As filed with the Securities and Exchange Commission on
October 16, 2009
Registration
No. 333-160417
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Amendment No. 3
to
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
VUZIX CORPORATION
(Exact name of registrant as
specified in its charter)
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Delaware
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3577
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04-3392453
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(State or other jurisdiction
of
incorporation or organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification Number)
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75 Town Centre Drive
Rochester, NY 14623
(585) 359-5900
(Address, including
zip code, and telephone number, including area code, of
registrants principal executive offices)
Copies to:
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Robert F. Mechur, Esq.
Boylan, Brown, Code, Vigdor & Wilson, LLP
2400 Chase Square
Rochester, New York 14604
(585) 232-5300
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Kenneth G. Sam, Esq.
Jason Brenkert, Esq.
Dorsey & Whitney LLP
370 17th Street, Suite 4700
Denver, Colorado 80202
(303) 629-3400
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Approximate date of commencement of proposed sale to the
public: As soon as practicable after the
effective date of this registration statement.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act, check the following
box. þ
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same
offering. o
If this form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration number of the
earlier effective registration statement for the same
offering. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company þ
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(Do not check if a smaller reporting company)
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Proposed Maximum
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Amount of
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Aggregate
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Registration
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Title of Securities to be Registered
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Offering Price(1)
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Fee(6)
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Units, each consisting of one share of Common Stock,
$0.001 par value, and one-half of one Common Stock Purchase
Warrant(2)
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$
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15,464,625.00
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$
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862.93
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Shares of Common Stock included as part of the Units
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Common Stock Purchase Warrants included as part of the Units
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Shares of Common Stock underlying the Common Stock Purchase
Warrant included in the Units
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$
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11,598,469.00
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(3)(5)
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$
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647.19
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Agent Compensation Options(4)
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Shares of Common Stock included as part of the Agent
Compensation Options
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$
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1,933,079.00
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$
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107.87
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Common Stock Purchase Warrants included as part of the
Compensation Options(5)
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Shares of Common Stock underlying the Common Stock Purchase
Warrants included in the Compensation Options
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$
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1,449,808.00
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(3)(5)
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$
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80.90
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Total
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$
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30,445,981.00
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$
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1698.89
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(1)
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Estimated solely for purposes of
calculating the registration fee in accordance with Rule 457(o)
under the Securities Act of 1933, as amended. In accordance with
Rule 457(o) under the Securities Act, the number of shares
being registered and the maximum offering price per share are
not included in this table.
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(2)
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Public offering of units, each unit
consisting of one share of common stock, $0.001 par value,
and one-half of one common stock purchase warrant.
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(3)
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Estimated pursuant to
Rule 457(g).
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(4)
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Options entitling the Canadian
agents to purchase that number of shares of common stock and
warrants equal to 12.5% of the aggregate number of shares of
common stock and warrants sold under the offering, respectively,
at the offering price per share and warrant, respectively, for a
period of 12 months from the closing date.
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(5)
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Pursuant to Rule 416, there
are also being registered such indeterminable additional
securities as may be issued as a result of any additional shares
of common stock that shall become issuable by reason of any
stock dividend, stock split, recapitalization or other similar
transaction effected without the receipt of consideration that
results in an increase in the number of the outstanding shares
of common stock.
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(6)
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Registration fee previously paid in
connection with the initial filing of this Registration
Statement.
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The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment that
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933, as amended, or until the
Registration Statement shall become effective on such date as
the Commission, acting pursuant to said Section 8(a), may
determine.
EXPLANATORY
NOTES
This Registration Statement contains a prospectus relating to an
offering of shares of our common stock, warrants and common
stock acquirable upon exercise of warrants in the United States,
together with separate prospectus pages relating to an offering
of shares of our common stock, warrants and common stock
acquirable upon exercise of warrants in Canada. The
U.S. prospectus and the Canadian prospectus will be
identical in all material respects. The complete
U.S. prospectus is included herein and is followed by those
pages to be used solely in the Canadian prospectus. Each of the
alternate pages for the Canadian prospectus included in this
registration statement has been labeled Alternate Page for
Canadian Prospectus.
The
information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these
securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not
permitted.
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(Subject
to Completion) Dated October 16, 2009
PRELIMINARY PROSPECTUS
Vuzix
Corporation
Minimum Offering of
Cdn$6,000,000
Up to 50,000,000
Units
(each consisting of one share of
common stock and one half of one common stock purchase
warrant)
This is the initial public offering of our securities. We are
offering for sale up to 50,000,000 units at a price between
Cdn$0.15 and Cdn$0.25 per unit, on a best efforts basis. This
offering is subject to us raising minimum gross proceeds of
Cdn$6,000,000. Each unit consists of one share of our common
stock, par value US$0.001 per share, and
one-half of
one common stock purchase warrant. Each whole warrant entitles
its holder to purchase one share of our common stock at a price
of 150% of the initial public offering price per unit at any
time for 36 months after the closing of this offering,
subject to acceleration based upon the market price of our
common stock. Our units are being concurrently offered to the
public in Canada by our Canadian agents under the terms of a
prospectus filed with Canadian securities regulatory
authorities. Our agents are not purchasing any of the offered
units. The agents must sell the number of units that will result
in us receiving the minimum gross proceeds (Cdn$6,000,000) if
any are sold. The agents are required to use their best efforts
to sell the maximum number of units offered (50,000,000 units).
The shares of common stock and warrants underlying the units
will be issued separately. Pursuant to an escrow agreement among
us, the agents and an escrow agent, the funds received in
payment for the units sold in this offering will be deposited
into a non-interest bearing escrow account and held until the
closing of the offering. The offering will close as soon as
practicable after the minimum gross proceeds have been raised.
At the closing, certificates representing the shares of common
stock and the common stock purchase warrants will be delivered
to one of our Canadian agents in its nominee name for deposit
with CDS Clearing and Depository Services Inc. and the proceeds
from the offering will be delivered to us. No funds shall be
released to us until such a time as the minimum gross proceeds
are raised. If the minimum gross proceeds are not raised within
90 days of the date of this prospectus, all funds will be
returned to investors promptly without interest or deduction of
fees. There is currently no public market through which our
securities may be sold, and you may not be able to resell any
securities you purchase under this prospectus. We have
applied to list our common stock and the warrants included in
the units on the TSX Venture Exchange (TSX-V) under the symbols
l
and
l,
respectively. Listing of our common stock and warrants will be
subject to fulfilling all of the requirements of the TSX-V.
Our business and an investment in our securities involve
significant risks. These risks are described under the caption
Risk Factors beginning on page 8 of this
prospectus.
Neither the SEC nor any other securities commission or
regulatory authority has approved or disapproved of these
securities or has passed upon the accuracy or adequacy of this
prospectus. Any representation to the contrary is a criminal
offense.
If we raise the minimum proceeds from this offering
(Cdn$6.0 million) by selling 30,000,000 units at
Cdn$0.20 per unit (the midpoint of our estimated
initial public offering price range), we estimate that the net
proceeds to us from the offering, after agents commissions,
would be approximately Cdn$5.52 million or
Cdn$0.184 per unit. If we sell the maximum number of units
we are offering (50,000,000 units) at Cdn$0.25 per
unit (the maximum of our estimated initial public offering price
range), we would receive gross proceeds of Cdn$12.5 million
and estimate that the net proceeds to us, after agents
commissions, would be approximately Cdn$11.5 million or
Cdn$0.23 per unit.
The offering is denominated in Canadian dollars. The purchase
price for the offered units may be paid by US investors in
Canadian or US dollars. If any purchaser indicates that his
or her payment will be made in US dollars, the payment will be
converted to Canadian dollars at the real-time, wholesale rate
at which our Canadian agents are able to purchase US dollars in
the foreign exchange market on the date on which securities
offered under this prospectus are allocated to that purchaser.
The agents expect to deliver the shares of common stock and
warrants comprising the units in Toronto, Ontario, Canada on or
about ,
2009.
CANACCORD ADAMS INC.
The date of this prospectus
is ,
2009.
Through and
including ,
2009 (the 40th day after the date of this prospectus), all
dealers effecting transactions in units or shares of our common
stock, whether or not participating in this offering, may be
required to deliver a prospectus. This is in addition to a
dealers obligation to deliver a prospectus when acting as
an underwriter with respect to an unsold allotment or
subscription.
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PROSPECTUS
SUMMARY
This summary provides an overview of selected information
contained elsewhere in this prospectus and does not contain all
of the information you should consider before investing in our
securities. You should carefully read the prospectus and the
registration statement of which this prospectus is a part in
their entirety before investing in our securities, including the
information discussed under Risk Factors beginning
on page 7 and our financial statements and notes thereto
that appear elsewhere in this prospectus.
BUSINESS
Company
Overview
We are engaged in the design, manufacture, marketing and sale of
devices that are worn like eyeglasses and feature built-in video
screens that enable the user to view video and digital content,
such as movies, computer data, the Internet or video games. Our
products (known commercially as Video Eyewear, but also commonly
referred to as virtual displays, wearable displays, personal
viewers, personal displays, head mounted displays, or
near-to-eye
displays) are used to view high-resolution video and digital
information primarily from mobile devices (such as cell phones,
portable media players, gaming systems and laptop computers) and
from personal computers. Our products provide the user with a
virtual viewing experience that simulates viewing a large screen
television or desktop computer monitor practically anywhere,
anytime.
Our Video Eyewear products feature high performance miniature
display modules, low power electronics and related optical
systems. We produce both monocular and binocular Video Eyewear
devices that we believe are excellent solutions for many mobile
computer, mobile internet devices (MID) or video viewing
requirements, including general entertainment applications. We
focus on two markets: the consumer markets for gaming, mobile
video viewing and stereoscopic three-dimensional video viewing;
and rugged mobile displays for defense and industrial
applications. We also offer low-vision assist Video Eyewear
products that are designed to assist and improve the remaining
vision of people suffering from macular degeneration.
The development of intellectual property rights relating to our
technologies is a key aspect of our business strategy. We have
generated and continue to generate intellectual property as a
result of our ongoing performance of development contracts and
our internal research and development activities. We have also
acquired technologies developed by third parties and we may do
so in the future.
Our business is subject to numerous risks, as discussed more
fully in the section entitled Risk Factors
immediately following this prospectus summary. The risks we face
include the following:
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We have incurred net losses since our inception and if we
continue to incur net losses in the foreseeable future the
market price of our common stock may decline.
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We have depended on defense related engineering contracts and
product orders from two customers for the majority of our sales
and our revenues would be materially reduced if we are unable to
obtain sales from government contracts or if either of our two
significant customers reduce or delay orders from us.
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If management continues to own a significant percentage of our
outstanding common stock, management may prevent other
stockholders from influencing significant corporate decisions.
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We do not manufacture our own microdisplays, one of the key
components of our Video Eyewear products, and we may not be able
to obtain the microdisplays we need.
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If we fail to develop new products and adapt to new
technologies, our business and results of operations may be
materially adversely affected.
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If microdisplay-based personal displays do not gain some
reasonable level of acceptance in the market for mobile
displays, our business strategy may fail.
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We may incur substantial costs or lose important rights as a
result of litigation or other proceedings relating to our
products, patents and other intellectual property rights.
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Purchasers of our units will experience immediate and
substantial dilution as a result because their common stock will
be worth less on a net tangible book value basis than the amount
they invested.
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Industry
Overview
Many mobile devices now allow the user to view high-resolution
full color content. We believe that typical displays currently
used on mobile devices do not work well for this purpose because
they are either too small, making it extremely difficult to view
the detail in their display images with a human eye, or too
large, making the mobile device cumbersome and difficult to use
and carry. Some mobile devices employ a touch screen with
software to magnify or zoom in on a partial image. We believe
that many consumers consider this solution unsatisfactory
because it is difficult to navigate and find information on the
portion of the page being viewed.
In contrast, our Video Eyewear products enable the user to
effectively view the entire screen on a small, eyeglass-like
device. Our products employ microdisplays that provide full
screen resolution but are smaller than one-inch diagonally, with
some as small as one-quarter of an inch. To make images on the
microdisplays viewable, our Video Eyewear products incorporate
proprietary magnifying optics that are usually designed by us.
The result is a detailed virtual image that appears to the
viewer to be similar to the image on a full size computer screen
from a normal desktop working distance or the image on a large
flat panel television from normal home TV viewing distance. For
example, when magnified through our optics, a high-resolution
0.44-inch diagonal microdisplay can provide a viewing experience
comparable to that on a
62-inch
diagonal television screen viewed at nine feet. We refer to this
as a 62-inch
virtual display.
We believe that there is growing demand for mobile access to
high-resolution content in both the consumer and industrial and
defense markets.
Our
Products
We offer products that use our proprietary technology and are
designed to meet the unique requirements of the consumer,
industrial and defense markets.
Binocular
Video Eyewear Products
Each binocular Video Eyewear product contains two microdisplay
screens, one in front of each eye, mounted in a frame attached
to eyeglass-style temples with headphones. These products enable
mobile private viewing of video content on virtual displays that
can simulate theater-sized screens. They are currently sold on
the basis of resolution and their effective virtual viewing
screen size. Our products today range from 320 × 240 pixels
(Quarter Video Graphics Array or QVGA) to 800 × 600 pixels
(Super Video Graphics Array or SVGA) resolution and provide
virtual screen sizes of 44- to
62-inch
screens viewed at nine feet. We also offer an interactive
version for PC gaming which includes our proprietary head
tracking technology, which enables the user to look around the
environment being displayed in the game by simply moving his or
her head, and a microphone to enable communication with others.
Finally, we offer a binocular Video Eyewear product that
integrates a high-resolution camera with digital magnification,
designed to assist and improve the remaining vision of persons
suffering from macular degeneration.
Monocular
Video Eyewear Products
Our
Tac-Eye®
monocular (single eye) Video Eyewear products are designed to
clip on to a pair of ballistic sunglasses, a head set or
conventional safety goggles. They can be used with rugged
laptops, security and night vision cameras and thermal night
vision sights, including those sights for which we currently
build the display drive electronics as a
sub-contractor
to the US Department of Defense.
Tac-Eye®
enables users to have wearable, private, hands-free and
glanceable access to high-resolution content or information
while retaining most of their real world view.
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Defense
Sub-Assembly
and Custom Solutions
We are involved in several programs as part of contracting teams
that produce thermal night vision sights to the US Department of
Defense. We design and manufacture many of the display drive
electronic subassemblies for light, medium, and heavy weight
thermal weapon sighting systems for the US and other defense
forces. When possible, we obtain a first right of refusal to be
the volume manufacturer of our proprietary display subassemblies
as part of our contracting process for the custom design of
products.
Our
Strategy
Our strategy is to establish and maintain a leadership position
as a worldwide supplier of Video Eyewear and other virtual
display technology solutions. We intend to offer our
technologies across major markets, platforms and applications.
We will strive to be an innovator in designing virtual display
devices that enable new mobile video viewing as well as general
entertainment applications.
To maintain and enhance our position as a leading provider of
virtual display solutions, we intend to:
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improve our brand name recognition;
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develop products for large markets;
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broaden and develop strategic relationships and partnerships;
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expand market awareness for virtual display solutions;
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maintain and exploit any cost advantage our technology can
provide us;
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extend our proprietary technology leadership; and
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establish multiple revenue sources.
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Company
Information
We were incorporated under the Delaware General Corporation Law
in 1997 as VR Acquisition Corp. In 1997 we changed our name to
Kaotech Corporation. In 1998 we changed our name to Interactive
Imaging Systems, Inc. In 2004 we changed our name to Vicuity
Corporation and then to Icuiti Corporation. In September 2007 we
changed our name to Vuzix Corporation.
Our principal executive offices are located at 75 Town Centre
Drive, Rochester, New York 14623. Our telephone number is
(585) 359-5900.
We maintain an Internet website at www.vuzix.com. The
information contained on, connected to or that can be accessed
via our website is not part of this prospectus. We have included
our website address in this prospectus as an inactive textual
reference only and not as an active hyperlink.
Our wholly-owned direct subsidiary is Vuzix (Europe) Limited,
which we refer to in this prospectus as Vuzix Europe. Vuzix
Europe was incorporated on April 10, 2008 pursuant to the
provisions of the Companies Act (England and Wales). The
registered and head office of Vuzix Europe is located at St.
Johns House, 5 South Parade, Summertown, Oxford OX2 7JL.
The
Offering
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Securities offered by Vuzix |
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Up to 50,000,000 units; each unit consisting of one share of our
common stock, par value $0.001 per share, and one half of one
common stock purchase warrant. |
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Up to 84,375,000 shares of our common
stock.(1) |
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Up to 25,000,000 common stock purchase warrants. Each whole
warrant will entitles its holder to purchase one share of our
common stock at a price of 150% of the initial public offering
price per unit at any time for 36 months after the closing
of this offering. If the weighted-average closing price of our
common stock on the TSX-V exceeds 250% of the initial public
offering price per unit for 20 consecutive trading days at any
time beginning 180 days after the date on which our common stock
is first traded on the TSX-V, we will have the right,
exercisable at our sole discretion, to accelerate the |
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expiration date of the warrants by providing written notice to
each registered warrant holder within five business days and
issuing a press release to the effect that the warrants will
expire at 5:00 p.m. (Toronto time) on the date specified in
the notice and press release, provided that the accelerated
expiration date may not be less than 30 days following the date
of the notice and press release. |
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Minimum gross proceeds |
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Cdn$6,000,000 |
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Common stock to be outstanding after this offering |
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Between 275,105,285 shares (assuming minimum gross proceeds of
Cdn$6,000,000 at the initial public offering price of Cdn$0.15
per unit) and 285,305,285 shares (assuming the sale of the
maximum number of units offered (50,000,000
units).(2) |
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Agent Compensation |
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As consideration for their services, the Canadian agents will
receive: (i) a commission equal to 8% of the gross proceeds
of the offering; (ii) options entitling the Canadian agents
to purchase that number of shares of our common stock and
warrants equal to 12.5% of the aggregate number of shares of our
common stock and warrants sold under the offering, at the
offering price per share and warrant, for a period of
12 months from the closing date; and (iii) a non-refundable
due diligence fee of Cdn$15,000. The Canadian agents will also
be reimbursed for their reasonable fees and expenses including
the reasonable legal fees and disbursements of legal counsel to
the agents. Canaccord Adams Inc. and any US selling agents that
the Canadian agents may appoint will be paid cash selling
commissions not to exceed 6% of the gross proceeds of the
offering in the United States and options entitling the US
selling agents to purchase that number of shares of our common
stock and warrants sold in the United States under the offering
equal to 8% of the aggregate number of shares of our common
stock and warrants at the initial public offering price for a
period of 12 months from the closing date. The commission paid
to US selling agents will be paid by the Canadian agents from
their commissions and the options issued to the US selling
agents will be assigned by the Canadian agents from their
options. This prospectus covers the sale of the shares of our
common stock and warrants issuable upon exercise of the
agents options. |
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In consideration of certain fiscal advisory services rendered by
the Canadian agents to us pursuant to a fiscal advisory fee
agreement between us and the Canadian agents, we have agreed to
issue to the Canadian agents at the closing of this offering, in
payment of a fiscal advisory fee, that number of shares of our
common stock equal to, depending on the gross proceeds of the
offering, between 1.0% and 2.0% of our common stock issued and
outstanding immediately upon the closing of the offering. The
issuance of these shares to the Canadian agents is not covered
by this prospectus. These shares will be subject to resale
restrictions under applicable United States and Canadian
securities legislation and a contractual lock-up agreement for
one year. See Underwriting Fiscal Advisory Fee
Agreement. |
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Use of proceeds |
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The minimum gross proceeds to us from the offering will be
Cdn$6,000,000 and we estimate that the net proceeds to us from
such amount, after payment of agents commissions and
offering-related expenses, would be approximately Cdn$5,000,000.
Assuming the sale of the maximum number of units offered
(50,000,000 units) and an initial public offering price of
Cdn$0.25 per unit (the maximum of our estimated initial public
offering price range), we would receive gross proceeds of
Cdn$12,500,000 and we estimate that the net proceeds to us from
such amount, after payment of agents commissions and
offering-related expenses, would be approximately |
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Cdn$10,978,000. We expect to use $1,181,000 of the net proceeds
of this offering to repay outstanding indebtedness, including
accrued interest. The indebtedness to be repaid includes
$165,500 in principal amount plus interest payable to our
President and Chief Executive Officer. We intend to use the
remainder of the net proceeds from this offering new product
development and tooling expenses; for research and development
expenses; capital expenditures; selling, marketing, general and
administrative expenses; possible acquisitions of businesses,
technologies or other assets; and general corporate purposes.
For additional information see Use of Proceeds. |
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Risk Factors |
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See Risk Factors beginning on page 8 and other
information included in this prospectus for a discussion of
factors you should carefully consider before deciding to invest
in our securities. |
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(1) |
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Consists of up to (i) 50,000,000 shares included in
the units; (ii) 25,000,000 shares issuable upon
exercise of the common stock purchase warrants included in the
units; and (iii) up to 6,250,000 shares issuable upon
exercise of the options issued to the agents as compensation and
up to an additional 3,125,000 shares issuable upon exercise
of common stock purchase warrants issuable upon exercise of the
options issued to the agents as compensation. |
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(2) |
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Includes (i) up to 5,592,246 shares issued to the agents in
payment of a fiscal advisory fee; (ii) up to 7,148,982 shares
issuable upon conversion of 168,500 outstanding shares of our
Series C 6% Convertible Preferred Stock (Series C Preferred
Stock), together with all accrued and unpaid dividends thereon
through September 30, 2009, at the rate of $0.2917 per share;
and (iii) up to 4,642,189 shares issuable upon conversion of
$575,000 in aggregate principal amount of convertible promissory
notes outstanding, together with all accrued and unpaid interest
thereon through September 30, 2009. Does not include (i) up
to 15,304,554 shares issuable upon exercise of options
granted under our 2007 Amended and Restated Stock Option Plan;
(ii) any of the shares described in footnote (1) above
other than those described in clause (i) of
footnote (1); (iii) up to 1,200,00 shares
issuable upon exercise of options under our 2009 option plan
that we intend to grant to our four new non-employee directors
at the closing of this offering; and (iv) up to 3,542,107
shares issuable upon exercise of outstanding warrants. |
5
Selected
Summary Financial Data
The following tables present our summary financial data and
should be read together with our financial statements and
accompanying notes and Managements Discussion and
Analysis of Financial Condition and Results of Operations
appearing elsewhere in this prospectus. The summary financial
data for the years ended December 31, 2008, 2007 and 2006
are derived from our audited annual financial statements, which
are included elsewhere in this prospectus. The unaudited summary
financial data as of June 30, 2009 and for the three and
six months ended June 30, 2009 and 2008 have been derived
from our unaudited interim financial statements, which are
included elsewhere in this prospectus, and include all
adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of our financial position and
results of operations for these periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
Statement of Operations Data
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Sales
|
|
$
|
2,063,733
|
|
|
$
|
3,087,338
|
|
|
$
|
5,082,087
|
|
|
$
|
4,807,982
|
|
Cost of Sales
|
|
|
1,390,819
|
|
|
|
1,871,661
|
|
|
|
3,221,861
|
|
|
|
3,358,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
672,914
|
|
|
|
1,215,677
|
|
|
|
1,860,226
|
|
|
|
1,449,243
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
428,737
|
|
|
|
1,224,265
|
|
|
|
945,897
|
|
|
|
1,960,982
|
|
Selling and marketing
|
|
|
520,257
|
|
|
|
483,695
|
|
|
|
976,041
|
|
|
|
933,257
|
|
General and administrative
|
|
|
534,142
|
|
|
|
438,831
|
|
|
|
990,729
|
|
|
|
972,630
|
|
Depreciation and amortization
|
|
|
167,509
|
|
|
|
123,696
|
|
|
|
306,343
|
|
|
|
247,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,650,645
|
|
|
|
2,270,487
|
|
|
|
3,219,010
|
|
|
|
4,114,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (Loss) from operations
|
|
|
(977,731
|
)
|
|
|
(1,054,810
|
)
|
|
|
(1,358,784
|
)
|
|
|
(2,665,018
|
)
|
Interest and other income (expense)
|
|
|
11
|
|
|
|
|
|
|
|
59
|
|
|
|
166
|
|
Foreign exchange (loss) gain
|
|
|
(3,657
|
)
|
|
|
(300
|
)
|
|
|
(4,969
|
)
|
|
|
(33
|
)
|
Interest expense
|
|
|
(56,711
|
)
|
|
|
(57,353
|
)
|
|
|
(122,095
|
)
|
|
|
(99,019
|
)
|
Tax (expense) benefit
|
|
|
(888
|
)
|
|
|
(2,897
|
)
|
|
|
(1,776
|
)
|
|
|
(3,650
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tax and other income (expense)
|
|
|
(61,245
|
)
|
|
|
(60,550
|
)
|
|
|
(128,781
|
)
|
|
|
(102,536
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Loss)
|
|
$
|
(1,038,976
|
)
|
|
$
|
(1,115,360
|
)
|
|
$
|
(1,487,565
|
)
|
|
$
|
(2,767,554
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and fully diluted*
|
|
$
|
(0.0048
|
)
|
|
$
|
(0.0057
|
)
|
|
$
|
(0.0070
|
)
|
|
$
|
(0.0141
|
)
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and fully diluted*
|
|
|
220,268,927
|
|
|
|
200,424,027
|
|
|
|
219,935,594
|
|
|
|
200,015,546
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
Statement of Operations Data
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
Sales
|
|
$
|
12,489,884
|
|
|
$
|
10,146,379
|
|
|
$
|
9,538,308
|
|
|
|
|
|
Cost of Sales
|
|
|
8,788,905
|
|
|
|
6,783,473
|
|
|
|
5,767,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
3,700,979
|
|
|
|
3,362,906
|
|
|
|
3,770,758
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
3,366,518
|
|
|
|
2,365,412
|
|
|
|
1,279,239
|
|
|
|
|
|
Selling and marketing
|
|
|
2,128,625
|
|
|
|
1,920,164
|
|
|
|
1,191,800
|
|
|
|
|
|
General and administrative
|
|
|
2,299,685
|
|
|
|
1,718,627
|
|
|
|
1,560,278
|
|
|
|
|
|
Depreciation and amortization
|
|
|
510,133
|
|
|
|
374,078
|
|
|
|
276,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
8,304,961
|
|
|
|
6,378,281
|
|
|
|
4,308,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (Loss) from operations
|
|
|
(4,603,982
|
)
|
|
|
(3,015,375
|
)
|
|
|
(537,548
|
)
|
|
|
|
|
Interest and other income (expense)
|
|
|
188
|
|
|
|
2,549
|
|
|
|
313
|
|
|
|
|
|
Foreign exchange (loss) gain
|
|
|
(24,216
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(260,977
|
)
|
|
|
(241,692
|
)
|
|
|
(179,019
|
)
|
|
|
|
|
Legal settlement
|
|
|
|
|
|
|
96,632
|
|
|
|
|
|
|
|
|
|
Tax (expense) benefit
|
|
|
(5,212
|
)
|
|
|
98,372
|
|
|
|
(3,700
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tax and other income (expense)
|
|
|
(290,217
|
)
|
|
|
(44,139
|
)
|
|
|
(182,406
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Loss)
|
|
$
|
(4,894,199
|
)
|
|
$
|
(3,059,514
|
)
|
|
$
|
(719,954
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and fully diluted*
|
|
$
|
(0.0240
|
)
|
|
$
|
(0.0176
|
)
|
|
$
|
(0.0047
|
)
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and fully diluted*
|
|
|
207,710,498
|
|
|
|
185,263,660
|
|
|
|
173,254,715
|
|
|
|
|
|
|
|
|
* |
|
All outstanding warrants, options, and convertible debt are
anti-dilutive, therefore basic and diluted earnings per share
are the same for all periods. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Six Months Ended June 30,
|
|
Cash Flow Data
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Cash flows provided by (used in) operating activities
|
|
$
|
(1,285,449
|
)
|
|
$
|
(3,295,900
|
)
|
|
$
|
120,053
|
|
|
$
|
(476,637
|
)
|
|
$
|
(107,925
|
)
|
Cash flows (used in) investing activities
|
|
|
(549,804
|
)
|
|
|
(316,743
|
)
|
|
|
(479,236
|
)
|
|
|
(148,777
|
)
|
|
|
(259,193
|
)
|
Cash flows provided by financing activities
|
|
|
2,289,116
|
|
|
|
3,408,328
|
|
|
|
874,569
|
|
|
|
91,820
|
|
|
|
106,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
As of June 30,
|
|
Balance Sheet Data
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Cash and cash equivalents
|
|
$
|
818,719
|
|
|
$
|
364,856
|
|
|
$
|
569,171
|
|
|
$
|
285,126
|
|
|
$
|
103,993
|
|
Working Capital (deficiency)
|
|
|
(1,846,289
|
)
|
|
|
966,658
|
|
|
|
69,766
|
|
|
|
(2,808,676
|
)
|
|
|
(2,150,731
|
)
|
Total Assets
|
|
|
6,221,897
|
|
|
|
6,967,254
|
|
|
|
5,013,263
|
|
|
|
4,351,101
|
|
|
|
5,939,483
|
|
Long-Term Liabilities
|
|
|
1,754,379
|
|
|
|
2,014,476
|
|
|
|
1,980,476
|
|
|
|
1,797,680
|
|
|
|
1,606,559
|
|
Accumulated (deficit)
|
|
|
(14,687,276
|
)
|
|
|
(9,691,977
|
)
|
|
|
(6,531,363
|
)
|
|
|
(16,225,391
|
)
|
|
|
(12,510,081
|
)
|
Total Stockholders equity (deficit)
|
|
|
(2,089,942
|
)
|
|
|
423,236
|
|
|
|
(603,954
|
)
|
|
|
(3,253,196
|
)
|
|
|
(2,274,435
|
)
|
7
RISK
FACTORS
An investment in our securities involves a high degree of
risk. You should carefully consider the risks described below,
together with all of the other information included in this
prospectus, before making an investment decision. If any of the
following risks actually occurs, our business, financial
condition or results of operations could suffer. In that case,
the market value of our securities could decline, and you may
lose all or part of your investment.
RISKS
RELATED TO OUR BUSINESS
Because
we have a limited operating history in the Video Eyewear
industry, there is a limited amount of past experience upon
which to evaluate our business and prospects.
We were formed in 1997 to develop and sell virtual reality and
other personal display technology and products. Since our
inception the majority of our sales have been derived from the
sale of night vision display drive electronics and from research
and development contracts with suppliers to the US government
and others. In 2003, we discontinued our original virtual
reality product line to focus on Video Eyewear products. Since
that time, the market for Video Eyewear products has developed
more slowly than we anticipated. Although we sold our first
monocular Video Eyewear products in 2003 and our first binocular
Video Eyewear products in February 2005, since 2003 we have
continued to earn the majority of our revenues from defense
related engineering contracts. Accordingly, there is a limited
amount of Video Eyewear-related experience upon which to
evaluate our business and prospects, and a potential investor
should consider the challenges, expenses, delays and other
difficulties involved in the development of our business,
including the continued development of our technology and the
achievement of market acceptance for products using our
technology.
We
have incurred net losses since our inception and if we continue
to incur net losses in the foreseeable future the market price
of our common stock may decline.
We incurred annual net losses of $4,894,199 in 2008, $3,059,514
in 2007 and $719,954 in 2006 and net losses of $1,487,565 and
$2,767,554 for the six-month periods ended June 30, 2009
and 2008, respectively. We had an accumulated deficit of
$16,225,391 as of June 30, 2009.
We may not achieve or maintain profitability in the future. In
particular, we expect that our expenses relating to sales and
marketing and product development and support, as well as our
general and administrative costs, will increase, requiring us to
increase sales in order to achieve and maintain profitability.
If we do not achieve and maintain profitability, our financial
condition will be materially and adversely affected. We would
eventually be unable to continue our operations unless we were
able to raise additional capital. We may not be able to raise
any necessary capital on commercially reasonable terms or at
all. If we fail to achieve or maintain profitability on a
quarterly or annual basis within the timeframe expected by
investors, the market price of our common stock may decline.
We
have depended on defense related engineering contracts and two
customers for sales and our revenues would be materially reduced
if we are unable to continue to obtain sales from government
contracts or if either of our two significant customers reduce
or delay orders from us.
Since inception, the majority of our sales have been derived
from the sale of night vision display drive electronics to two
suppliers to the US government. Sales of night vision display
drive electronics to these customers amounted to 20%, 17% and
42% of our sales in 2008, 2007 and 2006, respectively, and 44%
and 16% for the six-month periods ended June 30, 2009 and
2008, respectively. We have no long-term contracts with these
customers. A significant reduction or delay in orders from
either of our significant customers would materially reduce our
revenue and cash flow and adversely affect our ability to
achieve or maintain profitability in the future.
The next largest source of revenues has been sales directly to
the US Department of Defense, primarily for engineering
programs. Such sales amounted to 12%, 54% and 27% of our sales
in 2008, 2007 and 2006, respectively, and 6% and 2% for the
six-month periods ended June 30, 2009 and 2008,
respectively. We have no long-term contracts with the US
government for engineering services. We plan to submit proposals
for additional
8
development contract funding. However, development contract
funding is subject to legislative authorization and, even if
funds are appropriated, such funds may be withdrawn based on
changes in government priorities.
Together, these two groups of customers accounted for 32%, 71%
and 69% of our sales in 2008, 2007 and 2006, respectively, and
for 50% and 18% of our sales in the six-month periods ended
June 30, 2009 and 2008. We may not be successful in
obtaining new government contracts or in receiving further night
vision display electronics orders. Our inability to obtain sales
from government contracts could have a material adverse effect
on our results of operations and would likely cause us to delay
or slow our growth plans, resulting in lower net sales and
adversely affect our liquidity and profitability.
Because
our US government defense contracts and subcontracts are subject
to procurement laws and regulations, we may not receive all of
the revenues we anticipate receiving under those contracts and
subcontracts.
Generally, US government contracts are subject to procurement
laws and regulations. Some of the our contracts are governed by
the Federal Acquisition Regulation (FAR), which lays out uniform
policies and procedures for acquiring goods and services by the
US government, and agency-specific acquisition regulations that
implement or supplement the FAR. For example, the Department of
Defense implements the FAR through the Defense Federal
Acquisition Regulations (DFAR).
The FAR also contains guidelines and regulations for managing a
contract after award, including conditions under which contracts
may be terminated, in whole or in part, at the governments
convenience or for default. If a contract is terminated for the
convenience of the government, a contractor is entitled to
receive payments for its allowable costs and, in general, the
proportionate share of fees or earnings for the work done. If a
contract is terminated for default, the government generally
pays for only the work it has accepted. These regulations also
subject us to financial audits and other reviews by the
government of our costs, performance, accounting and general
business practices relating to our government contracts, which
may result in adjustment of our contract-related costs and fees.
Our US government contract and subcontract orders are funded by
government budgets that are proposed by the President of the
United States and reviewed and approved by the Congress. Funds
allocated to government agencies are administered by the
Executive Office of the President. There are two primary risks
associated with this process. First, the process may be delayed
or disrupted because of congressional schedules, negotiations
over funding levels for programs or unforeseen national or world
events. Second, funding for multi-year contracts can be changed
in future appropriations. Either of these events could affect
the allocation, timing, schedule and program content of our
government contracts and subcontracts.
Our
lack of long-term purchase orders and commitments from our
customers may lead to a rapid decline in our sales and
profitability.
All of our significant consumer division customers issue
purchase orders solely in their own discretion, often only two
to four weeks before the requested date of shipment. Our
customers are generally able to cancel orders (without penalty)
or delay the delivery of products on relatively short notice. In
addition, our customers may decide not to purchase products from
us for any reason. Any of our current customers may stop
purchasing our products in the future. If those customers do not
continue to purchase our products, our sales volume and
profitability could decline rapidly with little or no warning
whatsoever.
We cannot rely on long-term purchase orders or commitments to
protect us from the negative financial effects of a decline in
demand for our products. The limited certainty of product orders
can make it difficult for us to forecast our sales and allocate
our resources in a manner consistent with our actual sales.
Moreover, our expense levels are based in part on our
expectations of future sales and, if our expectations regarding
future sales are inaccurate, we may be unable to reduce costs in
a timely manner to adjust for sales shortfalls. Furthermore,
because we depend on a small number of customers for the vast
majority of our sales, the ramifications of these risks is
greater than if we had a greater number of customers. As a
result of our lack of long-term purchase orders and purchase
commitments, we may experience a rapid decline in our sales and
profitability.
9
If
either of the two customers on whom we depend fails to pay us
amounts owed in a timely manner, we could suffer a significant
decline in cash flow and liquidity which, in turn, could cause
us to fail to pay our liabilities and purchase adequate
inventory to sustain or expand our sales volume.
Our accounts receivable represented approximately 30%, 53% and
53% of our total current assets as of December 31, 2008,
2007 and 2006, respectively, and 20% and 11% as of June 30,
2009 and 2008, respectively. As of June 30, 2009, our two
major customers represented 17% of our total accounts
receivable. As a result of the substantial amount and
concentration of our accounts receivable, if any of our major
customers fails to pay us amounts owed in a timely manner, we
could suffer a significant decline in cash flow and liquidity
which could adversely affect our ability to pay our liabilities
and to purchase inventory to sustain or expand our current sales
volume and adversely affect our ability to continue our business.
