow them to develop products that better compete with our products, which would intensify the competition that we face and may also disrupt or lead to termination of our distribution, technologytechnology, software, and/or content partnerships. Increased competition may result in pricing pressures and reduced profit margins and may impede our ability to increase the sales of our products, any one of which could substantially harm our business and results of operations.

Our lack of long-term purchase orders andor binding commitments from our customers maycould leadresult toin significant volatility and a rapid decline in our sales.sales and operating results.

AllWe ofgenerally ourdo not receive long-term purchase orders or other binding commitments from customers for our Vuzix branded productsproducts. Instead, customers typically issue purchase orders solely at their own discretion, often shortly before the requested dateshipment of shipment.date. These customers are generally able to cancelpurchase orders (may be canceled, reduced, or delayed by customers, in many cases without penalty) or delay the delivery of productsand on relatively short notice. In addition, our current customers may decide not to purchasediscontinue purchasing our products fromat usany time and for any reason. If those customers do not continue to purchase our products, our sales volume could decline rapidly with little or no warning.

We depend on advances in certain technology by other companies and if those advances do not materialize, some of our anticipated new products could be delayed or cancelled.

We rely on and will continue to rely on technologies (including micro-displays,microdisplays, mobile computing electronics and operating systems) that are developed and produced by other companies. The commercial success of certain of our planned future products will depend in part on advances in these and other technologies by other companies. We may, from time to time, contract with and support companies developing key technologies in order to accelerate the development of them for our specific uses. Such activities might not result in useful technologies or components for us.

If micro-display-basedmicrodisplay-based personal displays or near-eye displays do not gain greater acceptance in the market for head worn or mobile displays, our business strategy may fail.

The mobile display market is dominated by displays larger than one inch, most of which are currently based on direct view liquid crystal display (LCD) and organic light emitting display (OLED) technology. A number of large established global companies have made and continue to make substantial investments in, and are conducting research to improve characteristics of, handheld direct view LCDs and OLED displays. Advances in direct view LCD and OLED technology, microLED or other technologies, including foldable and stretchable displays may overcome their current market limitations and permit them to remain or become more attractive technologies for most personal viewing applications, whichwhich, along with general public acceptability of wearing smart glasses, could limit the potential market for our near-eye display and wearable computing technology and cause our business strategy to fail.

There are a number of competing providers of micro-display-basedmicrodisplay-based personal display technology, including smart glasses, and we may fail to capture a substantial portion of the personal wearable display market.

In addition to competing with direct view displays, we also compete with micro-display-basedmicrodisplay-based personal and wearable display technologies that have been developed by many other companies. Numerous other start-up companies have announced their intentions to offer smart glasses and AI/AR products. Most of our competitors have greater financial, marketing, distribution and technical resources than we do. Moreover, our competitors may succeed in developing new micro-display-basedmicrodisplay-based personal display technologiestechnologies, optics, and near-eye display products that are more affordable or have more desirable features than our technology. If our products are unable to capture a reasonable portion of the smart wearable display market, our business strategy may fail.

Any worsening of global economic, financial, political, social, or public health conditions, including global pandemics, such as COVID-19, could materially adversely affect (i) demand for our current and future products; (ii) our ability to raise, or the terms of, needed capital; and (iii) the supply of components for our products. We cannot predict the timing, strength, or duration of any future economic slowdown or subsequent economic recovery, or such impact on the wearable display industry.

Due to our significant level of international operations, including the use of foreign suppliers and contract manufactures,manufacturers, we are subject to international operational, financial, legal, political and public health risks which could harm our operating results.

Cybersecurity risksincidents or failures of our information technology systems, or those of third parties, could adversely affect our businessbusiness, results of operations, and disruptfinancial our operations.condition.

Changes in our management could have an adverse effect on our business and, in particular, while our staff is relatively small with just under 7088 employees and full-time foreign contractors globally, we are dependent upon the active participation of several key management personnel, including Paul Travers, our President and Chief Executive Officer. Mr. TraversTravers, the Company’s founder, is critical to the strategic direction and overall management of our Company as well as our research and development process. The loss of Mr. Travers could adversely affect our business, financial condition, and operating results. We do not carry key person life insurance on any of our senior management or other key personnel. Our Executive Vice President and Chief Financial Officer, Grant Russell, a Canadian citizen, currently has his principal residence in Vancouver, Canada and a second residence in West Henrietta, New York. If he becomes unable to travel to and work in the United States, his ability to perform some of his duties could be materially adversely affected.

