Innovative Eyewear Inc 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . You should read the following discussion and analysis of our financial condition and results of operations together with the accompanying “Index to Consolidated Financial Statements” included within this Annual Report on Form 10-K. Except for historical information, the matters discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are forward-looking statements that involve risks and uncertainties and are based upon judgments concerning factors that are beyond our control. Overview We develop and sell smart eyeglasses and sunglasses, which are designed to allow our customers to remain connected to their digital lives, while also offering vision correction and protection. Our flagship product, Lucyd Lyte, enables the wearer to listen to music, take and make calls, and use voice assistants to perform many common smartphone tasks hands-free. Innovative Eyewear owns the exclusive rights to the Lucyd brand and the Lyte product line. Our mission is to Upgrade Your Eyewear ® . Our smart eyewear is a fusion of headphones with glasses, bringing vision correction and protection together with digital connectivity and clear audio, while also offering a solution for listening to music outdoors (as compared to in-ear headphones). The convenience of having a Bluetooth headset and comfortable glasses in one, especially for those who are already accustomed to all-day eyewear use, offers a lifestyle upgrade at a price similar to traditional prescription eyewear. After the full launch of Lucyd Lyte in January 2021, we had strong interest and demand from customers in the U.S. and have since sold thousands of our smart eyewear. In order to meet the growing demand for our products, and in an effort to expand our reach, we have engaged over 180 unique wholesale accounts. All of our products are designed in Miami, manufactured in Asia, and currently sold through two major types of channels: 1. e-commerce, primarily via our website (Lucyd.co) and marketplaces such as Amazon, Bestbuy.com, and DicksSportingGoods.com; and, 2. a growing network of independent eyewear and sporting goods stores. We apply a manufacturer suggested retail price (“MSRP”) of $199 (for our standard frames) to $229 (for our titanium frames) for non-prescription, polarized sunglass and blue light blocking glasses across all of our online channels, with our wholesale pricing offering volume discounts to these prices. Please refer to discussion in the Components of Results of Operations for more details regarding our pricing structure. We are working to expand these channels with national eyewear chains, big box retail stores (electronics, sporting goods, general merchandise) and specialty retail stores. We view this business model as capital light, by electing not to build our own manufacturing facilities and Company-owned retail distribution, but rather contract with existing sources of production and proven consumer-facing retail distribution. Impact of COVID-19 on Our Business On March 11, 2020, the World Health Organization officially declared the outbreak of the COVID-19 virus a “pandemic.” This contagious disease outbreak has continued to spread across the globe and has had an impact on worldwide economic activity and financial markets. In light of the uncertain and rapidly evolving situation relating to the spread of COVID-19, we took precautionary measures intended to minimize the risk of the virus to our employees, by following the CDC guidelines. Specifically, we set up a system that enabled our employees to work remotely when it was beneficial for them or when they felt ill. Additionally, precautionary measures that have been adopted may negatively affect our ability to sell our products. This includes, for example, reducing company attendance at trade shows. Additionally, our product is manufactured in China and shipped from China on a regular basis. We have not experienced substantial delays in manufacturing or shipping due to COVID-19; however, we are exposed to such risk in the future as a potential impact of COVID-19. More generally, the outbreak of COVID-19 could adversely affect economies and financial markets globally, potentially leading to an economic downturn, which could decrease consumer spending and adversely affect demand for our products. 44 Key Factors Affecting Performance Expansion of retail points of purchase In addition to sustained growth of our e-commerce business, our future revenues are correlated positively with our placement of Lucyd glasses in optical stores, as well as sporting goods stores and other specialty stores such as cellular shops. To address this, we assembled a team with decades of experience in the eyewear industry and are offering a strong co-op marketing program and reordering incentives program. We currently offer an expansive line of 16 different styles and several accessories, with plans to continuously expand this offering over time. Retail store client retention and re-orders Our ability to sustain and increase revenue is correlated positively with our ability to receive re-orders from stores, either directly or through our wholesale distributors. To support our sales to retail stores directly, we offer a strong co-op marketing program that includes free and paid store display materials. As part of this strategy, we have launched the Lucyd Digital Try-on Display for our resellers to help educate their in-store customers about Lucyd Lyte and enable customers to try them on virtually. This proprietary virtual try on software and display is central to our efforts to introduce traditional retail customers to Lucyd eyewear, and we are planning further enhancements to our merchandising displays to enable more immersive experiences. Investing in business growth We believe that people care about what