In addition, our business is characterized by long periods for
collection from our customers and short periods for payment to
our suppliers, the combination of which may cause us to have
liquidity problems. We experience an average accounts settlement
period ranging from one month to as high as three months from
the time we deliver our products to the time we receive payment
from our customers. In contrast, we typically need to place
certain deposits and advances with our suppliers on a portion of
the purchase price. Because our payment cycle is considerably
shorter than our receivable collection cycle, we may experience
working capital shortages. Working capital management, including
prompt and diligent billing and collection, is an important
factor in our results of operations and liquidity. System
problems, industry trends, our customers liquidity
problems or payment practices or other issues may extend our
collection period, which would adversely impact our liquidity,
our ability to pay our liabilities and to purchase inventory to
sustain or expand our current sales volume, and adversely affect
our ability to continue our business.
Our
future growth and profitability may be adversely affected if our
marketing initiatives are not effective in generating sufficient
levels of brand awareness.
Since inception, the majority of our sales have been derived
from the sale of night vision display electronics and from
research and development contracts with suppliers to, or
directly to the US government and other customers. Our long-term
business plan contemplates that we will transition our business
so that the majority of our sales are earned from consumer
products sales. In connection with this transition, we are
engaged in a variety of marketing initiatives intended to
promote sales of our consumer products. Our future growth and
profitability from our consumer products will depend in large
part upon the effectiveness and efficiency of these marketing
efforts, including our ability to:
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create awareness of our brand and products, including general
awareness of this new Video Eyewear product category;
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identify the most effective and efficient levels of spending for
marketing expenditures in our new target market;
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effectively manage marketing costs (including creative and
media) in order to maintain acceptable operating margins and
return on marketing investment;
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select the right markets in which to market; and
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convert consumer awareness into actual product purchases.
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Our planned marketing expenditures may not result in increased
total sales or generate sufficient levels of product and brand
name awareness. We may not be able to manage our marketing
expenditures on a cost-effective basis.
The
current decline and any future decline in general economic
conditions could lead to reduced consumer demand for our
products and otherwise have an adverse effect on our liquidity
and profitability.
We believe that purchases of our consumer Video Eyewear products
are dependent upon levels of discretionary spending by our
customers. This means that our financial performance will be
sensitive to changes in overall
10
economic conditions that affect consumer spending. Consumer
spending habits are affected by, among other things, prevailing
economic conditions, levels of employment, salaries and wage
rates, consumer confidence and consumer perception of economic
conditions. As widely reported, general worldwide economic
conditions have experienced a downturn due to, among other
things, slower economic activity, concerns about inflation,
decreased consumer confidence, reduced corporate profits and
capital spending, and adverse business conditions. This can
impact us through reduced sales, elongated selling cycles,
delays in product implementation and increased competitive
margin pressure. We are unable to accurately predict the likely
duration and severity of the current disruption in financial
markets and adverse economic conditions in the United States and
other countries. The continuation of this downturn, the further
deterioration of economic conditions in the United States or key
international economies or uncertainty as to the economic
outlook could reduce discretionary spending or cause a shift in
consumer discretionary spending to other products. Any of these
factors would likely cause us to delay or slow our growth plans,
result in lower net sales and adversely affect our liquidity and
profitability. Similarly, the tightening of credit markets may
adversely affect our supplier base and increase the potential
for one or more of our suppliers to experience financial
distress or bankruptcy, which could materially and adversely
affect our business.
If we
fail to accurately forecast seasonal demand for our consumer
Video Eyewear products, our results of operations for the entire
fiscal year may be materially adversely affected.
Historically, a high percentage of our consumer Video Eyewear
product annual sales have been attributable to the winter
holiday selling season. Like many manufacturers of consumer
electronics products, we must make merchandising and inventory
decisions for the winter holiday selling season well in advance
of actual sales. Further compounding this forecasting are other
fluctuations in demand for the consumer electronics products
that work with our Video Eyewear products, often due to the same
seasonal influences, as well as technological advances and new
models which are often introduced later in the calendar year.
Inaccurate projections of demand or deviations in the demand for
our products may cause large fluctuations in both our fourth
quarter results and could have a material adverse effect on our
results of operations for the entire fiscal year. We expect that
our fourth quarter sales of consumer products will remain
dependent on our performance during the winter holiday selling
season.
Our
Video Eyewear products require ongoing research and development
and we may experience technical problems or delays and may not
have the funds necessary to continue their development which
could lead our business to fail.
Our research and development efforts remain subject to all of
the risks associated with the development of new products based
on emerging and innovative technologies, including, for example,
unexpected technical problems or the possible insufficiency of
funds for completing development of these products. If we
experience technical problems or delays, further improvements in
our products and the introduction of future products could be
delayed, and we could incur significant additional expenses and
our business may fail.
We anticipate that we will require additional funds and further
US government engineering services contracts to maintain our
current levels of expenditure for research and development of
new products and technologies, and to obtain and maintain
patents and other intellectual property rights in these
technologies, the timing and amount of which are difficult to
forecast. Our cash on hand after the successful completion of
this offering coupled with the possibility of further negative
cash flow from operations may not be sufficient to meet all of
our future needs. We have no commitment for additional funds.
Any funds we need may not be available on commercially
reasonable terms or at all. If we cannot obtain any necessary
additional capital when needed, we might be forced to reduce our
research and development efforts which would materially and
adversely affect our business. If we attempt to raise capital in
an offering of shares of our common stock, preferred stock,
convertible securities or warrants, or if we engage in
acquisitions involving the issuance of such securities, our
then-existing stockholders interests will be diluted.
11
We
depend on advances in technology by other companies and if those
advances do not materialize, some of our products may not be
successfully commercialized and our anticipated new products
could be delayed or cancelled.
We rely on and will continue to rely on technologies (including
microdisplays) 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 we
fail to develop new products and adapt to new technologies, our
business and results of operations may be materially adversely
affected.
The market for our products is characterized by rapid changes in
products, designs and manufacturing process technologies. Our
success depends to a large extent on our ability to develop and
manufacture new products and technologies to match the varying
requirements of different customers and groups in order to
establish a competitive position and become profitable.
Furthermore, we must adapt our products and processes to
technological changes and emerging industry standards and
practices on a cost-effective and timely basis. Our failure to
accomplish any of the above could harm our business and
operating results.
Consumer electronics products are subject to rapid technological
changes. Companies within the consumer electronics industry are
continuously developing new products with increased performance
and functionality. This puts pricing pressure on existing
products and constantly threatens to make them, or causes them
to be, obsolete. During the last two fiscal years, we sold one
product below cost after introducing new product models and as a
result incurred a negative gross margin of approximately 20% or
approximately $28,000 in negative margin. As our unit sales
increase, our ability to manage and mitigate future clearance
discounting activities may be harder and greater sales with
negative margins could increase. Our typical product life cycle
is relatively short, generating lower average selling prices as
the cycle matures. With cost reductions in component design and
increased manufacturing volumes we have not faced significant
margin erosion as we introduce new models of our Video Eyewear
products. If we fail to accurately anticipate the introduction
of new technologies, we may possess significant amounts of
obsolete inventory that can only be sold at substantially lower
prices and gross margins than we anticipated. In addition, if we
fail to accurately anticipate the introduction of new
technologies, we may be unable to compete effectively due to our
failure to offer products most demanded by the marketplace. If
any of these failures occur, our sales, profit margins and
profitability will be adversely affected.
If
microdisplay-based personal displays do not gain some reasonable
level of acceptance in the market for mobile displays, our
business strategy may fail.
The mobile display market is dominated by displays larger than
one-inch, based on direct view liquid crystal display
(LCD) and organic light emitting display (OLED) technology.
A number of companies have made and continue to make substantial
investments in, and are conducting research to improve
characteristics of, small direct view LCDs. Many of the leading
manufacturers of these larger direct view LCDs, including LG
Electronics, Royal Philips Electronics, Samsung Electronics Co.,
Ltd., Sony Corporation and Sharp Corporation, are large,
established companies with global marketing capabilities,
widespread brand recognition and extensive financial resources.
Advances in LCD and OLED technology or other technologies may
overcome their current limitations and permit them to remain or
become more attractive technologies for personal viewing
applications, which could limit the potential market for our
Video Eyewear technology and cause our business strategy to fail.
It is difficult to assess or predict with any certainty the
potential size, timing and viability of market opportunities for
our microdisplay-based Video Eyewear products or their market
acceptance. Market acceptance of Video Eyewear technology will
depend, in part, upon consumer acceptance of
near-to-eye
displays and upon microdisplay technology providing benefits
comparable to or greater than those provided by alternative
direct view display technology at a competitive price. If
consumers fail to accept
near-to-eye
displays in the numbers we anticipate or as soon as we
anticipate, the sales of our Video Eyewear products and our
results of operations would be adversely affected and our
business strategy may fail.
12
There
are a number of competing providers of microdisplay-based
personal display technology and we may fail to capture a
substantial portion of the personal display
market.
In addition to competing with direct view displays, we also
compete with microdisplay-based personal display technologies
that have been developed by other companies. Our primary
personal display competitors include DaeYang Co., Ltd., Ilixco
Inc., MyVu Corporation (MyVu), Carl Zeiss, Inc. (Zeiss), 5DT
Inc., eMagin Corporation (eMagin), Kopin Corporation (Kopin),
Lumus Ltd. (Lumus) and Kaiser Electro Optics Inc. (Kaiser).
Additionally, at recent technology exhibitions Sony and Brother
International Corporation have demonstrated personal display
glasses that look like sunglasses. Most of our
microdisplay-based competitors have greater financial,
marketing, distribution and technical resources than we do.
Certain of these competing microdisplay-based technologies
entered the marketplace prior to us. Moreover, our competitors
may succeed in developing new microdisplay-based personal
display technologies that are more affordable or have more or
more desirable features than our technology. If our products are
unable to capture a substantial portion of the personal display
market, our business strategy may fail.
Our
business and products are subject to government regulation and
we may incur additional compliance costs or, if we fail to
comply with applicable regulations, may incur fines or be forced
to suspend or cease operations.
Our products must comply with certain requirements of the US
Federal Communications Commission (FCC) regulating
electromagnetic radiation in order to be sold in the US and with
comparable requirements of the regulatory authorities of the
European Union (EU) and other jurisdictions in order to be sold
in those jurisdictions. We are also subject to various
governmental regulations related to toxic, volatile, and other
hazardous chemicals used in connection with parts of our
manufacturing process, including the Restriction of Certain
Hazardous Substances Directive (RoHS) issued by the EU effective
July 1, 2006. This directive restricts the distribution of
products within the EU that exceed very low maximum
concentration values of certain substances, including lead.
We believe that all our current consumer products comply with
the regulations of the jurisdictions in which they are sold. Our
failure to comply with these regulations in the future could
result in the imposition of fines or in the suspension or
cessation of our operations in the applicable jurisdictions.
Additional regulations applicable to our business may be enacted
in the United States or other jurisdictions in the future.
Compliance with regulations enacted in the future could
substantially increase our cost of doing business or otherwise
have a material adverse effect on our results of operations and
our business.
Our
products will likely experience rapidly declining unit prices
and we may not be able to offset that decline with production
cost decreases or higher unit sales.
In the markets in which we expect to compete, prices of
established products tend to decline significantly over time. In
order to maintain our profit margins over the long term, we
believe that we will need to continuously develop product
enhancements and new technologies that will either slow price
declines of our products or reduce the cost of producing and
delivering our products. While we anticipate many opportunities
to reduce production costs over time, we may not be able to
reduce our production costs. We expect to attempt to offset the
anticipated decrease in our average selling price by introducing
new products, increasing our sales volumes or adjusting our
product mix. If we fail to do so, our results of operations will
be materially and adversely affected.
If we
cannot obtain and maintain appropriate patent and other
intellectual property rights protection for our technology, our
business will suffer.
The value of our personal display and related technologies is
dependent on our ability to secure and maintain appropriate
patent and other intellectual property rights protection. We
intend to continue to aggressively pursue additional patent
protection for our new products and technology. Although we own
many patents covering our technology that have already been
issued, we may not be able to obtain additional patents that we
apply for, or that any of these patents, once issued, will give
us commercially significant protection for our technology, or
will be found valid if challenged. Moreover, we have not
obtained patent protection for some of our technology in all
foreign countries in which our products might be manufactured or
sold. In any event, the patent laws and
13
enforcement regimes of other countries may differ from those of
the United States as to the patentability of our personal
display and related technologies and the degree of protection
afforded.
Any patent or trademark owned by us may be challenged and
invalidated or circumvented. Patents may not issue from any of
our pending or future patent applications. Any claims and issued
patents or pending patent applications may not be broad or
strong enough and may not be issued in all countries where our
products can be sold or our technologies can be licensed to
provide meaningful protection against any commercial damage to
us. Further, others may develop technologies that are similar or
superior to our technologies, duplicate our technologies or
design around the patents owned by us. Effective intellectual
property protection may be unavailable or limited in certain
foreign countries. Despite our efforts to protect our
proprietary rights, unauthorized parties may attempt to copy or
otherwise use aspects of our processes and devices that we
regard as proprietary. Policing unauthorized use of our
proprietary information and technology is difficult and our
efforts to do so may not prevent misappropriation of our
technologies. In the event that our intellectual property
protection is insufficient to protect our intellectual property
rights, we could face increased competition in the market for
our products and technologies, which could have a material
adverse effect on our business, financial condition and results
of operations.
We may become engaged in litigation to protect or enforce our
patent and other intellectual property rights or in
International Trade Commission proceedings to abate the
importation of goods that would compete unfairly with our
products. In addition, we may have to participate in
interference or reexamination proceedings before the
US Patent and Trademark Office, or in opposition,
nullification or other proceedings before foreign patent
offices, with respect to our patents or patent applications. All
of these actions would place our patents and other intellectual
property rights at risk and may result in substantial costs to
us as well as a diversion of management attention. Moreover, if
successful, these actions could result in the loss of patent or
other intellectual property rights protection for the key
technologies on which our business strategy depends.
In addition, we rely in part on unpatented proprietary
technology, and others may independently develop the same or
similar technology or otherwise obtain access to our unpatented
technology. To protect our trade secrets, know-how and other
proprietary information, we require employees, consultants,
financial advisors and strategic partners to enter into
confidentiality agreements. These agreements may not provide
meaningful protection for our trade secrets, know-how or other
proprietary information in the event of any unauthorized use,
misappropriation or disclosure of those trade secrets, know-how
or other proprietary information. In particular, we may not be
able to fully or adequately protect our proprietary information
as we conduct discussions with potential strategic partners. If
we are unable to protect the proprietary nature of our
technology, it will harm our business.
Despite our efforts to protect our intellectual property rights,
intellectual property laws afford us only limited protection. A
third party could copy or otherwise obtain information from us
without authorization. Accordingly, we may not be able to
prevent misappropriation of our intellectual property or to
deter others from developing similar products or services.
Further, monitoring the unauthorized use of our intellectual
property is difficult. Litigation may be necessary to enforce
our intellectual property rights or to determine the validity
and scope of the proprietary rights of others. Litigation of
this type could result in substantial costs and diversion of
resources, may result in counterclaims or other claims against
us and could significantly harm our results of operations. In
addition, the laws of some foreign countries do not protect our
proprietary rights to the same extent as do the laws of the
United States.
As is commonplace in technology companies, we employ individuals
who were previously employed at other technology companies. To
the extent our employees are involved in research areas that are
similar to those areas in which they were involved at their
former employers, we may be subject to claims that such
employees or we have, inadvertently or otherwise, used or
disclosed the alleged trade secrets or other proprietary
information of the former employers. Litigation may be necessary
to defend against such claims. Litigation of this type could
result in substantial costs to us and divert our resources.
We also depend on trade secret protection through
confidentiality and license agreements with our employees,
subsidiaries, licensees, licensors and others. We may not have
agreements containing adequate protective provisions in every
case, and the contractual provisions that are in place may not
provide us with adequate protection in all circumstances. The
unauthorized reproduction or other misappropriation of our
intellectual property could diminish the value of our brand,
competitive advantages or goodwill and result in decreased sales.
14
We may
incur substantial costs or lose important rights as a result of
litigation or other proceedings relating to our products,
patents and other intellectual property rights.
In recent years, there has been significant litigation involving
patents and other intellectual property rights in many
technology-related industries. Until recently, patent
applications were retained in secrecy by the US Patent and
Trademark Office until and unless a patent was issued. As a
result, there may be US patent applications pending of which we
are unaware that may be infringed by the use of our technology
or a part thereof, thus substantially interfering with the
future conduct of our business. In addition, there may be issued
patents in the United States or other countries that are
pertinent to our business of which we are not aware. We and our
customers could be sued by other parties for patent infringement
in the future. Such lawsuits could subject us and them to
liability for damages or require us to obtain additional
licenses that could increase the cost of our products, which
might have an adverse affect on our sales.
In addition, in the future we may assert our intellectual
property rights by instituting legal proceedings against others.
We may not be able to successfully enforce our patents in any
lawsuits we may commence. Defendants in any litigation we may
commence to enforce our patents may attempt to establish that
our patents are invalid or are unenforceable. Any patent
litigation could lead to a determination that one or more of our
patents are invalid or unenforceable. If a third party succeeds
in invalidating one or more of our patents, that party and
others could compete more effectively against us. Our ability to
derive sales from products or technologies covered by these
patents could be adversely affected.
Whether we are defending the assertion of third party
intellectual property rights against our business as a result of
the use of our technology, or we are asserting our own
intellectual property rights against others, such litigation can
be complex, costly, protracted and highly disruptive to our
business operations by diverting the attention and energies of
management and key technical personnel. As a result, the
pendency or adverse outcome of any intellectual property
litigation to which we are subject could disrupt business
operations, require the incurrence of substantial costs and
subject us to significant liabilities, each of which could
severely harm our business.
Plaintiffs in intellectual property cases often seek injunctive
relief. Any intellectual property litigation commenced against
us could force us to take actions that could be harmful to our
business and thus to our sales, including the following:
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discontinuing selling the products that incorporate or otherwise
use technology that contains our allegedly infringing
intellectual property;
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attempting to obtain a license to the relevant third party
intellectual property, which may not be available on reasonable
terms or at all; or
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attempting to redesign our products to remove our allegedly
infringing intellectual property.
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If we are forced to take any of the foregoing actions, we may be
unable to manufacture and sell products that incorporate our
technology at a profit or at all. Furthermore, the measure of
damages in intellectual property litigation can be complex, and
is often subjective or uncertain. If we were to be found liable
for infringement of proprietary rights of a third party, the
amount of damages we might have to pay could be substantial and
is difficult to predict. Decreased sales of our products
incorporating our technology would adversely affect our sales.
Any necessity to procure rights to the third party technology
might cause us to negotiate the royalty terms of the third party
license which could increase our cost of production or, in
certain cases, terminate our ability to build some of our
products entirely.
If we
fail to renew, register or otherwise protect our trademarks, the
value of our brand names may decline and we may be unable to use
those names in certain geographical areas.
We believe our copyrights and trademarks are critical to our
success. We rely on trademark, copyright and other intellectual
property laws to protect our proprietary rights. If we fail to
properly register and otherwise protect our trademarks, service
marks and copyrights, we may lose our rights, or our exclusive
rights, to them. In that case, our ability to effectively market
and sell our products and services could suffer, which could
harm our business.
15
Our
business and results of operations may suffer if there are, or
if users claim there are, negative effects on eyesight from the
long-term use of our products.
The personal display products that we currently market or may
introduce and market in the future are new and utilize new
technology. While virtual display technology has been in use
over the past 25 years, sales to the general public have
been limited. Extensive and continual viewing of any display,
including standard computer monitors, for hours each day has the
potential to negatively affect eyesight. Accordingly, it is
possible that prolonged use of our products may adversely affect
a users eyesight. We design our products with these
considerations in mind to attempt to minimize any potential
negative impact. We warn users that extensive daily use without
appropriate rest periods may cause eye fatigue that could result
in temporary or permanent damage (in much the same way that a
computer monitor manufacturers now warn users about long-term
computer use). Despite our efforts, we may be unable to overcome
this risk and such risk could result in claims against us by
users of our products. Any such claims, whether or not we are
ultimately held liable for them, could diminish the value of our
brand, competitive advantages or goodwill and may result in
decreased sales and we could incur significant expense in
defending against any such claims. In addition, if we are
ultimately held liable for any such claims, the resulting
liabilities may have a material adverse effect on our business,
financial condition and results of operations.
Product
liability claims, whether or not we are ultimately held liable
for them, could have a material adverse affect on our business
and results of operations.
Our business may expose us to product liability claims. Although
no such claims have been brought against us to date, and to our
knowledge no such claim is threatened or likely, we may face
liability to product users for damages resulting from the design
or manufacture of our products. Any such claims, whether or not
we are ultimately held liable for them, could diminish the value
of our brand, competitive advantages or goodwill and result in
decreased sales and we could incur significant expense in
defending against any such claims. While we plan to obtain and
maintain product liability insurance coverage, product liability
claims made against us may exceed coverage limits or fall
outside the scope of such coverage. Also, insurance may not be
available at commercially reasonable rates or at all. We do not
have any such product liability insurance in effect.
Our
results of operations may suffer if we are not able to
successfully manage our increasing exposure to foreign exchange
rate risks.
A substantial majority of our sales and cost of components are
denominated in US dollars. As our business grows both our sales
and production costs may increasingly be denominated in other
currencies. Where such sales or production costs are denominated
in other currencies, they are converted to US dollars for the
purpose of calculating any sales or costs to us. Our sales may
decrease as a result of any appreciation of the US dollar
against these other currencies. The proceeds of this offering
will be denominated in Canadian dollars and any substantial
appreciation of the US dollar against the Canadian dollar during
this offering may materially adversely affect our liquidity and
capital resources.
The majority of our current expenditures are incurred in US
dollars and many of our components come from countries that
currently peg their currency against the US dollar. If the US
dollar depreciates versus these foreign currencies, additional
US dollars will be required to fund our purchases of these
components.
Although we do not currently enter into currency option
contracts or engage in other hedging activities, we may do so in
the future. We can not assure you that we will undertake any
such hedging activities or that, if we do so, they will be
successful in reducing the risks to us of our exposure to
foreign currency fluctuations.
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Due to
our significant level of international operations, we are
subject to international operational, financial, legal and
political risks.
A substantial part of our operations are expected to be outside
of the United States and many of our customers and suppliers
have some or all of their operations in countries other than the
United States. Risks associated with our doing business outside
of the United States include:
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compliance with a wide variety of foreign laws and regulations,
particularly labor, environmental and other laws and regulations
that govern our operations in those countries;
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legal uncertainties regarding taxes, tariffs, quotas, export
controls, export licenses, import controls and other trade
barriers;
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economic instability in the countries of our suppliers and
customers, particularly in the Asia-Pacific region, causing
delays or reductions in orders for their products and therefore
our sales;
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political instability in the countries in which our suppliers
operate, particularly in China and Taiwan;
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difficulties in collecting accounts receivable and longer
accounts receivable payment cycles; and
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potentially adverse tax consequences.
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Any of these factors could harm our own, our suppliers and
our customers international operations and businesses and
impair our and their ability to continue expanding into
international markets.
We may
lose the services of key management personnel and may not be
able to attract and retain other necessary
personnel.
Changes in our management could have an adverse effect on our
business. This is especially an issue while our staff is small.
We are dependent upon the active participation of several key
management personnel, including Paul J. Travers, our
President and Chief Executive Officer (CEO). We do not carry key
person life insurance on any of our senior management or other
key personnel other than our CEO. While we have some life
insurance coverage on our CEO, we do not believe it would be
sufficient to completely protect us against losses we may suffer
if his services were to become unavailable to us in the future.
Our Chief Financial Officer, Grant Russell, a Canadian citizen,
currently has his principal residence in Vancouver, Canada and a
second residence in Rochester, New York. If he becomes unable to
legally travel to and work in the United States, his ability to
perform some of his duties could be materially adversely
affected.
We must hire highly skilled technical personnel as employees and
as independent contractors in order to develop our products. As
of the date of this prospectus we have 52 full-time
employees. The competition for highly skilled technical,
managerial and other personnel is intense and we may not be able
to retain or recruit such personnel. Our recruiting and
retention success is substantially dependent on our ability to
offer competitive salaries and benefits to our employees. We
must compete with companies that possess greater financial and
other resources than we do and that may be more attractive to
potential employees and contractors. To be competitive, we may
have to increase the compensation, bonuses, stock options and
other fringe benefits offered to employees in order to attract
and retain such personnel. The costs of retaining or attracting
new personnel may have a material adverse effect on our business
and operating results. If we fail to attract and retain the
technical and managerial personnel we need to be successful, our
business, operating results and financial condition could be
materially adversely affected.
Our
failure to effectively manage growth could harm our
business.
We have rapidly and significantly expanded the number and types
of products we sell, and we will endeavor to further expand our
product portfolio. We must regularly introduce new products and
technologies, enhance existing products, and effectively
stimulate customer demand for new products and upgraded versions
of our existing products.
17
This expansion of our products places a significant strain on
our management, operations and engineering resources.
Specifically, the areas that are strained most by our growth
include the following:
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New Product Launch: With the growth of our
product portfolio, we experience increased complexity in
coordinating product development, manufacturing, and shipping.
As this complexity increases, it places a strain on our ability
to accurately coordinate the commercial launch of our products
with adequate supply to meet anticipated customer demand and
effective marketing to stimulate demand and market acceptance.
If we are unable to scale and improve our product launch
coordination, we could frustrate our customers and lose retail
shelf space and product sales;
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Forecasting, Planning and Supply Chain
Logistics: With the growth of our product
portfolio, we also experience increased complexity in
forecasting customer demand, in planning for production, and in
transportation and logistics management. If we are unable to
scale and improve our forecasting, planning and logistics
management, we could frustrate our customers, lose product sales
or accumulate excess inventory; and
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Support Processes: To manage the growth of our
operations, we will need to continue to improve our transaction
processing, operational and financial systems, and procedures
and controls to effectively manage the increased complexity. If
we are unable to scale and improve these areas, the consequences
could include: delays in shipment of product, degradation in
levels of customer support, lost sales, decreased cash flows,
and increased inventory. These difficulties could harm or limit
our ability to expand.
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Our
facilities and information systems and those of our key
suppliers could be damaged as a result of disasters or
unpredictable events, which could have an adverse effect on our
business operations.
We operate the vast majority of our business from three
locations in the Rochester, New York area. We also rely on third
party manufacturing plants in China and third party logistics,
sales and marketing facilities in other parts of the world to
provide key components of our Video Eyewear products and
services necessary for our operations. If major disasters such
as earthquakes, fires, floods, wars, terrorist attacks, computer
viruses, transportation disasters or other events occur in any
of these locations, or our information systems or communications
network or those of any of our key component suppliers breaks
down or operates improperly as a result of such events, our
facilities or those of our key suppliers may be seriously
damaged, and we may have to stop or delay production and
shipment of our products. We may also incur expenses relating to
such damages. If production or shipment of our products or
components is stopped or delayed or if we incur any increased
expenses as a result of damage to our facilities, our business,
operating results and financial condition could be materially
adversely affected.
We
generally do not have long-term contracts with our customers and
therefore we may not be able to accurately forecast inventory
requirements and sales.
Our business is operated on the basis of short-term purchase
orders and engineering contracts that typically do not exceed
12 months in duration. We cannot guarantee that we will be
able to obtain long-term contracts in the future. The purchase
orders that we receive can often be cancelled or revised without
penalty. In the absence of a backlog of orders that can only be
canceled with penalty, we plan production on the basis of
internally generated forecasts of demand, which makes it
difficult to accurately forecast inventory requirements and
sales. Large supply line commitments and large inventories of
various components will be required to support our business and
provide reasonable order fulfillment for customers. If we fail
to accurately forecast operating requirements, our business may
suffer and the value of your investment in us may decline.
Terrorism
and the uncertainty of future terrorist attacks or war could
reduce consumer confidence which could adversely affect our
operating results.
Terrorist acts or acts of war may cause damage or disruption to
our facilities, information systems, vendors, employees and
customers, which could significantly harm our sales and results
of operations. In the future, fears of war or additional acts of
terrorism may have a negative effect on consumer confidence or
consumer discretionary spending patterns, as well as have an
adverse effect on the economy in general. This impact may be
particularly
18
harmful to our business because we expect to rely heavily on
discretionary consumer spending and consumer confidence levels.
RISKS
RELATED TO MANUFACTURING
We do
not manufacture our own microdisplays, one of the key components
of our Video Eyewear products, and we may not be able to obtain
the microdisplays we need.
We do not currently own or operate any manufacturing facilities
for microdisplays, one of the key components in our Video
Eyewear products. We currently purchase almost all of the
microdisplays used in our products from Kopin and eMagin. Kopin
accounts for approximately 95% of our microdisplays by unit
volume. We estimate that products incorporating Kopin
microdisplays will account for approximately 56% of our sales in
2009 and products incorporating eMagin microdisplays will
account for approximately 19% of our sales in 2009. Our
relationships with both Kopin and eMagin generally are on a
purchase order basis and neither supplier has a contractual
obligation to provide adequate supply or acceptable pricing on a
long-term basis. Both Kopin and eMagin could discontinue
sourcing merchandise for us at any time. If Kopin or eMagin were
to discontinue their relationships with us, or discontinue
providing specific products to us, and we are unable to contract
with a new supplier that can meet our requirements, or if Kopin
or eMagin or such other supplier were to suffer a disruption in
their production, we could experience disruption of our
inventory flow, a decrease in sales and the possible need to
redesign our products. Any such event could disrupt our
operations and have an adverse effect on our business, financial
condition and results of operations.
Certain other components and services necessary for the
manufacture of our products are available from only a limited
number of sources, and other components and services are only
available from a single source.
Our inability to obtain sufficient quantities of high quality
components or services on a timely basis could result in future
manufacturing delays, increased costs and ultimately in reduced
or delayed sales or lost orders which could materially and
adversely affect our operating results.
The
consumer electronics industry is subject to significant
fluctuations in the availability of components. If we do not
properly anticipate the need for critical components, we may be
unable to meet the demands of our customers and
end-users.
The availability of certain of the components that we require to
produce our Video Eyewear products may decrease. As the
availability of components decreases, the cost of acquiring
those components ordinarily increases. High growth product
categories have experienced chronic shortages of components
during periods of exceptionally high demand. If we do not
properly anticipate the need for or procure critical components,
we may pay higher prices for those components, our gross margins
may decrease and we may be unable to meet the demands of our
customers and end-users, which could reduce our competitiveness,
cause a decline in our market share and have a material adverse
effect on our results of operations.
Unanticipated
disruptions in our operations or slowdowns by our suppliers,
distributors and shipping companies could adversely affect our
ability to deliver our products and service our
customers.
Our ability to provide high quality customer service, process
and fulfill orders and manage inventory depends on the
efficient, timely and uninterrupted performance of our
manufacturing and distribution facilities and our management
information systems and the facilities and systems of our third
party suppliers, distributors and shipping companies.
Any material disruption or slowdown in the operation of our
manufacturing and distribution facilities or our management
information systems, or comparable disruptions or slowdowns
suffered by our principal suppliers, distributors or shippers
could cause delays in our ability to receive, process and
fulfill customer orders and may cause orders to be canceled,
lost or delivered late, goods to be returned or receipt of goods
to be refused. If any of these events occur, our sales and
operating results could be materially and adversely affected.
19
If we
acquire any companies or technologies in the future, they could
prove difficult to integrate, disrupt our business, dilute
stockholder value or have an adverse effect on our results of
operations.
We intend to expand our business primarily through internal
growth, but from time to time we may consider strategic
acquisitions. Any future acquisition would involve numerous
risks including:
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potential disruption of our ongoing business and distraction of
management;
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difficulty integrating the operations and products of the
acquired business;
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unanticipated expenses related to technology integration;
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exposure to unknown liabilities, including litigation against
the companies we may acquire;
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additional costs due to differences in culture, geographic
locations and duplication of key talent; and
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potential loss of key employees or customers of the acquired
company.
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Additionally, to finance an acquisition we may incur substantial
amounts of indebtedness, which would affect our balance sheet
and results of operations, or we may issue a substantial number
of shares of our common stock, which may be dilutive to our
stockholders. If we make acquisitions in the future,
acquisition-related accounting charges may affect our balance
sheet and results of operations. We may not be successful in
addressing these risks or any other problems encountered in
connection with any acquisitions.
RISKS
RELATING TO THIS OFFERING
There
is currently no trading market for our securities and if an
established trading market does not develop holders of our
common stock and warrants may not be able to resell their
securities at or near the offering price or at any
price.
Our securities are not currently listed or quoted on any
national securities exchange or national quotation system. We
have applied to list our common stock issuable upon exercise of
the warrants included in the units offered under this prospectus
on the TSX-V
under the symbol
l.
Listing of our common stock will be subject to fulfilling all of
the requirements of the
TSX-V. We
have also applied for listing of the warrants included in the
units on the
TSX-V under
the symbol
l.
Listing of our warrants included in the units will be subject to
fulfilling all of the requirements of the
TSX-V,
including distribution of the warrants to a minimum number of
public security holders. Neither the
TSX-V nor
any other exchange or quotation system, may not permit our
common stock to be listed and traded. Even if our common stock
or warrants are accepted for listing on the
TSX-V, the
TSX-V has
continuing listing requirements and we may not be able to comply
with those requirements and maintain our listing. If our common
stock and warrants are not listed on the
TSX-V, we
may seek to have them quoted on the OTC Bulletin Board of
the US Financial Industry Regulatory Authority, Inc. (FINRA).
The OTC Bulletin Board is an inter-dealer, over-the-counter
market that provides significantly less liquidity and
transparency than the
TSX-V.
Therefore, prices for securities traded solely on the OTC
Bulletin Board may be difficult to obtain and holders of
our common stock and warrants may be unable to resell their
securities at or near their original offering price or at
any price.
Purchasers
of our units may not be able to exercise their warrants if we
cannot maintain a current prospectus relating to the common
stock underlying the warrants.
The warrants included in the units may be exercised only if at
the time of exercise (i) a prospectus relating to the
issuance of the shares of our common stock underlying the
warrants is then current or an exemption from registration under
the federal securities laws is available and (ii) those
shares are registered or qualified for sale or exempt from
registration or qualification under the securities laws of the
states in which the holders of the warrants reside. The issuance
of the shares of our common stock underlying the warrants is
covered by this prospectus but we may not be able to keep this
prospectus or any other prospectus we file with the SEC covering
the issuance of those shares current and such exemptions may not
be available. We intend to apply to register or qualify the
issuance of those shares in California, Connecticut, Delaware,
Florida, Georgia, Illinois, Maryland, Massachusetts, Nevada, New
Jersey, New York, Ohio, Oregon, Virginia and Washington but we
may not be able to maintain those
20
registrations or qualifications. If we are not able to do so
and no exemption from registration is available, the holders of
the warrants will not able to exercise their warrants and they
will expire unexercised. We have no obligation to compensate the
holders if they are not able to exercise their warrants because
we have failed to maintain the effectiveness of a registration
statement filed with the SEC or the registration or
qualification filed with any state. If the warrants expire
unexercised, the purchasers of units will have effectively paid
the entire initial public offering price per unit for one share
of our common stock.
Purchasers
of our units may not be able to resell their shares of common
stock or warrants at or near the offering price because the
offering price for our units may not be indicative of their fair
market value.
The offering price range for our units was determined in the
context of negotiations between us and the agents. Accordingly,
the offering price may not be indicative of the fair market
value of our company or the fair market value of our common
stock or the warrants included in the units. We are making no
representations that the offering price of our units under this
prospectus bears any relationship to our assets, book value, net
worth or any other recognized criteria of our value. If an
established trading market for our common stock or warrants
develops, the prevailing prices in that market may be
substantially less than the original offering price.
The
market price of our common stock and warrants may decline
because of the number of shares of our common stock eligible for
future sale in the public marketplace.
The price of our common stock and warrants could decline if
there are substantial sales of our common stock in the public
market after this offering. Based on the number of shares of our
common stock outstanding as of the date of this prospectus after
pro-forma adjustments, upon completion of this offering the
number of shares of our common stock outstanding will be between
275,105,285 (assuming that we receive the minimum gross proceeds
from this offering (Cdn$6,000,000) at an initial public offering
price of Cdn$0.15 (the minimum of our estimated initial public
offering price range)) and 285,305,285 (assuming that we sell
the maximum number of units offered under this prospectus). All
of the shares sold in this offering will be freely tradable
without restriction or further registration under the Securities
Act, except for any of those shares held by our
affiliates, as that term is defined in Rule 144
under the Securities Act, whose sales would be subject to the
volume and manner of sale limitations of Rule 144 described
below. In addition, 134,836,808 shares of our common stock
currently outstanding, or between approximately 47% and 49% of
our common stock outstanding after this offering depending on
the number of units sold, may be resold at any time, subject to
the lock-up
agreements and
TSX-V escrow
arrangements and seed share resale restrictions described below.
Our executive officers and directors currently own
82,987,672 shares, or approximately 29% of our common stock
outstanding after this offering, which are eligible for resale
subject to the volume and manner of sale limitations of
Rule 144 and subject to the
lock-up
agreements and
TSX-V escrow
arrangements described below. The remaining
2,444,447 shares of our common stock currently outstanding,
or approximately 0.9% of our common stock outstanding after this
offering, are restricted under Rule 144 and are
eligible for sale under the provisions of Rule 144. See
Shares Eligible for Future Resale.