The design, tooling and manufacture of waveguides encompasses several complex processes, and several steps of our production processes are dependent upon certain critical machines and tools which could result in delivery interruptions, which could adversely affect our operating results.

Our product technology and manufacturing processes are evolvingevolving, which can result in production challenges and difficulties. We may be unable to produce our products in sufficient quantity and quality to maintain existing customers and attract new customers. In addition, we may experience manufacturing problems which could result in delays in delivery ofdelivering orders or product introductions. We currently do not have full equipment redundancy in our manufacturing facility.facility or tooling. If we experience any significant disruption in the operation of our manufacturing facility or a serious failure of a critical piece of equipment,equipment or tooling, we may be unable to supply products to our customers in a timely manner. Interruptions in our manufacturing could be caused by equipment problems, the introduction of new equipment into the manufacturing process or delays in the delivery of new manufacturing equipment. Lead-time for delivery, installation, testing, repair and maintenance of manufacturing equipment can be extensive. We have experienced production interruptions in the past and no assurance can be given that we will not lose potential sales or be able to meet production orders due to future production interruptions in our manufacturing lines.

Our waveguide and display engine products sales to third parties are subject to lengthy OEM development periods.

We intend to sell somecertain of our waveguides as componentswaveguides, and in some cases,cases related display engines with micro-displays,microdisplays, as components to ODMs/OEMs withfor the objective that they then incorporate themincorporation into productstheir they sell.products. To date, thisthese businesssales hashave not been a material contributor to our overall revenues, butand itthere couldcan be no assurance they will become so in the future. TheseODMs typesand of customersOEMs determine during their product development phasewhether and when and whether they willto incorporate our products intoduring their solutions.development cycles, which can be lengthy and unpredictable. The time elapsedperiod between initial samplingproduct ofsampling, our products by ODMs/OEMs, the custom design of our productscustomization to meet specific productcustomer requirements, qualification, and the ultimate incorporation of our products into theiran ODM/ or OEM productsproduct canmay beextend significant, often with a duration of betweenfrom six months to two years or even longer. If our products fail to meet our eventual customers’customer cost, performanceperformance, reliability, or technical requirementsrequirements, or if unexpectedunanticipated technical challenges arise induring theintegration, integrationcustomers may delay, limit, or abandon adoption of our productsproducts. intoProlonged theirdevelopment overall products, our operating results could be significantly and adversely affected. Longcycles, delays in achieving customer qualificationqualification, or failure to achieve design wins could materially and incorporation of our products also could adversely affect our business.operating results, financial condition, and prospects.

Many of our various reseller relationships for our Smart Glasses and AI/AR products and their accessories could involve such resellers taking inventory positions and reselling to multiple customers. Under some possible future distributor relationships, we would not recognize revenue until the distributors sell the product to their end user customers and receive payment thereon; however, at this time we do not currently enter into these types of arrangements. Our VAR and distributor relationships may reduce our ability to forecast sales and increase risks to our business. Since our distributors and VARs would act as intermediaries between us and the end user customers or resellers, we would be required to rely on our distributors to accurately report inventory levels and production forecasts. This may require us to manage a more complex supply chain and monitor the financial condition and credit worthiness of our distributors and VARs and their major end user customers. Our failure to manage one or more of these risks could result in excess inventory or shortages that could adversely impact our operating results and financial condition.

WeOur relyreliance on third-partythird party suppliers, someincluding ofsole which are sole-sourcesource suppliers, tofor providecritical components forand ourmanufacturing productsexposes which may leadus to supply shortages,disruptions, cost increases, long lead times for components,times, and supplycomponent changes,obsolescence, any one of which could disruptmaterially and adversely affect our supplybusiness, chain,financial may increase our costs,condition, and may cause us to be unable to meet the demandsresults of our customers and end-users on a timely basis.operations.

The trading price of our common stock has been subject to wide fluctuations in response to quarter-to-quarter variations in results of operations, announcements of technological innovations or new products introduced by us or our competitors, general conditions in the wearable, wireless communications, software applications (including AI), consumer electronics, semiconductor and display markets, changes in our operating results estimates by financial analysts or other events or factors. In addition, the public stock markets have recently have experienced high price and trading volatility. The risks relatedrelating to rising inflation, rising interest rates and the imposition of tariffs could have a material impact on our revenues and costs. ThisThese volatilitymatters hascan significantly affectedaffect the market prices and price volatility of securities of many technology companies for reasons frequently unrelated to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of our common stock.

