Item 7. Management’s Discussion and Analysis
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 cutting-edge 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 and ChatGPT to perform many common smartphone tasks hands-free.
46
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 most consumers can afford.
Since the initial launch of Lucyd Lyte in 2021, we have sold thousands of our smartglasses, and have significantly upgraded and expanded our product offerings – including the launch of Lucyd Lyte 2.0 and Lyte XL smartglasses in 2023, and most recently with the launch of the Nautica® Powered by Lucyd smart eyewear collection in January 2024. We plan to further expand our product offerings through the launch of new cobranded collections with Eddie Bauer and Reebok later in 2024.
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 Amazon.com, as well as through Walmart.com, BestBuy.com, DicksSportingGoods.com, Brookstone.com, and eBay; and,
2.
A growing network of retail stores, including independent eyewear stores and national eyewear chains – we currently have approximately 350 retail stores selling our products (across just over 300 unique wholesale accounts), and are continually working to expand our network.
We apply a manufacturer suggested retail price (“MSRP”) of $149 – $199 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 view our business model as capital light, as we have elected 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.
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. To address this, we have 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 29 different styles and several accessories, and are in the process of expanding our product offerings to include cobranded eyewear with well-known brands like Nautica, Eddie Bauer, and Reebok. In total, the Company expects to offer 38 total smart eyewear SKUs across these brands and Lucyd by the end of 2024.
During 2023, we added approximately 136 new wholesale accounts, primarily independent optical stores.
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 a new modular display system with engaging video screens and audio testing capabilities for our resellers to help educate their in-store customers about Lucyd Lyte and enable customers to try them on. This proprietary display system 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. Additionally, we consistently incorporate retail partner feedback directly into our frames to better serve our end users. As of December 31, 2023, 45 display systems have been deployed so far to retailers.
47
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.
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 approximately 350 retail stores selling Lucyd Lyte primarily in the United States and Canada, across just over 300 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 2024.
Customer Ratings (B2C)
The Lucyd Lyte version 2.0 product is receiving higher ratings online compared to our previous products, indicating that customers are appreciative of improvements in product design, functionality, and build quality. Many of our version 2.0 variants carry a 4.0/5 rating or higher, compared to most products with an approximate 3.5/5 rating from our previous collection. This is a strong signal of positive feedback on our products that indicates our ability to grow and scale with America’s largest online retailer and other platforms.
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, 2023, we had over 20,000 cumulative total orders from customers online since inception, up from a cumulative total of approximately 12,000 as of December 31, 2022. 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 and sunglasses, and shipping charges associated with these purchases, which are charged to the customer. We sell products through our retail store resellers, distributors, on our own website Lucyd.co, and on Amazon.com.
Our newest flagship Lucyd Lyte XL brand frames are priced at $179 on acetate models and $199 on titanium models for non-prescription glasses across all of our online channels.
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 $500 for our proprietary Blueshift Polarized transitional blue light lenses in a progressive format. Glasses with prescription lenses are provided by the Company through our website Lucyd.co, while our sales through Amazon and to our e-commerce partners only include non-prescription glasses (with rare exceptions, such as a reseller ordering a customized unit for display purposes).
48
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 our Lucyd.co website and Amazon.com) are not recharged to customers. We charge applicable state sales taxes for 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 prescription 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, compared to when consumers place their orders directly from third-party platforms like Amazon and eBay.
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.
Gross margins in 2022 and the first half of 2023 were adversely impacted by supply chain challenges with our previous manufacturer. We received a high number of defective frames in 2022 despite our rigorous inspection procedure, which involves a third-party inspection agency reviewing 100% of new units as they come off the production line, and testing every pair of glasses for sound quality and basic functionality. Despite this, a large number of inaccurately-tested frames made it to our customers, precipitating a large number of replacement units and lenses which negatively impacted margins. To address this problem, we immediately underwent a new manufacturer search program in 2022 which we believe yielded two higher-quality factories, that are now producing all of our glasses to a higher quality standard. These issues were resolved and remediated by the end of the second quarter of 2023, and we do not expect such impacts on our gross margins going forward.