they wear on their faces, and because we understand that customers have diverse preferences about the shape, size and design of their eyewear, we aim to continuously invest in the design and development of new models in an effort to provide the consumer with a wide selection of styles, colors and finishes. We are offering a strong co-op marketing program with retail stores, and intend to expand our sales, marketing and brand ambassador teams to broaden our brand awareness and online presence. We will also increase our general and administrative expenses in the foreseeable future to cover the additional costs for finance, compliance, supply chain, quality assurance and investor relations as we grow as a public company. Key Performance Indicators Store Count (B2B) We believe that one of the key indicators for our business is the number of retail stores onboarded to sell Lucyd Lyte. We started onboarding our first retail stores in June 2021. Currently, we have over 250 retail stores selling Lucyd Lyte primarily in the United States and Canada, across 180 unique wholesale accounts. Based on the existing demand for our products, current distribution and recently consummated supply agreements, we anticipate that our products will be available in a significant number of new third-party retail locations in 2023. Re-order ratio (B2B) Many of the retail stores that placed initial stocking orders, either directly or through our wholesale distributors, have also placed follow-on orders in the few short months since launching our wholesale business in June 2021. As of December 31, 2022, 28.6% of stores have re-ordered our product. Smart eyewear is still a new, emerging category for our optical sales partners. As such it can be expected that their sell-through rate is slower compared to traditional eyewear, and we expect many accounts to take some time to familiarize their clientele with the product category before reordering. We believe our reorder rate is a positive signal, given the overall lack of awareness of smart eyewear among consumers. The fact that a reasonable portion of our retail partners are experiencing enough early success and sell-through with our products to drive them to reorder, is an indication that success can be had with our product for the stores willing to put in the effort to merchandise it well, and educate staff and customers about it. We expect this number to gradually increase as we continue to improve our product, roll out our co-op marketing program and introduce more of our virtual try-on kiosks into retail stores, to facilitate customer education and product sell-through. 45 Number of online orders (B2C) For our e-commerce business, we track the number of online orders as an indicator of the success of our online marketing efforts. As of December 31, 2022, we received a total of 11,988 orders from customers online. We believe that the addition of new styles, as well as further investment in brand awareness, product ambassadors, and influencer campaigns, will enable continued growth of online orders in the foreseeable future. We expect to allocate a significant portion of our advertising expenditures towards influencer marketing programs. Components of Results of Operations Net Revenue Our revenue is generated from the sales of prescription and non-prescription optical glasses, sunglasses, and shipping charges, which are charged to the customer, associated with these purchases. We sell products through our retail store resellers, distributors, and on our own website Lucyd.co and on Amazon. Our flagship product line increased in price with the launch of the version 2.0 models, from $149 to $199 on acetate models, and $179 to $229 on titanium models for non-prescription glasses across all of our online channels. In addition, we have introduced a minimum advertised price on the new models of $169 and $199, respectively, to support our retail partners with guaranteed minimum pricing. When adding a prescription lens upgrade to our glasses on the Lucyd.co website, the price can increase from between $40 for a basic clear prescription lens, all the way up to $450 for the latest Transitions ® progressive bifocal lens. Glasses with prescription lenses are only available through our website Lucyd.co, while our sales through Amazon and to our retail partners only include non-prescription glasses. U.S. consumers enjoy free USPS first class postage, with faster delivery options available for extra cost, for sales processed through our website. For Amazon sales, shipping is free for U.S consumers while international customers pay shipping charges. Any costs associated with fees charged by the online platforms (Shopify for Lucyd.co website and Amazon) are not recharged to customers. We charge applicable state sales taxes for both online channels and all other marketplaces on which sell. Our wholesale pricing for eyewear sold to retail store partners and distributors includes volume discounts, due to the nature of large quantity orders. The pricing includes shipping charges, while excluding any state sales tax charges applicable. Due to the nature of wholesale retail orders, no e-commerce fees are applicable. Cost of Goods Sold Cost of goods sold includes the costs incurred to acquire materials, assemble, and sell our finished products. For retail sales placed on one of our e-commerce channels, these costs include (i) product costs held at the lesser of cost and net realizable value and inclusive of inventory reserves, (ii) freight, import, and inspection costs, (iii) optical laboratory costs for RX glasses, (iv) merchant fees, (v) fees paid to third-party e-commerce platforms, and (vi) cost of shipping the product to the consumer. For wholesale sales these costs include (i) product costs stated at the lesser of cost and net realizable value and inclusive of inventory