Additional stock offerings in the future may dilute thenthe existing stockholders’ percentage ownership of our Company.

Given our capital plans, needs and expectations, we may issue additional shares of common stock, preferred stock or securities convertible or exercisable for shares of common stock, including convertible preferred stock, convertible notes, stockwarrants, optionsand orequity warrants.incentive awards. The issuance of additional securities in the future will dilute the percentage ownership of the then existing stockholders.

Our business and products are subject to extensive government regulationregulation, and we may incur additional compliance costs or, if we failfailure to comply with applicable laws and regulations, may incur fines or bechanges forcedin tosuch suspendlaws orand ceaseregulations, could adversely affect our business, financial condition, and results of operations.

We are engaged in the design, manufacture, marketing and sale of augmented reality wearable display devices also referred to as head mounted displays (or HMDs, but also known as near-eye displays), in the form of Smart Glasses, AI powered Smart Glasses, Waveguides, and Augmented Reality (AR) technologies. Our 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-displaymicrodisplay technology with our advanced optics to produce compact high-resolution display engines, less than half an inch diagonally, which when viewed through our Smart Glasses products create virtual images that appear comparable in size to that of a computer monitor or a large-screen television.

With respect to our Smart Glasses and AI/AR products, we are focused on the enterprise, defense, industrial,medical, medicalsecurity, and commercialselect markets.consumer applications. All of the mobile display and mobile electronics markets in which we compete have been subject to rapid technological change over the last decade including the rapid adoption of tablets, larger screen sizes and display resolutions along with declining prices on mobile phones and other computing devices, and as a result we must continue to improve our products’ performance and lower our costs. We believe our technology, intellectual property portfolio and position in the marketplace give us a leadership position in AI/AR and Smart Glasses products, waveguide optics, microLEDs and display engine technology.

The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements and related notes appearing elsewhere in this annual report. The preparation of these statements in conformity with generally accepted accounting principles requires the appropriate application of certain accounting policies, many of which require us to make estimates and assumptions about future events and their impact on amounts reported in our consolidated financial statements, including the statement of operations, balance sheet, cash flow and related notes. We continually evaluate our estimates used in the preparation of our consolidated financial statements, including those related to revenuevaluation recognition, bad debt,of inventories, warrantygoing reserves,concern, productvariable warranty,interest entities, investments in equity securities, carrying value of long-lived assets, derivatives,goodwill and other intangible assets, software development costs, revenue recognition, product warranty, valuation of stockstock-based compensation awards,compensation, and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not apparent from other sources. Since we cannot determine future events and their impact with certainty, the actual results may differ from our estimates. Such differences could be material to the consolidated financial statements.

Inventory is stated at the lower of cost or net realizable value, with cost determined on a weighted average first-in, first-out method. Inventory includes purchased parts and components, work-in-process and finished goods. Provisions for excess, obsolete or slow-moving inventory are recorded after periodic evaluation of historical sales, current economic trends, forecasted sales, estimated product life cycles and estimated inventory levels. Purchasing practices, electronic component obsolescence, accuracy of sales and production forecasts, introduction of new products, product life cycles, product support and foreign regulations governing hazardous materials are factors that contribute to inventory valuation risks. Exposure to inventory valuation risks is managed by maintaining safety stocks, minimum purchase lots, managing product and end-of-life issues brought on by aging components or new product introductions, and by utilizing certain inventory minimization strategies such as vendor-managed inventories. The accounting estimate related to the valuation of inventories is considered a “critical accounting estimate” because it is susceptible to changes from period-to-period due to the requirement for management to make estimates relative to each of the underlying factors, ranging from purchasing to sales, production, and after-sale support. If actual demand, market conditions or product life cycles differ from estimates, inventory adjustments to net realizable values wouldcould result in a reduction to the carrying value of inventory, an increase in inventory write-offs and a decrease to gross margins.

The write-offincrease to our obsolescence provision for finished goods and components totaled $503,400, $4,167,917, $4,358,062, and $290,405$4,358,062 for the years ended December 31, 2025, 2024, 2023, and 2022,2023, respectively. These additional obsolescence provisions are included in Cost of Sales in the Consolidated Statements of Operations.