49
Additionally, in late 2022, the cost of nearly all lenses produced by our supplier increased by approximately 10% from previous levels, which adversely impacted our gross margins in 2023; we do not anticipate similar increases in the cost of lenses in the foreseeable future.
We have numerous products at different price points which impact the gross margins on each pair sold. Although price points of Lucyd-branded frames have been reduced from their peak at the launch of the Lyte 2.0 in February 2023, while also costing slightly more to manufacture, the Company has reduced the size of discounts available, and has needed to send fewer warranty replacements due to improvements in product durability and comfort. Therefore, we do not believe the increase in cost of goods sold has a material effect on our gross margins year over year.
Operating Expenses
Our operating expenses consist primarily of:
●
general & administrative expenses that include primarily consulting and payroll expenses, IT & software, legal, and other administrative expenses;
●
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, primarily includes interest, dividends, and investment returns from our investments in money market funds and U.S. Treasury bills, and interest expense paid on convertible note loan due to Tekcapital (which was repaid in full in February 2023).
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.
Results of Operations
Years Ended December 31, 2023 (“current year”) and December 31, 2022 (“prior year”)
Year ended
December 31,
2023
Year ended
December 31,
2022
Change
between the
year ended
December 31,
2023 and 2022
Revenues, net
$
1,152,479
100
%
$
659,788
100
%
$
492,691
75
%
Less: Cost of Goods Sold
(1,271,808
)
110
%
(716,077
)
109
%
(555,731
)
78
%
Gross Deficit
(119,329
)
-10
%
(56,289
)
-9
%
(63,040
)
112
%
Operating Expenses:
General and administrative
(3,886,960
)
337
%
(2,796,669
)
424
%
(1,090,291
)
39
%
Sales and marketing
(2,047,069
)
178
%
(2,059,012
)
312
%
11,943
-1
%
Research & development
(662,184
)
57
%
(524,692
)
80
%
(137,492
)
26
%
Related party management fee
(140,000
)
12
%
(140,000
)
21
%
-
0
%
Total Operating Expenses
(6,736,213
)
584
%
(5,520,373
)
837
%
(1,215,839
)
22
%
Other Income (Expense)
195,150
-17
%
-
195,150
n/m
Interest Expense
(3,036
)
0
%
(105,171
)
16
%
102,135
-97
%
Total Other Income (Expense), net
192,114
-17
%
(105,171
)
16
%
297,285
-283
%
Net Loss
$
(6,663,428
)
578
%
$
(5,681,833
)
861
%
$
(981,595
)
17
%
50
Revenue
Our revenues for the year ended December 31, 2023, were $1,167,479, representing an increase of approximately 77% as compared to revenues of $659,788 during the year ended December 31, 2022.
The increase in revenue was primarily attributable to the combination of higher unit volumes, favorable channel mix as described more fully below, and a larger number of styles available in 2023. These positive factors were partially offset by significant discounts offered during the current year in order to help drive unit sales and grow our market share. Key competing products dropped their prices to or below the price point of Lucyd frames during temporary and extended discount sales; to help respond to the ramp-up in the competition’s discounts, we introduced several promotions in 2023 to support our continued market share growth. The imminent diversification of our products with the new cobranded Powered by Lucyd lines (including Nautica, which launched in January 2024, and Eddie Bauer and Reebok, which are expected to launch later in 2024) is expected to reduce the need for discounting to support customer acquisition in the future, due to the global renown of our partner brands.
Overall, we believe that the significant increase in revenues in the current year is reflective of the high quality and cutting-edge technology of our Lucyd Lyte 2.0 and Lyte XL smartglasses, and our investment in marketing to grow our brand and our company.