reserves, (ii) freight, import, and inspection costs, and (iii) credit card fees. When consumers place their orders directly on our online store, we save approximately 12-15% on marketplace fees than when consumers place their orders directly from third-party platforms like Amazon and eBay. 46 We expect our cost of goods sold to fluctuate as a percentage of net revenue primarily due to product mix, customer preferences and resulting demand, customer shipping costs, and management of our inventory and merchandise mix. Over time we expect our total cost of goods sold on a per unit basis to decrease as a result of an increase in scale. Increase in scale is achieved as a result of increase in volumes from both business to consumer and business to business (retail store) orders. We continue to expand our products with line extensions and new models and broaden our presence in retail stores carrying our products. Gross Profit and Gross Margin We define gross profit as net revenues less cost of goods sold. Gross margin is gross profit expressed as a percentage of net revenues. Our gross margin may fluctuate in the future based on a number of factors, including the cost at which we can obtain, transport, and assemble our inventory, the rate at our vendor network expands, and how effective we can be at controlling costs, in any given period. We anticipate our cost of goods sold, on a per unit basis, will decrease with scale, and this will likely have a positive impact on our gross margins. Operating Expenses Our operating expenses consist primarily of: ● general & administrative expenses that include primarily consulting and payroll expenses, IT & software, legal, stock compensation expense, postage and non-customer product shipping, and other administrative expense; ● sales and marketing expenses including cost of online and TV advertising, marketing agency fees, influencers, trade shows, and other initiatives; ● related party management fees for a range of back-office services provided by Tekcapital LLC and ● research and development expenses related to (i) development of new styles and features of our smart eyewear, (ii) development and improvement of our e-commerce website, and (iii) development of our Vyrb social media app for wearables. Interest and Other Income, Net Interest and other income, net, consists primarily of interest expense paid on convertible note loan due to the Parent. Provision for Income Taxes Provision for income taxes consists of income taxes related to foreign and domestic federal and state jurisdictions in which we conduct business, adjusted for allowable credits, deductions, and valuation allowance against deferred tax assets. 47 Results of Operations Years Ended December 31, 2022 and 2021 Year ended December 31, 2022 2021 2022 vs 2021 Revenues, net 659,788 100 % 690,670 100 % (30,882 ) -4 % Less: Cost of Goods Sold (716,077 ) 109 % (542,416 ) 79 % (173,661 ) 32 % Gross Profit (56,289 ) -9 % 148,254 21 % (204,543 ) -138 % Operating expenses: General & administrative (2,796,669 ) 424 % (1,386,079 ) 201 % (1,410,590 ) 102 % Sales and marketing (2,059,012 ) 312 % (1,771,012 ) 256 % (288,000 ) 16 % Research and development (524,692 ) 80 % (86,261 ) 12 % (438,431 ) 508 % Related party management fee (140,000 ) 21 % (109,975 ) 16 % (30,025 ) 27 % Total Operating Expenses (5,520,373 ) 837 % (3,353,327 ) 486 % (2,167,046 ) 65 % Other Income/(Expense): Interest Expense (105,171 ) 16 % (39,433 ) -6 % (65,738 ) 0 % Total Other Income/(Expense) (105,171 ) 16 % (39,433 ) -6 % (65,738 ) 0 % Net Loss (5,681,833 ) 861 % (3,244,506 ) 470 % (2,437,327 ) 75 % Revenue Our revenues for the year ended December 31, 2022, were $659,788, representing a decrease of approximately 4% as compared to revenues of $690,670 during the year ended December 31, 2021. Our revenue is generated entirely from sales of eyewear products, namely smart frames, lenses, and accessories. The decline in revenue was primarily attributable to several factors, including unfavorable channel mix as described in the following paragraph, partially offset by higher unit volumes, and favorable price impacts as we increased the MSRP of our flagship product line with the launch of the version 2.0 models in the current year. Additionally, due to the relative age of the version 1.0 models on the market, we deployed significant discounts on those models to assist in inventory turnover. Finally, we experienced an increase in the rate of customer returns due to minor product imperfections that were the result of supplier inaccuracies in manufacturing. These manufacturing imperfections have been wholly addressed with our new version 2.0 product line. In addition, we anticipate that new licensing agreements which we entered into during 2022 will help to increase our sales in 2023 and beyond. For the year ended December 31, 2022, approximately 32% of sales were processed on our online store (Lucyd.co), 38% on Amazon, and 30% with reseller partners. This sales channel mix impacted our revenue for the period, due to the fact we charge an additional $35 to $275 for our prescription lenses available only on Lucyd.co. For the year ended December 31, 2022, we generated $579,214 of revenue from sales of non-prescription frames and accessories and $80,574 was generated from sales of frames with prescription lenses. All of the $252,799 in sales generated on Amazon.com during the period were for non-prescription frames and accessories as we only offer prescription lenses through our website. Of the $208,477 in online sales generated through Lucyd.co, $80,574 related to frames with prescription lenses and $127,873 of glasses sold were with non-prescription lenses. E-commerce sales are the most material portion of our sales to date. There were several notable advances in the Company’s technology products and partnerships in 2022 which speak to the potential to grow revenues well beyond the current level. Key hardware improvements include the development of a new proprietary four-speaker audio temple for the Lucyd Lyte flagship line, the increase in battery life of all of our flagship to 12 hours of playback, which is longer than the vast majority of wireless audio products, and design improvements to the frames overall that were the result of hiring two new expert eyewear designers. 