For all annual and interim periods, management willassesses assessour going concern uncertainty in our consolidated financial statements to determine whether there is sufficient cash on hand and working capital, including available borrowings on loans, to operate for a period of at least one year from the date the consolidated financial statements are issued or available to be issued, which is referred to as the “look-forward period”, as defined in U.S. GAAP. As part of this assessment, based on conditions that are known and reasonably knowable to management, management will consider various scenarios, forecasts, projections, estimates and will make certain key assumptions. These assumptions include, among other factors, the expected timing and nature of our programs and projected cash expenditures, our ability to delay or curtail these expenditures or programs and our ability to raise additional capital, if necessary, to the extent management has the proper authority to execute them and considers it probable that those implementations can be achieved within the look-forward period.

Investments in equity securities with a readily determinable fair value, not accounted for under the equity method, are recorded at that value with unrealized gains and losses included in earnings. For equity securities without a readily determinable fair value, the investment is recorded at cost, less any impairment, plus or minus adjustments related to observable transactions for the same or similar securities, with unrealized gains and losses included in earnings. As of December 31, 2025 and 2024, we had $300,000 and $650,000 of investments in equity securities. For the year ended December 31, 2025, we recorded an impairment loss of $400,000 on these investments.

Carrying Value of Long-Lived Assets, Goodwill and Other Intangible Assets

If facts and circumstances indicate that a long-lived asset, including a products’ mold tooling and equipment, may be impaired, the carrying value is reviewed in accordance with FASB ASC Topic 360-10 Accounting for the Impairment or Disposal of Long-Lived Assets. If this review indicates that the carrying value of the asset will not be recovered as determined based on projected undiscounted cash flows related to the asset over its remaining life, the carrying value of the asset is reduced to its estimated fair value. Impairment losses are dependent on a number of factors such as general economic trends and major technology advances, and thus could be significantly different from historical results. For the years ending December 31, 20242025 and 2023,2024, there were no indicators of impairment present. For the years ended December 31, 2025, 2024, 2023, and 2022,2023, we recorded a loss on fixed asset disposal of $106,898, $27,654, nil, and $35,350,nil, respectively, upon the retirement of certain tooling and manufacturing equipment assets no longer in use.

We perform an evaluation of our patents and trademark assets when events or circumstances indicate their carrying amounts may be unrecoverable. For the years ended December 31, 2024, 2023,2025 and 2022,2024 there were nil in impairment charges and for the year ended December 31, 2023 there was an impairment charge of nil,$41,869 $41,869,to patents and $97,675, respectively.trademarks. The carrying value of the remaining intellectual property, such as patents and trademarks, was valued (net of accumulated amortization) at $2,998,760$3,359,066 as of December 31, 2024,2025, because management believes that this value is recoverable.

The Company adopted the guidance on Revenue from Contracts with Customers under FASB ASC Topic 606, Revenue from Contracts with Customers, as of January 1, 2018. Product sales represent the majority of the Company’s revenue. The Company recognizes revenue from these product sales as performance obligations are satisfied and transfer of control to the customer has occurred, typically upon physical shipment.occurred. Revenue is recognized in the amount that the Company expects to receive in exchange fromfor the sale of our products. FOB shipping point is our standard shipping term and revenue is recognized as our products ship to customers, as control is transferred at that 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, 20242025 and 2023,2024, deferred revenue associated with our expected returns was immaterial. The Company collects and remits sales taxes in certain jurisdictions and reports revenue net of any associated sales taxes.

Warranty obligations are generally incurred in connection with the sale of our products. The warranty period for these products is generally one year and up to eighteen (18) months for certain distributors. Customers may also purchase an additional twelve (12) month extended warranty. Warranty costs are accrued, to the extent that they are not recoverable from third-party manufacturers, for the estimated cost to repair or replace products for the balance of the warranty periods. We provide for the costs of expected future warranty claims at the time of product shipment or over-builds to cover replacements. The adequacy of the provision is assessed at each quarter end and is based on historical experience and projected factors of warranty claims and costs. The costs incurred to provide for these warranty obligations are estimated and recorded as an accrued liability at the time of sale. Future warranty costs are estimated based on historical performance rates and related costs to repair given products. The accounting estimate related to product warranty is considered a “critical accounting estimate” because judgment is exercised in determining future estimated warranty costs. Should actual performance rates or repair costs differ from estimates, revision to the estimated warranty liability would be required. As of December 31, 2025 and 2024, there were $55,637 and $46,078 in accrued warranty obligations.