Additionally, under our fiscal advisory fee agreement with the
Canadian agents, we are obligated to issue to the Canadian
agents at the closing of this offering, in payment of a fiscal
advisory fee, that number of shares of our common stock equal
to, depending on the gross proceeds of the offering, between
1.0% and 2.0% of our common stock issued and outstanding
immediately upon the closing of the offering. The issuance of
those shares to the Canadian agents is not covered by this
prospectus. The shares issued to our Canadian agents under the
agreement will be subject to resale restrictions in accordance
with applicable US and Canadian securities laws and contractual
resale restrictions for a period of one year following the
closing of the offering under the
lock-up
agreements described below.
After this offering and the expiration of the
lock-up
periods, the holders of an aggregate of 31,764,437 shares
of our common stock will have rights, subject to some
conditions, to require us to include their shares in
registration statements that we may file for ourselves or other
stockholders. We also intend to register for resale all shares
of common stock that we have issued and may issue under our
option plans. Once we register these shares, subject to any
lock-up
restrictions, if any, they can be freely sold in the public
market. Furthermore, our agents may, at their discretion and at
any time without notice, release all or any portion of the
securities from the restrictions on sale imposed by
lock-up
agreements. Due to
21
these factors, sales of a substantial number of shares of our
common stock in the public market could occur at any time. These
sales, or the perception in the market that the holders of a
large number of shares are able to or intend to sell shares,
could reduce the market price of our common stock. See
Dilution.
Purchasers
of our units may not be able to resell their shares of common
stock or warrants at or above the initial public offering price
because the market price of our common stock and warrants may be
highly volatile.
Prior to this offering, there has been no public market for our
securities. We have applied to list our common stock on the
TSX-V under the symbol
l .
Listing of our common stock will be subject to fulfilling all of
the requirements of the TSX-V. We have also applied for listing
of the warrants included in the units on the TSX-V under the
symbol
l .
Listing of our warrants included in the units will be subject to
fulfilling all of the requirements of the TSX-V, including
distribution of the warrants to a minimum number of public
security holders. An active trading market for our common stock
and warrants may not develop following this offering. You may
not be able to sell your common stock or warrants quickly or at
the market price if trading in our common stock or warrants is
not active.
The market for our common stock and warrants will likely be
characterized by significant price volatility when compared to
more established issuers and we expect that it will continue to
be so for the foreseeable future. The market prices of our
common stock and warrants are likely to be volatile for a number
of reasons. First, our common stock and warrants are likely to
be sporadically
and/or
thinly traded. As a consequence of this lack of liquidity, the
trading of relatively small quantities of common stock or
warrants may disproportionately influence their prices in either
direction. The price of the common stock could, for example,
decline precipitously if even a relatively small number of
shares are sold on the market without commensurate demand, as
compared to a market for shares of an established issuer which
could better absorb those sales without adverse impact on its
share price. Secondly, we are a speculative or risky
investment due to our small amount of sales and lack of profits
to date and uncertainty of future market acceptance for our
current and potential products or engineering services. As a
consequence of this enhanced risk, more risk-adverse investors
may, under the fear of losing all or most of their investment in
the event of negative news or lack of progress, be more inclined
to sell their common stock or warrants on the market more
quickly and at greater discounts than would be the case with the
securities of an established issuer. We cannot make any
predictions or projections as to what the prevailing market
prices for our securities will be at any time or as to what
effect the sale of our securities or the availability of our
securities for sale at any time will have on the prevailing
market price.
Purchasers
of our units will experience immediate and substantial dilution
because their securities will be worth less on a net tangible
book value basis than the amount they invested.
The price that will be paid by investors in this offering for
our units will be significantly higher than the net tangible
book value per share of our common stock. Purchasers of our
units will experience immediate and substantial dilution of
between $(0.1391) assuming that we receive the minimum gross
proceeds from this offering (Cdn$6,000,000) at an initial public
offering price of Cdn$0.15 (the minimum of our estimated initial
public offering price range) based on the sale of 40,000,000
units and $(0.2151) assuming that we sell the maximum number of
units offered under this prospectus (50,000,000 units) at an
initial public offering price of Cdn$0.25 (the maximum of our
estimated initial public offering price range). In addition, a
majority of our outstanding options, warrants, convertible debt
and convertible preferred stock may be exercised for or
converted into shares of our common stock at prices that are
below the expected purchase price paid by investors in this
offering. In connection with this offering, we will issue
warrants as part of the units and agent options exercisable to
purchase that number of shares of our common stock and warrants
equal to 12.5% of the aggregate number of shares of our common
stock and warrants sold under the offering, at the initial
public offering price per share and warrant, for a period of
12 months from the closing date. To the extent that these
outstanding options, warrants, convertible debt or convertible
preferred stock are exercised or converted, there may be further
dilution to investors. In addition, under our fiscal advisory
fee agreement with the Canadian agents, we are obligated to
issue to the Canadian agents at the closing of this offering, in
payment of a fiscal advisory fee, that number of shares of our
common stock equal to, depending on the gross proceeds of the
offering, between 1.0% and 2.0% of our common stock issued and
22
outstanding immediately upon the closing of the offering, which
will further dilute investors. Accordingly, in the event we are
liquidated, investors may not receive the full amount of their
investment. See Dilution.
If
management continues to own a significant percentage of our
outstanding common stock management may prevent other
stockholders from influencing significant corporate
decisions.
Our officers and directors currently own approximately 38% of
the outstanding shares of our common stock. Following the
completion of this offering, our executive officers and
directors will own between approximately 31% (assuming that we
receive the minimum gross proceeds from this offering
(Cdn$6,000,000) at an initial public offering price of Cdn$0.15
(the minimum of our estimated initial public offering price
range) and approximately 30% (assuming that we sell the maximum
number of units offered under this prospectus (50,000,000
units)) of the outstanding shares of our common stock. As a
result, our management will exercise significant control over
matters requiring stockholder approval, including the election
of our board of directors, the approval of mergers and other
extraordinary transactions, as well as the terms of any of these
transactions. This concentration of ownership could have the
effect of delaying or preventing a change in our control or
otherwise discouraging a potential acquirer from attempting to
obtain control of us, which could in turn have an adverse effect
on the fair market value of our company and our common stock.
The interests of these and other of our existing stockholders
may conflict with the interests of our other stockholders.
Management
will have broad discretion as to the use of the proceeds from
this offering and may use the proceeds for purposes different
from their current intent or not utilize the proceeds
effectively.
While we intend to use the net proceeds of this offering to fund
capital expenditures, sales and marketing efforts and research
and development, repay bank and certain other borrowings, and
for general corporate purposes, including working capital, we
will have broad discretion to adjust the application and
allocation of the net proceeds in order to address changed
circumstances and opportunities. The success of our operations
that are influenced by capital expenditures, research and
development and working capital allocations will be
substantially dependent upon the discretion and judgment of our
management with respect to the application and allocation of the
net proceeds of this offering. Our management will have broad
discretion as to the application of the net proceeds and could
use them for purposes other than those contemplated at the time
of this offering. Moreover, our management may use the net
proceeds for corporate purposes that may not lead to
profitability or increase the fair market value of our company
or our common stock.
It may
be difficult for us to attract or retain qualified officers and
directors because of the rules and regulations that we will be
subject to as a public company.
As a public company, the Sarbanes-Oxley Act of 2002
(Sarbanes-Oxley) and the related rules and regulations of the
SEC, as well as the rules and regulations of applicable Canadian
securities regulators and the rules of the
TSX-V
(if our listing application is accepted), will require us
to implement additional corporate governance practices and
adhere to a variety of reporting requirements and complex
accounting rules. Among other things, we will be subject to
rules regarding the independence of the members of our board of
directors and committees of the board and their experience in
finance and accounting matters and certain of our executive
officers will be required to provide certifications in
connection with our quarterly and annual reports filed with the
SEC and applicable Canadian securities regulators. The perceived
increased personal risk associated with these rules may deter
qualified individuals from accepting these positions.
Accordingly, we may be unable to attract and retain qualified
officers and directors. If we are unable to attract and retain
qualified officers and directors, our business and our ability
to obtain or maintain the listing of our shares of common stock
on a stock exchange could be adversely affected.
If we
fail to implement and maintain an effective system of internal
controls, we may not be able to accurately report our financial
results or prevent fraud and may fail to comply with SEC rules
and the rules and regulations of applicable Canadian securities
regulators.
We must implement and maintain effective internal financial
controls for us to provide reliable and accurate financial
reports and effectively prevent fraud. Implementation and
maintenance of effective internal financial controls will depend
on the effectiveness of our financial reporting and data systems
and controls. We expect these
23
systems and controls to become increasingly complex to the
extent that our business grows. To effectively manage this
growth, we will need to continue to improve our operational,
financial and management controls and our reporting systems and
procedures. We cannot be certain that these measures will ensure
that we design, implement and maintain adequate controls over
our financial processes and reporting in the future. Any failure
to implement required new or improved controls, or difficulties
encountered in their implementation or operation, could harm our
operating results or cause us to fail to meet our financial
reporting obligations. Inferior internal controls could also
cause investors to lose confidence in our reported financial
information, which could have a negative effect on the market
price of our common stock and our access to capital.
Rules adopted by the SEC pursuant to Section 404 of
Sarbanes-Oxley require annual assessment of our internal control
over financial reporting, and attestation of this assessment by
our independent registered public accountants. Under the SEC
rules currently in effect, both the management assessment of our
internal control over financial reporting and the attestation of
managements assessment by our independent registered
public accountants will first apply to our annual report for the
2010 fiscal year. The standards governing managements
assessment of internal control over financial reporting are new
and complex, and require significant documentation, testing and
possible remediation to meet the detailed standards. In
addition, the attestation process by our independent registered
public accountants is new and we may encounter problems or
delays in completing the implementation of any requested
improvements and receiving an attestation of our assessment by
our independent registered public accountants. If we cannot
assess our internal control over financial reporting as
effective, or our independent registered public accountants are
unable to provide an unqualified attestation report on such
assessment, investors could lose confidence in our reported
financial information, which could have a negative effect on the
market price of our common stock and our access to capital.
In addition, managements assessment of internal control
over financial reporting may identify weaknesses and conditions
that need to be addressed in our internal control over financial
reporting or other matters that may raise concerns for
investors. Any actual or perceived weaknesses and conditions
that need to be addressed in our internal control over financial
reporting, disclosure of managements assessment of our
internal control over financial reporting, or disclosure of our
independent registered public accounting firms attestation
to our report on managements assessment of our internal
control over financial reporting may have a negative effect on
the market price of our common stock and our access to capital.
The
additional expenses that we will incur as a public company, and
the time our management will be required to devote to new
compliance initiatives, may have a material adverse affect on
our business and results of operations.
As a public company, we will incur significant legal, accounting
and other expenses that we did not incur as a private company.
In addition, Sarbanes-Oxley and the related rules and
regulations of the SEC, as well as the rules and regulations of
applicable Canadian securities regulators and the rules of the
TSX-V (if
our listing application is accepted), impose various
requirements on public companies, including requiring changes in
corporate governance practices. Our management and other
personnel will need to devote a substantial amount of time to
these compliance initiatives. Moreover, these rules and
regulations will increase our legal and financial compliance
costs and will make some activities more time-consuming and
costly. For example, we expect these new rules and regulations
to make it more difficult and more expensive for us to obtain
director and officer liability insurance, and we may be required
to incur substantial costs to maintain the same or similar
coverage. Compliance with Section 404 of Sarbanes-Oxley
will also require that we incur substantial accounting expenses
and expend significant management efforts.
If our
common stock is considered a penny stock it will be
subject to additional sale and trading regulations that may make
it more difficult to sell.
Our common stock, which is not currently listed or quoted on any
national securities exchange or national quotation system, may
be considered to be a penny stock if it does not
qualify for one of the exemptions from the definition of
penny stock under
Rule 3a51-1
under the Securities Exchange Act of 1934 (Exchange Act). Our
common stock may be a penny stock if it meets one or
more of the following conditions (i) the stock trades at a
price less than $5.00 per share; (ii) it is not traded on a
recognized national exchange; (iii) it is not
quoted on the
24
NASDAQ Capital Market, or even if so, has a price less than
$5.00 per share; or (iv) is issued by a company that has
been in business less than three years with net tangible assets
less than $5,000,000.
The principal result or effect of being designated a penny
stock is that US securities broker-dealers participating
in sales of our common stock will be subject to the penny
stock regulations set forth in
Rules 15g-2
through
15g-9
promulgated under the Exchange Act. For example,
Rule 15g-2
requires broker-dealers dealing in penny stocks to provide
potential investors with a document disclosing the risks of
penny stocks and to obtain a manually signed and dated written
receipt of the document at least two business days before
effecting any transaction in a penny stock for the
investors account. Moreover,
Rule 15g-9
requires broker-dealers in penny stocks to approve the account
of any investor for transactions in such stocks before selling
any penny stock to that investor. This procedure requires the
broker-dealer to (i) obtain from the investor information
concerning his or her financial situation, investment experience
and investment objectives; (ii) reasonably determine, based
on that information, that transactions in penny stocks are
suitable for the investor and that the investor has sufficient
knowledge and experience as to be reasonably capable of
evaluating the risks of penny stock transactions;
(iii) provide the investor with a written statement setting
forth the basis on which the broker-dealer made the
determination in (ii) above; and (iv) receive a signed
and dated copy of such statement from the investor, confirming
that it accurately reflects the investors financial
situation, investment experience and investment objectives.
Compliance with these requirements may make it more difficult
and time consuming for holders of our common stock to resell
their shares to third parties or to otherwise dispose of them in
the market or otherwise.
Because
we do not intend to pay dividends on our common stock, our
stockholders will only realize a return (or recovery of a
portion of their initial investment) on their investment upon
the sale of their shares.
We have never declared or paid any cash dividends on our common
stock. We currently intend to retain our future earnings, if
any, to finance the operation and growth of our business and do
not expect to pay any cash dividends.
Our
certificate of incorporation, by-laws and Delaware law may
discourage takeovers and business combinations that our
stockholders might consider in their best
interests.
Provisions in our certificate of incorporation and by-laws may
delay, defer, prevent or render more difficult a takeover
attempt that our stockholders might consider in their best
interests. Even in the absence of a takeover attempt, the
existence of these provisions may adversely affect the market
value of our common stock if they are viewed as discouraging
takeover attempts in the future. See Description of
Capital Stock for additional information on the
anti-takeover measures applicable to us.
Provisions in the amended and restated certificate of
incorporation and amended and restated bylaws that will be in
effect immediately after the closing of this offering, as well
as provisions of Delaware law, could make it more difficult for
a third party to acquire us, even if doing so would benefit our
stockholders. Our proposed amended and restated certificate of
incorporation and bylaws:
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provide that the authorized number of directors may be changed
only by resolution of the board of directors;
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provide that all vacancies, including newly created
directorships, may, except as otherwise required by law, be
filled by the affirmative vote of a majority of directors then
in office, even if such number is less than a quorum;
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require that any action to be taken by our stockholders be
effected at a duly called annual or special meeting of
stockholders and not by written consent;
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provide that stockholders seeking to present proposals before a
meeting of stockholders or to nominate candidates for election
as directors at a meeting of stockholders must provide notice in
writing in a timely manner, and also specify requirements as to
the form and content of a stockholders notice;
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do not provide for cumulative voting rights, therefore allowing
the holders of a majority of the shares of our common stock
entitled to vote in any election of directors to elect all of
the directors standing for election, if they should so
choose; and
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provide that special meetings of our stockholders may be called
only by the chairman of the board, our chief executive officer
or by the board of directors pursuant to a resolution adopted by
a majority of the total number of authorized directors.
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The amendment of any of these provisions would require approval
by the holders of at least two thirds of our voting stock then
outstanding, voting together as a single class.
In addition, we may become subject to Section 203 of the
Delaware General Corporation Law, which generally prohibits a
Delaware corporation from engaging in any of a broad range of
business combinations with an interested stockholder for a
period of three years following the date on which the
stockholder became an interested stockholder. This provision
could have the effect of delaying or preventing a change of
control, whether or not it is desired by or beneficial to our
stockholders.
If we
issue new shares of preferred stock your rights as a holder of
our common stock or warrants may be materially adversely
affected.
As of the date of this prospectus, we are authorized to issue up
to 6,745,681 shares of preferred stock. Immediately after
the closing of this offering, the number of shares of preferred
stock we are authorized to issue will be reduced to 5,000,000
shares. The designations, rights and preferences of our
preferred stock may be determined from time-to-time by our board
of directors. Accordingly, our board of directors is empowered,
without shareholder approval, to issue one or more series of
preferred stock with dividend, liquidation, conversion, voting
or other rights superior to those of the holders of our common
stock. For example, an issuance of shares of preferred stock
could:
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adversely affect the voting power of the holders of our common
stock;
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make it more difficult for a third party to gain control of us;
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discourage bids for our common stock;
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limit or eliminate any payments that the holders of our common
stock could expect to receive upon our liquidation; or
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adversely affect the market price of our common stock.
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168,500 shares of our Series C Preferred Stock were
outstanding as of the date of this prospectus. We have agreed
with the agents to use our best efforts to cause all of the
outstanding shares of our Series C Preferred Stock,
together with all dividends accrued and unpaid thereon, to be
converted into common stock prior to the effective time of the
registration statement of which this prospectus forms a part.
Purchasers
of our units in this offering may be diluted if we raise
additional funds.
Our operations to date have consumed substantial amounts of
cash, and we expect our capital and operating expenditures to
increase in the next few years. We believe that our existing
capital resources and anticipated cash flow from planned
operations, together with the net proceeds of this offering
(assuming that we raise the minimum gross proceeds from this
offering (Cdn$6,000,000), should be adequate to satisfy our cash
requirements for the next 12 months. However, we may need
significant additional capital before that time. Any additional
required financing may not be available on acceptable terms or
at all. If we raise additional funds by issuing equity
securities or convertible debt securities, further dilution to
existing stockholders may result. If adequate funds are not
available, our business, financial condition and results of
operations and the market price of our common stock would be
materially adversely affected.
We may
not be able to meet our liquidity needs or to access capital
when necessary because of adverse capital and credit market
conditions.
We have historically relied on private placements of equity and
debt to fund our operating losses and capital expenditure.
During the past 12 months, the capital and credit markets
experienced extreme volatility and disruption. Disruptions,
uncertainty or volatility in the capital and credit markets may
limit our ability to access the capital necessary to operate and
grow our business. Adverse capital and credit market conditions
may force us to
26
delay raising capital or bear an unattractive cost of capital
which could significantly reduce our financial flexibility. Our
results of operations, financial condition, cash flows and
capital position and the market value of our common stock could
be materially adversely affected by disruptions in the financial
markets.
If we
sell additional shares of our common stock or preferred stock,
we may not be able to fully utilize our net operating loss
carryforwards and certain other tax attributes.
As of June 30, 2009, we had net operating loss carryforwards of
approximately $13,500,000 million for Federal and state
income tax purposes. Under Section 382 of the Internal
Revenue Code, if a corporation undergoes an ownership
change, the corporations ability to use its
pre-change net operating loss carryforwards and other pre-change
tax attributes to offset its post-change income may be limited.
An ownership change is defined for these purposes as a greater
than 50% change in its equity ownership by value over a
three-year period. We may also experience ownership changes in
the future as a result of this offering or subsequent changes in
our stock ownership.
GENERAL
MATTERS
All references to Vuzix, the company,
we, us and our are
references to Vuzix Corporation.
Unless otherwise indicated, all references to
dollars, US$, or $ in this
prospectus are to United States dollars and all references to
Cdn$ are to Canadian dollars. Unless otherwise
indicated, all Canadian dollar values have been translated to US
dollars, or vice versa, using a convenience translation of
US$1.00 = Cdn$1.0424, the closing buying rate of the Bank of
Canada on October 8, 2009.
This prospectus contains various company names, product names,
trade names, trademarks and service marks, all of which are the
properties of their respective owners.
Unless otherwise indicated, all references to GAAP
in this prospectus are to United States generally accepted
accounting principles.
We completed a 1-for-7 reverse stock split of our common stock
in June 2007 and an 8-for-1 split of our common stock in July
2008. All share numbers and amounts per share in this prospectus
have been retroactively adjusted to give effect to these changes.
Information contained on our websites, including www.vuzix.com,
shall not be deemed to be part of this prospectus or
incorporated herein by reference and should not be relied upon
by prospective investors for the purposes of determining whether
to purchase the units offered hereunder.
You should rely only on the information contained in this
prospectus. We have not, and the agents have not, authorized any
other person to provide you with different information. If
anyone provides you with different or inconsistent information,
you should not rely on it. We are not, and the agents are not,
making an offer to sell these securities in any jurisdiction
where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate only as
of the date on the front cover of this prospectus. Our business,
financial condition, results of operations and prospects may
have changed since that date.
For investors outside the United States, neither we nor any of
our agents have done anything that would permit this offering or
possession or distribution of this prospectus in any
jurisdiction where action for that purpose is required, other
than in the United States and certain provinces of Canada. You
are required to inform yourself about and to observe any
restrictions relating to this offering and the distribution of
this prospectus.
27
USE OF
MARKET AND INDUSTRY DATA
This prospectus includes market and industry data that has been
obtained from third party sources, including industry
publications, as well as industry data prepared by our
management on the basis of its knowledge of and experience in
the industries in which we operate (including our
managements estimates and assumptions relating to those
industries based on that knowledge). Managements knowledge
of such industries has been developed through its experience and
participation in those industries. Although our management
believes such information to be reliable, neither we nor our
management have independently verified any of the data from
third party sources referred to in this prospectus or
ascertained the underlying economic assumptions relied upon by
such sources. In addition, the agents have not independently
verified any of the industry data prepared by management or
ascertained the underlying estimates and assumptions relied upon
by management. Furthermore, references in this prospectus to any
publications, reports, surveys or articles prepared by third
parties should not be construed as depicting the complete
findings of the entire publication, report, survey or article.
The information in any such publication, report survey or
article is not incorporated by reference in this prospectus.
FORWARD-LOOKING
STATEMENTS
This prospectus contains, in addition to historical information,
forward-looking statements. These statements are based on our
managements beliefs and assumptions and on information
currently available to our management. The forward-looking
statements are contained principally under the headings
Prospectus Summary, Risk Factors,
Managements Discussion and Analysis of Financial
Condition and Results of Operations, Use of
Proceeds and Business. Forward-looking
statements include statements concerning:
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our possible or assumed future results of operations;
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our business strategies;
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our ability to attract and retain customers;
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our ability to sell additional products and services to
customers;
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our cash needs and financing plans;
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our competitive position;
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our industry environment;
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our potential growth opportunities;
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expected technological advances by us or by third parties and
our ability to leverage them;
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the effects of future regulation; and
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the effects of competition.
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All statements in this prospectus that are not historical facts
are forward-looking statements. We may, in some cases, use terms
such as anticipates, believes,
could, estimates, expects,
intends, may, plans,
potential, predicts,
projects, should, will,
would or similar expressions that convey uncertainty
of future events or outcomes to identify forward-looking
statements.
The outcome of the events described in these forward-looking
statements are subject to known and unknown risks, uncertainties
and other factors that may cause our actual results, performance
or achievements to be materially different from any future
results, performances or achievements expressed or implied by
the forward-looking statements. These important factors include
our financial performance and the other important factors we
discuss in greater detail in Risk Factors. You
should read these factors and the other cautionary statements
made in this prospectus as applying to all related
forward-looking statements wherever they appear in this
prospectus. Given these factors, you should not place undue
reliance on these forward-looking statements. Also,
forward-looking statements represent our managements
beliefs and assumptions only as of the date on which the
statements are made. We undertake no obligation to publicly
update any forward-looking statements, whether as a result of
new information, future events or otherwise, except as required
by law. You should read this prospectus and the documents that
we reference in this prospectus and have filed as exhibits to
the registration statement, of which this prospectus is a part,
completely and with the understanding that our actual future
results may be materially different from what we currently
expect.
28
USE OF
PROCEEDS
This offering is subject to us raising minimum gross proceeds of
Cdn$6,000,000. If we raise the minimum gross proceeds from this
offering we estimate that the net proceeds to us, after payment
of agents commissions and offering expenses, would be
approximately Cdn$5,000,000. Assuming that we sell the maximum
number of units offered (50,000,000 units) at Cdn$0.25 per unit
(the maximum of our estimated initial public offering price
range), we would receive gross proceeds of Cdn$12,500,000 and
estimate that the net proceeds to us, after payment of
agents commissions and offering expenses, would be
approximately Cdn$11,000,000.
Assuming that we receive the estimated maximum amount of the
proceeds from this offering, we plan to use approximately
$1,181,000 of the net proceeds from this offering to repay the
outstanding principal amounts of and interest accrued on our
lines of credit and notes payable. The indebtedness we plan to
repay includes $165,500 in principal amount plus interest
payable to Paul J. Travers, our President and Chief Executive
Officer, under a revolving loan agreement that we entered into
with Mr. Travers in October 2008. Our indebtedness to Mr.
Travers has been incurred since October 2008 and was incurred to
fund our working capital requirements. This indebtedness bears
interest at the annual rate of 12.0% and is payable on demand.
The indebtedness under our lines of credit bears interest at
annual rates ranging from 4.25% to 7.5% and is payable on
demand. $500,000 in principal amount of the indebtedness we plan
to repay from the proceeds of the offering was due and payable
on January 31, 2009 and currently bears interest at the annual
rate of 18.0%. $200,000 in principal amount of indebtedness that
we plan to repay from the proceeds of the offering bears
interest at an annual rate of 18.0% and is due and payable on
October 31, 2009. We borrowed this $200,000 from three
individual lenders (including $50,000 from Mr. Paul Churnetski,
our Vice President of Quality Assurance and the beneficial owner
of approximately 9% of our issued and outstanding common stock)
to finance part of our working capital investment for a defense
order that is currently in process and we intend to repay those
loans out of revenues from that defense order if this offering
does not close prior to the maturity date. Prior to the closing
of this offering, we may borrow an additional $100,000 from one
or more individual lenders on the same terms and conditions. We
may not be able to borrow these additional funds on the same
terms, or at all. We may not receive sufficient proceeds from
this offering to repay any of this indebtedness.
We intend to use the remainder of the net proceeds from this
offering for:
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new product development and research expenses;
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capital expenditures;
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selling, marketing, general and administrative expenses;
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possible acquisitions of businesses, technologies or other
assets; and
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general corporate purposes.
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We intend to continue our development and tooling of new
products that leverage our advancements in our optics and
electronics technology. We believe that these new technologies,
if successfully implemented, will result in significant
performance improvements in our products and as a result
increase our overall customer demand. Assuming that we receive
the estimated maximum amount of the proceeds from this offering,
our current development plans by product line are as follows:
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New Product Development Objectives
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Completion Date
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Wrap Video Eyewear (consumer)
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Fall 2009
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Blade Video Eyewear (consumer)
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Spring 2010
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Blade Tac-Eye (defense)
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Summer 2010
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Blade low vision-assist product
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Fall 2010
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Blade II display engine
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Spring 2011
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Among the capital expenditures that we propose to finance from
the proceeds of this offering over the next 18 months are
the expansion of our manufacturing facilities and the purchase
of engineering equipment and computer hardware and software.
Among the sales and marketing expenditures that we propose to
finance from the
29
proceeds of this offering over the next 18 months is the
purchase of new point of purchase (POP) display systems to show
case our new products at retail outlets that we expect to carry
our new products as they are released. The amounts of the
proceeds from the offering that we propose to use for the
purposes described above will depend on the proceeds from the
offering. The table below sets forth the amount of the proceeds
from this offering that we propose to use for (1) the
purchase of computers and equipment; (2) new product
tooling; (3) new product engineering and design;
(4) general research and development; (5) the purchase
of POP display systems; and (6) working capital purposes
depending on the gross proceeds from the offering over the range
from Cdn$6,000,000 (the minimum gross proceeds of the offering)
to Cdn$12,500,000 (the gross proceeds that we would receive upon
the sale of 50,000,000 units (the maximum number of units
offered under this prospectus) at Cdn$0.25 (the maximum of our
estimated initial public offering price range). This table does
not set forth all possibilities. Regardless of the number of
units sold, we expect to incur offering expenses estimated at
approximately Cdn$546,000 for legal, accounting, printing, and
other costs in connection with this offering. We may not receive
sufficient proceeds from this offering to undertake all these
new product development and tooling programs, capital
expenditures, sales and marketing efforts and ongoing research
and accordingly we will have to reduce the speed and number of
our new product development plans and the number of new products
under development. We may also use a portion of the net proceeds
to acquire businesses, technologies or other assets. We have no
agreements or arrangements with respect to any acquisitions at
the present time. There is no guarantee that we will be
successful at selling any of the securities being offered in
this prospectus. Accordingly, the actual amount of proceeds we
will raise in this offering, if any, may differ.
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Gross proceeds (Cdn$)
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$
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6,000,000
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$
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8,000,000
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$
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10,000,000
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$
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12,500,000
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Less offering expenses:
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Selling agents commission (Cdn$)
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480,000
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640,000
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800,000
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1,000,000
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Estimated expenses of offering (Cdn$)
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522,000
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522,000
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522,000
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522,000
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Net proceeds from offering (Cdn$)
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4,998,000
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6,838,000
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8,678,000
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10,978,000
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Net proceeds (US$)
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4,794,000
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6,559,000
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8,325,000
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10,531,000
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Less use of net proceeds (US$):
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Repayment of debt
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1,181,000
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1,181,000
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1,181,000
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1,181,000
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Computers and equipment
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150,000
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200,000
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300,000
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400,000
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New product tooling
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500,000
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700,000
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850,000
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1,000,000
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New product engineering and design
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250,000
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350,000
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400,000
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550,000
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General R&D
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225,000
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350,000
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600,000
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900,000
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Marketing POPs
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350,000
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450,000
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625,000
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750,000
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Total planned use of proceeds
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2,656,000
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3,328,000
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4,369,000
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5,750,000
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Unallocated for general working capital
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$
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2,138,000
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$
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3,328,000
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$
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4,369,000
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$
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5,750,000
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Although we intend to use the proceeds from the offering as set
forth above, the actual amount that we spend in connection with
each intended use of the proceeds may vary significantly from
the amounts specified above and will be dependent on a number of
factors, including those referenced under Risk
Factors.
Notwithstanding the foregoing, we cannot specify with certainty
the uses for the net proceeds to be received upon the completion
of this offering. Our management will have broad discretion as
to how to spend and invest between the approximately
Cdn$2,100,000 and Cdn$5,750,000 in possible unallocated general
working capital as shown in the table above. Investors will be
relying on the judgment of our management regarding the
application of these proceeds. You will not have the opportunity
to evaluate the economic, financial or other information on
which we base our decisions on how to use these proceeds. The
timing and amount of our actual expenditures will be based on
many factors, including cash flows (used for) or from
operations, available technology advances and the growth of our
business. The funds may not be fully used for a significant
period following the closing of the offering. Pending the uses
described above, we intend to invest the net proceeds from this
offering in short-term, investment grade, interest bearing
securities. We cannot predict whether the proceeds invested will
yield a favorable return.
30
We have agreed with Mr. Travers and Grant Russell, our
Executive Vice President and Chief Financial Officer, that we
will pay them deferred compensation in the aggregate amount of
$445,096, plus interest at the annual rate of 8.0%, and $209,208
in aggregate principal amount, plus interest at the annual rate
of 8.0%, in repayment of loans made to us more than five years
ago by those officers to finance our operations, either in one
lump sum on or before the first anniversary of the closing of
this offering from the proceeds of the exercise of the warrants
included in the units and the warrants issuable upon exercise of
the agents compensation options if and when at least 50%
of those warrants are exercised or otherwise in 12 equal monthly
installments beginning on the first anniversary of the closing
of this offering until paid in full. Any additional proceeds
from any exercise of the warrants included in the units and the
warrants issuable upon exercise of the agents compensation
options will be used for working capital. If all of these
warrants were to be exercised, we would receive additional funds
ranging in total of approximately Cdn$4,500,000 to
Cdn$9,375,000. These warrants may not be exercised before they
expire 36 months after the closing.
DIVIDEND
POLICY
We have never declared or paid any cash dividends on our common
stock. We currently intend to retain all available funds and any
future earnings to support our operations and finance the growth
and development of our business. We do not intend to pay cash
dividends on our common or preferred stock for the foreseeable
future. Any future determination related to dividend policy will
be made at the discretion of our board of directors.
Additionally, our lines of credit prohibit us from paying cash
dividends at any time at which any amount remains outstanding
under the lines. Although the outstanding principal amounts of
and interest accrued on our lines of credit will be paid in full
from the proceeds of this offering we expect that we will draw
down on the lines of credit from time to time after this
offering. We are not subject to any restrictions that would
prevent us from paying a dividend except for the restrictions
under our lines of credit and restrictions under
TSX-V
policies, our certificate of incorporation and bylaws and the
Delaware General Corporation Law.
31
CAPITALIZATION
The following table sets forth our cash and cash equivalents and
our capitalization as of June 30, 2009:
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on an actual basis;
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on a pro forma basis assuming the conversion of
(i) 168,500 shares of our Series C Preferred
Stock outstanding immediately prior to the closing of this
offering, together with all dividends accrued and unpaid
thereon, at the conversion price of $0.2917 per share into
7,060,914 shares of our common stock; and (ii) $75,000
in aggregate principal amount of convertible promissory notes,
together with all interest accrued and unpaid thereon, at the
conversion price of $0.057089 per share into
2,251,985 shares of our common stock; and
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on a pro forma as adjusted basis assuming the events
described above and the sale in this offering of
(i) 40,000,000 units at an initial public offering price of
Cdn$0.15 per unit (the minimum of our estimated initial
public offering price range) resulting in gross proceeds of
Cdn$6,000,000 (the minimum gross proceeds to us of this
offering); (ii) 40,000,000 units at an initial public offering
price of Cdn$0.20 per unit (the midpoint of our estimated
initial public offering price range) resulting in gross proceeds
of Cdn$8,000,000; (iii) 50,000,000 units at an initial public
offering price of Cdn$0.20 per unit (the midpoint of our
estimated initial public offering price range) resulting in
gross proceeds of Cdn$10,000,000; and (iv) the sale of
50,000,000 units (the maximum number of units offered under this
prospectus) at an initial public offering price of Cdn$0.25 per
unit (the maximum of our estimated initial public offering price
range) resulting in gross proceeds of Cdn$12,500,000, after
deducting estimated underwriting commissions and offering
expenses of between Cdn$1,002,000 and $1,522,000, and the
issuance of between 2,696,123 and 5,592,246 shares of our
common stock to the Canadian agents in payment of a fiscal
advisory fee.
|
32
You should read the information in this table together with our
consolidated financial statements and accompanying notes and
Managements Discussion and Analysis of Financial
Condition and Results of Operations appearing elsewhere in
this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
Pro Forma As Adjusted
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross proceeds from offering (Cdn$)
|
|
|
|
|
|
|
|
|
|
$
|
6,000,000
|
|
|
$
|
8,000,000
|
|
|
$
|
10,000,000
|
|
|
$
|
12,500,000
|
|
Estimated net proceeds from offering (US$)
|
|
|
|
|
|
|
|
|
|
|
4,794,000
|
|
|
|
6,559,000
|
|
|
|
8,325,000
|
|
|
|
10,531,000
|
|
Cash and cash equivalents
|
|
$
|
285,126
|
|
|
|
|
|
|
|
5,079,126
|
|
|
|
6,844,126
|
|
|
|
8,610,126
|
|
|
|
10,816,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt (non-convertible) and related accrued interest
|
|
|
1,294,268
|
|
|
|
|
|
|
|
1,294,268
|
|
|
|
1,294,268
|
|
|
|
1,294,268
|
|
|
|
1,294,268
|
|
Accrued cumulative preferred dividends
|
|
|
374,849
|
|
|
|
(374,849
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible promissory notes and bridge loans and related
accrued interest
|
|
|
128,563
|
|
|
|
(128,563
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term obligations
|
|
|
1,797,680
|
|
|
|
|
|
|
|
1,294,268
|
|
|
|
1,294,268
|
|
|
|
1,294,268
|
|
|
|
1,294,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series C preferred stock ($0.001 par value),
500,000 shares authorized, 168,500 and 0 shares issued
and outstanding, actual and pro forma
|
|
|
169
|
|
|
|
(169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock ($0.001 par value), 400,000,000 shares
authorized, 220,268,927 and 229,581,826 shares issued and
outstanding, actual and pro forma
|
|
|
220,269
|
|
|
|
9,343
|
|
|
|
275,005
|
|
|
|
275,005
|
|
|
|
285,205
|
|
|
|
285,205
|
|
Additional paid-in capital
|
|
|
12,979,093
|
|
|
|
494,238
|
|
|
|
18,221,938
|
(1)
|
|
|
19,986,938
|
(1)
|
|
|
21,742,738
|
(2)
|
|
|
23,948,738
|
(2)
|
Subscriptions receivable
|
|
|
(227,336
|
)
|
|
|
|
|
|
|
(227,336
|
)
|
|
|
(227,336
|
)
|
|
|
(227,336
|
)
|
|
|
(227,336
|
)
|
Accumulated deficit
|
|
|
(16,225,391
|
)
|
|
|
|
|
|
|
(16,225,391
|
)
|
|
|
(16,225,391
|
)
|
|
|
(16,225,391
|
)
|
|
|
(16,225,391
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity (deficit)
|
|
|
(3,253,196
|
)
|
|
|
|
|
|
|
2,044,216
|
|
|
|
3,809,216
|
|
|
|
5,575,216
|
|
|
|
7,781,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
(1,170,390
|
)
|
|
|
|
|
|
$
|
8,417,610
|
|
|
$
|
11,947,610
|
|
|
$
|
15,479,610
|
|
|
$
|
19,891,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
275,004,557 shares of common
stock issued and outstanding on a pro forma as adjusted basis.
|
|
(2)
|
|
285,204,557 shares of common
stock issued and outstanding on a pro forma as adjusted basis.
|
The number of shares of common stock to be outstanding
immediately after this offering is based on the number of shares
outstanding as of June 30, 2009 and excludes:
|
|
|
|
|
15,304,554 shares of our common stock issuable upon
exercise of then outstanding options under our 2007 option plan,
having a weighted average exercise price of $0.0999 per share;
|
|
|
|
1,200,000 shares of our common stock issuable upon exercise
of options under our 2009 option plan that we intend to grant to
our non-employee directors at the closing of this offering, each
having a per share exercise price equal to the initial public
offering price per unit; and
|
|
|
|
7,069,988 shares of our common stock issuable upon exercise of
outstanding warrants, having a weighted average exercise price
of $0.1815 per share.
|
In consideration of certain fiscal advisory services rendered by
the Canadian agents to us pursuant to a fiscal advisory fee
agreement between us and the Canadian agents, we have agreed to
issue to the Canadian agents at the closing of this offering, in
payment of a fiscal advisory fee, that number of shares of our
common stock equal to, depending on the gross proceeds of the
offering, between 1.0% and 2.0% of our common stock issued and
33
outstanding immediately upon the closing of the offering. The
issuance of these shares to the Canadian agents is not covered
by this prospectus. These shares will be issued pursuant to
exemptions from the registration requirements of applicable
United States and Canadian securities laws and subject to resale
restrictions under those laws and a
lock-up
agreement for one year. See Underwriting
Fiscal Advisory Fee Agreement.