48 Key software improvements include the development of a live broadcasting feature on the Company’s proprietary Vyrb mobile app, the ability to import any form of audio content into Vyrb to support the migration of existing audio content creators to the platform, and the introduction of the Company’s Digital Try-on Display into dozens of retail stores, to offer an immersive product experience for in-store shoppers at our partner locations. The Company believes that Nautica Powered by Lucyd line launching in 2023, made possible by the exclusive agreement with Authentic Brands Group for the Nautica brand, represents significant revenue potential in the coming year. The Company intends to partner with Nautica-branded sales channels, and expects to be able to increase our presence in other retail channels via the Nautica brand, a household name in dozens of countries. For the year ended December 31, 2021, approximately 41% of sales were processed on our online store (Lucyd.co), 39% on Amazon and 20% with retail store partners. This sales channel mix impacted our revenue for the period, due to the fact we charge additional $35 to $275 for our prescription lenses available only on Lucyd.co. For the year ended December 31, 2021, we generated $530,885 of revenue from sales of nonprescription frames and $159,815 was generated from sales of frames with prescription lenses. All of the $266,733 in sales generated on Amazon.com during the period were for non-prescription frames as we only offer prescription lenses through our website. Of the $282,364 in online sales generated through Lucyd.co, $159,785 related to frames with prescription lenses and $122,579 of glasses sold were with non-prescription lenses. Lucyd.co sales are the most material portion of our sales to date, aided by higher price compared to retail store pricing as well as additional revenue recorded due to sales of prescription lenses. We expect that the online portion of our sales will gradually decrease on a percentage basis but remain an important component of our total sales as we onboard more retail stores. We pursued growth in retail store segment in the year ended 2021 and during 2022, growing our retail store presence to over 250 stores as of December 31, 2022. Cost of goods sold Our total cost of goods sold increased to $716,077 for the year ended December 31, 2022, as compared to $542,416 for the year ended December 31, 2021. This increase was primarily driven by the combination of (i) a $78,288 write-off of inventory as a result of our physical inventory count procedures performed in December 2022 and (ii) damaged inventory received from one of our suppliers in 2022, which resulted in write-offs of $69,532 of inventory. Subsequently, we have engaged new suppliers for our product sourcing. The Company faced a supply chain challenge in 2022, and received two shipments of glasses that included a few thousand defective units. Once the high rate of defects became apparent, the Company immediately undertook a second 100% inspection of all inventory, and discovered the extent of the issue. The Company then worked to pull any problematic units from standing inventory, and also offered immediate replacement to any customers experiencing issues with any units from these batches. As a result of these problems, the Company severed the relationship with that supplier and conducted a detailed research investigation in China to identify better potential manufacturers of our products, and settled on two new suppliers. Although the Company was reimbursed for a portion of these units from the old supplier, in some cases the units were not discovered to be defective until many months after receipt from the manufacturer and were not able to be compensated. Early customer feedback on the Lyte 2.0 products and feedback from our independent inspection team, indicates that our products from our new suppliers have improved reliability and build quality compared to the original Lyte product, therefore the Company expects significantly less damaged inventory in the future. In regards to the Company’s overall cost of goods, they have remained relatively constant with an increase of only $4-5 per unit compared to the previous supplier - however the improved components and aesthetics allowed the company to adjust the retail MSRP of our products upward by $50, which compensates well for this increase. Our wholesale prices adjusted $10 upward to compensate for this increase. 49 A positive development in COGs is a significant decrease in air shipping costs in the latter half of 2022 ($6.50 per unit at the height of the pandemic to $3.50 per unit in Q4 2022), with the company able to ship goods at approximately just over half the price per unit by air compared to 2021 and H1 2022, and with a new sea route available through our local 3PL partner at approximately $1.50/unit. Smart eyewear is a highly specialized product that has the combined specifications and component requirements of a wireless Bluetooth headset and optical eyewear in one, meaning it is expensive to manufacture in small quantities of a few thousand at a time. As demand and awareness for smart eyewear continues to grow, the Company expects that its per unit cost will decrease as its order volumes increase. Key components of cost of goods sold for the year ended December 31, 2022 included, but were not limited to, the cost