Our Board of Directors approves grants of stock awardsawards, including restricted stock units (“RSUs) and performance stock units (“PSUs”) and options to employees and independent directors to purchase our common stock. Stock-based compensation expense is recorded based upon the estimated fair value of the stock option or stock award at the date of grant. The Company uses the Black-Scholes-Merton option pricing model to estimate the fair value of stock options granted pursuant to ASC Topic 718. The application of this pricing model involves assumptions that are judgmental and sensitive in the determination of compensation expense. The fair value of our common stockstock, including PSUs and RSUs, on the date of each optionequity grant is determined based on the most recent quoted sales price on our primary trading stock exchange, currently the NASDAQ Capital Market. For PSUs, the determination of the probabilities of the underlying performance targets being achievable is judgmental and affects the amount compensation expense recognized. For the years ended December 31, 2025, 2024, and 2023, the Company recorded total stock-based compensation expense related to stock optionsoptions, stock awards, RSUs and PSUs but excluding awards under the Company'sCompany’s former LTIP (Long-term Incentive Plan), options vest upon the achievement of certain$4,149,950, equity market conditions$5,928,198, and performance-based$4,566,253, milestones. The fair value of options granted under this program was calculated by using a Monte Carlo simulation for the equity market condition tranches and the Black-Scholes-Merton option pricing method for the performance-based tranches. The equity market condition awards are expensed over their derived service periods, which is an output of the Monte Carlo model. Upon the achievement of any market condition milestone, any unrecognized expense to date would be expensed immediately. The performance-based tranches, which are currently considered probable of achievement, are expensed over their respective implicit service periods. We may experience significant catch-up or reversal of expense in the future in a period when any performance-based milestones first are determined to be probable of achievement or when any that are currently deemed probable are considered no longer probable.respectively.

We have historically incurred operating losses from both a financial reporting and tax return standpoint. We provide deferred income tax assets and liabilities based on the estimated future tax effects of differences between the financial and tax bases of assets and liabilities based upon currently enacted tax laws. Any future recorded value of our deferred tax assets will be dependent upon our ability to generate taxable income in the jurisdictions in which we operate. These assets consist primarily of credit carryforwards and net operating loss carryforwards and the future tax effects of temporary differences between balances recorded for financial statement purposes and for tax return purposes. A valuation allowance is established for deferred tax assets in amounts for which realization is not considered more likely than not to occur. The accounting estimate related to income taxes is considered a “critical accounting estimate” because judgment is exercised in estimating future taxable income, including prudent and feasible tax planning strategies, and in assessing the need for any valuation allowance. To date, we have determined a 100% valuation allowance is required and accordingly no deferred tax asset has been reflected in our consolidated financial statements. In the event that itwe should be determineddetermine that all or part of a deferred tax asset in the future is more likely than not to be realized, an adjustment (reduction) of the valuation allowance would increase income to be recognized in the period such determination was made.

Sales of engineering services for the year ended December 31, 2024, waswere $1,267,354, as compared to $1,368,787 in 2023, a decrease of 7%.

Cost of Sales and Gross Profit (Loss).Loss. Cost of product revenues and engineering services are comprised of materials, components, labor, warranty costs, freight costs, manufacturing overhead, software royalties, the depreciation for our tooling and manufacturing equipment, and amortization of software development costs related to the production of our products and the rendering of engineering services. The following table reflects the components of our cost of goods soldsales:

In addition to its normal Reserve for Obsolescence provision, the Company reserved as of December 31, 2024 additional provisions for expected surplus component parts and obsolescence in excess of its currently planned existing product builds in 2025 and into 2026 on most of its existing smart glasses product models in anticipation of the planned introduction of newer models by 2026, which would logically replace the existing models when introduced. The disposal value of the excess components that could not be used in future models iswas unknown, so a 100% obsolescence provision has beenwas accrued. During the year ended December 31, 2024, the Company wrote-offrecorded an obsolescence provision for gross inventory of $4,167,917 and disposed of $1,998,893 of inventory that was fully provisioned for in the previous year. The total obsolescence provisions totaled $7,944,575 and $5,775,551 for the years ended December 31, 2024 and 2023, respectively. The changes to these provisions are included in Cost of Sales on the Consolidated Statements of Operations.