Consolidated
Capitalization
Except as disclosed in the table above, there have been no
material changes in our share and loan capital since
December 31, 2008.
34
DILUTION
If you invest in our units in this offering, your ownership
interest will be diluted to the extent of the difference between
the initial public offering price per unit and the pro forma net
tangible book value per share of our common stock after this
offering. The historical net tangible book value of our common
stock as of June 30, 2009 was a deficit of approximately
$5,700,000, or $(0.0256) per share, based on the number of
shares outstanding as of June 30, 2009. Historical net
tangible book value per share is determined by dividing the
number of outstanding shares of our common stock into our total
tangible assets, or total assets less intangible assets, less
our total liabilities and less the carrying value of our total
convertible preferred stock. Investors participating in this
offering will incur immediate, substantial dilution. Our pro
forma net tangible book value as of June 30, 2009 was a
deficit of approximately $(3,500,000), or approximately
$(0.0161) per share. Pro forma net tangible book value per share
represents the amount of our total tangible assets less our
total liabilities, divided by the pro forma number of shares of
our common stock outstanding after giving effect to the
conversion of all outstanding shares of our Series C
Preferred Stock, together with all dividends accrued and unpaid
thereon, into 7,062,324 shares of our common stock and
$75,000 in aggregate principal amount of convertible promissory
notes, together with all interest accrued and unpaid thereon,
into 2,281,060 shares of our common stock upon completion
of this offering.
The following table sets forth our pro forma as adjusted net
tangible book value as of June 30, 2009 assuming the sale of
(i) 40,000,000 units at an initial public offering price of
Cdn$0.15 per unit (the minimum of our estimated initial public
offering price range) resulting in gross proceeds of
Cdn$6,000,000 (the minimum gross proceeds to us of this
offering); (ii) 40,000,000 units at an initial public
offering price of Cdn$0.20 per unit (the midpoint of our
estimated initial public offering price range) resulting in
gross proceeds of Cdn$8,000,000; (iii) 50,000,000 units at
an initial public offering price of Cdn$0.20 per unit (the
midpoint of our estimated initial public offering price range)
resulting in gross proceeds of Cdn$10,000,000; and (iv) the
sale of 50,000,000 units (the maximum number of units offered
under this prospectus) at an initial public offering price of
Cdn$0.25 per unit (the maximum of our estimated initial public
offering price range) resulting in gross proceeds of
Cdn$12,500,000, and after deducting estimated underwriting
commissions and offering expenses of between Cdn$1,026,000 and
Cdn$1,546,000, and the issuance of between 2,696,123 and
5,592,246 shares of our common stock to the Canadian agents in
payment of a fiscal advisory fee:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed number of units sold in offering
|
|
|
40,000,000
|
|
|
|
40,000,000
|
|
|
|
50,000,000
|
|
|
|
50,000,000
|
|
Historical net tangible book value per share as of June 30,
2009
|
|
$
|
(0.0256
|
)
|
|
$
|
(0.0256
|
)
|
|
$
|
(0.0256
|
)
|
|
$
|
(0.0256
|
)
|
Increase in net tangible book value deficit per share
attributable to conversion of preferred stock and convertible
notes
|
|
|
0.0095
|
|
|
|
0.0095
|
|
|
|
0.0095
|
|
|
|
0.0095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net tangible book value deficit per share as of
June 30, 2009
|
|
|
(0.0161
|
)
|
|
|
(0.0161
|
)
|
|
|
(0.0161
|
)
|
|
|
(0.0161
|
)
|
Increase in net tangible book value per share attributable to
investors participating in this offering, after offering costs
|
|
|
0.0209
|
|
|
|
0.0273
|
|
|
|
0.0331
|
|
|
|
0.0408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma as adjusted net tangible book value per share after
this offering
|
|
|
0.0048
|
|
|
|
0.0112
|
|
|
|
0.0170
|
|
|
|
0.0247
|
|
Assumed gross initial public offering price per unit (US$)
|
|
|
0.1439
|
|
|
|
0.1918
|
|
|
|
0.1918
|
|
|
|
0.2398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma dilution per share to investors participating in this
offering
|
|
$
|
(0.1391
|
)
|
|
$
|
(0.1806
|
)
|
|
$
|
(0.1748
|
)
|
|
$
|
(0.2151
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes, on a pro forma as adjusted basis
as of June 30, 2009, the differences between the number of
shares of common stock purchased from us, the total
consideration and the average price per share paid by existing
stockholders and by investors participating in this offering,
after deducting estimated underwriting discounts and commissions
and offering expenses of between Cdn$1,002,000 and
Cdn$1,522,000, assuming the sale of the number of units at the
initial public offering prices specified below and the issuance
of the corresponding
35
number of shares of our common stock to the Canadian agents
pursuant to our fiscal advisory fee agreement with the Canadian
agents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
|
Total Consideration
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
Average Price
|
|
|
|
Number
|
|
|
(%)
|
|
|
Amount
|
|
|
(%)
|
|
|
per Share
|
|
|
Offering of 40,000,000 units at Cdn$0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Existing stockholders before this offering
|
|
|
229,670,083
|
|
|
|
83.5
|
|
|
$
|
13,475,607
|
|
|
|
73.8
|
|
|
$
|
0.0587
|
|
Investors participating in this offering
|
|
|
40,000,000
|
|
|
|
14.5
|
|
|
|
4,794,704
|
|
|
|
26.2
|
|
|
|
0.1199
|
|
Agents (in payment of fiscal advisory fee)
|
|
|
5,392,246
|
|
|
|
2.0
|
|
|
|
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
275,004,557
|
|
|
|
100.0
|
|
|
$
|
18,270,311
|
|
|
|
100.0
|
|
|
$
|
0.0664
|
|
Offering of 40,000,000 units at Cdn$0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Existing stockholders before this offering
|
|
|
229,670,083
|
|
|
|
83.5
|
|
|
$
|
13,475,607
|
|
|
|
67.3
|
|
|
$
|
0.0587
|
|
Investors participating in this offering
|
|
|
40,000,000
|
|
|
|
14.5
|
|
|
|
6,559,862
|
|
|
|
32.7
|
|
|
|
0.1640
|
|
Agents (in payment of fiscal advisory fee)
|
|
|
5,392,246
|
|
|
|
2.0
|
|
|
|
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
275,004,557
|
|
|
|
100.0
|
|
|
$
|
20,035,469
|
|
|
|
100.0
|
|
|
$
|
0.0729
|
|
Offering of 50,000,000 units at Cdn$0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Existing stockholders before this offering
|
|
|
229,670,083
|
|
|
|
80.5
|
|
|
$
|
13,475,607
|
|
|
|
61.8
|
|
|
$
|
0.0587
|
|
Investors participating in this offering
|
|
|
50,000,000
|
|
|
|
17.5
|
|
|
|
8,325,019
|
|
|
|
38.2
|
|
|
|
0.1665
|
|
Agents (in payment of fiscal advisory fee)
|
|
|
5,592,246
|
|
|
|
2.0
|
|
|
|
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
285,204,557
|
|
|
|
100.0
|
|
|
$
|
21,800,626
|
|
|
|
100.0
|
|
|
$
|
0.0764
|
|
Offering of 50,000,000 units at Cdn$0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Existing stockholders before this offering
|
|
|
229,670,083
|
|
|
|
80.5
|
|
|
$
|
13,475,607
|
|
|
|
56.1
|
|
|
$
|
0.0587
|
|
Investors participating in this offering
|
|
|
50,000,000
|
|
|
|
17.5
|
|
|
|
10,531,466
|
|
|
|
43.9
|
|
|
|
0.2106
|
|
Agents (in payment of fiscal advisory fee)
|
|
|
5,592,246
|
|
|
|
2.0
|
|
|
|
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
285,204,557
|
|
|
|
100.0
|
%
|
|
$
|
24,007,073
|
|
|
|
100.0
|
|
|
$
|
0.0842
|
|
The discussion and table above assume no exercise of the
agents compensation options or any other options or
warrants outstanding on the date of this prospectus. If the
agents compensation options are exercised in full, the
number of shares of common stock held by existing stockholders
will be reduced to 78.8% of the total number of shares of common
stock to be outstanding after this offering, and the number of
shares of common stock held by investors participating in this
offering will be increased to 291,454,557 shares or 19.3% of the
total number of shares of common stock outstanding after this
offering.
In consideration of certain fiscal advisory services rendered by
the Canadian agents to us pursuant to a fiscal advisory fee
agreement between us and the Canadian agents, we have agreed to
issue to the Canadian agents at the closing of this offering, in
payment of a fiscal advisory fee, that number of shares of our
common stock equal to, depending on the gross proceeds of the
offering, between 1.0% and 2.0% of our common stock issued and
outstanding immediately upon the closing of the offering. The
table above assumes that we will issue the maximum number of
shares issuable to the Canadian agents under the fiscal advisory
fee agreement. The issuance of these shares to the Canadian
agents is not covered by this prospectus. These shares will be
issued pursuant to exemptions from the registration requirements
of applicable United States and Canadian securities laws and
subject to resale restrictions under these laws and a
lock-up
agreement for one year. See Underwriting
Fiscal Advisory Fee Agreement.
The share data in the table above is based on the number of
shares outstanding as of June 30, 2009 and excludes:
|
|
|
|
|
15,304,554 shares of our common stock issuable upon
exercise of options then outstanding under our 2007 option plan,
having a weighted average exercise price of $0.0883 per share;
|
36
|
|
|
|
|
1,200,000 shares of our common stock issuable upon exercise
of options under our 2009 option plan that we intend to grant to
our non-employee directors at the closing of this offering, each
having a per share exercise price equal to the initial public
offering price per unit; and
|
|
|
|
7,172,160 shares of common stock issuable upon exercise of
then outstanding warrants, having a weighted average exercise
price of $0.1815 per share.
|
To the extent that any of these options or warrants are
exercised, new options are issued under our equity incentive
plans or we issue additional shares of common stock in the
future, there will be further dilution to investors
participating in this offering.
Quantitative
and Qualitative Disclosures about Market Risk
Foreign
Currency Exchange Risk
In 2008, approximately 85% of our total sales were comprised of
sales to customers in the United States and 15% were comprised
of sales to customers outside the United States. Of our sales
received in 2008 from customers outside of the United States,
95% were paid in currencies other than US dollars. Therefore,
our results could be negatively affected by such factors as
changes in foreign currency exchange rates, trade protection
measures and changes in regional or worldwide economic or
political conditions. We also buy many components manufactured
in other countries in transactions denominated in US dollars.
The domestic currencies of some of those suppliers fluctuate
with the US dollar. As a result, changes in the cost of our
components can occur with each new purchase. A decrease in the
value of the US dollar against our suppliers domestic
currencies could negatively and materially affect our
manufacturing costs. A 10% change in the value of the US dollar
relative to each of the foreign currencies in which our sales
are denominated would have resulted in a change in our sales of
no more than 2%. Historically, we have not tried to reduce our
exposure to exchange rate fluctuations by engaging in hedging
activities.
Interest
Rate Risk
At December 31, 2008, we had unrestricted cash and cash
equivalents totaling $818,719, and at December 31, 2007 we
had unrestricted cash and cash equivalents totaling $364,856.
These amounts were not held in interest-bearing accounts. The
unrestricted cash and cash equivalents were held for working
capital purposes. We do not enter into investments for trading
or speculative purposes. The interest rates on our $879,208 of
notes payable outstanding at December 31, 2008 are fixed at
a range of between 7.5% and 12.0% and a weighted average range
of approximately 10%. If market interest rates increase,
the fair value of our notes payable would decrease.
Recent
Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standard (SFAS)
No. 141(R), Business Combinations, a revision to
SFAS No. 141, Business Combinations
(SFAS No. 141(R)). SFAS No. 141(R)
provides revised guidance for recognition and measurement of
identifiable assets and goodwill acquired, liabilities assumed
and any non-controlling interest in the acquiree at fair value.
The statement also establishes disclosure requirements to enable
the evaluation of the nature and financial effects of a business
combination. SFAS No. 141(R) is required to be applied
prospectively to business combinations for which the acquisition
date is on or after January 1, 2009. The impact of the
adoption of SFAS 141(R) on our consolidated financial
position and results of operations for the first two quarters of
2009 did not have a material effect on our consolidated
financial statements. Any subsequent impact will be dependent on
the size and nature of business combinations, if any, completed
in the future.
In December 2007, the FASB issued SFAS No. 160,
Non-controlling Interests in Consolidated Financial
Statements an amendment of ARB No. 51
(SFAS No. 160). This statement establishes
accounting and reporting standards for ownership interests in
subsidiaries held by parties other than the parent.
Specifically, SFAS No. 160 requires the presentation
of non-controlling interests as equity in the Consolidated
Balance Sheets, and separate identification and presentation in
the Consolidated Statements of Income of net income attributable
to the entity and the non-controlling interest. It also
establishes accounting and reporting standards regarding
deconsolidation and changes in a parents ownership
interest. SFAS No. 160 is effective as of
January 1, 2009. The provisions of
37
SFAS No. 160 are generally required to be applied
prospectively, except for the presentation and disclosure
requirements, which must be applied retrospectively. The
adoption of SFAS No. 160 did not have a material
effect on our consolidated financial statements.
In February 2008, the FASB issued FASB Staff Position (FSP)
No. FAS 157-2,
Effective Date of SFAS No. 157. This FSP delays
the effective date of SFAS No. 157 for all
non-financial assets and non-financial liabilities, except those
that are recognized or disclosed at fair value in the
consolidated financial statements on a recurring basis (at least
annually). This FSP partially deferred the effective date of
SFAS No. 157 to fiscal years beginning after
November 15, 2008, and interim periods within those fiscal
years for items within the scope of this FSP. We adopted this
FSP for our fiscal year 2009, and did not have a material impact
on our consolidated financial statements in our first two
quarters of that year.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities, an amendment of FASB Statement No. 133
(SFAS No. 161). This statement enhances the disclosure
requirements related to derivative instruments and hedging
activity to improve the transparency of financial reporting, and
is effective for fiscal years and interim periods beginning
after November 15, 2008. The adoption of
SFAS No. 161 did not have a material effect on our
consolidated financial statements.
In May 2009, the FASB issued SFAS No. 165, Subsequent
Events (FAS 165). This standard sets forth the period after
the balance sheet date during which management of a reporting
entity should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements,
the circumstances under which an entity should recognize events
or transactions occurring after the balance sheet date in its
financial statements, and the disclosures that an entity should
make about events or transactions that occurred after the
balance sheet date. FAS 165 is effective for fiscal years
and interim periods ended after June 15, 2009. We adopted
this standard during the quarter ended June 30, 2009 and have
evaluated any subsequent events through the date of this filing.
We do not believe there are any material subsequent events which
would require further disclosure.
In June 2009, the FASB issued SFAS No. 168, The FASB
Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles (FAS 168). FAS 168
replaces FASB Statement No. 162, The Hierarchy of
Generally Accepted Accounting Principles, and establishes
the FASB Accounting Standards Codification (the Codification) as
the source of authoritative accounting principles recognized by
the FASB to be applied by nongovernmental entities in the
preparation of financial statements in conformity with generally
accepted accounting principles (GAAP). FAS 168 is effective
for interim and annual periods ending after September 15,
2009. We will begin to use the new guidelines and numbering
system prescribed by the Codification when referring to GAAP
during the quarter ended September 30, 2009. The
Codification will not have an impact on our financial results.
38
SELECTED
FINANCIAL AND OTHER DATA
The following tables present our summary financial data and
should be read together with our financial statements and
accompanying notes and Managements Discussion and
Analysis of Financial Condition and Results of Operations
appearing elsewhere in this prospectus. The summary financial
data for the years ended December 31, 2008, 2007 and 2006
are derived from our audited annual financial statements, which
are included elsewhere in this prospectus. The unaudited summary
financial data as of June 30, 2009 and for the three and
six months ended June 30, 2009 and 2008 have been derived
from our unaudited interim financial statements, which are
included elsewhere in this prospectus, and include all
adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of our financial position and
results of operations for these periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
Statement of Operations Data
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Sales
|
|
$
|
2,063,733
|
|
|
$
|
3,087,338
|
|
|
|
5,082,087
|
|
|
$
|
4,807,982
|
|
Cost of Sales
|
|
|
1,390,819
|
|
|
|
1,871,661
|
|
|
|
3,221,861
|
|
|
|
3,358,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
672,914
|
|
|
|
1,215,677
|
|
|
|
1,860,226
|
|
|
|
1,449,243
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
428,737
|
|
|
|
1,224,265
|
|
|
|
945,897
|
|
|
|
1,960,982
|
|
Selling and marketing
|
|
|
520,257
|
|
|
|
483,695
|
|
|
|
976,041
|
|
|
|
933,257
|
|
General and administrative
|
|
|
534,142
|
|
|
|
438,831
|
|
|
|
990,729
|
|
|
|
972,630
|
|
Depreciation and amortization
|
|
|
167,509
|
|
|
|
123,696
|
|
|
|
306,343
|
|
|
|
247,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,650,645
|
|
|
|
2,270,487
|
|
|
|
3,219,010
|
|
|
|
4,114,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (Loss) from operations
|
|
|
(977,731
|
)
|
|
|
(1,054,810
|
)
|
|
|
(1,358,784
|
)
|
|
|
(2,665,018
|
)
|
Interest and other income (expense)
|
|
|
11
|
|
|
|
|
|
|
|
59
|
|
|
|
166
|
|
Foreign exchange (loss) gain
|
|
|
(3,657
|
)
|
|
|
(300
|
)
|
|
|
(4,969
|
)
|
|
|
(33
|
)
|
Interest expense
|
|
|
(56,711
|
)
|
|
|
(57,353
|
)
|
|
|
(122,095
|
)
|
|
|
(99,019
|
)
|
Tax (expense) benefit
|
|
|
(888
|
)
|
|
|
(2,897
|
)
|
|
|
(1,776
|
)
|
|
|
(3,650
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tax and other income (expense)
|
|
|
(61,245
|
)
|
|
|
(60,550
|
)
|
|
|
(128,781
|
)
|
|
|
(102,536
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Loss)
|
|
$
|
(1,038,976
|
)
|
|
$
|
(1,115,360
|
)
|
|
|
(1,487,565
|
)
|
|
$
|
(2,767,554
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and fully diluted*
|
|
|
(0.0048
|
)
|
|
|
(0.0057
|
)
|
|
|
(0.0070
|
)
|
|
$
|
(0.0141
|
)
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and fully diluted*
|
|
|
220,268,927
|
|
|
|
200,424,027
|
|
|
|
219,935,594
|
|
|
|
200,015,546
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Statement of Operations Data
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Sales
|
|
$
|
12,489,884
|
|
|
$
|
10,146,379
|
|
|
$
|
9,538,308
|
|
Cost of Sales
|
|
|
8,788,905
|
|
|
|
6,783,473
|
|
|
|
5,767,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
3,700,979
|
|
|
|
3,362,906
|
|
|
|
3,770,758
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
3,366,518
|
|
|
|
2,365,412
|
|
|
|
1,279,239
|
|
Selling and marketing
|
|
|
2,128,625
|
|
|
|
1,920,164
|
|
|
|
1,191,800
|
|
General and administrative
|
|
|
2,299,685
|
|
|
|
1,718,627
|
|
|
|
1,560,278
|
|
Depreciation and amortization
|
|
|
510,133
|
|
|
|
374,078
|
|
|
|
276,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
8,304,961
|
|
|
|
6,378,281
|
|
|
|
4,308,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (Loss) from operations
|
|
|
(4,603,982
|
)
|
|
|
(3,015,375
|
)
|
|
|
(537,548
|
)
|
Interest and other income (expense)
|
|
|
188
|
|
|
|
2,549
|
|
|
|
313
|
|
Foreign exchange (loss) gain
|
|
|
(24,216
|
)
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(260,977
|
)
|
|
|
(241,692
|
)
|
|
|
(179,019
|
)
|
Legal settlement
|
|
|
|
|
|
|
96,632
|
|
|
|
|
|
Tax (expense) benefit
|
|
|
(5,212
|
)
|
|
|
98,372
|
|
|
|
(3,700
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tax and other income (expense)
|
|
|
(290,217
|
)
|
|
|
(44,139
|
)
|
|
|
(182,406
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Loss)
|
|
$
|
(4,894,199
|
)
|
|
$
|
(3,059,514
|
)
|
|
$
|
(719,954
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and fully diluted*
|
|
$
|
(0.0240
|
)
|
|
$
|
(0.0176
|
)
|
|
$
|
(0.0047
|
)
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and fully diluted*
|
|
|
207,710,498
|
|
|
|
185,263,660
|
|
|
|
173,254,715
|
|
|
|
|
* |
|
All outstanding warrants, options, and convertible debt are
anti-dilutive, therefore basic and diluted earnings per share
are the same for all periods. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Six Months Ended June 30,
|
|
Cash Flow Data
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Cash flows provided by (used in) operating activities
|
|
$
|
(1,285,449
|
)
|
|
$
|
(3,295,900
|
)
|
|
$
|
120,053
|
|
|
$
|
(476,637
|
)
|
|
$
|
(107,925
|
)
|
Cash flows (used in) investing activities
|
|
|
(549,804
|
)
|
|
|
(316,743
|
)
|
|
|
(479,236
|
)
|
|
|
(148,777
|
)
|
|
|
(259,193
|
)
|
Cash flows provided by financing activities
|
|
|
2,289,116
|
|
|
|
3,408,328
|
|
|
|
874,569
|
|
|
|
91,820
|
|
|
|
106,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
As of June 30,
|
|
Balance Sheet Data
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Cash and cash equivalents
|
|
$
|
818,719
|
|
|
$
|
364,856
|
|
|
$
|
569,171
|
|
|
$
|
285,126
|
|
|
$
|
103,993
|
|
Working Capital (deficiency)
|
|
|
(1,846,289
|
)
|
|
|
966,658
|
|
|
|
69,766
|
|
|
|
(2,808,676
|
)
|
|
|
(2,150,731
|
)
|
Total Assets
|
|
|
6,221,897
|
|
|
|
6,967,254
|
|
|
|
5,013,263
|
|
|
|
4,351,101
|
|
|
|
5,939,483
|
|
Long-Term Liabilities
|
|
|
1,754,379
|
|
|
|
2,014,476
|
|
|
|
1,980,476
|
|
|
|
1,797,680
|
|
|
|
1,606,559
|
|
Accumulated (deficit)
|
|
|
(14,687,276
|
)
|
|
|
(9,691,977
|
)
|
|
|
(6,531,363
|
)
|
|
|
(16,225,391
|
)
|
|
|
(12,510,081
|
)
|
Total Stockholders equity (deficit)
|
|
|
(2,089,942
|
)
|
|
|
423,236
|
|
|
|
(603,954
|
)
|
|
|
(3,253,196
|
)
|
|
|
(2,274,435
|
)
|
40
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of
financial condition and results of operations in conjunction
with the Selected Financial and Other Data and our
financial statements and related notes appearing elsewhere in
this prospectus. In addition to historical information, the
following discussion and analysis includes forward looking
statements that involve risks, uncertainties and assumptions.
Our actual results and the timing of events could differ
materially from those anticipated in these forward looking
statements as a result of a variety of factors, including those
discussed in Risk Factors and elsewhere in this
prospectus. See the discussion under Forward Looking
Statements beginning on page 24 of this
prospectus.
Overview
We are engaged in the design, manufacture, marketing and sale of
devices that are worn like eyeglasses and feature built-in video
screens that enable the user to view video and digital content,
such as movies, computer data, the Internet or video games. Our
products (known commercially as Video Eyewear, but also commonly
referred to as virtual displays, wearable displays, personal
viewers, head mounted displays, or near-to-eye displays) are
used to view high-resolution video and digital information
primarily from mobile electronic devices (such as cell phones,
portable media players, gaming systems and laptop computers) and
from desktop computers. Our products provide the user a viewing
experience that simulates viewing a large screen television or a
desktop computer monitor.
Our Video Eyewear products feature high performance miniature
display modules, low power electronics and related optical
systems. We produce both monocular and binocular Video Eyewear
devices that we believe are excellent solutions for many mobile
computer or video viewing requirements. We focus on two markets:
the consumer markets for gaming and mobile video and rugged
mobile displays for defense and industrial applications. We also
offer low-vision assist Video Eyewear products that are designed
to assist and improve the remaining vision of many people
suffering from macular degeneration.
Since our inception in 1997, we have derived the majority of our
sales from fees paid to us under research and development
contracts and related volume manufacturing services primarily of
night vision display electronics as a sub-contractor to defense
suppliers to the US government. Since 2005, we have devoted
significant resources to the development and commercial launch
of our industrial and consumer products. During 2008 and 2007,
we derived 35.4% and 32.4%, respectively, of our sales from our
consumer Video Eyewear products.
We believe our intellectual property portfolio gives us a
leadership position in microdisplay electronics, ergonomics,
packaging, motion tracking and optical systems.
Critical
Accounting Policies and Significant Developments and
Estimates
The discussion and analysis of our financial condition and
results of operations are based on our financial statements and
related notes appearing elsewhere in this prospectus. 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 financial
statements, including the statement of operations, balance
sheet, cash flow and related notes. Since future events and
their impact cannot be determined with certainty, the actual
results will inevitably differ from our estimates. Such
differences could be material to the financial statements.
We believe that our application of accounting policies, and the
estimates inherently required therein, are reasonable. These
accounting policies and estimates are periodically reevaluated,
and adjustments are made when facts and circumstances dictate a
change. Historically, we have found our application of
accounting policies to be appropriate, and actual results have
not differed materially from those determined using necessary
estimates.
Our accounting policies are more fully described in the notes to
our financial statements included in this prospectus. In reading
our financial statements, you should be aware of the factors and
trends that our management
41
believes are important in understanding our financial
performance. The critical accounting policies, judgments and
estimates that we believe have the most significant effect on
our financial statements are:
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valuation of inventories;
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carrying value of long-lived assets;
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valuation of intangible assets;
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revenue recognition;
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product warranty;
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stock-based compensation; and
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income taxes.
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Valuation
of Inventories
Inventory is stated at the lower of cost or market, with cost
determined on a
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 lifecycles and
estimated inventory levels. Purchasing practices, electronic
component obsolescence, accuracy of sales and production
forecasts, introduction of new products, product lifecycles,
product support and foreign regulations governing hazardous
materials are the 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 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, to
production, to after-sale support. If actual demand, market
conditions or product lifecycles differ from estimates,
inventory adjustments to lower market values would result in a
reduction to the carrying value of inventory, an increase in
inventory write-offs and a decrease to gross margins.
Carrying
Value of Long-Lived 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. 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. To
date, no impairment on long-lived assets has been booked.
Impairment losses in the future will be dependent on a number of
factors such as general economic trends and major technology
advances, and thus could be significantly different than
historical results.
Valuation
of Intangible Assets
We perform a valuation of intangible assets when events or
circumstances indicate their carrying amounts may be
unrecoverable. We have not impaired the value of certain
intellectual property, such as patents and trademarks, which
were valued (net of accumulated amortization) at $715,958 as of
June 30, 2009, because management believes that its value
is recoverable.
Revenue
Recognition
Revenue from product sales is recognized in accordance with the
SEC Staff Accounting Bulletin No. 104, Revenue
Recognition Product sales represent the majority
of our revenue. We recognize revenue from these product sales
when persuasive evidence of an arrangement exists, delivery has
occurred or services have been provided, the sale price is fixed
or determinable, and collectability is reasonably assured.
Additionally, we sell our products on terms which transfer title
and risk of loss at a specified location, typically shipping
point. Accordingly,
42
revenue recognition from product sales occurs when all factors
are met, including transfer of title and risk of loss, which
typically occurs upon shipment by us. If these conditions are
not met, we will defer the revenue recognition until such time
as these conditions have been satisfied. We collect and remit
sales taxes in certain jurisdictions and report revenue net of
any associated sales taxes. We also sell certain products
through distributors who are granted limited rights of return
for stock balancing against purchases made within a prior
90 day period, including price adjustments downwards on any
existing inventory. The provision for product returns and price
adjustments is assessed for adequacy both at the time of sale
and at each quarter end and is based on recent historical
experience and known customer claims.
Revenue from any engineering consulting and other services is
recognized at the time the services are rendered. For our
longer-term development contracts, which to date have all been
firm, fixed-priced contracts, we recognize revenue on the
percentage-of-completion method. Under this method income is
recognized as work on contracts progresses, but estimated losses
on contracts in progress are charged to operations immediately.
To date, all of our longer-term development contracts have been
less than one calendar year in duration. We generally submit
invoices for our work under these contracts on a monthly basis.
The percentage-of-completion is determined using the
cost-to-cost method.
The accounting estimate related to revenue recognition is
considered a critical accounting estimate because
terms of sale can vary, and judgment is exercised in determining
whether to defer revenue recognition. Such judgments may
materially affect net sales for any period. Judgment is
exercised within the parameters of GAAP in determining when
contractual obligations are met, title and risk of loss are
transferred, sales price is fixed or determinable and
collectability is reasonable assured.
Product
Warranty
Warranty obligations are generally incurred in connection with
the sale of our products. The warranty period for these products
is generally one year, but can be 24 months in certain
countries if required by law, such as in Europe. 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 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.
Stock-Based
Compensation
Our board of directors approves grants of stock options to
employees to purchase our common stock. Under
SFAS No. 123 (revised 2004), Share-Based
Payment, stock compensation expense, is recorded based upon
the estimated fair value of the stock option at the date of
grant. The accounting estimate related to stock-based
compensation is considered a critical accounting
estimate because estimates are made in calculating
compensation expense including expected option lives, forfeiture
rates and expected volatility. The fair market value of our
common stock on the date of each option grant was determined
based on the most recent cash sale of common stock in an
arms length transaction with an unrelated third party. We
engaged in at least one such transaction during each of our last
four fiscal years. Expected option lives are estimated using
vesting terms and contractual lives. Expected forfeiture rates
and volatility are calculated using historical information.
Actual option lives and forfeiture rates may be different from
estimates and may result in potential future adjustments which
would impact the amount of stock-based compensation expense
recorded in a particular period.
Income
Taxes
We account for income taxes in accordance with
SFAS No. 109, Accounting for Income Taxes.
Accordingly, we provide deferred income tax assets and
liabilities based on the estimated future tax effects of
differences between
43
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 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 amounts have been
reflected in our consolidated financial statements. In the event
that it should be determined that all or part of a deferred tax
asset in the future is in excess of the nil amount currently
recorded, an adjustment of the valuation allowance would
increase income to be recognized in the period such
determination was made.
In addition, the calculation of our tax liabilities involves
dealing with uncertainties in the application of complex tax
regulations. As a result of the implementation of Interpretation
No. 48, Accounting for Uncertainty in Income Taxes- an
interpretation of FASB Statement No. 109, we recognize
liabilities for uncertain tax positions based on the two-step
process prescribed within the interpretation. The first step is
to evaluate the tax position for recognition by determining if
the weight of available evidence indicates that it is more
likely than not that the position will be sustained on audit,
including resolution of related appeals or litigation processes,
if any. The second step requires us to estimate and measure the
tax benefit as the largest amount that is more than 50% likely
of being realized upon ultimate settlement. It is inherently
difficult and subjective to estimate such amounts, as this
requires us to determine the probability of various possible
outcomes. We re-evaluate these uncertain tax positions on a
quarterly basis. This evaluation is based on factors including,
but not limited to, changes in facts or circumstances, changes
in tax law, effectively settled issues under audit and new audit
activity. Such a change in recognition or measurement would
result in the recognition of a tax benefit or an additional
charge to the tax provision in the period.
Finally, any future recorded value of our deferred tax assets
will be dependent upon our ability to generate future taxable
income in the jurisdictions in which we operate. These assets
consist of research credit carry-forwards, capital and net
operating loss carry-forwards and the future tax effect of
temporary differences between balances recorded for financial
statement purposes and for tax return purposes. It will require
future pre-tax earnings in excess of $13,200,000 in order to
fully realize the value of our unrecorded deferred tax assets.
If we were to sustain future net losses, it may be necessary to
record valuation allowances against such deferred tax assets in
order to recognize impairments in their estimated future
economic value.
Key
Performance Indicators
We believe that a key indicator for our business is the trend
for the volume of orders received from customers, especially
those orders related to night-vision electronic modules. During
weak economic periods, customers ability to forecast their
requirements deteriorates causing delays in the placement of
orders. Forward-looking visibility on customer orders is at an
all time low. Our major night-vision electronics modules
customers (Kopin and DRS Technologies, Inc.) are placing orders
for product only when they have orders in hand from their
governmental customer. Total shipments of night vision
electronics module customers in 2008 amounted to $6,068,449,
compared to $1,418,249 in 2007.
Comparison
of Fiscal Years Ended December 31, 2008 and
December 31, 2007
Sales. Our sales were $12,489,884 for the year
ended December 31, 2008 compared to $10,146,379 for the
year ended December 31, 2007. This represents a 23.1%
increase for the year 2008 over the year 2007. Our sales from
defense products increased to $6,397,221 or 51.2% of our total
sales in 2008 versus $1,418,249 or 14.0% of total sales in 2007,
an increase of $4,978,972 or 351.1%. The increase resulted
primarily from new orders of night vision drive electronics from
prime contractors and the introduction of our
Tac-Eye®
display product line in the fourth quarter of 2008. Sales from
our defense-related engineering programs decreased to $1,548,703
or 12.4% of total sales versus $5,445,375 or 53.7% of total
sales in 2007. The large decrease in fiscal 2008 was the result
of the start and completion of a $4,300,000 engineering program
in late 2007. Consumer Video Eyewear product sales increased to
$4,451,121 or 35.64% of total sales for the year ended
December 31, 2008 compared to $3,282,755 for our
2007 year or 32.4% of 2007s total sales. This 35.6%
sales dollar increase resulted from a broader Video Eyewear
product line and increased distribution in the
United Kingdom and Japan. Low-vision assist sales,
44
consisting mainly of sales of low-vision assist products, were
$92,839 or 0.7% of total sales in fiscal 2008 versus none in
fiscal 2007.
Cost of Sales and Gross Margin. Gross margin
increased to $3,700,979 for fiscal 2008 from $3,362,906 for
fiscal 2007, an increase of $338,073 or 10.1%. As a percentage
of net sales, gross margin decreased to 29.6% for fiscal 2008
compared to 33.1% for fiscal 2007. This reduction was the result
of changes in our revenue mix and related margins. Generally, we
earn a higher gross margin on engineering only programs as
compared to the gross margin on products, in which we incur cost
of goods or volume production costs. Engineering services
revenues decreased to 12.4% as a percentage of total sales in
2008 versus 53.7% of total sales in 2007, resulting in the
majority of the reduction in overall gross margin in 2008 versus
fiscal 2007.
Research and Development. Our research and
development expenses in 2008 increased by $1,001,106, or 42.3%,
to $3,366,518 in fiscal 2008 versus $2,365,412 in 2007. This was
due to increased internal development activities and less direct
support of our research under government funded engineering
programs. Expenses we incur under government funded engineering
programs are included in costs of goods sold.
Selling and Marketing. Selling and marketing
expenses were $2,128,625 for fiscal 2008 as compared to
$1,920,164 for fiscal 2007, an increase of $208,461 or 10.9%.