of frames of $478,020, cost of prescription lenses incurred with our third-party vendor of $104,217, affiliate referral fees, sales commission expense, and e-commerce platform fees of $128,340, and quality assurance costs related to our products sold of $5,500. Out of our total cost of goods sold for the year ended December 31, 2022, $113,024 related to orders with prescription lenses, while $639,294 pertained to non-prescription orders. For the year ended December 31, 2022, approximately 32% of sales were processed on our online store (Lucyd.co), 38% on Amazon, and 30% with reseller partners. This sales channel mix impacted our cost of goods sold, as the cost of prescription lenses attributable to our Lucyd.co sales increased our cost of goods sold through Lucyd.co while not impacting cost of goods sold for sales realized through Amazon or retail store partners. As we continue to grow our business, we expect that our cost of goods sold per unit will decrease as we realize economies of scale. Key components of cost of goods sold for the year ended December 31, 2021 included, but were not limited to, the cost of frames of $303,909, cost of prescription lenses incurred with our third-party vendor of $144,957, affiliate referral fees, sales commission expense, e-commerce platform fees of $89,950, and quality assurance costs related to our products sold of $3,600. In Q4 2022, the company standardized all custom lens profit margins at 35%, except one variant, the basic Single Vision clear prescription lens, which is sold at a 17.5% margin to enable the company to advertise an competitive $40 basic prescription upgrade price. A number of factors in 2022 caused our overall lens lab vendor costs to be higher than revenue from lenses sold: ● Primarily, a large number of prescription units are provided annually as promotional items to influencers, investors, online and traditional media, and other press outlets for the purpose of gaining various forms of brand awareness, investor interest and site traffic for the company. ● The lens lab charges the Company $3,000 annually for the storage of frames in their facility. ● Improperly cut prescriptions, and pairs lost in transit, both infrequent occurrences, are typically replaced for free to enhance customer retention and customer lifetime value. ● When a frame does not properly fit a customer, sometimes a new lens set is provided for free in a different frame that will fit the customer properly. ● Warranty replacements sometimes require a new lens set to be made at no cost to the consumer. ● Our 7-day return policy provides customers comfort when trying our products, but sometimes causes a prescription pair to be returned (custom lenses are refunded in store credit, which may be used to purchase an additional lens set). With active customer care, we are able to keep our return rate low on Lucyd.co (our only prescription channel). ● In conclusion, prescription lenses can often be expensive, running to the hundreds of dollars per set for specialty and bifocal lenses, so a seemingly low number of free prescription pairs can cause a large deficit. However, prescription fitted smart eyewear is a USP of the Company and an incredibly useful tool for attracting positive media coverage. As we continue to scale up the volume of our ecommerce business, we fully expect the standardized lens profit margin to bring more revenue than overall lens costs in the future. 50 Out of our total cost of goods sold for the year ended December 31, 2021, $211,620 related to orders with prescription lenses, while $330,796 pertained to non-prescription orders. For the year ended December 31, 2021, approximately 41% of sales were processed on our online store (Lucyd.co), 39% on Amazon and 20% from retail store partners. Over time, we expect third-party retail stores to become our primary sales channel as we onboard additional stores. Consequently, we expect sales of prescription lens, offered through our website to decrease, as our third-party retail partners outfit our Lyte frames with more prescriptions. As a result, over time we expect prescription lens costs to gradually decrease as a percentage of our overall cost of goods sold. We anticipate growth in both wholesale and e-commerce channel sales in 2023, and we also expect corresponding growth in total cost of goods sold, primarily from additional product related costs. Gross (deficit) profit Our gross profit decreased to negative $56,289 for the year ended December 31, 2022, as compared to positive $148,254 for the year ended December 31, 2021. This decrease was primarily driven by the aforementioned inventory write-offs during the current year totaling $147,820. We expect gross profit for the fiscal year ending December 31, 2023, to improve, primarily due to economies of scale from large, anticipated orders. As we expect retail stores to become our primary sales channel as we on board new stores, we also expect our overall gross margin to be better than that of the wholesale channel, since no e-commerce platform fees or prescription lens costs apply in wholesale channels. Operating expenses Our operating expenses increased by 65% to $5,520,373 for the year ended December 31, 2022, as compared to $3,353,327 for the year ended December 31, 2021. This increase was primarily due to the expansion of our business following the launch of Lucyd Lyte in January 2021 and included, but was not limited to, the following: General and administrative expenses Our general and administrative expenses increased by 102% to $2,796,669 for the year ended December 31, 2022, as compared to $1,386,079 for the year ended December 31, 2021. This increase was primarily attributable to (i) an increase of approximately $436,000 in employee-related costs, resulting from increases in our staffing and new employment agreements entered into