Depreciation and Amortization. Depreciation and amortization expense, not included in cost of sales, for the year ended December 31, 2024, was $2,994,643, compared to $3,844,428 in 2023 or a decrease of $849,785. This decrease was due to a significant decrease in amortization expense related to our Atomistic technology license, which was written-offwritten off as of June 30, 2024; partially offset by increases in depreciation related to leasehold improvements being put into service this year related to our new waveguide manufacturing facility.

Impairment on Intangible Asset and Equity Investment. For the year ended December 31, 2024 there was a total impairment charge on an intangible and an equity investment of $30,301,355. On July 1, 2024, Atomistic exercised its option to terminate its previously granted license related to certain microLED technologies it was developing, and as a result of the termination of the granted license, which was effective June 30, 2024, the Company determined that the technology license asset of $24,335,554, net book value as of June 30, 2024, was impaired as the Company no longer has exclusive licensing rights to the technology. In addition, in connection with the Atomistic agreements, the Company recorded an additional impairment charge in the amount of $181,676 in August for the issuance of 174,688 shares of common stock at a fair market value of $1.04 per share to the Foundersfounders of Atomistic for the achievement of certain technological milestones. The Company had a related equity interest in Atomistic, a private French company, and determined that at this time, the Company iswas unable to reasonably estimate a value to its future value and therefore recorded a full impairment of its investment in Atomistic resulting in a write-down charge of $5,784,125 for the period ended June 30, 2024.

Capital Resources: As of December 31, 2024,2025, we had cash and cash equivalents of $18,186,506,$21,150,213, aan decreaseincrease of $8,369,086$2,963,707 from $26,555,592$18,186,506 as of December 31, 2023.2024.

As of December 31, 2024,2025, we had current assets of $26,722,490 as$27,195,727 compared to current liabilities of $2,112,273,$4,888,202, which resulted in a positive working capital position of $24,610,217.$22,307,525. As of December 31, 2023,2024, we had a working capital position of $36,284,259.$24,610,217. Our current liabilities are comprised principally of accounts payable, accrued expenses, and operating lease right-of-use liabilities.

During the year ended December 31, 20242025 we used $23,739,372$18,789,272 of cash for operating activities. Net changes in working capital items were $1,171,047$3,993,328 for the year ended December 31, 2024,2025, with the largest factors resulting from a $2,503,100$2,237,067 decrease in inventory and vendor prepayments; a $2,028,448 increase in trade accounts payables and accrued expenses; and a $941,149$257,699 decreaseincrease in trade accounts and other receivables; and a $271,399 decrease in other prepaid expenses.receivables. For the year ended December 31, 2023,2024, we used a total of $26,277,824$23,739,372 in cash for operating activities.

Our accounting policies are more fully described in the notes to our consolidated financial statements included in this quarterly report and in our Annual Report on Form 10-K for the year ended December 31, 2025. There have been no significant changes in our accounting policies for the three months ended MarchJune 31,30, 2026.

With respect to our Smart Glasses and AI/AR products, we are focused on the enterprise, defense, medical, security, and select consumer applications. All of the mobile display and mobile electronics markets in which we compete have been subject to rapid technological change over the last decade including the rapid adoption of tablets, larger screen sizes, and display resolutions, along with declining prices on mobile phones and other computing devices, and as a result we must continue to improve our products’ performance and lower our costs. We believe our technology, intellectual property portfolio and position in the marketplace give us a leadership position in AI/AR and Smart Glasses products, waveguide optics, microLEDsmicroLEDs, and display engine technology.

Comparison of Three Months Ended MarchJune 31,30, 2026 and 2025

The following table compares the Company’s consolidated statements of operations data for the three months ended MarchJune 31,30, 2026 and 2025:

Sales. There was a decrease in total sales for the three months ended MarchJune 31,30, 2026, compared to the same period in 2025 of $189,617,$182,211, or 12%.14%. The following table reflects the major components of our sales:

Sales of engineering services and OEM products for the three months ended MarchJune 31,30, 2026, were $348,936$229,202 compared to $256,868$250,399 in the comparable 2025 period, ana increasedecrease of 36%.8%.

For the three months ended MarchJune 31,30, 2026, there was a gross loss from total sales of $377,911,$645,411, or 27%,58%, compared to a gross loss of $265,118,$761,370, or 17%59%, in the comparable period in 2025. The increased gross loss was primarily due to lower total sales as compared to the comparable 2025 period.