For the year ended December 31, 2023, approximately 47% of sales were processed on our online store (Lucyd.co), 33% on Amazon.com, and 20% with reseller partners. This product mix represents the fact that the e-commerce channels have grown more rapidly than our wholesale business. This sales channel mix positively impacted our revenue for the current year as compared with the prior year, 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, 2023, we generated $978,405 of revenue from sales of non-prescription frames and accessories, and $189,074 from sales of frames with prescription lenses. All of the $384,293 in sales generated on Amazon.com during the current year were for non-prescription frames and accessories, as we only offer prescription lenses through our website and our optical store partners. Of the $554,060 in online sales generated through Lucyd.co, $189,074 was related to frames with prescription lenses and $364,986 was related to glasses with non-prescription lenses. E-commerce sales are the most material portion of our sales to date since inception.
For the year ended December 31, 2022, approximately 32% of sales were processed on our online store (Lucyd.co), 38% on Amazon.com, and 30% with reseller partners. 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 prior year were for non-prescription frames and accessories, as we only offer prescription lenses through our website. Of the $208,447 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 since inception.
Over time, 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 currently have a retail store presence in approximately 350 stores, up from over 250 stores as of December 31, 2022. We anticipate that a partnership with a major eyeglass distributor will substantially increase our wholesale sales.
Cost of goods sold
Our total cost of goods sold increased to $1,240,171 for the year ended December 31, 2023, as compared to $716,077 for the year ended December 31, 2022. This increase was primarily driven by higher volumes of products sold during the current year.
51
This increase was primarily driven by increased cost of lenses and frames largely as a result of higher volumes of products sold in the current year. The increase in the cost of lenses was also driven by (i) a 10% increase in the production cost of lenses sourced through supplier in late 2022, and (ii) the introduction of our new proprietary Blueshift premium lenses in August 2023, which are more expensive than other lenses to produce. Cost of goods sold was also impacted by sales channel mix, as a higher relative proportion of our sales in the current year were through our online store (Lucyd.co), and the cost of prescription lenses attributable to this channel increased our cost of goods sold while not impacting cost of goods sold for sales realized through Amazon or retail store partners. Also contributing to the increase in cost of goods sold in the current year were replacement products provided to customers free of charge (which could be due to warranty, improperly cut prescription lenses, or improperly fitting frames), and about 500 product samples distributed as promotional and content generation pieces 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.
We believe our product margins are competitive relative to other smartglasses. This provides ample margins to support the higher cost of customer acquisition for an emerging product category. Our relationship with a new supplier with lower cost of goods than our main supplier has enabled us to plan to launch the Reebok and Smart Safety lines at even more competitive prices than our current offering.
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 and we realize economies of scale.
Key components of cost of goods sold for the year ended December 31, 2023 included, but were not limited to, the cost of frames of $756,795, which was made much larger due to the high number of warranty replacements for product flaws which have since been eliminated. Cost of prescription lenses incurred with our third-party vendor of $271,229, affiliate referral fees, sales commission expense, and e-commerce platform fees of $190,326, and quality assurance costs related to our products sold of $13,100. Out of our total cost of goods sold for the year ended December 31, 2023, $271,229 related to orders with prescription lenses, while $969,064 pertained to non-prescription orders.
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.
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 2024. We also expect corresponding growth in total cost of goods sold, primarily from additional product related costs. As we continue to refine our SKU mix with sales data, we anticipate reducing our unit costs by reducing the variety of SKUs produced per product line compared to the past, to focus only on the highest volume styles. Additionally, we have been informed by key suppliers that significant price reductions over 10% are possible as we continue to scale our production quantities.
Gross profit (deficit)
Our gross profit was negative $72,692 for the year ended December 31, 2023, as compared to negative $56,289 for the year ended December 31, 2022. This decrease was primarily driven by the factors outlined above.
We expect gross profit for the fiscal year ending December 31, 2024, to improve, primarily due to economies of scale from large, anticipated orders. As we expect retail stores to eventually become our primary sales channel as we onboard new stores, we also expect our overall gross margin to improve, since no e-commerce platform fees or prescription lens costs apply in wholesale channels.