with executives, (ii) increased costs associated with being a publicly-traded company, including directors’ remuneration, legal and insurance expense, and public and investor relations, which altogether resulted in an increase in expense of approximately $416,000, (iii) bad debt expense in the current year of approximately $116,000, and (iv) an increase in consulting fees of approximately $103,000 as a result of our growth and increased used of consultants. Sales and marketing expenses Our sales and marketing expenses increased by 16% to $2,059,012 for the year ended December 31, 2022, as compared to $1,771,012 for the year ended December 31, 2021. The increase was primarily due to our multi-prong sales and marketing strategy, growing continuously over the past two years after the launch of our main product in January 2021. We anticipate these costs to further increase as we continue to invest in and build our brand, expand the number of e-commerce platforms we sell our products on, invest in retail store co-op marketing programs to help educate our in-store customers about Lucyd Lytes, and increase our brand’s physical presence and role in the eyewear industry. 51 Related party management fee Our related party management fee was $140,000 for the year ended December 31, 2022, as compared with $109,975 for the year ended December 31, 2021. This increase was due to increased scope of assistance received under the agreement, corresponding to continuous scale-up of Company’s operations after launch of its flagship product in the first quarter of 2021. The management fees are related to the management services agreement between us and an affiliate of our Parent. Research and development costs Our research and development costs increased by 508% to $524,692 for the year ended December 31, 2022, as compared with $86,261 for the year ended December 31, 2021. The increase was primarily due to stock-based compensation totaling $263,612 in addition to the increased cost of new frame development as the Company continued to expand its product line. Eyewear R&D includes the purchase and testing of new components, the compensation of staff involved primarily in frame design and the creation of new eyewear molds. Software R&D includes the portion of the work hours spent by the CEO and CTO on new software development on the Vyrb app and our glasses, and external coding teams we have engaged to write the programming for our software, and enhance our software user experiences with code updates. Other software costs such as the Apple Developer program are nominal fees only. Liquidity and Capital Resources Cash Flow Data: Year ended Year ended December 31, December 31, 2022 2021 Net cash flows from operating activities $ (3,224,418 ) $ (1,214,160 ) Net cash flows from investing activities (219,951 ) (118,454 ) Net cash flows from financing activities 6,955,751 1,385,318 Net Change in Cash $ 3,511,382 $ 52,704 Initial Public Offering On August 17, 2022, the Company closed on its initial public offering of 980,000 units, consisting of 980,000 shares of its common stock and 1,960,000 warrants to purchase 1,960,000 shares of common stock, at a combined offering price of $7.50 per unit in exchange for gross proceeds of approximately $7.35 million, before deducting underwriting discounts and offering expenses. Each share of common stock was sold together with two warrants, each warrant to purchase one share of common stock at an exercise price of $7.50 per share. In addition, the Company granted the underwriters a 45-day option to purchase up to an additional 147,000 shares of common stock and/or warrants to purchase up to an additional 294,000 shares of common stock to cover over-allotments, of which the underwriter exercised its option to purchase additional warrants to purchase 294,000 shares of common stock. After deducting underwriting discounts and offering expenses, net proceeds received by the Company amounted to $6,189,734. We intend to use proceeds from this offering primarily on (i) sales and marketing, (ii) expanding our inventory, (iii) updating and developing our in-store displays, (iv) developing new smart eyewear styles and sizes, as well as further development and commercialization of the Vyrb app, and (v) working capital and other general corporate purposes. We expect that operating losses could continue in the foreseeable future as we continue to invest in the expansion and development of our business. We believe our existing cash and cash equivalents, proceeds from the aforementioned offering, proceeds received from investors’ exercises of warrants, funds available under our existing credit facility, and cash flows from operating activities will be sufficient to fund our operations for at least the next twelve months. In February 2023, investors exercised warrants to purchase an aggregate of 408,600 shares of our common stock, at an adjusted exercise price of $3.75 per share, resulting in cash proceeds to us of $1,532,250. 