Unapplied manufacturing overhead costs, not already added into product cost of sales, increased by $28,613,$60,828, or 5%12%, for the three months ended MarchJune 31,30, 2026 compared to the 2025 comparable period. As a percentage of total sales, such costs increased to 44%51% compared to 37%39% in 2025 due to lower product revenue and lower production levels of new product, as the Company has sufficient finished goods on hand to meet currently expected demand for current Smart Glasses models for the foreseeable future.

Depreciation and Amortizationamortization included in cost of sales decreased by $94,128,$93,770, or 53%,56%, for the three months ended MarchJune 31,30, 2026 versus the comparable period 2025. This decrease was due to certain leasehold improvements becoming fully depreciated in November 2025.

Total research and development expenses for the three months ended MarchJune 31,30, 2026 increased by $422,515,$527,002, or 16%,20%, compared to the comparable period in 2025. This increase was largely due to a $433,703$326,614 increase in external development costs for our new products; a $231,641 increase in cash salary and benefits related expenses due to headcount increases; a $244,601$98,880 increase in depreciation related to under-utilized new manufacturing equipment still being used primarily for R&D purposes, which were still being built in the comparable period; a $75,494 increase in rent and utilities expenses related to our new California-based waveguide research and development facility that we did not have in the first quarter of 2025purposes; and a $37,932$41,964 increase in computer software subscriptionsupplies expenses; partially offset by a $217,233$98,443 decrease in non-cash stock-based compensation expensesrent and autilities $188,919 decrease in external development costs.expenses.

Total selling and marketing expenses for the three months ended MarchJune 31,30, 2026 increaseddecreased by $13,400,$143,046, or 1%11%, compared to the comparable period in 2025. This increasedecrease was due to a $254,426 increase in cash salary and benefits related expenses due to headcount increases; and a $47,663 increase in travel related expenses; offset by a $292,027$184,636 decrease in non-cash stock-based compensation expense; andpartially aoffset decreaseby an increase of $21,572$26,621 in education and consulting related expenses and an increase of $15,193 in advertising and tradeshow expenses.

Total general and administrative expenses for the threesix months ended MarchJune 31,30, 2026,2026 decreased by $1,827,042,$1,901,300, or 46%,28%, compared to the comparable period in 2025. The decrease was largely due to a $1,729,895$1,618,957 decrease in non-cash stock-based compensation expense related to our 2024 cash salary reduction program in exchange for equity, which ended on April 30, 2025, and the termination of the Company’s original LTIP, which was cancelled on June 16, 2025; a $304,376$805,641 decrease in IR and shareholder related expenses; a $63,259$87,397 decrease in legal expenses; and a $35,763$77,467 decrease in consulting fees; partially offset by a $232,908$459,578 increase in cash salary and benefits mostly due to our 2024 cash salary reduction program, which ended on April 30, 2025; a $30,263$87,984 increase in travelrecruitment relatedand hiring expenses; anda $58,825 increase in supplies expenses; a $25,087$43,503 increase in accounting and auditing fees.costs; and a $38,289 increase in travel related costs.

Depreciation and Amortization. Depreciation and amortization expense, not included in cost of sales or research and development expenses, for the threesix months ended MarchJune 31,30, 2026, was $115,017,$233,262, compared to $405,011$818,494 in the comparable period in 2025, or a decrease of $289,994.$585,232. This decrease was due to certain leasehold improvements becoming fully depreciated in November 2025.

Other Income, Net. Total other income was $134,767$259,885 for the threesix months ended MarchJune 31,30, 20262026, compared to other income of $136,793$325,842 in the comparable period in 2025, a modest decrease of $2,026.$65,957. This decrease was due to an increase of $58,829 in other taxes; and an increase of $29,056 in foreign exchange losses; partially offset by an increase in investment income of $21,928.

Provision for Income Taxes. There was no provision for income taxes in the respective threesix month periods ended MarchJune 31,30, 2026 and 2025.

Capital Resources: As of MarchJune 31,30, 2026, we had cash and cash equivalents of $20,167,137,$17,297,697, a decrease of $983,076$3,852,516 from $21,150,213 as of December 31, 2025.

As of MarchJune 31,30, 2026, we had current assets of $24,780,826$21,850,841 compared to current liabilities of $4,005,287$3,836,024 which resulted in a positive working capital position of $20,775,539.$18,014,817. As of December 31, 2025, we had a positive working capital position of $22,307,525. Our current liabilities are comprised principally of accounts payable, accrued expenses, and operating lease right-of-use liabilities.