Despite the increase in absolute dollars, as a percentage of
total sales, the selling and marketing expenses decreased to
16.9% of sales for fiscal 2008 as compared to 18.9% for fiscal
2007. The absolute dollar increase was primarily due to
increased advertising expenses along with increased marketing
support paid out to our expanded consumer products resellers and
the introduction of in-store point of purchase displays with US
resellers.
General and Administrative. General and
administrative expenses were $2,299,685 for fiscal 2008 as
compared to $1,718,627 for fiscal 2007, an increase of $581,058
or 33.8%. The higher general and administrative related to
increases in staff and personnel costs, and increased legal
expenses.
Depreciation and Amortization. Our
depreciation and amortization expense increased by $136,055, or
36.4%, to $510,133 in 2008 versus $374,078 in 2007. The increase
was related to increased depreciation on new capital
expenditures in 2008 and 2007.
Other Income (Expense). Total other expenses,
consisting primarily of interest expense, was $285,005 in 2008
versus $142,511 for 2007. The increase in expenses was primarily
attributable to an offsetting legal settlement received during
2007 in the amount of $96,632.
Provision (Benefit) for Income Taxes. The
provision for income taxes for the year ended December 31,
2008 was $5,212 versus a net benefit of ($98,372) in 2007.
The 2007 net benefit includes our accrual of $130,130 in
New York State tax credits for our research and development
activities. The balance of each years tax provision was
primarily for franchise taxes payable to the State of Delaware,
our state of incorporation. These taxes were $5,212 for 2008 and
$31,758 for 2007. This decrease was a result of the
8-for-1
split of our common stock in July 2008.
Net (Loss) and (Loss) per Share. Our net loss
was $(4,894,199) or $(0.0240) per share in 2008, an increased
loss of $(1,834,685), or (60.0)%, from $(3,059,514) or $(0.0176)
per share in 2007.
Comparison
of Fiscal Years Ended December 31, 2007 and
December 31, 2006
Sales. Our sales were $10,146,379 for the year
ended December 31, 2007 compared to $9,538,308 for the year
ended December 31, 2006. This represents a 6.4% increase
for the year 2007 over the year 2006. Our sales from defense
products decreased to $1,418,249 or 14.0% of total sales in 2007
versus $4,888,243 or 51.2% of total sales in 2006, a decrease of
$3,469,994. The decrease resulted from reduced orders from the
prime defense contractor caused by technical problems in other
areas of their supply chain. Sales from our defense related
engineering programs increased to 53.7% of total sales or
$5,445,375 versus $2,627,442 or 27.5% of total sales in 2006.
This large increase was the result of a new $4,300,000
government research and development program in 2007. Consumer
Video Eyewear product sales increased to $3,282,755 or 32.4% of
total sales for the year ended December 31, 2007 compared
to $2,022,623 or 21.2% of sales for our 2006 fiscal year. This
62.3% increase in dollar sales resulted from the introduction of
three new Video Eyewear models in 2007 and the commencement of
our European sales activities in late 2007.
45
Cost of Sales and Gross Margin. Gross margin
decreased to $3,362,906 for fiscal 2007 from $3,770,758 for
fiscal 2006, a decrease of $407,852 or 10.8%. As a percentage of
net sales, gross margin decreased to 33.1% for fiscal 2007
compared to 39.5% for fiscal 2006. This reduction was the result
of changes in our revenue mix and related margins. Generally, we
earn a higher gross margin on our defense products as compared
to the gross margin on consumer products, and with the
introduction of three new consumer Video Eyewear products our
margins decreased. As defense product sales as a percentage of
our total sales decreased to 14.0% in 2008 versus 51.2% in 2006
our overall margins decreased.
Research and Development. Our research and
development expenses in 2007 increased by $1,086,173 or 84.9%,
to $2,365,412 in fiscal 2007 versus $1,279,239 in 2006. This was
due to increases in the number of our research and development
personnel and the lease of additional space dedicated to this
function.
Selling and Marketing. Selling and marketing
expenses were $1,920,164 for fiscal 2007 as compared to
$1,191,800 for fiscal 2006, an increase of $728,364 or 61.1%.
The increase resulted from the preparatory marketing and
advertising launch expenses by three new consumer Video Eyewear
products, the establishment of our first print advertising
programs and increased trade show costs to promote our new Video
Eyewear products.
General and Administrative. General and
administrative expenses were $1,718,627 for fiscal 2007 as
compared to $1,560,278 for fiscal 2006, an increase of $158,349
or 10.1%. The increase was mainly attributable to increased
staffing and legal expenses.
Depreciation and Amortization. Our
depreciation and amortization expense increased by $97,089, or
35.1%, to $374,078 in 2007 versus $276,989 in 2006. The increase
was related to increased depreciation provisions on new capital
expenditures in 2007 and full years provision on our 2006
additions.
Other Income (Expense). Total other expenses,
consisting primarily of interest expense, was $142,511 in 2007
versus $178,706 in 2006. Our borrowing costs were $62,673 higher
in 2007 than in 2006 but our 2007 borrowing costs were offset by
$96,632 in miscellaneous income related to the settlement of a
legal dispute.
Provision (Benefit) for Income Taxes. The
provision for income taxes for the year ended December 31,
2007 was a net benefit of $98,372 versus an expense of $3,700
for 2006. The 2007 benefit includes our accrual of $130,130 in
New York State tax credits for our research and development
activities. The balance of each years tax provision was
primarily attributable to franchise taxes payable to the State
of Delaware, our state of incorporation. These taxes were
$31,758 for 2007 and $3,700 for 2006. The large increase was a
direct result of the
7-for-1
reverse stock split that took place in 2007.
Net (Loss) and (Loss) per Share. Our net loss
was $(3,059,514) or $(0.0171) per share in 2007, an increase of
$(2,339,560) from $(719,954) or $(0.0047) per share in 2006.
Comparison
of Three Months Ended June 30, 2009 and June 30,
2008
Sales. Our sales were $2,063,733 for the three
months ended June 30, 2009 compared to $3,087,338 for the
three months ended June 30, 2008. This represents a (33.2%)
decrease for the 2009 period over the comparable 2008 period.
Our sales from defense production programs decreased to
$1,179,146 or 57.1% of total sales for the 2009 period from
$2,442,817 or 79.1% of sales in the comparable 2008 period, a
decrease of $(1,263,672) or (51.7%). The decrease resulted
directly from our early completion during the three months ended
March 31, 2009 of a large order and fewer resulting follow on
sales versus the prior year when a production order spanned most
of the same second quarterly period. These orders are normally
completed in 90 to 120 days once deliveries commence, so any
given calendar quarter can contain anywhere from zero to three
months of shipments resulting in substantial revenue variations.
Sales from our defense related engineering services programs
decreased slightly to $116,865 or 5.7% of sales for the 2009
period versus $127,006 or 4.1% of total sales in the comparable
2008 period. Engineering services were slower in 2009 as we were
still in transition between new major programs. Consumer Video
Eyewear product sales increased to $764,629 or 37.1% of total
sales for the three months ended June 30, 2009 compared to
$516,214 or 16.7% of total sales for the same period in 2008.
This 48.1% increase in revenues was primarily due to our
increased sales of Video Eyewear products in Europe and Japan as
compared to 2008. Low-vision assist sales for the three months
ended June 30, 2009 were $3,094 versus $1,301 in the prior
years period and were in both periods less than 0.1% of
revenues.
46
Cost of Sales and Gross Margin. Gross margin
decreased to $672,914 for the three-months ended June 30,
2009 from $1,215,677 for three months ended June 30, 2008,
a decrease of $(542,763) or (44.6%). As a percentage of net
sales, gross margin decreased to 32.6% for 2009 period compared
to 39.4% for the comparable 2008 period. Gross margins for the
2008 period were higher than for the similar period in 2009 due
to increased margins earned on defense product sales which were
79.1% of sales and only 57.1% in the 2009 period. This change in
our revenue mix and their related lower gross margins on
Consumer Video Eyewear resulted in the decrease in the 2009
margin as we generally earn a higher gross margin on engineering
services and our defense product sales as compared to the gross
margin on products.
Research and Development. Our research and
development expenses in the three months ended June 30,
2009 were $428,737 versus $1,224,265 in the comparable 2008
period, a decrease of $(795,528) or (65.0)%. This decrease was
due to lower staffing levels and a decreased use of external
contractors for development work versus 2008.
Selling and Marketing. Selling and marketing
expenses were $520,257 for the three months ended June 30, 2009
as compared to $483,695 for the comparable 2008 period, an
increase of just $36,562. As a percentage of total sales, the
selling and marketing expenses increased to 25.1% of sales for
the three month period in 2009 as compared to 15.5% for same
period in fiscal 2008 which is reflective of our previously
mentioned change in revenue mix and decreased total sales
between the comparable quarters. Consumer Video Eyewear sales
require higher sales and marketing expenses over defense product
sales consisting primarily of night vision display electronics.
General and Administrative. General and
administrative expenses were $534,142 for the three months ended
June 30, 2009 as compared to $438,831 for the comparable
2008 period, an increase of $95,311 or 21.7%. The higher general
and administrative expenses are attributable to increases in
accounting fees related to our commencement of external
accountant reviews of our quarterly results and increased wage
costs as compared to same quarterly period in 2008.
Depreciation and Amortization. Our
depreciation and amortization expense increased by $43,813, or
35.4%, to $167,509 in the three months ended June 30, 2009
versus $123,696 in the comparable 2008 period. The increase is
attributable to increased depreciation provisions on new capital
expenditures and patent investments made in fiscal 2008.
Other Income (Expense). Interest expense, net
of interest income and foreign exchange adjustments, was $60,357
in the three months ended June 30, 2009 versus $57,653 for
the comparable 2008 period. The increase represents increased
borrowings and higher interest rates on a note payable.
Provision (Benefit) for Income Taxes. The
provision for income taxes was for franchise taxes to Delaware,
our state of incorporation. Such income taxes for the three
months ended June 30, 2009 were $888 and $2,897 for the
comparable 2008 period.
Net (Loss) and (Loss) per Share. Our net loss
was $(1,038,976) (or $(0.0048) per share) in the three months
ended June 30, 2009, a decrease from an overall loss of
$(1,115,360) or $(0.0057) per share for the same quarter in 2008.
Comparison
of Six Months Ended June 30, 2009 and June 30,
2008
Sales. Our sales were $5,082,087 for the six
months ended June 30, 2009 compared to $4,807,982 for the six
months ended June 30, 2008. This represents a 5.7% increase
for the 2009 period over the comparable 2008 period. Our sales
from defense production programs were $2,633,300 or 51.8% of
total sales for the 2009 period versus $3,300,428 and 68.6% of
total sales in the comparable 2008 period, a decrease of
$(667,128). As a percentage of total revenues this category of
product sales was 51.8% of sales for the first six months of
2009 versus 68.6% of sales for the same period in 2008. The
decrease resulted directly from decreased orders for our night
vision display drive electronics customer due to timing issues,
which as explained previously can vary significantly from
quarter to quarter. Offsetting this reduction was a continued
strengthening of our Tac-Eye product line, which had minimal
sales in the comparable 2008 period. Sales from our defense
related engineering service programs increased to $565,355 or
11.1% of total sales for the 2009 period versus $317,994 in the
comparable 2008 period. The majority of this $247,361 increase
occurred in the first quarter of 2009 over the same period in
2008. Overall engineering
47
program revenues rose to 11.1% of total sales as compared to
6.6% in the first six months of 2008. Consumer Video Eyewear
product sales increased to $1,865,815 or 36.7% of total sales
for the six months ended June 30, 2009 as compared to $1,182,859
or 24.6% of total sales for the same period in 2008. This 57.7%
increase was entirely due to increased sales in Europe and Japan
as compared to the same period in 2008. Low-vision assist sales
for the six months ended June 30, 2009 were $17,617 versus
just $6,701 for the same period in 2008, both less than 0.3% of
our overall revenues in each years period.
Cost of Sales and Gross Margin. Gross margin
increased to $1,860,226 for the six-month ended June 30, 2009
from $1,449,243 for six months ended June 30, 2008, an
increase of $410,983 or 28.4%. As a percentage of total net
sales, overall gross margin increased to 36.6% for 2009 period
compared to 30.1% for the comparable 2008 period. Gross margins
for the 2008 period were lower than for the similar period in
2009 due to product clearance activities, when an older product
model was being phased out and larger reseller discounts were
being offered to assist its sales. Additionally, our cost
reductions improved margins for the 2009 period.
Research and Development. Our research and
development expenses in the six months ended June 30, 2009
were $945,897 versus $1,960,982 in the comparable 2008 period, a
decrease of $(1,015,085) or (51.8%). This was due to staff
reductions made in late 2008 and a decreased use of external
contractors in the 2009 period versus 2008.
Selling and Marketing. Selling and marketing
expenses were $976,041 for the six months ended June 30,
2009 as compared to $933,257 for the comparable 2008 period, an
increase of $42,784. As a percentage of total sales, the selling
and marketing expenses decreased slightly to 19.1% of sales for
the six month period in 2009 as compared to 19.3% for same
period in fiscal 2008.
General and Administrative. General and
administrative expenses were $990,729 for the six months ended
June 30, 2009 as compared to $972,630 for the comparable
2008 period, an increase of $18,099 or 1.9%. The higher expenses
are attributable to increased accounting and audit services
involved in our changeover of audit firms, external accountant
reviews of our quarterly results and higher wage costs against
the same period in 2008.
Depreciation and Amortization. Our
depreciation and amortization expense increased by $58,951, or
23.8%, to $306,343 in the six months ended June 30, 2009
versus $247,392 in the comparable 2008 period.
Other Income (Expense). Interest expense, net
of interest income and foreign exchange adjustments, was
$127,005 in the six months ended June 30, 2009 versus
$98,886 for the comparable 2008 period. The increase represents
increased borrowings and higher interest rates on a note payable.
Provision (Benefit) for Income Taxes. The
provision for income taxes was for franchise taxes to Delaware,
our state of incorporation. Such income taxes for the six months
ended June 30, 2009 were $1,776 and $3,650 for the
comparable 2008 period.
Net (Loss) and (Loss) per Share. Our net loss
was $(1,487,565) (or $(0.0070) per share) in the six months
ended June 30, 2009, an improvement of $1,279,988, or
46.2%, from the larger loss of $(2,767,554) or $(0.0141) per
share in the comparable 2008 period.
Liquidity
and Capital Resources
As of June 30, 2009, we had cash and cash equivalents of
$285,126, a decrease of $533,593 from $818,719 as of
December 31, 2008.
Our cash requirements are primarily for research and
development, product tooling, and working capital. Historically,
we have met these requirements through capital generated from
the sale and issuance of our common equity securities,
convertible debt and notes payable to private investors, cash
flow provided by operations and our revolving bank lines of
credit.
Operating Activities. Cash (used in) operating
activities was $(1,285,449) in fiscal 2008 and $(3,295,900) in
fiscal 2007. Changes in operating assets and liabilities,
excluding cash, provided (used) cash were $2,785,425 in fiscal
2008 and $(800,177) in fiscal 2007. The decreases in our
accounts receivable by December 31, 2008 of $1,494,613
along with a $733,691 increase in accounts payable and customer
deposits of $683,040 primarily resulted in this cash flow
improvement in 2008 over 2007. Our reduced accounts receivable
year over year was due
48
to the completion of a defense product production program in
December 2008, whereas in 2007 a similar program was in
mid-stream at December 31, 2007 along with the larger
receivables from the final deliveries and billings on a large
2007 engineering program, including the programs holdback. To
accelerate our cash collections we offer early payment
allowances to certain customers on our defense production
programs. In both 2008 and 2007, those customers took the early
payment discounts we offered. We intend to continue to offer
early payment discounts as long as we continue to operate with a
working capital deficit. On one defense production program,
early payment discounts reduced our working capital investment
in accounts receivable by an average of $800,000. Cash (used in)
operating activities was $(476,637) and $(107,925) for the
six-month periods ended June 30, 2009 and 2008,
respectively. Changes in operating assets and liabilities,
excluding cash, provided cash were $614,521 and $2,322,088 for
the six-month periods ended June 30, 2009 and 2008,
respectively. In both these periods, the reductions in accounts
receivable from the seasonally higher
December 31st
balances were the major providers of cash. The 2009
periods reduction versus the same period in 2008 resulted
mainly from a $(1,089,159) decrease in accounts payable since
December 31, 2008, a direct result of the normal seasonal
slow-down in parts of our business. Offsetting this decrease was
an increase in customer deposits of $451,399 over those as at
December 31, 2008 attributable to the advance component
purchasing requirements for a large order for special night
vision electronics that commenced production in September 2009.
We normally request an advance from customers placing large
orders for special goods. If in the future we are unable to
obtain such advance deposits, our liquidity and ability to
support large orders would decrease.
Investing Activities. Cash used in investing
activities was $549,804 in fiscal 2008 and $316,743 in fiscal
2007 and $148,777 and $259,193 for the six-month periods ended
June 30, 2009 and 2008, respectively. Cash used for
investing activities in fiscal 2008 related primarily to
production tooling and computer software equipment additions of
$424,166 and in the six-month period ended June 30, 2009
related primarily to tooling acquisitions of $81,837 versus
$193,126 for the same 6 month period in 2008. The costs of
registering our intellectual property rights, included in the
investing activities totals described above were $125,638 in
fiscal 2008 and $136,433 in fiscal 2007 and $66,940 and $66,067
for the six-month periods ended June 30, 2009 and 2008,
respectively.
Financing Activities. Cash provided by
financing activities was $2,289,116 in fiscal 2008 and
$3,408,328 in fiscal 2007 and $91,820 and $106,255 for the
six-month periods ended June 30, 2009 and 2008,
respectively. We sold shares of our common stock for aggregate
gross proceeds of $2,138,646 in 2008 and $3,792,362 in 2007 and
$300,000 in the six-month period ended June 30, 2009 in
private placements offerings. In the six-month period ended
June 30, 2008 we sold shares of our common stock for
aggregate gross proceeds of $16,697 upon exercise of stock
options and received $13,586 from the exercise of warrants.
Capital Resources. As of December 31,
2008, we had a cash balance of $818,719. As of June 30,
2009, we had a cash balance of $285,126. We had $123,952
available under our bank lines of credit (total drawings as of
June 30, 2009 were $88,548). The credit lines are with two
banks, are payable on demand and secured by the personal
guarantee of our President and Chief Executive Officer, Paul J.
Travers. The bank credit agreements contain various restrictions
on indebtedness, liens, guarantees, redemptions, mergers,
acquisitions or sale of assets, loans, transactions with any
affiliates, and investments. They also prohibit us from
declaring and paying cash dividends without the banks
prior consent.
On September 19, 2006, we borrowed $500,000 from an
individual lender and issued a convertible promissory note in
the principal amount of $500,000 in evidence of the loan.
Interest on the outstanding principal amount of the note accrues
at the annual rate of 10.0%. The outstanding principal amount of
the note, together with all accrued and unpaid interest thereon,
is convertible at the option of the holder into shares of our
common stock at the rate of $0.2667 per share. The outstanding
principal amount of the note together with all unpaid accrued
interest thereon was due and payable on January 31, 2009.
As of January 31, 2009, the interest accrued and unpaid on
the note was $118,493. Since January 31, 2009 interest on the
principal amount of the note has accrued at the annual rate of
18.0% and we have made monthly payments of interest only. As of
the date of this prospectus, no demand for immediate payment of
the principal amount of the note has been made. Such a demand
would have a negative impact on our liquidity and ongoing
operations. As the conversion price of the note is greater than
our expected maximum offering price, we intend to pay the
outstanding principal amount of the note in full, together with
all interest accrued and unpaid thereon, from the proceeds of
this offering.
49
In August and September 2009, we borrowed an aggregate amount of
$200,000 from three individual lenders, including $50,000 from
Mr. Paul Churnetski, our Vice President of Quality Assurance and
the beneficial owner of approximately 9% of our issued and
outstanding common stock. These loans bear interest at an annual
rate of 18.0% and are due and payable on October 31, 2009.
We borrowed these funds to finance part of our working capital
investment for a defense order in process. We are negotiating to
borrow an additional $100,000 from one or more individual
lenders on the same terms and conditions. We intend to repay all
these loans from revenues from the receivables collections from
that order or out of the proceeds from this offering if the
closing occurs prior to the maturity date.
Our cash requirements depend on numerous factors, including new
product development activities, our ability to commercialize our
products, their timely market acceptance, selling prices and
gross margins, and other factors. We expect to carefully devote
capital resources to continue our development programs, hire and
train additional staff, expand our research and development
activities, new product marketing and increased inventory
levels. Assuming we are able to continue to increase our sales
and maintain our planned gross margins, we anticipate that we
will also experience growth in our operating expenses for the
foreseeable future. Our future net operating losses, product
tooling expenses, and related working capital investments will
be the principal use of our cash. In particular, we expect that
potentially significant amounts of working capital investments
in accounts receivable and inventories that are not offset by
corresponding increases in accounts payable will use cash with
our planned growth.
We anticipate, based on our internal forecast and assumptions
relating to our operations (including, among others, assumptions
regarding our working capital requirements, the progress of our
research and development efforts and Video Eyewear product sales
and gross margins) that, taking into account the minimum
anticipated proceeds of the sale of our securities pursuant to
this prospectus, we will have sufficient cash to meet our
working capital and other cash flow requirements for at least
the next 12 months. In the event we do not close this
offering in the near future, we will have to make adjustments in
our operating plans and scale back on new product development as
our net operating activities still are consuming cash. Many of
our proposed new products would be placed on hold and staff
reductions across the company would be required. In parallel
with such spending reductions, management would begin an active
search for private sources of financing, including debt and
equity offerings to reduce our working capital deficiency. If
we were unsuccessful in obtaining alternative financing by
December 31, 2009, management would have to reassess its
operating plans for fiscal 2010.
The recent global economic crisis has caused disruptions and
extreme volatility in global financial markets, increased rates
of default and bankruptcy, and has impacted consumer spending
levels. These macroeconomic developments could adversely affect
our business, operating results or financial condition. Current
or potential customers, including suppliers to the US
government, may delay or decrease spending on our products and
services as their business
and/or
budgets are impacted by economic conditions. The inability of
current
and/or
potential customers to pay us for our products and services may
adversely affect our earnings and cash flows.
Current
Financial Position
As of September 30, 2009 we had approximately $181,197 in
cash and cash equivalents and we had $28,210 in available bank
credit lines. In August and September 2009 we borrowed an
aggregate amount of $200,000 from three individual lenders,
including $50,000 from Mr. Paul Churnetski, our Vice
President of Quality Assurance and the beneficial owner of
approximately 9% of our issued and outstanding common stock.
These loans bear interest at an annual rate of 18.0% and are due
and payable on October 31, 2009. We borrowed these funds to
finance part of our working capital investment for a defense
order in process. We are negotiating to borrow an additional
$100,000 from one or more individual lenders, on the same terms
and conditions. We intend to repay all these loans from revenues
from the receivables collections from that order or out of the
proceeds from this offering if the closing occurs prior to the
maturity date.
We had a working capital deficit of $2,808,676 as of
June 30, 2009 and this deficit will increase by a further
amount since that date due to our expected operating losses in
our third quarter of fiscal 2009. Our ability to continue
operations is currently reliant on the extended support of
certain of our major trade suppliers, several of whom have
granted us extended credit terms on our accounts payable.
Further we have a $500,000 note payable that was due as of
January 31, 2009 that has not been repaid as of the date of
this prospectus. The lender to date has not
50
demanded repayment of this note nor have they agreed to any
formal extension. In the event the note holder or a major trade
supplier demanded repayment of their overdue accounts payable
before the successful closing of this offering, management would
be forced to look immediately for other financing resources,
which may or may not be available, regardless of terms. If such
funds were not readily available management would have to look
at restructuring the company, reducing our operations and/or the
sale of a portion or all of the companys assets. As a
result without the successful closing of this offering our
future as an operating entity would be jeopardy.
In May 2009, we were awarded a contract to deliver our
Tac-Eye
LT®
display system to the Air Forces Battlefield Airman
Program. The system has been developed over the last five years
with support from various US military commands including the Air
Force Research Laboratory, Natick Soldier Center and US Special
Operations Command (USSOCOM). If the Air Force exercises all of
its options under the contract, our revenues under the contract
could equal $2,000,000 over the next 19 months.
In October 2008, we received approval of a $640,000 government
engineering program. We anticipate that the contract relating to
this award will be executed and our work on the program will
commence in fall 2009. We expect the program to be completed in
nine months.
As of September 30, 2009 we had approximately $1,287,000 in
purchase orders for our defense-related products and night
vision drive electronics. Those purchase orders are generally
non-cancelable. Backorders for our consumer Video Eyewear
products as of September 30, 2009 were $197,000, which is
normal for this time of the year for our consumer product sales
along with customer anticipation regarding are fall new product
releases. We had orders totaling $334,000 for our Tac-Eye Video
Eyewear products as of September 30, 2009. We have an
engineering program in progress with eventual gross billings of
$336,000 which is expected to be completed by November 2009.
Since June 30, 2009, our inventory and accounts payable
have not changed materially but we expect them to increase
during the remainder of 2009 as a result of the seasonal ramp-up
for our consumer products, subject to the continued extended
support of our suppliers.
We believe that if we succeed in raising the minimum gross
proceeds from this offering, we will achieve additional growth
in sales of our consumer Video Eyewear products and that our
defense products should contribute to revenue growth for the
remainder of 2009 and beyond. Subject to the closing of this
offering, we also anticipate that we will continue to experience
increases in our sales and marketing, and general operating
expenses throughout the remainder of 2009 and in 2010 but that
they should not grow as a percentage of overall sales.
51
BUSINESS
Company
Overview
We are engaged in the design, manufacture, marketing and sale of
devices that are worn like eyeglasses and feature built-in video
screens that enable the user to view video and digital content,
such as movies, computer data, the Internet or video games. Our
products (known commercially as Video Eyewear but also commonly
referred to as virtual displays, wearable displays, personal
viewers, head mounted displays, or near-to-eye displays) are
used to view high-resolution video and digital information from
mobile electronic devices, such as cell phones, portable media
players, gaming systems and laptop computers. Our products
provide the user with a viewing experience that simulates
viewing a large screen television or a desktop computer monitor
that can be viewed practically anywhere, anytime.
Our Video Eyewear products feature high performance miniature
display modules, low power electronics and related optical
systems. We produce both monocular and binocular Video Eyewear
devices that we believe are excellent solutions for uses
including many mobile computer, mobile internet devices
(MID) or video viewing requirements, including general
entertainment applications. We focus on two markets: the
consumer markets for gaming and mobile video and rugged mobile
displays for defense and industrial applications. We also offer
low-vision assist Video Eyewear products that are designed to
assist and improve the remaining vision of many people suffering
from macular degeneration.
Owners of mobile display devices increasingly want to use them
to view high-resolution, full color content. The displays
currently used in these mobile devices do not work well for this
purpose because they are either too small, which makes it
extremely difficult for the human eye to view the detail of the
images that they display, or they are too large, making the
device heavier, larger and difficult to carry. Recently, some
mobile devices, like the iPhone, have employed a touch screen
with software capable of magnifying or zooming in on a small
portion of the image. We believe that many consumers consider
this solution unsatisfactory because it is not like their
desktop computer viewing experience and they find it difficult
to navigate touch screens and to find information on the portion
of the image being viewed.
In contrast, our Video Eyewear products enable users of many
mobile devices to effectively view the entire screen on a small,
eyeglass-like device. They can be used as a wearable replacement
for any television or desktop computer monitor in almost any
environment. Our products employ microdisplays that are smaller
than one-inch diagonally, with some as small as one-quarter of
an inch. They can display an entire, detailed image with
resolution of up to 1280×720 pixels (High Definition or
HD). The images on the microdisplay are viewed through
proprietary magnifying optics that are usually designed by us
and incorporated into our Video Eyewear products. Using these
optics and displays, our Video Eyewear products provide a
virtual image that appears to be similar to the image on a full
size computer screen from a normal desktop working distance or
the image on a large flat panel television from normal home TV
viewing distance. For example, when magnified through our
optics, a high-resolution 0.44-inch diagonal microdisplay can
provide a viewing experience comparable to that on a
62-inch
diagonal television screen viewed at nine feet.
Overall
Strategy
Our goal is to establish and maintain a leadership position as a
worldwide supplier of Video Eyewear and virtual imaging
technology solutions. We intend to offer our technologies across
major markets, platforms and applications. We will strive to be
an innovator in designing virtual display devices that enable
new mobile video viewing and general entertainment applications.
To maintain and enhance our position as a leading provider of
virtual display solutions, we intend to:
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improve brand name recognition;
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provide excellent products and service;
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develop products for large markets;
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broaden and develop strategic relationships and partnerships;
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promote and enhance development of third party software that can
take advantage of our products;
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expand market awareness for Video Eyewear, including use for
Virtual Reality and Augmented Reality;
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obtain and maintain market leadership and expand customer base;
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maintain and exploit cost advantage;
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extend our proprietary technology leadership;
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enhance and protect our intellectual property portfolio;
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establish multiple revenue sources;
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continue to invest in highly qualified personnel;
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build and maintain strong design capabilities; and
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leverage our outsourcing model.
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The
Market
We believe that there is growing demand for mobile access to
high-resolution content in several major markets. Our business
focuses on the consumer mobile entertainment and gaming markets
and the industrial and defense markets. The demand for personal
displays in these markets is being driven by such factors as:
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Increasing use of the Internet in all aspects of society and
business, which is increasing demand for Internet access
anywhere, anytime.
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Low cost wireless networks, with significantly increased
bandwidths and improved compression of digital media, continue
to evolve. They now allow users to view television or access the
Internet on mobile devices. However, the relatively lower
resolution and larger size of the displays currently used in
these mobile devices do not allow the users to take full
advantage of the high-resolution content available to them. We
believe that our Video Eyewear products are well suited for this
purpose.
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Increased spending by consumers on mobile entertainment devices
such as iPods and cellular telephones. We expect that
full-featured, cellular handsets with video capabilities will
become more widely available and that a single handset will
replace todays separate telephone, PDA, digital camera,
handheld game player and MP3 music player. Our Video Eyewear
products can provide viewable high-resolution mobile displays
for users of these merged devices, with better viewing
capability and higher detailed resolution than the small screens
on existing mobile devices.
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Industrial, defense and security sectors are employing mobile
communications, sensors and surveillance devices that are light,
durable and easy to use but require displaying their
high-resolution content on an external device and often in a
hands-free way. Our wearable Video Eyewear products can be ideal
for this and will allow a user their physical mobility.
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Video gaming on PCs and consoles continues to grow in North
America and around the world. We believe that our Virtual
Display technologies will significantly increase user
satisfaction with gaming applications by engaging the user
through the use of stereoscopic imagery and interactive head
tracking. Our Virtual Reality and Augmented Reality Video
Eyewear are designed to provide this capability.
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The widening distribution of new three dimensional (3D) movies
and other 3D content in North America is creating a need for a
method to play this content outside movie theaters. We believe
that Video Eyewear, with its inherent dual display design, is
well suited for the playback of 3D content. Stereoscopic 3D
video playback on Video Eyewear also avoids many of the negative
issues commonly encountered by shutter, polarized or color
anaglyph glasses used in competing technologies and allows the
user to view 3D content without purchasing new computer or
television equipment.
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People with low-vision problems require devices to magnify and
capture images that they wish to see and to display them in a
manner that they can view with their remaining vision. Our Video
Eyewear, with the
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addition of a camera and digital signal processing in a single
device, can provide this capability to many people suffering
from certain types of vision problems.
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Target
Markets
Our target markets and applications by major sector are:
Consumer
Entertainment and Internet. We believe
that there is an increasing demand for convenient,
high-resolution, 3D displays to view content such as movies,
entertainment and the Internet in a mobile environment.
Gaming. We believe that there is a need
for high-resolution, interactive, stereoscopic 3D display
devices for use with desktop computers, consoles and other
gaming products. We believe that gaming on modern mobile devices
with small, direct view screen is not a satisfactory experience
for many consumers. Our Video Eyewear products are designed to
significantly enhance a consumers experience by providing
larger, high-resolution images with stereoscopic 3D
capabilities. We believe that there is also a demand for display
devices that enable the user to simulate and experience movement
within a three-dimensional environment when using either gaming
consoles or mobile devices. We anticipate that Virtual Reality
(VR) (which allows a user to interact with a computer-simulated
environment, whether that environment is a simulation of the
real world or an imaginary world) and Augmented Reality (AR)
(which combines real-world and computer-generated data in real
time) will become increasingly popular entertainment
applications. Both VR and AR are difficult to implement using
traditional desktop computer monitors and televisions.
Industrial
and Defense
The US government requires display devices for mobile and
hands-free viewing of computer and mapping information, remote
viewing of sensor data, and remote viewing of transmissions from
targeting systems. These applications currently include:
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Night vision and thermal sighting systems;
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Unmanned vehicle and robotic systems; and
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Training and simulation systems, including AR Video Eyewear.
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These systems typically are required to provide detailed,
high-resolution images, with limited power consumption and low
external light emission, and to be durable.
Our Video Eyewear products are also used for a number of
industrial applications, including as remote camera displays and
wearable computer displays, for viewing of industrial thermal
signature systems and for providing hands-free access to manuals
and other required information in remote and in-field
maintenance servicing.
Low-vision
Assist
We believe that our Video Eyewear products may provide solutions
for patients suffering from certain types of visual handicaps.
Our low-vision assist products are designed to assist patients
suffering from macular degeneration by signal processing and
re-focusing an integrated camera image into the areas of the
retina that are not affected by the patients macular
degeneration.
In the United States, macular degeneration in older people is
the leading cause of loss of sight. As an indication of the size
of the low-vision assist market, according to US National Eye
Institute, there are currently over 1,800,000 Americans
suffering from some form of degenerative low-vision disease with
an additional 200,000 being diagnosed annually.
54
Products
We believe we provide the broadest range of consumer Video
Eyewear product offerings available in the market and that our
products contain the most advanced electronics and optics for
their target markets and uses. Our products include:
Binocular
Video Eyewear Products
The features of our binocular Video Eyewear products, including
their resolution and apparent display size, microphones,
tracking devices and support of three-dimensional viewing are
designed to suit consumer applications. Our binocular Video
Eyewear products contain two microdisplays, a separate display
for each eye, typically mounted in a frame attached to eyeglass
style-temples. These products enable mobile and hands-free
private viewing of video content on screens that simulate home
theater-sized screens. Headphones are built into the temples so
that users can listen to accompanying audio in full stereo. They
can be employed as mobile high-resolution displays with products
such as portable DVD players, laptop computers, MIDs, cellular
phones with video output capability, and personal digital
media/video players (video iPods).
For the consumer markets, we currently produce four binocular
Video Eyewear products, all of which support 3D applications.
Each has a different apparent display size and native
resolution. They are:
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AV230 XL QVGA (320x240 three-color pixels)
resolution and simulating a
44-inch
screen at nine feet.
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AV310 widescreen WQVGA (420x240 three-color pixels)
resolution and simulating a
52-inch
screen at nine feet.
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AV920 VGA (640x480 three-color pixels) resolution
and simulating a
62-inch
screen at nine feet.
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VR920 VGA (640x480 three-color pixels) resolution,
simulating a
62-inch
screen at nine feet, designed to plug into a computers USB
and video ports, and containing our proprietary three degrees of
freedom head tracking technology, which enables the user to look
around the environment being displayed by simply moving his or
her head. A microphone allows the user to communicate with
others. We expect those features to be of particular interest to
users playing games using the VR920, but they also can be used
in commercial 3D applications and for exploring Internet virtual
worlds like Second Life. The VR920 is currently compatible with
over 80 titles that work with it out of the box, including
popular games such as Microsofts Flight Simulator X and
World of Warcraft. We currently have over 1000 software
developers kits being used in applications from college
research programs to commercial developers to develop additional
titles for the VR920. With the addition of a clip-on camera
which we are currently tooling the VR920 can also used in AR
applications.
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We sell our current binocular products into the consumer
marketplace under the brand
iWear®.
At the Consumer Electronics show in January 2009 we introduced
our first sunglass styled Video Eyewear product that we will be
selling under the
Wraptm
brand. We plan to introduce two versions of our Wrap optics,
including one that will both allow the user to see through to
the real world when the display is off or be just partially
transparent when the display is on. The first version will not
be see-through and we expect it will be introduced by October
2009. We anticipate that by spring 2010 we will be offering a
second version with see-through optics and a higher display
native resolution that will accept HD inputs and support AR
applications and at the same time be backwards compatible to all
the VR920 gaming applications already written. We also
anticipate that by spring 2010 we will be offering our six
degrees of freedom tracking technology, which is currently still
in development. That technology is being designed to both
accurately track an objects and the users position
in 3D virtual space and to combine that tracking capability with
translational information about the three rotational axes (roll,
yaw, pitch). The addition of this translational information will
allow the device to report information about its X, Y and Z
position as it moves. This will expand the realism and accuracy
for users interacting in a VR or AR environment. We anticipate
that our six degrees of freedom tracking technology will be
available both separately as an accessory and as a built-in
feature of many of our Video Eyewear products.