52
Operating expenses
Our operating expenses increased by 22% to $6,736,213 for the year ended December 31, 2023, as compared to $5,520,373 for the year ended December 31, 2022. This increase was primarily due to the following:
General and administrative expenses
Our general and administrative expenses increased by 39% to $3,886,960 for the year ended December 31, 2023, as compared to $2,796,669 for the year ended December 31, 2022. This increase was primarily attributable to (i) an increase of approximately $560,000 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, insurance expense, public and investor relations, and filing fees, which altogether resulted in an increase in expense of approximately $430,000, (iii) higher license costs, which increased approximately $146,000, and (iv) and increase in depreciation and amortization expense of approximately $53,000. These increased expenses were partially offset by recoveries of bad debts, and lower costs related to consultants and other outside service providers.
Sales and marketing expenses
Our sales and marketing expenses were essentially flat year-over-year at $2,047,069 for the year ended December 31, 2023, as compared with $2,059,012 in the prior year.
During the first quarter of the current year, we temporarily paused and postponed our marketing spending while we restructured our e-commerce business, and management made a tactical decision to preserve a significant portion of our marketing budget for later in the year, in order to better align the timing of marketing spending with major new product launches and thus maximize impact. Our overall actual spending on advertising and promotions in 2023 increased significantly over prior year, particularly in the areas of spending on paid ads on websites and social media platforms, as well as spending on influencers, but was largely offset by the reversal of approximately $309,000 of previously-recognized stock-based compensation for certain individuals within the Company’s sales and marketing function whose awards expired during the current year without ever having vested, as the related performance conditions (sales quotas) for those awards were not met.
We anticipate our marketing costs to increase in 2024 as we continue to invest in and build our brand, expand the number of e-commerce platforms on which we sell our products, invest in retail store co-op marketing programs and displays to help educate in-store customers about our products, and increase our brand’s physical presence and role in the eyewear industry.
Related party management fee
Our related party management fee was $140,000 for each of the years ended December 31, 2023 and 2022, based on the terms of the management services agreement between us and Tekcapital.
Research and development costs
Our research and development costs increased by 26% to $662,184 for the year ended December 31, 2023, as compared with $524,692 the year ended December 31, 2022.
This increase was primarily attributable to a large number of new temple and frontplate molds as we expand our core offering, an expansion of the Company’s software initiatives to include the Lucyd app, and therefore increased the portion of the work hours spent by the CEO and CTO (as well as a portion of their stock-based compensation expense) on new software development on the Vyrb app, the new Lucyd app, and our glasses, as well as the hiring of an additional full-time software engineer to support our CTO. Some planned features for our Lucyd app include the ability to access AI other than ChatGPT, the addition of an audio content library for users to enjoy, and further enhancements to the core AI functionality. In terms of the Vyrb app, we are planning launching a full peer-to-peer content marketplace in the style of Patreon, but with a focus on audio and content designed on and for wearables.
53
Liquidity and Capital Resources
Cash Flow Data:
Year ended
December 31,
2023
Year ended
December 31,
2022
Net cash flows from operating activities
$
(5,766,303
)
$
(3,224,418
)
Net cash flows from investing activities
(198,753
)
(219,951
)
Net cash flows from financing activities
6,661,394
6,955,751
Net Change in Cash
$
696,338
$
3,511,382
Operating Activities
Net cash flows used in operating activities for the years ended December 31, 2023 and 2022 are primarily reflective of our net losses, resulting from our operating costs to support and grow our business, including employee-related costs, sales and marketing, research and development, and various costs associated with being a publicly-traded company. Additionally, our operating asset levels grew significantly during 2023 as we have procured additional inventory to position us for future anticipated sales growth.
Investing Activities
During the current year, the Company used low-risk bonds and similar investment instruments for the purpose of earning interest on its cash balance. The Company also continued to invest in its growing intellectual property portfolio, making expenditures to file for various new patents.