The following table summarizes our select cash flows for the threesix months ended:

During the threesix months ended MarchJune 31,30, 2026, we used $5,555,245$12,151,830 of cash for operating activities, an increase of $2,101,622$3,910,018 from the comparable 2025 period. Net changes in working capital items were $385,149$275,710 for the threesix months ended MarchJune 31,30, 2026, with the largest factors resulting from aan $1,068,533$848,156 decrease in trade accounts and other receivables; a $300,007$344,656 increasedecrease in inventory and vendor prepayments; partially offset by a $1,028,238$1,257,323 decrease in trade accounts payables and accrued expenses. For the threesix months ended MarchJune 31,30, 2025, we used a total of $3,453,623$8,241,812 in cash for operating activities.

During the threesix months ended March,June 30, 2026, we used $1,172,101$1,537,472 of cash for investing activities, which included: $996,385$1,213,562 in manufacturing equipment and toolingtooling, primarily for our new waveguide manufacturing facilityequipment, and $175,716$323,910 in patent and trademark expenditures. For the threesix months ended MarchJune 31,30, 2025, we used a total of $764,132$1,631,941 in cash for investing activities.

During the threesix months ended MarchJune 31,30, 2026, we received $5,744,270$9,836,786 from financing activities, which included $5,784,193$9,914,210 in net proceeds from sales of common stock under our ATM program less $39,923$77,424 in Series B Preferred Stock dividend payments. For the threesix months ended MarchJune 31,30, 2025, we received $1,262,250$9,141,832 from financing activities.

As of MarchJune 31,30, 2026, the Company does not have any current or long-term debt obligations outstanding.

In February 2026, the U.S. Supreme Court issued a ruling invalidating tariffs previously imposed under the International Emergency Economic Powers Act ("IEEPA"). Through March 31, 2026, the Company hashad paid approximately $190,000 related to IEEPA tariffs for the purchase of fixed assets and components included in the costs of sales. However, significant uncertainty remains regarding the ultimate availability, timing, and magnitude of potential refunds due to a phased administrative process, ongoing litigation, and potential appeals. Consequently, as of MarchJune 31,30, 2026, the Company has not recorded a receivable, asset, or gain because recovery isfor any unrefunded amounts as they are not considered "probable" or "reasonably estimable" under the loss recovery model of ASC 410-30 and ASC 450, with potential refunds currently treated as unrecognized gain contingencies. Through the date of this filing, the Company has received refunds totaling $80,066, $26,154 in the three months ended June 30, 2026, and is recognizing the refunds as a reduction of cost of goods sold.

The Company incurred net losses of $7,071,324$14,700,019 for the threesix months ended MarchJune 31,30, 2026; $32,273,128 for the year ended December 31, 2025; and $73,538,157 for the year ended December 31, 2024. The Company had net cash outflows from operations of $5,555,245$12,151,830 for the threesix months ended MarchJune 31,30, 2026; $18,789,272 for the year ended December 31, 2025; and $23,739,372 for the year ended December 31, 2024. As of MarchJune 31,30, 2026, the Company had an accumulated deficit of $406,967,234.$414,633,429.

These historical financial factors initially raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s management intends to take actions necessary to continue as a going concern, as discussed herein. Management’s plans to alleviate the conditions that raise substantial doubt include raising further capital, and the implementation of operational improvementsimprovements, and the curtailment of certain development programs, bothall of which the Company expects will preserve cash.

The Company has historically raised capital through the sale of equity securities. The Company filed a Registration Statement on Form S-3 that became effective in May 2024, which includes a sales agreement prospectus for the issuance and sale of up to $50,000,000 of our common stock from time to time under a sales agreement with an investment bank in an ATM“at the market” offering. Since commencement of the ATM offering in May 2024, the Company has raised $28,250,484,$32,380,501, net of broker expenses, including $5,784,193$9,914,210 to date in the three months ended March 31, 2026, under this sales agreement.

Management monitorswill continue to utilize the available “at the market” noted above to satisfy obligations as they become due, as well as, monitor the capital markets on an ongoing basis and may consider raising capital under other programs if favorable market conditions develop. If the Company needs to raise capital for additional liquidity, the Company may pursue additional equity financings, further curtail expenses, or enter into one or more strategic transactions. However, management can make no assurance that the Company will be able to successfully complete any of the forementioned pursuits on terms acceptable to the Company, or at all.