We anticipate that future generations of our Video Eyewear
products will have form factors that should be even more
appealing to consumers, with appearances and sizes that are more
like ordinary sunglasses, and be more
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ergonomic and fashionable. We intend to sell our binocular
products into the defense markets and have developed and
delivered prototypes of a rugged version for marine
applications. We also intend to sell our binocular products for
industrial applications that are similar to those in the defense
markets and with our new
Wraptm
line of Video Eyewear we anticipate advanced applications from
training and tools for maintenance and repair to interactive
product design and development.
Monocular
Video Eyewear Products
Our
Tac-Eye®
monocular (single eye) high-resolution Video Eyewear models are
designed to clip onto a pair of ballistic sunglasses, a head set
or conventional safety goggles. They can be used with the large
installed base of rugged laptops, security and night vision
cameras and thermal night vision sights, including those systems
that we currently act as a sub-contractor of display drive
electronics to the US defense department.
Tac-Eye®
enables users to have wearable, private and hands-free access to
high-resolution content or information. They enable the viewing
of material that is difficult or impossible to accurately view
on the lower-resolution direct view screens that are standard on
many of these devices without extensive zooming in or panning
across the screen.
Most of our
Tac-Eye®
products have an SVGA display and afford a 28 degree field of
view, the equivalent of a
20-inch
computer screen at three feet. They are also designed to be
durable and suitable for defense field use and industrial
applications.
Defense
Sub-Assembly and Custom Solutions
We are involved in two programs as part of contracting teams
that produce display drive electronic subassemblies for light,
medium, and heavy weight thermal weapon systems for US and other
defense forces. We produce the display drive electronics as part
of these night-vision systems and over the last five years we
have delivered over 107,000 systems. These products have
accounted for over 50% of our sales in the last two years.
We also have provided full optics systems, including head
mounted devices, wrist worn displays, human computer interface
devices, and wearable computers as prototypes under several
armed services test programs. These are being tested in
applications such as the remote control of unmanned vehicles.
When possible, we obtain a first right of refusal to be the
volume manufacturer of our proprietary display subassemblies as
part of our contracting process for the custom design of
products.
Low-vision
Assist Products
We offer two Video Eyewear products specifically for low-vision
assist applications. The first is a bundle of our AV920 Video
Eyewear with an external handheld camera that magnifies written
information to help a user to read small print. The second
consists of binocular Video Eyewear that incorporates a camera
and digital signal processor that uses our proprietary digital
signal processing algorithms to increase contrast,
magnification, color correction, edge detection, histogram
flattening, and using other video processing techniques. The
image received by the camera is processed, enhanced and
transmitted to the displays within the Video Eyewear to be
viewed by a user suffering from macular degeneration. These
devices are designed to permit many users suffering from macular
degeneration to perform a number of normal daily functions, such
as reading or signing a check, that they could not perform
unaided.
Technology
We believe that it is important to make substantial investments
in research and development to maintain our competitive
advantage. The development and procurement of intellectual
property rights relating to our technologies is a key aspect of
our business strategy. Near-to-eye virtual displays and their
components use relatively new technologies. We believe that it
is technologically feasible to improve the weight, ergonomics,
optical performance, luminance, power efficiency, design
compactness, field of view and resolution of the current
generation of virtual displays and display components. We expect
to continue to improve our products through our ongoing research
and development and advancements made by our third party
suppliers of key components. We also develop intellectual
property through our ongoing performance under engineering
service contracts for the US Government. During our fiscal years
ended December 31, 2008, December 31, 2007 and
December 31, 2006, we spent $3,366,518,
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$2,365,412 and $1,279,239, respectively, on research and
development activities. We expect to continue to increase our
research and development expenditures in the future. We have
also acquired technologies developed by third parties and we may
do so in the future.
We believe that the range of our proprietary technologies gives
us a significant competitive advantage. Our technologies include
motion tracking systems; stereoscopic display assemblies; optic
systems; display backlights; mobile and wearable computing
devices and user interface technology; low-power electronics;
software drivers; and software applications. Our technologies
enable us to provide low-cost, small form factor,
high-resolution Video Eyewear products. To protect our
technologies, we have developed a patent portfolio which
consists of:
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44 total patents issued worldwide;
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27 US patents issued (12 non-provisional, 15 design);
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12 US patents pending (3 design, 7 non-provisional, 2
provisional);
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17 international (non-US) patents issued (15 design, 2
non-provisional);
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11 international (non-US) patents pending (3 design, 5
non-provisional, 3 applications under the Patent Cooperation
Treaty); and
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5 applications in preparation but not yet filed, covering our
virtual display technology.
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Our US patents expire on various dates from May 7, 2010
until September 23, 2024. Our international patents expire
on various dates from May 30, 2015 until May 30, 2030.
Major technologies that we employ in our products include:
Hardware
Technology
Virtual
Display Technology (including Lens Technology and Optics
Assemblies)
Microdisplay optics represents a significant cost of goods for
both us and our competitors. Driving this cost is the
significant trade off between the physical size of the
microdisplay and the cost of the supporting optics. Smaller
displays require larger and more sophisticated optics, while
larger displays require less magnification and less complex
optics. The smaller a microdisplay is, the less it costs to
produce. But the smaller a microdisplay is, the more difficult
it is to make optics systems that have no user adjustments,
large fields of view and very low distortion specifications. To
improve our Video Eyewears fashion and ergonomics we are
developing thin and lightweight optics that can be integrated
with display engines that match conventional eyewear frames in
size and weight and provide what we believe are significantly
improved ergonomics compared to competing wearable virtual
displays.
Vuzix Quantum Optic: We believe we have
developed revolutionary first surface optics
assemblies that include lenses, microdisplays, and backlights,
all assembled into a single sub-assembly. This technology
permits the production of inexpensive microdisplay engines that
provide low-distortion and large field of view images. We expect
that this technology will also enable us to produce
sunglass-styled Video Eyewear products that will allow the user
to see through the display to the real world. We expect to
introduce the first of these products in the fourth quarter of
2009 under the
Wraptm
brand. We have both issued and pending patents with respect to
this technology.
Vuzix Blade Optic: We are developing an
optical display engine that uses a blade of glass or plastic as
a wave guide, which we refer to as the
Bladetm.
The Blade uses a projected image from a conventional
microdisplay that is squeezed into a thin blade of
glass or plastic and, using a proprietary light guide expander,
the image exits from the glass in front of the users eye.
We expect this display engine will provide a large field of view
from a very thin lens system. The Blade can also function in
see-through applications. Unlike competing wearable virtual
displays, a see-through display does not obstruct the
wearers vision or reduce his awareness of what is
happening around him. Video Eyewear employing this display
engine will be closer to conventional sunglasses than currently
available products in comfort, size, weight and ergonomics. We
have filed patent applications with respect to this technology.
Holographic Display Engine: We have numerous
patents and patents pending on our new Holographic Display
Engine (HSE). The HSE incorporates both a display subsystem and
associated optics in a single monolithic design. The image is
projected into the edge of a slim piece of glass where it is
internally reflected and directed out
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through a holographic element where it appears as a large
virtual screen to the user. To date we have successfully
prototyped a monochrome version of this display engine in our
design lab. If our continued research is successful we believe
we should ultimately have a low cost very high-resolution
display engine that by price, resolution, weight, form factor
and power consumption all should far exceed existing
microdisplay technology.
Low Power LCD Drive
Electronics: We believe that our numerous
successful designs for the defense market demonstrate that we
can design and successfully implement very low-power
microdisplay electronics modules. The electronics required to
drive advanced microdisplays are a complex and costly piece of a
virtual display system. We may develop application-specific
integrated circuits (ASICs) to further reduce the cost, number
of components, and size of our electronics package while
improving the performance with various input sources. While
costly and complicated to develop, we believe these ASICs could
be critical to the success of our cost reduction programs and,
once completed, should also create barriers to entry for
competitors.
Position Tracking: Our tracking system
incorporates patented, multi-axis, source-less
tracking technology to track the rotational orientation of the
users head. Using the earths magnetic field and
gravity as references, a silicon sensor supplies the yaw
information and a silicon-based tilt sensor supplies pitch and
roll, as well as error correction. We have significantly reduced
the cost of tracking with our patented technology as compared to
competitive alternative solutions available today. We have also
begun development on our 6 degrees of freedom tracker that adds
translational tracking about the three rotational axes (roll,
yaw, pitch). We believe that cost-effective tracking technology
is fundamental to any Virtual and Augmented Reality Video
Eyewear systems success and will help create a significant
barrier to entry for the competition.
3D
Content Delivery
Vuzix Automated 3D Watermark: In response to
the proliferation of large-screen, HD home entertainment
systems, the motion picture industry has recently begun to
invest in stereoscopic 3D technologies to attract theater
viewers. Over 5,000 North American movie theaters are being
converted to both digital projection and full 3D and production
of 3D motion pictures is increasing. Video Eyewear, with its
immersive environment and two separate displays, is well suited
for viewing 3D content and avoids many of the negative issues
typically encountered by shutter, polarized or color anaglyph
glasses used in competing technologies such as video color
distortion, noticeable flicker, decreased contrast and
bleed-through. Currently, in order to effectively display 3D
content, the viewer must manually switch the projection system
or display device to 3D mode as required by the content. We have
developed and have patents pending on a system that does this
automatically for the viewer. Using our system, a
watermark is embedded into the video stream that
identifies it as being 3D content. Our Video Eyewear can decode
the watermark and reconfigure the Video Eyewear to view the
content in 3D without any involvement by the viewer. If the
content is not in 3D, the Video Eyewear remains functioning in
two-dimensional mode. Our technology can be used with both
legacy and advanced Digital Rights Managed (DRM) delivery
systems.
Vuzix 3D Stereoscopic USB Drivers: We have
developed a USB driver that will allow most 3D titles to work in
3D stereoscopic mode with our PC based Video Eyewear. This
driver allows 3D titles that have been and are being created
utilizing Microsofts Direct X 3D graphics drivers and Open
GL, industry standards for entertainment and other 3D graphic
applications, to be viewed in stereoscopic 3D using our Video
Eyewear. We release support for the 3D titles using
Monitor Software on a
title-by-title
basis, typically coincident with added tracking capabilities.
General
Eyewear Technology
Vuzix Ergonomics and Industrial Designs: We
have developed ergonomic technologies that make head-worn
displays easier to use in a wide variety of applications. For
example, we are currently one of the only producers of Video
Eyewear solutions that offers focus adjustment on our products
that accommodate many of our users that need glasses for vision
correction and at the same time we offer the ability to
accommodate glasses for those that need them. We generally file
design patents on our more advanced solutions.
Software/Firmware
Technology
We believe that our substantial software portfolio provides a
competitive advantage. We have developed an extensive set of
Windows XP/Vista 32 and 64 bit drivers, Mac through to WIN CE
and .NET drivers and core code
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capability that allows us to efficiently add new feature sets
centered around our hardware and their related software
products. We anticipate that this software technology will be
the foundation for some of our future products. Additionally, we
have a base of embedded microprocessor and field-programmable
gate array (FPGA) code related to microdisplay drive
electronics. We also have a large library of internally
developed, copyright-protected software that is used throughout
our products. Usable software applications and add-on accessory
hardware drivers can greatly increase customer value of our
Video Eyewear products.
Patents
and other Intellectual Property
We have a comprehensive intellectual property policy which has
as its objectives: (i) the development of new intellectual
property both to ensure and further our intellectual property
position in relation to personal display technology; and
(ii) the maintenance of our valuable trade secrets and
know-how. We seek to further achieve these objectives through
the commencement of more education and training of our
engineering staff and the adoption of appropriate systems and
procedures for the creation, identification and protection of
intellectual property.
Our general practice is to file patent applications for our
technology in the United States, Europe and Japan, while
inventions which are considered to have the greatest potential
are further protected by the filing of patent applications in
additional countries, including Canada, Russia and China. We
file and prosecute our patent applications in pursuit of the
most extensive protection including, where appropriate, the
applications of the relevant technology to the broader display
industry.
We believe that our intellectual property portfolio, coupled
with our key supplier relationships and accumulated experience
in the personal display field, gives us an advantage over
potential competitors. We also believe our copyrights,
trademarks, trade secrets, and patents are critical to our
success, and we intend, directly or indirectly, to maintain and
protect these. We also rely on proprietary technology, trade
secrets, and know-how, which are not patented. To protect our
rights in these areas, we require all employees and, where
appropriate, contractors, consultants, advisors and
collaborators to enter into confidentiality, invention
assignment and non-competition agreements.
In addition to our various patents, Vuzix currently has 11
registered US trademarks and a total of 27 trademark
registrations worldwide.
Competitors
and Competitive Advantage
The personal display industry in which we operate is highly
competitive. We compete against both direct view display
technology and against near-eye display technology. We believe
that the principal competitive factors in the personal display
industry include image size, image quality, image resolution,
power efficiency, manufacturing cost, weight and dimension,
feature implementation, ergonomics and finally the interactive
capabilities of the overall display system.
Most of our competitors products are based on direct view
display systems, in which the user views the display device, or
screen, directly without magnification. These products have
several disadvantages compared to virtual displays and our Video
Eyewear products. If the screens are large enough to read as
conventional internet page or HD video without external
magnification or image zooming, the products must be large and
bulky, such as laptops, personal computers or portable DVD
players. If the displays are small, such as those incorporated
in cellular phones and PDA-like devices, the screens are
difficult to read when displaying higher resolution content.
Despite the limitations of direct view personal displays,
advanced multi-media enabled or smart cellular phones are being
produced in ever increasing volumes by a number of
manufacturers, including Motorola, Inc., Nokia Corporation, Sony
Ericsson Mobile Communications AB, Research In Motion Limited,
Samsung Electronics Co., Ltd., LG Electronics and Apple Inc.
(Apple). We expect that these large and well-funded companies,
as well as newer entrants into the marketplace, will make
products that seek to compete with ours based on improvements to
their existing direct view display technologies or on new
technologies.
We also have competitors who produce near eye personal displays
or Video Eyewear. However, most of our competitors current
products lack one of more of the following critical features:
advanced optics, video up-scanning, 3D stereoscopic support,
on-screen video controls, and tracking. Furthermore, we believe
that most of our
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competitors near eye products have inferior optics,
marginal electronics and poor industrial design and that, as a
result, our Video Eyewear products are superior to those of our
competitors in both visual performance and ergonomics. They are
lightweight and provide high-resolution images. They have
convenient and easy to use controls that enable the user to
control the display. Our systems are also typically more
power-efficient than those of our competitors. We believe that
tracking technology is a critical component of any VR or AR
system and that our patented tracking technology gives us a
competitive advantage in the markets for those systems.
Competition
Consumer Products
A number of major companies, such as Sony, Olympus Corporation
and Canon Inc., produced head worn video display products for
the consumer market in the late 1990s. These products were not
well accepted by consumers and were ultimately discontinued. We
believe that these products were not well accepted because they
were ergonomically unsatisfactory and provided only low
resolution images and because, at that time, there was little
demand for mobile Video Eyewear. When these products were
available, video content was generally stored on video tape and
could only be viewed by playing the videotape on a videotape
recorder connected to a television. Currently there are a number
of smaller companies that have products which compete with our
Video Eyewear products. Our major competitors are MyVu, Zeiss,
i-O Display Systems, LLC, DaeYang Co., Ltd., Cybermind
Interactive Nederland, Mirage Innovations, Ltd., Lumus, Shenzhen
Oriscape Electronic Co., Ltd., Microvision Corporation
(Microvision) and Kopin.
Kopin began offering QVGA and VGA binocular display modules
(BDM) complete with drive electronics to original equipment
manufacturers (OEMs) in 2006. Those modules are designed for
easy customization by OEMs and include microdisplays,
backlights, optics and drive electronics. The availability of
those BDMs has greatly reduced the investment required for new
competitors to enter the business. To date, the Kopin products
have been primarily used by Asian-based Video Eyewear
manufacturers. Kopin does not currently compete with Vuzix at
the retail level. Kopin is our primary supplier of microdisplays.
In addition to numerous Asian-based companies using Kopin BDMs,
we currently have two principal competitors in the consumer
Video Eyewear market: MyVu and Zeiss.
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MyVu has based its most recent product line on an optic design
that results in relatively small virtual image sizes. While this
allows for a smaller form factor, it does not provide the large
virtual image that we believe consumers desire from Video
Eyewear products. Images on our Video Eyewear products appear as
much as four times larger than those on MyVu products. MyVu
products also do not currently support 3D, VGA video from a PC
or tracking. Finally, MyVu does not have a Video Eyewear product
designed specifically for the gaming market.
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Zeiss introduced its first Video Eyewear product in the spring
of 2008. This product is bigger and bulkier than ours and we
believe it will be less acceptable in the mobile markets. And
while Zeiss does provide some level of 3D video support, it does
not currently offer PC products nor does it support the tracking
technology that would allow its products to be interactive.
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There are also several Chinese manufacturers offering Video
Eyewear products that have one or more of the deficiencies
described above.
Competition
Industrial and Defense
Although several companies produce monocular Video Eyewear, we
believe that opportunities for sales of their products to date
have been limited. So far, the market opportunity outside of the
night vision products has been limited primarily to trial tests,
rather than commercial volume purchases for defense and
industrial applications. We are aware of only very limited
commercial volume purchases in the defense and industrial
markets. Our current competitors in these markets are Liteye
Systems, Inc., Lumus, Shimadzu Corporation, Microvision, Kopin,
Creative Display Systems, LLC, OASYS Technology, LLC, Rockwell
Collins, Inc. and its subsidiary Kaiser. Some of these companies
are currently shipping product and others have only introduced
prototypes
and/or are
offering only limited sample quantities. We expect that we will
encounter competition in the future from major
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suppliers of imaging and information products for defense
application, including DRS Technologies, Inc. (DRS), Insight
Technology Incorporated, Raytheon Company and BAE Systems, Inc.
There is competition in all classes of products manufactured by
us, including from divisions of the large companies, as well as
many small companies. Our sales do not represent a significant
share of the industrys market for any class of its
products. The principal points of competition for electronic
products of both a defense and industrial nature include, among
other factors: price, product performance, the experience of the
particular company and history of its dealings in such products.
We, as well as other companies engaged in supplying equipment
for military use, are subject to various risks, including,
without limitation, dependence on US and foreign government
appropriations and program allocations, the competition for
available military business, and government termination of
orders for convenience.
We believe that most of the monocular Video Eyewear products
offered by our competitors are inferior to ours because they are
bulky, have small image sizes with poor optics
and/or are
currently priced higher than our products.
Competition
Low-Vision Assist
The majority of competitors in the low-vision assist market
offer magnification systems that consist of a large desktop
television or computer screen that displays a magnified version
of an image captured by a hand scanner or stationary camera.
Over 30 companies currently offer such vision tools. The
largest providers are Enhanced Vision Inc. (Enhanced Vision)
(which markets its product under the Merlin brand name),
MagniSight, Inc., Optelec Holding B.V., REHAN Electronics Ltd.
(which markets it product under the Affinity brand name),
Beirley Associates, Inc., Telesensory Corporation and eSight
Corporation. Although the products offered by these companies
can provide effective low-vision assistance to many users, they
are not mobile and they are often difficult to use. They
generally require the user to sit in front of the large screen
to view the image. Recently, some companies, including Enhanced
Vision, have introduced mobile digital magnifiers that include a
camera and an integrated six-inch LCD screen. Enhanced
Visions product is marketed under the Amigo brand. We do
not believe that any of these competitive products offers the
flexibility of usage, portability and some of the advanced
digital video signal processing capabilities of our LV920.
Moreover, the utility of all of the other competitive tools is
generally limited to reading, whereas the LV920, which employs a
wearable camera and is mobile, can also be used for many other
normal vision applications.
In the wearable low-vision assist market, our competitors are
manufacturers of optical loops and head worn optical systems and
one manufacturer of a digital magnifying system similar to our
LV920. The optical loops are usually worn by dentists, doctors,
and jewelry makers for their fine work, and have gained limited
use in the low-vision assist market due to their lack of signal
processing and image brightness issues. The competitive digital
magnifier is manufactured by Enhanced Vision and is sold under
the Jordy and Maxport brand names. While the Enhanced Vision
product has been sold for several years now, its market
penetration has been limited. We believe our low-vision assist
product is more ergonomic and offers more advanced digital video
signal processing techniques than those manufactured by Enhanced
Vision.
Sales and
Marketing
Sales
Our sales strategy is to introduce our products to the widest
possible audience within our target markets. We focus today on
the consumer and industrial and defense markets. Historically,
most of our sales efforts were directed toward obtaining
contracts to provide custom engineering solutions and products
for the defense and industrial markets. However, in 2005, as our
products and technology evolved, we began to also sell standard
Video Eyewear products for the consumer markets. In fall 2008,
we began offering products for the low-vision assist market.
We have separate marketing and sales strategies for each of our
target markets. We have an internal sales force of five people.
We regularly attend industry trade shows in our markets and have
begun establishing some level of separate branding for both of
our divisions. The consumer division sells under the Vuzix name
and the industrial and defense division under the
Tac-Eye®
name.
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During the years 2008 and 2007, 63.8% and 67.6% of our sales
were derived from providing goods and services to the US
government, directly and indirectly. Of those amounts, 80.7% in
fiscal 2008 and 20.7% in 2007 were derived from subcontracts
with Kopin and DRS, and we are dependent upon continuing to be
engaged as a subcontractor to them. We derived 35.4% of our
sales from consumer Video Eyewear products in fiscal 2008 and
32.4% and 21.2% in fiscal 2007 and 2006 respectively.
Marketing
Our marketing group is responsible for product management,
planning, advertising, marketing communications, and public
relations. We intend to become known as the premier supplier of
Video Eyewear in the consumer markets, where our products are
currently sold under the
iWear®
brand. We also intend to become known as the premier supplier of
virtual display technology and systems for the industrial,
defense, and low-vision assist markets. We employ public
relations firms in both the United States and England and a
marketing firm to help convey our message through brochures,
packaging, tradeshow messaging and advertising campaigns. We
plan to undertake specific marketing activities as needed,
including, but not limited to:
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product reviews, case studies and promotions in trade
publications;
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enhancement and maintenance of our Website;
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Internet and web page advertising and targeted emails;
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public relations, print advertising, catalogs and point of
purchase displays
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trade shows and sponsorships;
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co-marketing relationships with relevant companies in selected
markets; and
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Internet awareness and outreach activities.
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Industrial
and Defense
We primarily solicit and manage our government/defense products
and engineering services directly. We expect to continue to
obtain business through marketing our existing reputation within
the defense markets for quality, precision electronics for
defense night vision and thermal weapons systems. We believe
this market to be a relationship and word of mouth
market in which large contracts are generally awarded only to
those who have performed well on previous contracts. We employ,
and expect to continue to employ, a Washington-based lobbying
firm to help increase our visibility as a potential supplier in
these markets and to assist us in uncovering new sales
opportunities. We also act as a value added supplier, supplying
our products to major defense suppliers, such as iRobot and DRS,
to complement their products so that they can offer a complete
turn-key solution to their potential defense customers. We are
attempting to expand such partnerships and co-marketing
agreements with government- and defense-focused value added
resellers and system integrators, for our
Tac-Eye®
product lines. We market our products primarily through our own
direct sales organization. Business is solicited from large
industrial manufacturers and defense companies, the US
government and foreign governments and major foreign electronic
equipment companies. In certain countries we have and will use
external sales representatives to help solicit and coordinate
foreign contracts. We are also on the eligible list of
contractors of many agencies of the US Department of Defense and
may now be solicited by such agencies for procurement needs
falling within the major classes of products we produce. We also
search the various government contract offering sites for
procurement programs in which we believe we are qualified to
participate.
Consumer
We engage in a variety of marketing efforts that are intended to
drive customers to our products and to grow awareness of our
consumer products and Video Eyewear in general. Public relations
is an important aspect of our
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marketing and we intend to continue to distribute samples of our
products to key industry participants. We currently plan to
focus our marketing efforts for the next 12 months on:
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distinguishing the Video Eyewear product category from current
competitors and legacy head mounted displays;
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building consumer acceptance and momentum around the new Video
Eyewear category;
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creating awareness of the benefits of Video Eyewear as compared
to existing technologies; and
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creating brand awareness of the Vuzix,
iWear®
and
Wraptm
brands.
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Our Video Eyewear and VR Video Eyewear products are currently
sold directly to consumers, through select specialty retailers,
through catalogue offerings and through third party North
American distributors including D&H and Wynit. Our products
are currently sold by the following US based resellers: SkyMall,
Brookstone, Hammacher Schlemmer, Amazon and Micro Center. Our
website, www.vuzix.com is an important part of our direct sales
efforts.
If our marketing efforts are successful and our sales volume
increase we expect that most of our products will then be sold
through the traditional consumer electronics and PC mass-market
distribution channels and to a smaller extent from our current
specialty retailers. Therefore, we intend to spend the majority
of our marketing budget during this phase on website, direct
sales support and on reseller incentives and support. For
resellers with physical retail locations we began offering in
the US, point of purchase systems that include a video frame
running a slide show presentation on the products as well as an
integrated fully functional Video Eyewear product that allows
potential customers to use our products.
We may also explore and consider OEM and licensing relationships
with manufacturing partners, consumer electronics firms, and
mobile phone makers.
We intend to sell our products internationally through our
growing network of international distributors. Our
distributorships are being established on a country by country
basis, where market size allows. Normally, we appoint two or
more distributors in each area. However, in August 2009, we
entered into a long-term exclusive distribution arrangement for
the Chinese marketplace with a single distributor. This
agreement is subject to minimum funding and annual sales volume
requirements. Under this agreement, the distributor has the
option, subject to its achievement of unit sales volume
thresholds, to manufacture some of products under license
directly in China for that marketplace only.
Our initial international focus was on Japan. In late 2007 we
opened a branch sales and service office in Tokyo, staffed by
two full-time personnel. In addition to supporting local
resellers and distributors and providing end user customer
support, we are seeking new sales channels and partnerships with
software and hardware solution providers in Japan.
To serve the EU market, in spring 2008 we established a wholly
owned subsidiary, Vuzix (Europe) Limited, through which to
conduct our business. As of June 30, 2009 we had resellers
in 23 countries that had placed orders with us in the last six
months. While we do not currently maintain a European office, we
have contracted with a third-party end user technical support
firm and fulfillment center to service our customers in the EU.
We have also retained a sales consultant (who acts as our
European Director of Operations), a UK public relations firm and
a mobile applications consultant to provide us with advice
regarding the European cellular phone market.
Low-Vision
Assist
We intend to market our low-vision assist products through
low-vision clinics, catalogs and the Internet. Our research
indicates that most low-vision sufferers visit a low-vision
clinic after visiting a retinal specialist (of which there are
approximately 2,000 in the United States) or after a low-vision
examination at an optometrist or ophthalmologist. We intend to
develop an awareness campaign aimed at retina specialists and to
provide demonstration systems and brochures at low-vision
clinics, which are the most common purchase point for low-vision
assist products. An internal sales force and independent sales
representatives will be used to sell our products through and to
those clinics. We intend to test our products against other
low-vision aids and publish the results in medical journals and
present them at medical conventions. There are at least five
major trade shows each
63
year for retina specialists in North America and we intend to
exhibit both our products and present the results of our testing
at those shows.
Manufacturing
Currently, we purchase product components from our suppliers and
perform the final assembly of our Video Eyewear products
ourselves in our Rochester, New York facility. We are
experienced in the successful production of our products in
moderate volumes. We expect to continue to perform final
assembly of our Video Eyewear products ourselves over the short
term. However, if our assembly volume increases and cost
effective third party sourcing becomes feasible, we anticipate
that we will outsource the bulk of the final assembly, with the
possible exception of certain critical optical and display
components.
We currently purchase almost all of the microdisplays used in
our products from Kopin and eMagin. Kopin accounts for
approximately 95% of our microdisplays by unit volume. Our
relationships with both Kopin and eMagin generally are on a
purchase order basis and neither supplier has a contractual
obligation to provide adequate supply or acceptable pricing on a
long-term basis. We estimate that products incorporating Kopin
microdisplays will account for approximately 46% of our sales in
2009 and products incorporating eMagin microdisplays will
account for approximately 20% of our sales in 2009. We procure
increasing percentages of our microdisplays from other sources,
but they are very limited currently. While we do not manufacture
our components, we own the tooling that is used to make our
custom components (with the exception of Apple iPod
authentication chips and connectors that we acquire directly
under license from Apple). We do not believe that we are
dependent on our relationships with any supplier other than
Kopin and eMagin in order to continue to operate our business
effectively. Some of our accessory products, such as screen-less
portable DVD players and mouse based camera systems are sourced
from third parties as finished goods. We typically have them
print our Vuzix brand name on the products. Such third party
products represent less than 2% of our sales in 2008.
We are committed to globally sourcing all our components to
minimize product costs. We anticipate that procuring assembled
products from third parties will result in decreased labor force
requirements, capital equipment costs, component inventories,
and the cost of maintaining inventories of work in progress. We
generally procure components and products from our vendors on a
purchase order basis without any long-term commitments. We
currently use several Asian manufacturing sources, where we have
located some of our tooling.
Employees
As of the date of this prospectus, we had 52 full-time
employees in North America: seven in sales and marketing,
distribution, and customer service; 17 in research and
development and engineering services support; 20 in
manufacturing, operations and purchasing; one in quality
assurance; and seven in finance, management, and administration.
We also work with a group of sub-contractors mainly for
industrial, mechanical and optical design assistance in the
Rochester, New York area, some of which have been continually
contracted over the last 36 months. In Japan we have two
full-time employees and in the UK we have one full-time
contractor to manage our European sales and marketing activities.
Facilities
Our manufacturing facility, consisting of approximately
8,800 square feet, is located at 2166 Brighton Henrietta
Townline Road, Rochester, New York 14623, and our research and
development, sales and administration offices, consisting of
approximately 9,600 square feet, are located in two
different suites at 75 Town Centre Drive, Rochester, New York
14623. We currently pay approximately $65,000 per year in rent
for our manufacturing facility and $110,000 per year for our
research and development, sales and administration offices. The
manufacturing facility is leased on a calendar year term and we
expect to renew the lease on substantially the same terms prior
to its expiration at the end of 2009. We currently occupy the
suite on which our lease expired on a month-to-month basis. Our
lease on both our office suites expires in June 2010.
We believe that each of our facilities is in good operating
condition and will adequately serve our needs for at least the
next 12 months. Subject to the successful completion of
this offering, we intend to start re-consolidating our
facilities. This will be done for efficiency reasons. We
anticipate that, if required, suitable additional or
64
alternative space would be available on commercially reasonable
terms to accommodate expansion of our operations.
Legal
Proceedings
As at the date of this prospectus, we are not a party to, and
our property is not the subject of, any legal proceedings, and
we are not aware of any such proceedings contemplated by or
against us or our property.
There have been no penalties or sanctions imposed against us by
a court relating to Canadian provincial and territorial
securities legislation or by a Canadian securities regulatory
authority within the three years immediately preceding the date
of this prospectus.
There have been no penalties or sanctions imposed by a court or
regulatory body against us that are necessary to be described
herein for the prospectus to contain full, true and plain
disclosure of all material facts relating to the securities
being distributed, nor have we entered into any settlement
agreements before a court relating to Canadian provincial and
territorial securities legislation within the three years
immediately preceding the date of this prospectus.
History
We were incorporated in Delaware in 1997 as VR Acquisition Corp.
In 1997, we acquired substantially all of the assets of Forte
Technologies, Inc. (Forte), which was engaged in the manufacture
and sale of virtual reality headsets and the development of
related technologies. It was originally owned and controlled by
Kopin, our main current microdisplay supplier. Most of the
technologies developed by Forte are now owned and used by us.
Thereafter in 1997 we changed our name to Kaotech Corporation.
In 1998 we changed our name to Interactive Imaging Systems, Inc.
In 2004 we changed our name to Vicuity Corporation and then to
Icuiti Corporation. In 2007, we changed to our current name,
Vuzix Corporation. None of these name changes were the result of
a change in our ownership control.
Our corporate offices are located at 75 Town Centre Drive,
Rochester, New York 14623. Our phone number is
(585) 359-5900.
The URL for our website is www.vuzix.com. The information
contained on, connected to or that can be accessed via our
website is not part of this prospectus. We have included our
website address in this prospectus as an inactive textual
reference only and not as an active hyperlink.
65
MANAGEMENT
Executive
Officers, Key Employees, Directors and Director
Nominees
Below are the names, ages and positions held with us of our
executive officers, key employees, directors and directors elect.
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position(s)
|
|
Paul J. Travers
|
|
|
47
|
|
|
CEO, President and Director
|
Grant Russell
|
|
|
56
|
|
|
CFO, Executive Vice President, Treasurer and Director
|
Vincent J. Ferrer
|
|
|
37
|
|
|
Director of Engineering
|
Paul Churnetski
|
|
|
61
|
|
|
Vice President Quality Assurance
|
Gary VanCamp
|
|
|
62
|
|
|
Vice President Low-Vision Assist Products
|
Steven D. Ward
|
|
|
48
|
|
|
Controller
|
Stephen J. Glaser
|
|
|
37
|
|
|
Vice President Sales & Marketing
Defense
|
Mike Hallett
|
|
|
36
|
|
|
Director Sales Consumer
|
Peter Artz
|
|
|
40
|
|
|
Director of Manufacturing
|
William Lee
|
|
|
56
|
|
|
Director
|
Frank Zammataro
|
|
|
51
|
|
|
Director Elect
|
Kathryn Sayko
|
|
|
42
|
|
|
Director Elect
|
Bernard Perrine
|
|
|
46
|
|
|
Director Elect
|
Executive
Officers
Paul J. Travers was the founder of Vuzix and has served
as our President and Chief Executive Officer since 1997 and as a
member of our board of directors since November 1997. Prior to
the formation of Vuzix, Mr. Travers founded both
e-Tek Labs,
Inc. and Forte Technologies Inc. He has been a driving force
behind the development of our products for the consumer market.
With more than 20 years experience in the consumer
electronics field, and 13 years experience in the virtual
reality and virtual display fields, he is a nationally
recognized industry expert. He holds an Associate degree in
engineering science from Canton, ATC and a Bachelor of Science
degree in electrical and computer engineering from Clarkson
University. Mr. Travers resides in Honeoye Falls, New York,
United States.
Grant Russell has served as our Chief Financial Officer
since 2000 and as a member of our board of directors since April
2009. From 1997 to 2004, Mr. Russell developed and
subsequently sold a successful software firm and a new concept
computer store and cyber café. In 1984, he
co-founded
Advanced Gravis Computer (Gravis), which, under his leadership
as President, grew to become the worlds largest PC and
Macintosh joystick manufacturer with sales of $44,000,000
worldwide and 220 employees. Gravis was listed on NASDAQ
and the Toronto Stock Exchange. In September 1996 it was
acquired by a US-based Fortune 100 company in a successful
public tender offer. Mr. Russell holds a Bachelor of
Commerce degree in finance from the University of British
Columbia and is both a US Certified Public Accountant and a
Canadian Chartered Accountant. Mr. Russell resides in
Vancouver, British Columbia, Canada.
Key
Employees
Paul J. Churnetski Mr. Churnetski held
the position of Vice President of Manufacturing from November
1997 to December 2005, when he became Vice President of Quality
Assurance at Vuzix. Mr. Churnetski was also a member of our
board of directors from November 1997 to August 2007. He was
previously employed with medical manufacturers Fisons Corp. and
Pennwalt Corp., where he held senior positions in the areas of
technical operations, quality assurance, manufacturing, and
information technology. He holds a Bachelor of Arts degree from
the State University of New York, College at Geneseo, and was
previously certified as a Quality Engineer. Mr. Churnetski
resides in Henrietta, New York, United States.
66
Vincent J. Ferrer has served as our Director of
Engineering since September 2005. Mr. Ferrer is responsible
for directing our research and development team as well as
managing our intellectual property portfolio and regulatory
affairs for markets served. From July 1993 to September 2005,
Mr. Ferrer was an engineer and project manager at Belkin
Components, Inc. Mr. Ferrer holds a Bachelor of Science
degree in computer engineering from Rochester Institute of
Technology. Mr. Ferrer resides in Pittsford, New York,
United States.
Gary VanCamp has been with us since March 2004 and has
served as our Vice President Low-vision Assist
Products since August 2007. Prior to joining us,
Mr. VanCamp was a Project Manager World Wide
Training (Sales and Marketing Department) at Intel Corporation
from January 1998 through July 2003. His more than 25 years
of electronics engineering, manufacturing, and project
management experience includes project management, Vice
President of Engineering positions and extensive hardware design
and development experience. Mr. VanCamp holds a Bachelor of
Science degree in electrical/electronics engineering from
Rochester Institute of Technology. Mr. VanCamp resides in
Rochester, New York, United States.
Steven D. Ward has served as our Controller since January
1998. Mr. Ward, formerly a Certified Public Accountant, is
responsible for all of our accounting and human resource
services. Mr. Wards previous experience includes
positions as Controller/Tax Manager for AM&M Companies, a
financial services firm, and as a principal in a regional
certified public accounting firm. Mr. Ward holds a Bachelor
of Science degree in accounting from the State University of New
York, College at Fredonia. Mr. Ward resides in Rochester,
New York, United States.
Stephen J. Glaser has served as our Vice President
Sales & Marketing Defense and Industrial
since January 2000. Prior to joining Vuzix, Mr. Glaser
worked in sales with Johnson & Johnson.