Financing Activities
Net cash flows provided by financing activities for year ended December 31, 2023 are mainly driven by the various capital-raising activities undertaken during the current year, including our second public offering completed in June 2023 and exercises of warrants by stockholders earlier in the year, partially offset by repayment of advances and convertible debt to related parties.
Net cash flows provided by financing activities for the year ended December 31, 2022 are mainly driven by our initial public offering completed in August 2022, and, to a lesser extent, by net proceeds from related party borrowings through convertible debt.
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.
The net proceeds received by the Company from this offering amounted to $6,189,734. We used the 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.
54
Second Public Offering
On June 26, 2023, the Company closed on a public offering of 4,500,000 units consisting of 4,500,000 shares of its common stock and 4,500,000 warrants to purchase 4,500,000 shares of common stock (the “Common Warrants”) at a combined offering price of $1.05 per unit in exchange for gross proceeds of approximately $4.73 million, before deducting underwriting discounts and offering expenses. Each share of common stock was sold together with one warrant. Each Common Warrant is exercisable to purchase one share of common stock at an initial exercise price of $1.05 per share, subject to certain adjustments as set forth in the warrant agreement. In addition, pursuant to the terms of the placement agency agreement for the offering, the Company issued to the placement agent certain other warrants to purchase up to 180,000 shares of the Company’s common stock at an exercise price of $1.31 per share.
The net proceeds received by the Company from this offering amounted to $4,115,688. We intend to use the net proceeds of this offering primarily for working capital and general purposes.
New Convertible Loan Note
Effective March 1, 2024, the Company issued a convertible note to Lucyd Ltd., the largest stockholder of the Company, for up to $1,250,000 that bears interest at 10% per annum, which includes the option to convert the debt into the Company’s common stock at market price. The note can be converted into shares of common stock of the Company upon the occurrence of certain events, as defined in the note, or for any reason at the sole discretion of Lucyd Ltd. The note has a maturity date of September 1, 2025, at which time all outstanding principal and accrued interest is payable in full. As of the date of this Annual Report on Form 10-K, we have not borrowed any amounts under this convertible note.
Other Factors
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 (including the proceeds from the aforementioned second public offering and proceeds received from investors’ exercises of warrants), plus planned capital-raising activities will be sufficient to fund our operations for at least the next twelve months.
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. Current geopolitical and macroeconomic factors have 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, 2023, we did not have any off-balance sheet arrangements.
55
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, 2023 and 2022.
As of December 31, 2023 and 2022, we recorded an inventory prepayment in the amount of $323,520 and $197,750, respectively, related to down payment on eyewear purchased from the manufacturer, prior to shipment of the product that occurred after the respective balance sheet dates.
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.
56
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 is 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.
●
For options granted after our initial public offering on August 17, 2022, the fair value of common stock used in the option pricing model is based on the quoted market price of our common shares on the NASDAQ stock exchange.
●
For options granted prior to our initial public offering, the fair value of common stock used in the option pricing model was determined using the most recent price paid by independent investors through a Regulation Crowdfunding (“CF”) securities offering undertaken by the Company.
For restricted stock units, the fair value of the share-based award is based on the quoted market price of our common shares on the NASDAQ stock exchange.
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, on our own website Lucyd.co, and on Amazon.com.
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 and determine those that are performance obligations, and also 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 collectibility 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. During the year ended December 31, 2023, we recognized $17,500 of revenue that was included in the contract liability balance as of January 1, 2023.
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.
57
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 the Company’s eyewear products to the retail store and is 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. If 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.
Our sales do not contain any variable consideration.
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. We recorded an allowance for sales returns of $25,933 and $24,897 as of December 31, 2023 and 2022, respectively.
Shipping and Handling
Costs incurred for shipping and handling are included in cost of revenue 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, 2023 and December 31, 2022, 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.
58
Item 7A. Quantitative and Qualitative Disclosures About Market Risk .
Not required for smaller reporting companies.
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.