52 However, our future capital requirements will depend on many factors, including, but not limited to, growth in the number of retail store customers, the needs of our e-commerce business and retail distribution network, expansion of our product and software offerings, and the timing of investments in technology and personnel to support the overall growth of our business. To the extent that current and anticipated future sources of liquidity are insufficient to fund our future business activities and requirements, we may be required to seek additional equity or debt financing. The sale of additional equity would result in additional dilution to our stockholders. The incurrence of debt financing would result in debt service obligations and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations. There can be no assurances that we will be able to raise additional capital. In the event that additional financing is required from outside sources, we may not be able to negotiate terms acceptable to us or at all. The COVID-19 pandemic along with other geopolitical and macroeconomic factors has caused disruption in the global financial markets, which could reduce our ability to access capital and negatively affect our liquidity in the future. If we are unable to raise additional capital when required, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, results of operations, financial condition, and cash flows would be adversely affected. Off-Balance Sheet Arrangements As of December 31, 2022, we did not have any off-balance sheet arrangements. Critical Accounting Policies and Significant Developments and Estimates Management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with GAAP. The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods, as well as related disclosures. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities and the amount of revenue and expenses that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and any such differences may be material. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates. We believe that our application of accounting policies, and the estimates inherently required therein, are reasonable. We periodically re-evaluate these accounting policies and estimates and make adjustments 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. Inventory Our inventory includes purchased eyewear and is stated at the lower of cost or net realizable value, with cost determined on a specific identification method of inventory costing which attaches the actual cost to an identifiable unit of product. Provisions for excess, obsolete, or slow-moving inventory are recorded after periodic evaluation of historical sales, current economic trends, forecasted sales, estimated product life cycles, and estimated inventory levels. No provisions were determined as needed as of December 31, 2022 and 2021. As of December 31, 2022 and 2021, we recorded an inventory prepayment in the amount of $197,750 and $64,715, respectively, related to down payment on eyewear purchased from the manufacturer, prior to shipment of the product that occurred after December 31, 2022 and 2021, respectively. 53 Intangible Assets Intangible assets relate to: ● Internally-developed and licensed utility and design patents. We amortize these assets over the estimated useful life of the patents. ● Capitalized software costs incurred due to development of the Vyrb app. We amortize these assets over the estimated useful life of the software application. We review our intangible assets for impairment whenever changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Income Taxes We are taxed as a C corporation. We comply with Financial Accounting Standards Board (FASB) ASC 740 for accounting for uncertainty in income taxes recognized in a company’s financial statements, which prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. FASB ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, and disclosure. Based on our evaluation, we have concluded that there are no significant uncertain tax positions requiring recognition in our financial statements. We believe that our income tax positions would be sustained on audit and do not anticipate any adjustments that would result in a material change to the Company’s financial position. We have incurred taxable losses since inception but are current in our tax filing obligations. We are not presently subject to any income tax audit in any taxing jurisdiction. Stock-Based Compensation We account for stock-based compensation to employees and directors in accordance with FASB ASC Topic 718, which requires that compensation expense be recognized in the financial statements for stock-based awards based on the grant date fair value. For stock option awards, the Black-Scholes-Merton option pricing model was used to estimate the fair value of share-based awards. The Black-Scholes-Merton option pricing model incorporates various and highly subjective assumptions, including expected term and share price volatility. The expected term of the stock options was estimated based on the simplified method as allowed by Staff Accounting Bulletin 107 (SAB 107). The share price volatility at the grant date is estimated using historical stock prices based upon the expected term of the options granted, using stock prices of comparably profiled public companies. The risk-free interest rate assumption is determined using the rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the award being valued. The fair value of common stock used in the option pricing model for stock-based awards granted in 2021 was determined using the most recent price paid by independent investors through a Regulation Crowdfunding (“CF”) securities offering undertaken by the Company. For the majority of time during which stock option awards were granted by the Company in 2021, we had been raising funds from investors under Regulation CF campaigns, with a significant number of transactions from both accredited and non-accredited investors. Specifically: ● from June 2020 to April 2021, we were conducting a REG CF offering of our shares of common stock at a price of $1 per share, and we utilized this $1 per share price to issue and value our stock-based awards during such period, and ● from May 2021 to September 2021, we were conducting a second REG CF offering of our shares of common stock at a price of $3.56 per share, and we utilized this $3.56 per share price to issue and value our stock-based awards during such period. 