Mr. Glaser holds a Bachelor of Science degree in marketing
and business administration from State University of New York,
Empire State College. Mr. Glaser resides in Pittsford, New
York, United States.
Michael Hallett has been with us since May 2005 and has
served as our Director of Sales Consumer since
October 2008. From June 2004 to May 2005, Mr. Hallett was a
sales manager at Wards Natural Science. Prior to that position,
Mr. Hallett held sales positions at Unisys Corporation and
Paychex, Inc. Mr. Hallett holds a Bachelor of Science
degree in business administration with a concentration in
marketing and a minor in economics from the State University of
New York, College at Brockport. Mr. Hallett resides in
Canandaigua, New York, United States.
Peter Artz has been with us since February 2005 and has
served as our Director of Manufacturing since October 2006.
Mr. Artz is responsible for directing our Production,
Manufacturing Engineering and Purchasing activities. Prior to
joining Vuzix, Mr. Artz was with ECR Software Corporation
for one year as a manufacturing analyst. Prior to joining ECR
Software he was with PSC Inc. for eight years as a Senior
Manufacturing Engineer, developing laser barcode scanners.
Mr. Artz holds a Bachelor of Science degree in
manufacturing engineering from Rochester Institute of
Technology. Mr. Artz resides in Penfield, New York, United
States.
Director
William Lee has served as a member of our board of
directors since June 2009. Mr. Lee has been self-employed
as a financial consultant since May 2008. From January 2006 to
May 2008, he served as Chief Financial Officer of Jinshan Gold
Mines Inc., a mining company listed on the Toronto Stock
Exchange. From July 2004 to January 2006, he was engaged as a
business analyst for Ivanhoe Energy Inc., a Toronto Stock
Exchange and NASDAQ-listed company, and Ivanhoe Mines Ltd.
Vancouver, an independent international heavy oil development
and production company with operations in Canada, the United
States, China, and Ecuador and listed on the New York and
Toronto Stock Exchanges. Mr. Lee spent nine years engaged
in the practice of public accounting with the firm of
Deloitte & Touche. Mr. Lee is a member of the
Institute of Chartered Accountants of British Columbia and holds
a Bachelor of Commerce degree from the University of British
Columbia. Mr. Lee also currently serves as a director of
Tinka Resources Ltd., Halo Resources Ltd., both of which are
listed on the
TSX-V, and
Golden Peaks Resources Ltd., which is listed on the TSX.
Mr. Lee resides in Delta, British Columbia, Canada.
Directors
Elect
Frank Zammataro has been elected, and has agreed to
serve, as a member of our board of directors upon the
effectiveness of the registration statement of which this
prospectus forms a part. Mr. Zammataro is the President of
67
Rentricity, Inc., a privately held, renewable energy company
which he founded in 2003. Prior to founding that business,
Mr. Zammataro served as Chief Marketing Officer of
w-Technologies, Inc., a wireless solutions
start-up
which provided a software platform and applications framework
for companies developing consumer-based wireless services. From
1979 through 2000, he was employed by Merrill Lynch, Pierce,
Fenner & Smith Inc., where in his last position he led
the Internet-related market and services development activities.
He holds a Bachelor of Arts degree in communications arts and
political science from St. Johns University.
Mr. Zammataro resides in Chatham, New Jersey, United States.
Kathryn Sayko has been elected, and has agreed to serve,
as a member of our board of directors upon the effectiveness of
the registration statement of which this prospectus forms a
part. Ms. Sayko is a Managing Director of J.P. Morgan,
Inc., most recently serving as its Head of North East Middle
Market Investment Banking Coverage. Ms. Sayko has been
employed by J.P. Morgan since 1993. She holds a Bachelor of
Business Administration degree from James Madison University
School of Business and a Master of Business Administration
degree from New York University, Stern School of Business.
Ms. Sayko resides in New York City, New York, United States.
Bernard Perrine has been elected, and has agreed to
serve, as a member of our board of directors upon the
effectiveness of the registration statement of which this
prospectus forms a part. Mr. Perrine, one of the founders
of Kinkos Inc., has been self-employed as a business
consultant since December 2007. From October 2006 through
November 2007, Mr. Perrine served as Vice President
U.S. Sales and Marketing of Rexel, Inc., an
electrical distribution company. From November 2005 through May
2006, he served as Chief Executive Officer of Telezygology,
Inc., a
start-up
provider of intelligent fastening technologies. From August 2004
through September 2005, he was a Worldwide General Manager for
Microsoft, Inc. Prior to August 2004, Mr. Perrine was
Worldwide Vice President/General Manager, Digital &
Film Imaging Systems for Eastman Kodak Co. He is in the process
of completing a Bachelor of Science degree in management from
the University of Akron. Mr. Perrine resides in
Lincolnshire, Illinois, United States.
Each of our directors serves, and each of our directors elect
shall serve, until the next annual meeting of our stockholders
and until his or her successor is duly elected and qualified,
subject to his or her earlier removal or resignation.
Indebtedness
of Directors and Executive Officers
As of the date of this prospectus, no amount is owed to us or
any of our subsidiaries by any of our directors, directors elect
or executive officers.
As of the date hereof and during the fiscal period ended
December 31, 2008, there was no indebtedness owing to us in
connection with the purchase of securities or other indebtedness
by any of our current or former executive officers, directors or
employees except as described below under the Related
Party Transactions Officer Loan.
No individual who is, or at any time during our most recent
completed fiscal year was, a director or officer of our company,
none of our directors elect, or any associate of any one of them
is, or at any time since the beginning of our most recent
completed fiscal year has been, indebted to us (other than in
respect of amounts which would constitute routine indebtedness)
or was indebted to another entity, which such indebtedness is,
or was at any time during our most recent completed fiscal year,
the subject of a guarantee, support agreement, letter of credit
or other similar arrangement or understanding provided by us
except as described below under the Related Party
Transactions Officer Loan.
Family
Relationships
There is no family relationship between or among any of our
directors, directors elect or executive officers.
Involvement
in Certain Legal Proceedings
During the past five years, none of our directors, directors
elect, executive officers, promoters or control persons has:
(1) filed a petition under the federal bankruptcy laws or
any state insolvency law, nor had a receiver, fiscal agent or
similar officer appointed by a court for the business or present
of such a person, or any partnership in which he was a general
partner at or within two years before the time of such filing,
or any corporation or business
68
association of which he was an executive officer within two
years before the time of such filing; (2) was convicted in
a criminal proceeding or named subject of a pending criminal
proceeding (excluding traffic violations and other minor
offenses); (3) was the subject of any order, judgment or
decree, not subsequently reversed, suspended or vacated, of any
court of competent jurisdiction, permanently or temporarily
enjoining him from or otherwise limiting the following
activities: (i) acting as a futures commission merchant,
introducing broker, commodity trading advisor, commodity pool
operator, floor broker, leverage transaction merchant,
associated person of any of the foregoing, or as an investment
advisor, underwriter, broker or dealer in securities, or as an
affiliated person, director of any investment company, or
engaging in or continuing any conduct or practice in connection
with such activity; (ii) engaging in any type of business
practice; (iii) engaging in any activity in connection with
the purchase or sale of any security or commodity or in
connection with any violation of federal or state securities
laws or federal commodity laws; (4) was the subject of any
order, judgment or decree, not subsequently reversed, suspended
or vacated, of any federal or state authority barring,
suspending or otherwise limiting for more than 60 days the
right of such person to engage in any activity described in
clause (3) above, or to be associated with persons engaged
in any such activity; (5) was found by a court of competent
jurisdiction in a civil action or by the SEC to have violated
any federal or state securities law and the judgment in
subsequently reversed, suspended or vacate; or (6) was
found by a court of competent jurisdiction in a civil action or
by the Commodity Futures Trading Commission (CFTC) to have
violated any federal commodities law, and the judgment in such
civil action or finding by the CFTC has not been subsequently
reversed, suspended or vacated.
Cease
Trade Orders, Bankruptcies and Penalties and Sanctions
None of our directors, directors elect, officers or control
persons is, or within the ten years prior to the date of this
prospectus has been, (a) a director, chief executive
officer or chief financial officer of any issuer (including us)
that, (i) was subject to an order that was issued while
that person was acting in the capacity as director, chief
executive officer or chief financial officer, or (ii) was
subject to an order that was issued after that person ceased to
be a director, chief executive officer or chief financial
officer and which resulted from an event that occurred while
that person was acting in the capacity as director, chief
executive officer or chief financial officer; or (b) a
director or executive officer of any company (including us)
that, while that person was acting in that capacity, or within a
year of that person ceasing to act in that capacity, became
bankrupt, made a proposal under any legislation relating to
bankruptcy or insolvency or was subject to or instituted any
proceedings, arrangement or compromise with creditors or had a
receiver, receiver manager or trustee appointed to hold its
assets. For the purposes of this paragraph, order
means a cease trade order, an order similar to a cease trade
order or an order that denied the relevant company access to any
exemption under securities legislation, in each case that was in
effect for a period of more than 30 consecutive days.
None of our directors, directors elect, officers or control
persons has been subject to any penalties or sanctions imposed
by a court relating to securities legislation or by a securities
regulatory authority or has entered into a settlement agreement
with a securities regulatory authority or has been subject to
any other penalties or sanctions imposed by a court or
regulatory body which would be important to a reasonable
investor making an investment decision.
None of our directors, directors elect, officers or control
persons (or a personal holding company of any such person) is,
or within the ten years prior to the date of this prospectus has
become, bankrupt, made a proposal under any legislation relating
to bankruptcy or insolvency or has been subject to or instituted
any proceedings, arrangement or compromise with creditors, or
had a receiver, receiver manager or trustee appointed to hold
his assets.
Conflicts
of Interest
Certain of our proposed directors are also directors of other
public companies and our existing and proposed directors and
officers are or may be shareholders of other public companies.
Accordingly, conflicts of interest may arise between such
persons duties as directors and officers of Vuzix and
their positions as directors and shareholders of such other
companies. All such possible conflicts are required to be
disclosed in accordance with the requirements of applicable
corporate law and the directors and officers are required to act
in accordance with the obligations imposed on them by law.
69
EXECUTIVE
COMPENSATION
Summary
Compensation Table
The following table sets forth information for the fiscal years
ended December 31, 2008 and 2007 concerning compensation of
(i) the one individual serving as our principal executive
officer during the fiscal year ended December 31, 2008 and
(ii) the one individual serving as our principal financial
officer during the fiscal year ended December 31, 2008
(collectively, the named executive officers):
SUMMARY
COMPENSATION TABLE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
All Other
|
|
|
|
|
|
|
|
|
|
Salary
|
|
|
Bonus
|
|
|
Awards
|
|
|
Compensation
|
|
|
Total
|
|
Name and Principal Position
|
|
Year
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
Paul J. Travers, President and
|
|
|
2008
|
|
|
$
|
200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
200,000
|
|
Chief Executive Officer
|
|
|
2007
|
|
|
$
|
142,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
142,460
|
|
Grant Russell, Chief Financial
|
|
|
2008
|
|
|
$
|
175,000
|
|
|
|
|
|
|
|
|
|
|
$
|
24,571
|
(1)
|
|
$
|
199,571
|
|
Officer & Executive Vice President
|
|
|
2007
|
|
|
$
|
127,407
|
|
|
|
|
|
|
|
|
|
|
$
|
23,309
|
(1)
|
|
$
|
150,716
|
|
|
|
|
(1) |
|
Consists of amounts paid to Mr. Russell as a reimbursement
for the rental of an automobile and direct travel to and from
his residence in Vancouver, Canada to Rochester. |
Employment
Agreements
Paul
J. Travers
On August 1, 2007, we entered into an employment agreement
with Paul J. Travers providing for his continued service as our
Chief Executive Officer and President. Under the agreement,
Mr. Travers is entitled to an initial annual base salary of
$200,000, subject to increases in the sole discretion of the
board of directors, and upon the initial public offering of
common stock an annual base salary of $300,000 or such greater
amount as shall be determined by the board of directors. He is
also eligible to receive such periodic, annual or other bonuses
as the board of directors in its sole discretion shall determine
and to participate in all bonus plans established for our senior
executives. The agreement also provides that Mr. Travers
may be awarded, in the sole discretion of the board of
directors, stock options and other awards under any plan or
arrangement for which our senior executives are eligible. The
level of his participation in any such plan or arrangement shall
be determined by the board of directors in its sole discretion.
To the greatest extent permissible under the Internal Revenue
Code (the Code) and the regulations thereunder, options granted
to Mr. Travers shall be incentive stock options within the
meaning Section 422 of the Code. He is also eligible to
participate in all employee benefit plans which are generally
available to our senior executives and entitled to receive
fringe benefits and perquisites comparable to those of our other
senior executives.
Mr. Travers employment under the agreement shall
continue indefinitely until terminated by him or by us. In the
event that his employment is terminated by us other than for
cause (as defined in the agreement), by him for
good reason (as defined in the agreement) or upon
his death or disability (as defined in the
agreement), Mr. Travers shall be entitled to be paid, in
addition to any base salary and bonuses then accrued and unpaid,
and his then current base salary for 24 months after the
date of termination and the entire bonus that would have been
payable pursuant to any agreement, understanding, arrangement or
plan in which he is entitled to participate for the year in
which the termination of his employment occurred as if he had
been employed for the entire year, provided that, in the opinion
of the board of directors, he is likely to have met any bonus
plan goals for the relevant period had he not been terminated.
As a condition to our obligation to make any such payment, we,
in our sole discretion, may require Mr. Travers to release
us and our officers, directors, employees, and agents, from any
and all claims and causes of action, including, but not limited
to those arising from his employment and the termination of his
employment. In the event of such termination, all stock options,
restricted stock grants, stock appreciation rights and other
similar awards held by Mr. Travers at the date of
termination shall immediately vest, the period during which any
options or rights relating to such grants may be exercised shall
be the longer of the date specified in such
70
grants or the date that is thirty (30) days after the end
of the
24-month
period following the date of termination and will, in all other
respects, continue to be governed by, and continued in
accordance with, their applicable plan and grant documents. In
the event that Mr. Traverss employment is terminated
by us for cause or by him other than for good reason,
Mr. Travers shall be entitled to be paid only any base
salary then accrued and unpaid and annual bonus amounts for any
fiscal year completed prior to the date of termination and we
shall have no further obligations to him.
In the event of a change of control (as defined in
the agreement), any unvested stock options held by
Mr. Travers shall be fully vested and become immediately
exercisable. Such options shall remain exercisable for the
period remaining under the relevant stock option agreement and
shall not have a shortened period of exercisability as a result
of the change of control, except for statutory stock options
which shall, at Mr. Traverss election,
(i) expire 90 days after his termination (or one year
after his termination upon his death or permanent and total
disability) or (ii) be converted into non-qualified stock
options expiring at the end of the entire term of such option
under the relevant stock option agreement. Additionally, if
Mr. Travers is terminated within one year of a change of
control for any reason other than by us for cause, or if he
elects to terminate his employment (whether or not for good
reason) after the expiration of 120 days after and on or
before the two-year anniversary of a change of control,
Mr. Travers shall be entitled to be paid, in addition to
any base salary and bonuses then accrued and unpaid, and his
then current base salary for 48 months after the date of
termination and the entire bonus that would have been payable
pursuant to any agreement, understanding, arrangement or plan in
which he is entitled to participate for the year in which the
termination of his employment occurred as if he had been
employed for the entire year, provided that, in the opinion of
the board of directors, he is likely to have met any bonus plan
goals for the relevant period had he not been terminated.
Under his agreement, we are obligated to reimburse
Mr. Travers for the costs of an automobile at the rate of
$750 per month and for all actual, reasonable and customary
expenses incurred in the course of his employment in accordance
with our policies as then in effect. Mr. Travers is subject
to certain restrictive covenants under the agreement, including
a covenant not to compete for 24 months after his
termination for any reason other than by him for good reason or
by us without cause and for 48 months after his termination
if such termination results in our obligation to pay him the
change of control payment described above.
Grant
Russell
On August 1, 2007, we entered into an employment agreement
with Grant Russell providing for his continued service as our
Chief Financial Officer and Executive Vice President. Under the
agreement, Mr. Russell is entitled to an initial annual
base salary of $175,000, subject to increases in the sole
discretion of the board of directors, and upon the initial
public offering of common stock an annual base salary of
$275,000 or such greater amount as shall be determined by the
board of directors. He is also eligible to receive such
periodic, annual or other bonuses as the board of directors in
its sole discretion shall determine and to participate in all
bonus plans established for our senior executives. The agreement
also provides that Mr. Russell may be awarded, in the sole
discretion of the board of directors, stock options and other
awards under any plan or arrangement for which our senior
executives are eligible. The level of his participation in any
such plan or arrangement shall be determined by the board of
directors in its sole discretion. To the greatest extent
permissible under the Code and the regulations thereunder,
options granted to Mr. Russell shall be incentive stock
options within the meaning of Section 422 of the Code. He
is also eligible to participate in all employee benefit plans
which are generally available to our senior executives and
entitled to receive fringe benefits and perquisites comparable
to those of our other senior executives.
Mr. Russells employment under the agreement shall
continue indefinitely until terminated by him or by us. In the
event that his employment is terminated by us other than for
cause (as defined in the agreement), by him for
good reason (as defined in the agreement) or upon
his death or disability (as defined in the
agreement), Mr. Russell shall be entitled to be paid, in
addition to any base salary and bonuses then accrued and unpaid,
and his then current base salary for 24 months after the
date of termination and the entire bonus that would have been
payable pursuant to any agreement, understanding, arrangement or
plan in which he is entitled to participate for the year in
which the termination of his employment occurred as if he had
been employed for the entire year, provided that, in the opinion
of the board of directors, he is likely to have met any bonus
plan goals for the relevant period had he not been terminated.
As a condition to our obligation to make any such payment, we,
in our sole discretion, may
71
require Mr. Russell to release us and our officers,
directors, employees, and agents, from any and all claims and
causes of action, including, but not limited to those arising
from his employment and the termination of his employment. In
the event of such termination, all stock options, restricted
stock grants, stock appreciation rights and other similar awards
held by Mr. Russell at the date of termination shall
immediately vest, the period during which any options or rights
relating to such grants may be exercised shall be the longer of
the date specified in such grants or the date that is thirty
(30) days after the end of the
24-month
period following the date of termination and will, in all other
respects, continue to be governed by, and continued in
accordance with, their applicable plan and grant documents. In
the event that Mr. Russells employment is terminated
by us for cause or by him other than for good reason,
Mr. Russell shall be entitled to be paid only any base
salary then accrued and unpaid and annual bonus amounts for any
fiscal year completed prior to the date of termination and we
shall have no further obligations to him.
In the event of a change of control (as defined in
the agreement), any unvested stock options held by
Mr. Russell shall be fully vested and become immediately
exercisable. Such options shall remain exercisable for the
period remaining under the relevant stock option agreement and
shall not have a shortened period of exercisability as a result
of the change of control, except for statutory stock options
which shall, at Mr. Russells election,
(i) expire 90 days after his termination (or
1 year after his termination upon his death or permanent
and total disability) or (ii) be converted into
non-qualified stock options expiring at the end of the entire
term of such option under the relevant stock option agreement.
Additionally, if Mr. Russell is terminated within one year
of a change of control for any reason other than by us for
cause, or if he elects to terminate his employment (whether or
not for good reason) after the expiration of 120 days after
and on or before the two-year anniversary of a change of
control, Mr. Russell shall be entitled to be paid, in
addition to any base salary and bonuses then accrued and unpaid,
and his then current base salary for 48 months after the
date of termination and the entire bonus that would have been
payable pursuant to any agreement, understanding, arrangement or
plan in which he is entitled to participate for the year in
which the termination of his employment occurred as if he had
been employed for the entire year, provided that, in the
opinion of the board of directors, he is likely to have met
any bonus plan goals for the relevant period had he not been
terminated.
Under his agreement, we are obligated to either reimburse
Mr. Russell for the costs of an automobile at the rate of
$750 per month or to bear all expenses associated with his lease
of an automobile for his use while in Rochester, New York and to
reimburse him for all actual, reasonable and customary expenses
incurred in the course of his employment in accordance with our
policies as then in effect. Mr. Russell is subject to
certain restrictive covenants under the agreement, including a
covenant not to compete for 24 months after his termination for
any reason other than by him for good reason or by us without
cause and for 48 months after his termination if such
termination results in our obligation to pay him the change of
control payment described above.
2007
Amended and Restated Stock Option Plan
Our stock option plan was originally adopted by our board of
directors and approved by our stockholders in October 1997. Our
board of directors adopted and our stockholders approved the
adoption of the amendment and restatement of our 1997 plan in
August 2007. Throughout this prospectus we refer to the plan as
amended and restated as our 2007 option plan. An aggregate of
45,714,288 shares of our common stock are reserved for
issuance under the 2007 option plan. Our board of directors has
determined that, upon the effectiveness of the registration
statement of which this prospectus forms a part, no further
options will be granted under our 2007 option plan.
Shares Available for Awards. As of the date of
this prospectus, we had issued 2,876,263 shares of our
common stock upon the exercise of options granted under the 2007
option plan, options to purchase 15,304,554 shares of
common stock had been issued and were outstanding under the plan
and 27,533,471 shares of common stock remained available
for issuance under the plan. Our board of directors has
determined that, upon the effectiveness of the registration
statement of which this prospectus forms a part, no further
options will be granted under our 2007 option plan.
72
Eligibility. Only our employees, our
directors, our consultants and other key persons are eligible to
participate in our 2007 option plan. We may grant incentive
stock options only to employees.
Administration. Our board of directors
administers the 2007 option plan. Our board, however, may
delegate this authority to a committee of one or more directors.
The party administering our 2007 option plan, whether it is our
board of directors or a committee appointed by our board of
directors, is referred to under the 2009 option plan as the
committee. Subject to the provisions of the 2007
option plan and the rules of any stock exchange on which shares
of our common stock may be listed, the committee has complete
authority to interpret the 2007 option plan, to prescribe, amend
and rescind rules and regulations relating to it, to determine
who will receive stock options, to determine the terms and
provisions of the respective option agreements (which need not
be identical), and to make all other determinations necessary or
advisable for the administration of the 2007 option plan.
Stock Options. We grant incentive and
nonstatutory stock options under the plan pursuant to incentive
and nonstatutory stock option agreements. The committee
determines who will receive stock options, whether the stock
options will be incentive or nonstatutory stock options, and the
number of stock options to be granted. The committee determines
the exercise price for a stock option, consistent with the terms
and conditions of the 2007 plan and applicable law. The
exercise price of any incentive stock option cannot be less than
100% of the fair market value of our common stock on the date of
grant. Under the 2007 option plan, fair market value
means the value of a share of the Companys common stock on
any date as determined by the committee. The exercise price for
stock options shall be paid in the form of cash or certified or
bank check, or consideration received by us under a cashless
exercise program if implemented by us in connection with the
2007 option plan and if permitted by the rules of any stock
exchange on which shares of our common stock may be listed.
Options granted under the 2007 option plan vest at the rate
determined by the committee and specified in each stock option
agreement. The committee determines the term of stock options
granted under the 2007 option plan, which can be up to ten
years, except in the case of certain incentive stock options,
which may have a term of up to five years. Unless an option
agreement provides otherwise, if an optionees employment
with the Company is terminated for any reason, whether voluntary
or otherwise, the optionee, or his or her beneficiary, may
exercise any vested options for a period of 30 days from
the date of termination of service. An optionee may not exercise
an option beyond the expiration of its term.
Adjustment of Shares. In the event that we
have a specified type of change in our capital structure, such
as, a stock split, stock dividend, recapitalization, spin-off,
reclassification or similar occurrence, then the committee must
appropriately adjust the number of shares reserved under the
2007 option plan, as well as the numbers of shares covered by
each outstanding award and the exercise prices or purchase
prices, if applicable, of all outstanding stock awards under the
2007 option plan.
Consolidation or Merger. In the event of any
consolidation or merger of the Company with or into another
company or in case of any sale or conveyance to another company
or entity of the property of the Company as a whole or
substantially as a whole, shares of stock or other securities
equivalent in kind and value to those shares and other
securities an optionee would have received if he or she had held
the full number of shares of common stock remaining subject to
the option immediately prior to such consolidation, merger, sale
or conveyance and had continued to hold those shares (together
with all other shares, stock and securities thereafter issued in
respect thereof) to the time of the exercise of the option shall
thereupon be subject to the option. However, unless any option
agreement shall provide different or additional terms, in any
such transaction the committee, in its discretion, may provide
instead that any outstanding option shall terminate, to the
extent not exercised by the optionee prior to termination,
either (a) at the close of a period of not less than ten
(10) days specified by the committee and commencing on the
committees delivery of written notice to the optionee of
its decision to terminate such option without payment of
consideration as provided in the following clause or (b) as
of the date of the transaction, in consideration of the
Companys payment to the optionee of an amount of cash
equal to the difference between the aggregate fair market value
of the shares of common stock for which the option is then
exercisable and the aggregate exercise price for such shares
under the option.
73
Other Terms. Whenever shares are to be issued
in satisfaction of an option granted under our 2007 option plan,
the Company shall have the right to require the optionee to
remit to the Company an amount sufficient to satisfy federal,
state, local or other withholding tax requirements if and to the
extent required by law (whether so required to secure for the
Company an otherwise available tax deduction or otherwise) prior
to the delivery of any certificate or certificates for such
shares. An optionee may not transfer a stock option granted
under our 2007 option plan other than by will or the laws of
descent and distribution, and each option is exercisable, during
the lifetime of the optionee, only by the optionee. Shares
issued upon exercise of an option may be subject to forfeiture
conditions, rights of repurchase, rights of first refusal and
other transfer restrictions as determined by the committee and
as set forth in the stock option agreement.
Amendment and Termination. Subject to
compliance with the rules of any stock exchange on which shares
of our common stock may be listed, the 2007 option plan may be
amended, altered, suspended or terminated by our board of
directors at any time. We may not alter the rights and
obligations under any option granted before amendment of the
2007 option plan without the written consent of the affected
optionee. Our board of directors has determined that, upon the
effectiveness of the registration statement of which this
prospectus forms a part, no further options will be granted
under our 2007 option plan.
2009
Stock Option Plan
Our 2009 stock option plan has been approved by our board of
directors and stockholders and will become effective as of the
time the registration statement of which this prospectus forms a
part is declared effective by the SEC. An aggregate of
37,000,000 shares of our common stock are reserved for
issuance under the 2009 option plan, No options have been
granted under our 2009 option plan. At the closing of this
offering, we intend to grant to each of our four new
non-employee directors an option to purchase 300,000 shares of
our common stock at an exercise price per share equal to the
initial public offering price per unit. These options will be
50% vested immediately on grant and the balance will vest
ratably, on a monthly basis, over the next 12 months.
Shares Available for Awards. The total number
of shares of our common stock that may be subject to awards
under our 2009 option plan is 37,000,000 shares. At the
closing of this offering, we intend to grant to each of our four
new non-employee directors an option to purchase 300,000 shares
of our common stock at an exercise price per share equal to the
initial public offering price per unit. These options will be
50% vested immediately on grant and the balance will vest
ratably, on a monthly basis, over the next 12 months. If these
options are granted, an additional 35,800,000 shares will
be available for issuance under the 2009 option plan.
Eligibility. The persons eligible to receive
awards under our 2009 option plan are our officers, directors,
employees and independent contractors who render consulting or
advisory services to us and those of our subsidiaries. An
employee on leave of absence may be considered as still in our
employ or in the employ of one of our subsidiaries for purposes
of eligibility for participation in our 2009 option plan.
Administration. Our 2009 option plan provides
that it shall be administered by our board of directors or a
committee appointed by our board of directors, which committee
shall be constituted to comply with applicable laws. The party
administering our 2009 option plan, whether it is our board of
directors or a committee appointed by our board of directors, is
referred to under the 2009 option plan as the
administrator. Subject to the terms of our 2009
option plan, the administrator is authorized to select eligible
persons to receive awards, determine the type and number of
awards to be granted and the number of shares of our common
stock to which awards will relate, specify times at which awards
will be exercisable or settleable (including performance
conditions that may be required as a condition thereof), set
other terms and conditions of awards, prescribe forms of award
agreements, interpret and specify rules and regulations relating
to our 2009 option plan and make all other determinations that
may be necessary or advisable for the administration of our 2009
option plan. Our board of directors has designated the
compensation committee of the board to act as the administrator
of our 2009 option plan.
Stock Options. The administrator is authorized
to grant stock options, including both incentive stock options
or ISOs, which can result in potentially favorable tax treatment
to the participant, and nonstatutory stock options. 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 nonstatutory stock option must not
be less than 100% of the fair market value of a share of our
common stock on the
74
date of grant provided that if stock options are granted within
90 days of a distribution by way of prospectus, the
exercise price must not be less than the offering price under
the prospectus. For purposes of our 2009 option plan, the term
fair market value means, as of any date, the value
of our common stock determined as follows: (1) if our
common stock is listed on any established stock exchange or a
national market system, its fair market value shall be the
closing sales price for such stock (or the closing bid, if no
sales were reported) as quoted on such exchange or system on the
day prior to the date of grant, as reported in The Wall Street
Journal or such other source as the administrator deems
reliable; (2) if our common stock is regularly quoted by a
recognized securities dealer but selling prices are not
reported, its fair market value shall be the mean between the
high bid and low asked prices for our common stock on the day of
determination; or (3) in the absence of an established
market for our common stock, the fair market value thereof shall
be determined in good faith by the administrator. The maximum
term of each option, the times at which each option will be
exercisable, and provisions requiring forfeiture of unexercised
options at or following termination of employment or service
generally are fixed by the administrator except that no option
may have a term exceeding ten years. The exercise price for
stock options shall be paid using such method of payment as
shall be determined by the administrator, including, without
limitation: (1) cash or check (2) pursuant to a
broker-assisted cashless exercise program developed under
Regulation T promulgated by the Federal Reserve Board if
permitted by the rules of any stock exchange on which shares of
our common stock may be listed; or (3) any combination of
the foregoing methods of payment. Grants of stock options are
subject to the limitation that, in any 12 month period, no
individual may receive options to purchase shares of our common
stock in excess of 5% of the number of shares of our common
stock then outstanding and no individual who is a consultant or
engaged in investor relations activities may receive options to
purchase shares of our common stock in excess of 2% of the
number of shares of our common stock then outstanding.
Adjustment of Shares. In the event that we
have a specified type of change in our capital structure, such
as a stock split, stock dividend, recapitalization, spin-off,
reclassification or similar occurrence, then the administrator
must appropriately adjust the number of shares reserved under
the 2009 option plan, as well as the numbers of shares covered
by each outstanding award and the exercise prices or purchase
prices, if applicable, of all outstanding stock awards under the
2009 option plan.
Other Terms of Awards. The administrator may
institute an exchange program which is a program under which
(1) outstanding awards are surrendered or cancelled in
exchange for awards of the same type (which may have lower
exercise prices and different terms), awards of a different
type, and/or
cash, and/or
(2) the exercise price of an outstanding award is reduced,
but subject to such approvals as may be required by any stock
exchange on which shares of our common stock may be listed. The
terms and conditions of any exchange program will be determined
by the administrator in its sole discretion. The administrator
may to allow participants to satisfy withholding tax obligations
by electing to have the Company withhold from the shares of our
common stock to be issued upon exercise of an award that number
of shares of common stock having a fair market value equal to
the minimum amount required to be withheld. Awards may not be
sold, pledged, assigned, hypothecated, transferred, or disposed
of in any manner other than by will or the laws of descent and
distribution, and may be exercised during the lifetime of the
participant, only by the participant. Awards under our 2009
option plan are generally granted without a requirement that the
participant pay consideration in the form of cash or property
for the grant (as distinguished from the exercise), except to
the extent required by law. The administrator may, however,
grant awards in exchange for other awards under our 2009 option
plan awards or under our other plans, or other rights to payment
from us, and may grant awards in addition to and in tandem with
such other awards, rights or other awards.
Acceleration of Vesting; Change in
Control. The administrator may, in its
discretion, but subject to such approvals as may be required by
any stock exchange on which shares of our common stock may be
listed, accelerate the exercisability, the lapsing of
restrictions or the expiration of vesting periods of any award.
In the event of a merger of the Company with or into another
corporation, or a change in control of the Company,
as defined in our 2009 option plan, each outstanding award shall
be assumed or an equivalent award substituted by the successor
corporation or a parent or subsidiary of the successor
corporation. In the event that the successor corporation refuses
to assume or substitute for the award, the participant will
fully vest in and have the right to exercise all of his or her
outstanding options and stock purchase rights, including shares
of our common stock as to which such awards would not otherwise
be vested or exercisable, all restrictions on restricted stock
will lapse, and all outstanding restricted stock units will
fully vest. In addition, the administrator may provide in an
award agreement that the
75
performance goals relating to any performance based award will
be deemed to have been met upon the occurrence of any change in
control.
Amendment and Termination. Our board of
directors may amend, alter, suspend, or terminate our
2009 option plan at any time without further stockholder
approval, except stockholder approval must be obtained for any
amendment or alteration if such approval is required by law or
regulation or under the rules of any stock exchange or quotation
system on which shares of our common stock are then listed or
quoted. Thus, stockholder approval may not necessarily be
required for every amendment to our 2009 option plan which might
increase the cost of our 2009 option plan or alter the
eligibility of persons to receive awards. Stockholder approval
will not be deemed to be required under laws or regulations,
such as those relating to ISOs, that condition favorable
treatment of participants on such approval, although our board
of directors may, in its discretion, seek stockholder approval
in any circumstance in which it deems such approval advisable.
Unless earlier terminated by our board of directors, our 2009
option plan shall continue in effect for a term of ten years
from the later of (1) the effective date of our
2009 option plan, or (2) the earlier of the most
recent board of directors or stockholder approval of an increase
in the number of shares of our common stock reserved for
issuance under our 2009 option plan.
Incentive
Bonus Plan
Our board of directors has adopted an incentive bonus plan under
which Paul J. Travers, our Chief Executive Officer and
President, and Grant Russell, our Chief Financial Officer and
Executive Vice President, may be awarded cash bonuses based upon
increases in our sales and improvements in our profitability in
2009 compared to 2008. Under the plan, Mr. Travers
will be entitled to a cash bonus of 0.50% of his base salary for
each 1.0% increase in our sales and Mr. Russell will be
entitled to a cash bonus of 0.35% of his base salary for each
1.0% increase in our sales, provided however, that no bonus
shall be paid unless our sales increase by at least 20%, the
amount paid for increases in our sales to Mr. Travers shall
not exceed 100% of his base salary and the amount paid to
Mr. Russell shall not exceed 70% of his base salary.
Additionally, but only if our 2009 sales are equal to or greater
than our 2008 sales, Mr. Travers and Mr. Russell
will each be entitled to a bonus of 15% of their respective base
salaries if our operating loss for 2009 is less than $1,000,000
or a bonus of 30% of their respective base salaries if our
operating income for 2009 is more than zero but less than 3% of
our sales for 2009. If our operating income for 2009 is more
than 3% of our sales for 2009, Mr. Travers and
Mr. Russell will each be entitled to an additional cash
bonus based upon the our 2009 operating income as a percentage
of our 2009 sales. In Mr. Travers case, the bonus
will be determined by multiplying his base salary by 10 times
our 2009 operating income expressed as a percentage of our 2009
sales. In Mr. Russells case, the bonus will be
determined by multiplying his base salary by 7.5 times our
2009 operating income expressed as a percentage of our 2009
sales. However, the amount paid to Mr. Travers shall not
exceed 100% of his base salary and the amount paid to
Mr. Russell shall not exceed 75% of his base salary.
Other
Benefits
We believe establishing competitive benefit packages for our
employees is an important factor in attracting and retaining
highly qualified personnel. Executive officers are eligible to
participate in all of our employee benefit plans, such as
medical, dental, vision, group life and accidental death and
dismemberment insurance and our 401(k) plan, in each case on the
same basis as other employees. While our 401(k) plan does permit
us to make discretionary contributions and matching
contributions, subject to established limits and a vesting
schedule, we have not made any discretionary or matching
contributions to the plan on behalf of any participating
employees since its inception in 2007.
Perquisites
In general, we do not provide significant perquisites to our
employees. As a result, the cost to us of any perquisites is
minimal. We reimburse our President and Chief Executive Officer
and our Chief Financial Officer for the costs of an automobile
at the rate of $750 per month. We also provide our Chief
Financial Officer, whose primary residence is in Vancouver,
British Columbia, the option to receive portions of his regular
salary as a housing allowance at the rate prescribed by the
Internal Revenue Service, for the maintenance of a second
residence in Rochester, New York. Payment of such allowance is
deductible by us for federal income tax purposes in the same
76
manner as compensation. We also reimburse the costs of our Chief
Financial Officers flights that are direct to and from his
residence in Vancouver Canada and Rochester, New York.
The board of directors or its compensation committee may at any
time choose not to implement, amend, suspend, discontinue or
terminate the annual incentive or profit sharing plan.
Outstanding
Equity Awards at Fiscal Year End
The following table sets forth information concerning
exercisable and unexercisable options and stock awards that has
not vested for each of the named executive officers that is
outstanding as of December 31, 2008. We have not granted
any stock awards.
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
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Option Awards
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Equity
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Incentive Plan
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Awards:
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Number
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Number of
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Number of
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Securities
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Securities
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Securities
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Underlying
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Underlying
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Underlying
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Unexercised
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Unexercised
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Unexercised
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Option
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Options
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Options
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Unearned
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Exercise
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Option
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Options
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Price
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Expiration
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($)
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Date
|
|
|
Paul Travers
|
|
|
188,576
|
|
|
|
|
|
|
|
|
|
|
$
|
0.00875
|
|
|
|
9/03/12
|
|
|
|
|
1,485,232
|
|
|
|
|
|
|
|
|
|
|
$
|
0.02599
|
|
|
|
1/03/13
|
|
Grant Russell
|
|
|
174,256
|
|
|
|
|
|
|
|
|
|
|
$
|
0.00875
|
|
|
|
9/03/12
|
|
Options
to Purchase Securities
The following chart sets out, as at the date of this prospectus,
information regarding outstanding options to purchase shares of
our common stock which have been granted to our directors,
executive officers, employees, consultants, past directors,
executive officers, employees and consultants.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market Value
|
|
|
|
|
|
|
|
Securities
|
|
|
|
|
|
|
|
of Common
|
|
|
|
|
|
Number of
|
|
Under
|
|
|
|
|
|
Exercise
|
|
Shares on Date
|
|
|
|
Relationship to the Corporation
|
|
Options(1)
|
|
Option
|
|
Grant Date
|
|
Expiry
Date(2)
|
|
Price(3)
|
|
of Grant
|
|
|
|
|
All directors and past directors of Vuzix (4 individuals in
total)
|
|
3,365,224
|
|
common
stock
|
|
November 1, 2001
to May 1, 2009
|
|
November 1, 2011
to May 1, 2019
|
|
$0.0608
|
|
|
(4
|
)
|
|
|
All executive officers and past executive officers of Vuzix (3
individuals in total all included in the above
grouping also)
|
|
2,222,320
|
|
common
stock
|
|
September 3, 2002
to May 1, 2009
|
|
September 3, 2002
to May 1, 2019
|
|
$0.0355
|
|
|
(4
|
)
|
|
|
All other employees or past employees of Vuzix (48 individuals
in total)
|
|
8,973,642
|
|
common
stock
|
|
September 30, 2000
to May 1, 2009
|
|
September 30, 2010 to
May 1, 2019
|
|
$0.1373
|
|
|
(4
|
)
|
|
|
All consultants and past consultants of Vuzix
(24 individuals in total)
|
|
6,821,587
|
|
common
stock
|
|
March 30, 2000
to May 1, 2009
|
|
June 30, 2009 to
May 1, 2019
|
|
$0.1539
|
|
|
(4
|
)
|
|
|
Other (none)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the aggregate number of shares issuable upon exercise
of all outstanding options and warrants held by the group.
Except for warrants exercisable to purchase an aggregate of
3,855,899 shares of our common stock held by our current
and former consultants, all the securities disclosed in this
table are options granted under our 2007 plan. |
|
(2) |
|
All options granted under our 2007 plan expire ten years from
the date of grant. Warrants expire between two and five years
from the date of issuance with a weighted average remaining term
of 0.99 years. |
|
(3) |
|
Represents the weighted average exercise price of all
outstanding options and warrants held by the members of the
group. Individual exercise prices range: (i) for directors,
from $0.0088 to $0.2334; (ii) for executive officers, |
77
|
|
|
|
|
from $0.0088 to $0.1500; (iii) for employees, from $0.0061
to $0.2334; and (iv) for consultants, from $0.0061 to
$0.2333. |
|
(4) |
|
All options and warrants are exercisable at the fair market
value of our common stock as of the date of grant as determined
by our board of directors. |
Potential
Payments upon Termination or Change in Control
We have entered into an agreement with each of Paul Travers and
Grant Russell that would require us to provide compensation to
them in the event of a termination of employment or a change in
control. See Employment Agreements above.
Their employment agreements entitle them to severance payments
upon their termination by us other than for cause
(as defined in the agreement) or by them for good
reason (as defined in the agreement) or upon their death
or disability (as defined in the agreement). Under
the agreements: (a) we shall have cause to
terminate them as a result of their: (i) willfully engaging
in conduct which is materially injurious to us;
(ii) willful fraud or material dishonesty in connection
with their performance as an employee; (iii) deliberate or
intentional failure to substantially perform their duties as
employees that results in material harm to us; or
(iv) conviction for, or plea of nolo contendere to a
charge of, commission of a felony; (b) they shall have
good reason to terminate their employment upon:
(i) a material diminution during the term of the agreements
in their duties, responsibilities, position, office or title;
(ii) a breach by us of the compensation and benefits
provisions of their agreements; (iii) a material breach by
us of any other terms of their agreements; or (iv) the
relocation of their principal place of business at our request
beyond 30 miles from its current location; and
(c) they shall be deemed to be disabled if they
shall be rendered incapable of performing their duties to us by
reason of any medically determined physical or mental impairment
that can be expected to result in death or that can reasonably
be expected to last for a period of either (i) six or more
consecutive months from the first date of their absence due to
the disability or (ii) nine months during any
12-month
period. Any termination by us for cause or by them for good
reason is subject to a
30-day
notice period and opportunity to cure.
In the event that their employment is terminated by us other
than for cause, by them for good reason or upon their death or
disability, Mr. Travers and Mr. Russell shall be
entitled to be paid, in addition to any base salary and bonuses
then accrued and unpaid, and their then current base salary for
24 months after the date of termination and the entire
bonus that would have been payable pursuant to any agreement,
understanding, arrangement or plan in which he is entitled to
participate for the year in which the termination of his
employment occurred as if they had been employed for the entire
year, provided that, in the opinion of the board of directors,
they are likely to have met any bonus plan goals for the
relevant period had they not been terminated. As a condition to
our obligation to make any such payment, we, in our sole
discretion, may require Mr. Travers and Mr. Russell to
release us and our officers, directors, employees, and agents,
from any and all claims and causes of action, including, but not
limited to those arising from their employment and the
termination of their employment. In the event of such
termination, all stock options, restricted stock grants, stock
appreciation rights and other similar awards held by them at the
date of termination shall immediately vest, the period during
which any options or rights relating to such grants may be
exercised shall be the longer of the date specified in such
grants or the date that is thirty (30) days after the end
of the
24-month
period following the date of termination and will, in all other
respects, continue to be governed by, and continued in
accordance with, their applicable plan and grant documents.
Under their employment agreements, change of control
means: (i) the approval by our stockholders, and the
completion of the transaction resulting from such approval, of
(A) the sale or other disposition of all or substantially
all our assets or (B) our complete liquidation or
dissolution; (ii) the sale, in a single transaction or in a
series of related transactions, of all or substantially all of
the outstanding shares of our capital stock; (iii) the
approval by our stockholders, and the completion of the
transaction resulting from such approval, of a merger,
consolidation, reorganization or similar corporate transaction,
whether or not we are the surviving corporation in such
transaction, in which the outstanding shares of common stock are
converted into (A) shares of stock of another company,
other than a conversion into shares of voting common stock of
the successor corporation (or a holding company thereof)
representing fifty percent (50%) or more of the voting power of
all capital stock thereof outstanding immediately after the
merger or consolidation or (B) other securities (either
ours or those of another company) or cash or other property;
(iv) pursuant to an affirmative vote of a holder or holders
of seventy five percent (75%) of our capital stock
78
of the entitled to vote on such a matter, the removal of a
majority of the individuals who are at that time members of the
board of directors; or (v) the acquisition by any entity or
individual of one hundred percent of our capital stock.
In the event of a change of control, any unvested stock options
held by Mr. Travers or Mr. Russell shall be fully
vested and become immediately exercisable. Such options shall
remain exercisable for the period remaining under the relevant
stock option agreement and shall not have a shortened period of
exercisability as a result of the change of control, except for
statutory stock options which shall, at their election,
(i) expire 90 days after their termination (or one
year after their termination upon their death or permanent and
total disability) or (ii) be converted into non-qualified
stock options expiring at the end of the entire term of such
option under the relevant stock option agreement. Additionally,
if Mr. Travers or Mr. Russell is terminated within one
year of a change of control for any reason other than by us for
cause, or if they elect to terminate their employment (whether
or not for good reason) after the expiration of 120 days
after and on or before the two-year anniversary of a change of
control, Mr. Travers and Mr. Russell shall be entitled
to be paid, in addition to any base salary and bonuses then
accrued and unpaid, their then current base salary for
48 months after the date of termination and the entire
bonus that would have been payable pursuant to any agreement,
understanding, arrangement or plan in which they are entitled to
participate for the year in which the termination of their
employment occurred as if they had been employed for the entire
year, provided that, in the opinion of the board of directors,
they are likely to have met any bonus plan goals for the
relevant period had he not been terminated.
Compensation
of Directors
The following table sets forth information concerning the
compensation for the fiscal year ended December 31, 2008 of
our directors and directors elect who are not also named
executive officers:
DIRECTOR
COMPENSATION YEAR ENDED DECEMBER 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees
|
|
|
|
|
|
|
|
|
|
|
|
Nonqualified
|
|
|
|
|
|
|
|
|
|
Earned or
|
|
|
|
|
|
|
|
|
Non-Equity
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
Paid in
|
|
|
Stock
|
|
|
Option
|
|
|
Incentive Plan
|
|
|
Compensation
|
|
|
All Other
|
|
|
|
|
|
|
Cash
|
|
|
Awards
|
|
|
Awards
|
|
|
Compensation
|
|
|
Earnings
|
|
|
Compensation
|
|
|
Total
|
|
Name
|
|
($)
|
|
|
($)
|
|
|
($)(1)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
Robert F.
Mechur(2)
|
|
|
|
|
|
|
|
|
|
$
|
1,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,081
|
|
William
Lee(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Frank
Zammataro(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kathryn
Sayko(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bernard
Perrine(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The amounts shown in this column represent the dollar amounts
recognized for share-based compensation expense for financial
statement reporting purposes for stock options granted in 2008
and unvested stock options granted in prior years in accordance
with Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based Payment, but without giving
effect to estimated forfeitures related to service-based vesting
conditions. The assumptions used to compute the fair value are
disclosed in note 18 (Stock-based Compensation Expense) to
our audited financial statements for the fiscal year ended
December 31, 2008 included in this prospectus. |
|
(2) |
|
Resigned from our board of directors in June 2009. |
|
(3) |
|
Elected to our board of directors in June 2009. |
|
(4) |
|
Elected, and has agreed to serve, as a member of our board of
directors upon the effectiveness of the registration statement
of which this prospectus forms a part. |
During 2008, no cash director fees were earned by or paid to any
non-management member of the board of directors but each of our
nonemployee directors was reimbursed for ordinary expenses
incurred in connection with attendance at meetings of the board
of directors. In the future, to recruit and maintain qualified
directors we believe that we will likely have to begin paying
annual retainers, board committee membership and board meeting
fees. It is not expected that such fees will be paid to any
directors who are also our employees.
79
At the closing of this offering, we intend to grant to each of
William Lee, Frank Zammataro, Kathryn Sayko and Bernard Perrine,
our four new non-employee directors, an option to purchase
300,000 shares of our common stock at an exercise price per
share equal to the initial public offering price per unit. These
options will be 50% vested immediately on grant and the balance
will vest ratably, on a monthly basis, over the next
12 months. Our 2007 option plan provided for each incoming
non-employee director to be granted an option to purchase
250,000 shares of our common stock at the fair market value
per share as of the date of grant and an annual grant of 125,000
shares of common stock. These options were exercisable at the
fair market value of our common stock as of the date of grant
and vested, in the case of the initial grant, 50% immediately on
grant and the balance ratably, on a monthly basis, over the next
12 months, and in the case of the annual grant, on
December 31 in the year granted.
Compensation
Committee Interlocks and Insider Participation
During 2007 and 2008, Paul J. Travers, our President and Chief
Executive Officer, participated in deliberations of our board of
directors concerning executive compensation.
RELATED
PARTY TRANSACTIONS
Since January 1, 2006, we have entered into the following
transactions in which our directors, executive officers or
holders of more than 5% of our capital stock had or will have a
direct or indirect material interest. The following transactions
do not include compensation, termination and
change-in-control
arrangements, which are described under Management.
We believe the terms obtained or consideration that we paid or
received, as applicable, in connection with the transactions
described below were comparable to terms available or the
amounts that would be paid or received, as applicable, in
arms-length transactions. Except as described below, we
are not aware, after enquiring with our directors and officers,
of any material interest, direct or indirect, of any our
directors, executive officers, principal stockholders, or any
associate or affiliate thereof, in any transaction within the
last three years, or in any proposed transaction, that has
materially affected or will materially affect our company.
Officer
Loan
In October 2002, we entered into a stock purchase agreement with
four of our employees, including Grant Russell, our Chief
Financial Officer and Executive Vice President, pursuant to
which they purchased an aggregate of 32,537,135 shares of
common stock at an aggregate purchase price of $276,566 or
$0.0085 per share. Of these shares, Mr. Russell purchased
8,339,644 shares at an aggregate purchase price of $58,378.
In order to finance the purchase of these shares, we loaned each
employee an amount equal to the purchase price for the shares he
purchased. Each loan was evidenced by a non-recourse promissory
note and was secured by a pledge of the shares purchased. Each
loan bore interest at the rate of 6% per annum, and all
principal and interest was originally due and payable in
September 2007. In September 2007, we extended the maturity date
of each note until September 2012. In April 2009, we forgave the
entire amount of Mr. Russells indebtedness under this
loan in payment of a one-time bonus in consideration of
Mr. Russells efforts in connection with this
offering. At that time, the outstanding principal amount of the
note payable by Mr. Russell together with all interest
accrued thereon was $81,046. The aggregate outstanding principal
amount of the notes payable by the employees other than
Mr. Russell, together with all interest accrued thereon as
of June 30, 2009, was approximately $227,336.
Related
Party Loan
On September 19, 2006, we borrowed $500,000 from Sally Hyde
Burdick and issued Ms. Burdick a convertible promissory
note in the principal amount of $500,000 in evidence of the
loan. Interest on the outstanding principal amount of the note
originally accrued at the annual rate of 10.0%. At the time of
the loan, Ms. Burdick held 85,712 shares of our common stock (or
less than 0.1% of our common stock then outstanding) and was
otherwise unaffiliated with us. In consideration of the loan we
issued to Ms. Burdick a warrant exercisable upon conversion
of the note to purchase up to that number of shares of our
common stock equal to the principal amount of and accrued
interest on the promissory note then converted divided by
0.5334, exercisable at $0.35 per share for three years from the
date of the issue of the promissory note. This warrant expired
on September 30, 2009. The outstanding principal amount of
the note, together with all accrued and unpaid interest thereon,
is convertible at the option of the holder into shares of
80
our common stock at the rate of $0.2667 per share. The
outstanding principal amount of the note together with $118,493
accrued and unpaid interest thereon was due and payable on
January 31, 2009. As of that date, Ms. Burdick was the
beneficial owner of 3,541,080 shares of our common stock
(including 2,319,059 shares issuable upon conversion of the note
and 1,136,309 shares issuable upon exercise of the warrant
issued in consideration of the loan) or approximately 1.6% of
our common stock then outstanding. As of the date of this
prospectus, Ms. Burdick has not demanded payment of the
note. In consideration of her forbearance to demand payment of
the note, since January 31, 2009 we have made monthly payments
to Ms. Burdick of interest only on the principal amount of the
note at the annual rate of 18.0%. We intend to pay the
outstanding principal amount of the note in full, together with
all interest accrued and unpaid thereon, from the proceeds of
this offering. We may not receive sufficient proceeds from this
offering to repay this indebtedness.
Revolving
Loan Agreement
In October 2008, we entered into a revolving loan agreement with
Paul J. Travers, our President and Chief Executive Officer,
pursuant to which Mr. Travers agreed to loan us such
amounts as we may request and he may agree from time to time
until December 31, 2010. Interest accrues on the principal
amount outstanding under the agreement at the annual rate of
12.0% and is payable on demand. As security for our obligations
under the loan agreement, we granted Mr. Travers a security
interest in all of our assets. The principal amount outstanding
under this loan agreement on the date of this prospectus is
$165,500. We plan to the repay the entire principal amount
outstanding under this agreement, together with all interest
accrued thereon, from the proceeds of this offering. We may not
receive sufficient proceeds from this offering to repay this
indebtedness.
Payment
of Deferred Compensation and Shareholder Loans
In June 2009, we agreed with Mr. Travers and Grant Russell,
our Executive Vice President and Chief Financial Officer, that
we will pay them deferred compensation in the aggregate amounts
of $445,096 and $209,208, respectively, plus interest at the
annual rate of 8.0%, and for the repayment of loans made to us
more than five years ago by those officers to finance our
operations, either in one lump sum on or before the first
anniversary of the closing of this offering from the proceeds of
the exercise of the warrants included in the units and the
warrants issuable upon exercise of the agents compensation
options if and when at least 50% of those warrants are exercised
or otherwise in 12 equal monthly installments beginning on the
first anniversary of the closing of this offering until paid in
full. Any excess proceeds from any exercise of the warrants
included in the units and the warrants issuable upon exercise of
the agents compensation options will be used for working
capital. Assuming that we raise minimum gross proceeds of
Cdn$6,000,000 by selling 40,000,000 units at the initial
public offering price of Cdn$0.15 per unit (the minimum of our
estimated initial public offering price range) and that we sell
the maximum number of units offered (50,000,000 units) at
Cdn$0.25 per unit (the maximum of our estimated initial public
offering price range), if all of these warrants were to be
exercised we would receive additional funds totaling between
approximately Cdn$4,500,000 and Cdn$9,375,000, respectively.
These warrants may not be exercised before they expire.
Indemnification
Agreements
We have entered into a standard form of indemnification
agreement with each of our directors and executive officers.
Under this agreement we are obligated to indemnify the
indemnitee to the fullest extent permitted by applicable law for
all reasonable expenses (including attorneys fees and
disbursements), judgments, fines (including excise taxes and
penalties) and amounts paid in settlement actually and
reasonably incurred by the indemnitee arising out of or
connected with the indemnitees service as a director or
officer and indemnitees service in another capacity at our
request or direction. We are also obligated to advance all
reasonable and actual expenses incurred by the indemnitee in
connection with any action, suit, proceeding or appeal with
respect to which he is entitled to be indemnified upon our
receipt of an invoice for such expenses. Our obligation to
advance expenses is subject to the indemnitees execution,
upon our request, of an agreement to repay all such amounts it
if is ultimately determined that he is not entitled to be
indemnified by us under applicable law. If a claim for
indemnification under this agreement may not be paid to the
indemnitee under applicable law, then in any action in which we
are jointly liable with the indemnitee, we are obligated to
contribute to the amount of reasonable expenses (including
attorneys fees and disbursements) actually and reasonably
incurred by the indemnitee in proportion to the relative
81
benefits received by us and the indemnitee from the transaction
from which such action arose, and our relative fault and that of
the indemnitee in connection with the events which resulted in
such expenses. The rights of an indemnitee under the form of
indemnification agreement are in addition to any other rights
that the indemnitee may have under our certificate of
incorporation or bylaws, any agreement, or any vote of our
stockholders or directors. We are not obligated to make any
payment under the form of indemnification agreement to the
extent payment is actually made to the indemnitee under an
insurance policy or any other method outside of the agreement.
Related-Person
Transactions Policy
Pursuant to our Code of Ethics and Business Conduct, all
employees, officers and directors of ours and our subsidiaries
are prohibited from engaging in any relationship or financial
interest that is an actual or potential conflict of interest
with us without prior approval. Employees are required to
disclose any potential or actual conflicts with supervisors or
our ethics compliance officer if one has been appointed by the
board and otherwise directly to the members of our board of
directors. Officers and directors are required to disclose any
potential or actual conflicts to our board of directors.
Our board of directors reviews and approves all transactions
with directors, officers, and holders of five percent or more of
our voting securities and their affiliates, or each, a related
party. Prior to our board of directors consideration of a
transaction with a related party, the material facts as to the
related partys relationship or interest in the transaction
are disclosed to our board of directors, and the transaction is
not considered approved by our board of directors unless a
majority of the directors who are not interested in the
transaction approve the transaction. Further, when stockholders
are entitled to vote on a transaction with a related party, the
material facts of the related partys relationship or
interest in the transaction are disclosed to the stockholders,
who must approve the transaction in good faith.
All future transactions between us and any of our officers and
directors or their respective affiliates will be on terms
believed by us to be no less favorable to us than are available
from unaffiliated third parties. Such transactions, including
any forgiveness of loans, will require prior approval by a
majority of the members of our board who do not have an interest
in the transaction and who had access, at our expense, to our
attorneys or independent legal counsel. We will not enter into
any such transaction unless our disinterested independent
directors or disinterested directors determine that the terms of
such transaction are no less favorable to us than those that
would be available to us with respect to such a transaction from
unaffiliated third parties.
CORPORATE
GOVERNANCE
Board of
Directors
Our board of directors currently consists of three members: Paul
J. Travers, our President and Chief Executive Officer, Grant
Russell, our Chief Financial Officer and Executive Vice
President and William Lee. Frank Zammataro, Kathryn Sayko
and Bernard Perrine have each been elected, and have agreed to
serve, as a member of our board of directors subject to the
effectiveness of the registration statement of which this
prospectus forms a part. Our board has determined that each of
our directors and directors elect other than Mr. Travers
and Mr. Russell is, or will be upon the effective time of
their election be, an independent director as defined by
Rule 5605(a)(2) of the NASDAQ Stock Market LLC (NASDAQ). We
believe that, upon the effectiveness of the of the registration
statement of which this prospectus forms a part, we will be
compliant with the independence criteria for boards of directors
under applicable laws and regulations, including NASDAQ
Rule 5605(a)(2). The board may meet independently of
management as required. Although they are permitted to do so,
the independent directors have not held regularly scheduled
meetings at which non-independent directors and members of
management are not in attendance.
Committees
of the Board of Directors
Subject to the effectiveness of the registration statement of
which this prospectus forms a part, we have established an audit
committee, a compensation committee and a nominating committee.
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Audit
Committee
Upon the effectiveness of the of the registration statement of
which this prospectus forms a part, our audit committee will
consist of William Lee, Kathryn Sayko and Bernard Perrine, each
of whom will then be a non-employee director. Mr. Lee will
be the chairperson of our audit committee. Our board of
directors has determined that each member designee of our audit
committee will be an independent director as defined by NASDAQ
Rule 5605(a)(2) and will meet the requirements of financial
literacy under SEC rules and regulations. Mr. Lee will
serve as our audit committee financial expert, as defined under
SEC rules.
Our audit committee will be responsible for, among other things:
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selecting and hiring our independent auditors, and approving the
audit and non-audit services to be performed by our independent
auditors;
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evaluating the qualifications, performance and independence of
our independent auditors;
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monitoring the integrity of our financial statements and our
compliance with legal and regulatory requirements as they relate
to financial statements or accounting matters;
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reviewing the adequacy and effectiveness of our internal control
policies and procedures;
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discussing the scope and results of the audit with the
independent auditors and reviewing with management and the
independent auditors our interim and year-end operating
results; and
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preparing the audit committee report that the SEC requires in
our annual proxy statement.
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Our board of directors has adopted a written charter for our
audit committee, which will be available on our website upon the
completion of this offering.
Compensation
Committee
Upon the effectiveness of the of the registration statement of
which this prospectus forms a part, our compensation committee
will consist of Kathryn Sayko, Bernard Perrine and Frank
Zammataro, each of whom will then be a non-employee director.
Ms. Sayko will be the chairperson of our compensation
committee. Our board of directors has determined that each
member designee of our compensation committee will be an
independent director as defined by NASDAQ Rule 5605(a)(2).
Our compensation committee will be responsible for, among other
things:
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reviewing and approving compensation of our executive officers
including annual base salary, annual incentive bonuses, specific
goals, equity compensation, employment agreements, severance and
change in control arrangements, and any other benefits,
compensations or arrangements;
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reviewing and recommending compensation goals, bonus and stock
compensation criteria for our employees;
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reviewing and discussing annually with management our
Compensation Discussion and Analysis disclosure
required by SEC rules;
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preparing the compensation committee report required by the SEC
to be included in our annual proxy statement; and
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administering, reviewing and making recommendations with respect
to our equity compensation plans.
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Our board of directors has adopted a written charter for our
compensation committee, which will be available on our website
upon the completion of this offering.
Nominating
Committee
Upon the effectiveness of the of the registration statement of
which this prospectus forms a part, our nominating committee
will consist of William Lee and Frank Zammataro, each of whom
will then be a non-employee member of our board of directors.
Mr. Zammataro will be the chairperson of our nominating
committee. Our board of directors has determined that each
member designee of our nominating committee will be an
independent director as defined by NASDAQ 5605(a)(2).
83
Our nominating committee will be responsible for, among other
things:
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assisting our board of directors in identifying, interviewing
and recruiting prospective director nominees;
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recommending director nominees;
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establishing and reviewing on an annual basis a process for
identifying and evaluating nominees for our board of directors;
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annually evaluating and reporting to the our board of directors
on the performance and effectiveness of the board of directors;
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recommending members for each board committee of our board of
directors; and
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annually presenting a list of individuals recommended for
nomination for election to our board of directors at the annual
meeting of our shareholders.
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Our board of directors has adopted a written charter for our
nominating committee, which will be available on our website
upon the completion of this offering.
Canadian
Governance Matters
Generally
The Canadian Securities Administrators have published National
Policy
58-201
Corporate Governance Guidelines. These instruments set out a
series of guidelines and requirements for effective corporate
governance and in this prospectus we refer to them collectively
as the Guidelines. The Guidelines address matters
such as the constitution and independence of corporate boards,
the functions to be performed by boards and their committees and
the effectiveness and education of board members.
Independence
Our board of directors has determined that each of our directors
and directors elect other than Mr. Travers and
Mr. Russell is, or will be upon the effective time of his
or her election, independent for the purpose of National
Instrument
58-101
Disclosure of Corporate Governance Practices.
Except as described below, our directors and directors elect
hold no other directorships at the present time with other
reporting issuers:
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Director Name and Municipality of Residence
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Other Directorships
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William Lee, Vancouver, British Columbia
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Tinka Resources Limited
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Halo Resources Ltd.
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Golden Peaks Resources Ltd.
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Orientation
and Continuing Education
Our board of directors is responsible for the orientation and
education of new members of the board and all new directors are
provided with copies of our policies. Prior to joining the
board, each new director will meet with our Chief Executive
Officer. Our Chief Executive Officer is responsible for
outlining our business and prospects, both positive and
negative, with a view to ensuring that the new director is
properly informed to commence their duties as a director. Each
new director is also given the opportunity to meet with our
auditors and counsel. As part of its annual self-assessment
process, our board of directors determines whether any
additional education and training is required for board members.
Ethical
Business Conduct
The directors encourage and promote a culture of ethical
business conduct through communication and supervision as part
of their overall stewardship responsibility. In addition, our
board of directors has adopted a code of ethics and business
conduct for our employees, officers and directors which
addresses our continuing commitment to conducting business with
highest integrity and in accordance with applicable laws, rules
and regulations. Our code of ethics and business conduct
establishes procedures that allow our directors, officers and
employees to
84
confidentially submit their concerns to our ethics officer or to
our audit committee regarding questionable ethical, moral,
accounting or auditing matters, without fear of retaliation. A
copy of our code of ethics and business conduct will be
available on our website and at www.sedar.com upon the
completion of this offering.
Nomination
of Directors
Historically, because of our size and stage of development and
the limited number of directors, the entire board of directors
has taken responsibility for nominating new directors and
assessing current directors. As of the closing of this offering,
nominees for election to our board of directors will be
identified, interviewed and recruited by our nominating
committee. For additional information about our nominating
committee, see Corporate Governance Committees
of the Board of Directors Nominating Committee
above.
Compensation
Historically, because of our size and stage of development and
the limited number of directors, the compensation of our
executive officers and directors was determined by our board of
directors as a whole. As of the closing of this offering, our
compensation committee will be responsible for reviewing and
approving the compensation of our executive officers and
directors and for reviewing and recommending compensation goals,
bonus and stock compensation criteria for our employees. For
additional information about our compensation committee, see
Corporate Governance Committees of the Board
of Directors Compensation Committee above.
Assessment
Historically, because of our size and stage of development and
the limited number of directors, our board of directors
considered a formal assessment process to be inappropriate and
evaluated its own effectiveness on an ad hoc basis. As of the
closing of this offering, our nominating committee will be
responsible for annually evaluating and reporting to our board
of directors on the performance and effectiveness of the board
as a whole, its committees and individual directors. For
additional information about our nominating committee, see
Corporate Governance Committees of the Board
of Directors Nominating Committee above.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding beneficial
ownership of our common stock by:
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each of our named executive officers;
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each of our directors and directors elect;
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each person, or group of affiliated persons, known by us to
beneficially own more than 5% of our common stock; and
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all of our directors, directors elect and executive officers as
a group.
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Number of
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Percentage of Shares
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Shares
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Beneficially Owned
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Beneficially
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Before
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After
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Name and Address of Beneficial
Owner(1)
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Owned(2)
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Offering(3)
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Offering(4)
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40,000,000 Units
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50,000,000 Units
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Paul J. Travers
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72,755,203
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(5)
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32.64
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%
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26.20
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%
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25.26
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%
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Grant Russell
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12,113,033
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(6)
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5.43
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%
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4.36
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%
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4.21
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%
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William Lee
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(7)
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*
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%
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*
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%
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*
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%
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Frank Zammataro
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(7)
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*
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%
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*
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%
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*
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%
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Kathryn Sayko
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(7)
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*
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%
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*
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%
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*
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%
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Bernard Perrine
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(7)
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*
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%
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*
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%
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*
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%
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Paul Churnetski
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20,452,709
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(6)
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9.17
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%
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7.37
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%
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7.10
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%
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Directors, directors elect and executive officers as a group
(6 people)
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105,320,945
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(8)
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38.38
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%
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30.84
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%
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29.72
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%
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85
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* |
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less than 1.0% |
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(1) |
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The address for each person is
c/o Vuzix
Corporation, 75 Town Centre Drive, Rochester, NY 14623. |
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(2) |
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We have determined beneficial ownership in accordance with the
rules of the SEC. These rules generally attribute beneficial
ownership of securities to persons who possess sole or shared
voting power or investment power with respect to those
securities. In addition, the rules include shares of common
stock issuable pursuant to the exercise of stock options or
warrants, or the conversion of convertible promissory notes,
that are either immediately exercisable or convertible, or that
will become exercisable within 60 days after the date of
this prospectus. These shares are deemed to be outstanding and
beneficially owned by the person holding those options, warrants
or convertible promissory notes for the purpose of computing the
percentage ownership of that person, but they are not treated as
outstanding for the purpose of computing the percentage
ownership of any other person. Unless otherwise indicated, the
persons or entities identified in this table have sole voting
and investment power with respect to all shares shown as
beneficially owned by them, subject to applicable community
property laws. |
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(3) |
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The percentage of shares beneficially owned before the offering
is based on 220,268,927 shares of our common stock issued
and outstanding as of the date of this prospectus. |
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(4) |
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The percentage of shares beneficially owned after the offering
is based on an estimated minimum 275,004,557 shares of our
common stock issued and outstanding assuming the sale of
40,000,000 units in this offering and issuance of
5,392,246 shares to the Canadian agents under our fiscal
advisory fee agreement with the Canadian agents and an estimated
maximum 285,204,557 shares of our common stock issued and
outstanding assuming the sale of 50,000,000 units in this
offering and issuance of 5,592,246 shares to the Canadian
agents under our fiscal advisory fee agreement with the Canadian
agents, and in either case including 9,343,384 shares of
common stock to be issued upon the conversion of both all our
outstanding shares of Series C Preferred Stock, together
with all accrued and unpaid dividends, and $75,000 in aggregate
principal amount of convertible promissory notes, together with
all accrued and unpaid interest, both as of June 30, 2009. |
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(5) |
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Includes 1,673,808 shares issuable upon exercise of options
granted under our 2007 option plan. |
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(6) |
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Includes 548,512 shares issuable upon exercise of options
granted under our 2007 option plan. |
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(7) |
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Does not include an option to purchase 300,000 shares of our
common stock at an exercise price per share equal to the initial
public offering price per unit that we intend to issue at the
closing of this offering. |
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(8) |
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Includes 1,879,556 shares issuable upon exercise of options
granted under our 2007 option plan. |
DESCRIPTION
OF CAPITAL STOCK
The following is a summary of the rights of our common stock and
preferred stock. This summary is not complete. For more detailed
information, please see our certificate of incorporation and
bylaws, which are filed as exhibits to the registration
statement of which this prospectus forms a part.
Common
Stock
As of the date of this prospectus, we are authorized to issue up
to 400,000,000 shares of common stock, par value $0.001 per
share of which 220,268,927 shares were issued and
outstanding and held of record by 246 stockholders. The
outstanding shares of our common stock are validly issued, fully
paid and nonassessable. Immediately after the closing of this
offering, the number of shares of common stock that we will be
authorized to issue will be increased to 700,000,000.
The holders of our common stock are entitled to vote upon all
matters submitted to a vote of our stockholders and are entitled
to one vote for each share of common stock held. Holders of our
common stock are not entitled to cumulative voting on any
matter, including in the election of directors. Subject to the
rights and preferences, if any, applicable to shares of our
preferred stock then outstanding, the holders of our common
stock are entitled to receive ratably such dividends, payable in
cash, stock or otherwise, as may be declared by our board of
directors out of any funds legally available for the payment of
dividends and distributions to the stockholders. See
Dividend Policy.
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In the event of our voluntary or involuntary liquidation,
dissolution or winding up, holders of our common stock are
entitled to share ratably in all of our assets legally available
for distribution after payment of our liabilities and
distribution of the liquidation preference, if any, on our
preferred stock then outstanding. Holders of our common stock
have no preemptive or other subscription rights and no rights of
conversion or redemption. The rights, preferences and privileges
of holders of our common stock are subject to the rights of
holders of any series of our preferred stock that may then be
issued and outstanding.
Preferred
Stock
As of the date of this prospectus, we are authorized to issue up
to 6,745,681 shares of preferred stock, par value $0.001
per share. Immediately after the closing of this offering, the
number of shares of preferred stock that we will be authorized
to issue will be reduced to 5,000,000. The shares of our
preferred stock may be issued in one or more series, and shall
have such voting powers, full or limited, or no voting powers,
and such designations, preferences and relative participating,
optional or other special rights, and qualifications,
limitations or restrictions thereof, as shall be stated and
expressed in the resolution or resolutions providing for the
issuance of such stock adopted from time to time by our board of
directors. The board of directors is expressly vested with the
authority to determine and fix in the resolution or resolutions
providing for the issuances of any series of preferred stock the
voting powers, designations, preferences and rights, and the
qualifications, limitations or restrictions thereof, of each
such series to the full extent now or hereafter permitted by the
laws of the State of Delaware.
As of the date of this prospectus, we have designated
500,000 shares of our preferred stock as Series C
6% Convertible Preferred Stock (Series C Preferred
Stock). As of that date, 168,500 shares of our
Series C Preferred Stock were issued and outstanding. We
have agreed with the agents to use our best efforts to cause all
of the outstanding shares of our Series C Preferred Stock,
together with all dividends accrued and unpaid thereon, to be
converted into common stock prior to the effective time of the
registration statement of which this prospectus forms a part.
The outstanding shares of our preferred stock are validly
issued, fully paid and nonassessable.
Series C
Preferred Stock
Holders of our Series C Preferred Stock are entitled to
vote with the holders of our common stock, together as a single
class, on all matters submitted to the vote of holders of our
common stock. On each such matter, each holder of our
Series C Preferred Stock is entitled to the number of votes
equal to the number of whole shares of our common stock into
which such holders Series C Preferred Stock is then
convertible. Holders of our Series C Preferred Stock are
entitled to receive an annual cumulative dividend of $0.60 per
share payable in cash out of the funds legally available
therefor and are entitled to participate ratably on an as
converted basis in any dividends paid on our common stock. In
the event of our voluntary or involuntary liquidation,
dissolution or winding up, prior to any distributions to holders
of our common stock, the holders of our Series C Preferred
Stock are entitled to receive out of the assets legally
available for distribution $10.00 per share (subject to
adjustment for stock splits, stock dividends, reorganizations,
consolidations and similar changes) plus any accrued and unpaid
dividends.
Each share of our Series C Preferred Stock is convertible
at the option of the holder into that number of shares of our
common stock equal to $10.00 divided by the conversion price
then in effect. The initial conversion price of one preferred
share for 30 shares of common equaled $0.3333 per share was
subject to adjustment for stock splits, dividends payable in
capital stock, capital reorganizations or reclassifications of
our capital stock and is now $0.2917 per share. All of the
shares of Series C Preferred Stock plus any unpaid accrued
dividends then outstanding were to automatically convert into
shares of our common stock at the same rate upon the earlier of
the election of the holders of 67% of the Series C
Preferred Stock outstanding or the closing of a public offering
of our common stock pursuant to a registration statement under
the Securities Act in which the aggregate public offering price
of our securities sold in the offering, before deduction of
agents commissions and discounts, is at least $10,000,000.
Our Series C Preferred Stock may be redeemed, at our
option, at any time and from time to time and in whole or in
part, upon written notice to the holder at a redemption price
equal to $10.00 per share plus any accrued and unpaid dividends.
The holders of our Series C Preferred Stock may exercise
their conversion rights notwithstanding our delivery of a
redemption notice until we have paid the redemption price.
87