54 The pre-money valuation determining price per share was agreed upon each time with the crowdfunding platform, who has a great deal of experience in setting the proper pre-money valuations for companies that list on their platforms. The determination was made using our business progress. Revenue Recognition Our revenue is generated from the sales of prescription and non-prescription optical glasses, sunglasses, and shipping charges, which are charged to the customer, associated with these purchases. We sell products through our retail store resellers, distributors, and on our own website Lucyd.co and on Amazon. To determine revenue recognition, we perform the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) we satisfy a performance obligation. At contract inception, we assess the goods or services promised within each contract, determine those that are performance obligations, and assess whether each promised good or service is distinct. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. In instances where the collectability of contractual consideration is not probable at the time of sale, the revenue is deferred on our balance sheet as a contract liability, and the associated cost of goods sold is deferred on our balance sheet as a contract asset; subsequently, we recognize such revenue and cost of goods sold as payments are received. All revenue, including sales processed online and through our retail store resellers and distributors, is reported net of sales taxes collected from customers on behalf of taxing authorities, returns, and discounts. For sales generated through our e-commerce channels, we identify the contract with a customer upon online purchase of our eyewear and transaction price at the manufacturer suggested retail price (“MSRP”) for non-prescription, polarized sunglass and blue light blocking glasses across all of our online channels. Our e-commerce revenue is recognized upon meeting of the performance obligation when the eyewear is shipped to end customers. Only U.S. consumers enjoy free USPS first class postage, with faster delivery options available for extra cost, for sales processed through our website and on Amazon. For Amazon sales, shipping is free for U.S consumers while international customers pay shipping charges on top of MSRP. Any costs associated with fees charged by the online platforms (Shopify for Lucyd.co website and Amazon) are not recharged to customers and are recorded as a component of cost of goods sold as incurred. The Company charges applicable state sales taxes in addition to the MSRP for both online channels and all other marketplaces on which the company sells products. For sales to our retail store partners, we identify the contract with a customer upon receipt of an order of our eyewear through our Shopify wholesale portal or direct purchase order. Our revenue is recognized upon meeting the performance obligation which is delivery of our eyewear products to the retail store and also recorded net of returns and discounts. Our wholesale pricing for eyewear sold to the retail store partners includes volume discounts, due to the nature of large quantity orders. The pricing includes shipping charges, while excluding any state sales tax charges applicable. Due to the nature of wholesale retail orders, no e-commerce fees are applicable. For sales to distributors, we identify the contract with a customer upon receipt of an order of our eyewear through a direct purchase order and after collectability of substantially all of the contract consideration is probable. Our revenue is recognized upon meeting the performance obligation, which is delivery of our eyewear products to the distributor and is also recorded net of returns and discounts. Our wholesale pricing for eyewear sold to distributors includes volume discounts, due to the nature of large quantity orders. The pricing includes shipping charges, while excluding any state sales tax charges applicable. Due to the nature of wholesale distributor orders, no e-commerce fees are applicable. The Company’s sales to both retail partners and through our e-commerce channels do not contain any variable consideration. 55 We allow our customers to return our products, subject to our refund policy, which allows any customer to return our products for any reason within the first: ● 7 days for sales made through our website (Lucyd.co) ● 30 days for sales made through Amazon ● 30 days for sales to most wholesale retailers and distributors (although certain sales to independent distributors are ineligible for returns) For all of our sales, at the time of sale, we establish a reserve for returns, based on historical experience and expected future returns, which is recorded as a reduction of sales. Additionally, we review all individual returns received in the month following the balance sheet date pertaining to orders processed prior to the balance sheet date in order to determine whether an allowance for sales returns is necessary. The Company recorded an allowance for sales returns of $24,897 and $22,266 as of December 31, 2022 and 2021, respectively. Shipping and Handling Costs incurred for shipping and handling are included in cost of goods sold at the time the related revenue is recognized. Amounts billed to a customer for shipping and handling are reported as revenues. Earnings/loss per share We present earnings and loss per share data by calculating the quotient of earnings/(loss) divided by the weighted average number of common shares outstanding during the period as required by ASC 260-10-50. As of December 31, 2022 and December 31, 2021, all shares underlying the related party convertible debt and common stock options were excluded from the earnings per share calculation, due to their anti-dilutive effect. Item 7A. Quantitative and Qualitative Disclosures About Market Risk . Not required for a smaller reporting company. Item 8. Financial Statements and Supplementary Data . See accompanying “Index to Consolidated Financial Statements.” Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure . None.