Innovative Eyewear, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. The company develops and sells smart eyewear, including Lucyd Lyte glasses, through e-commerce and retail partners. The unaudited interim financial statements are prepared under U.S. GAAP.
Financial results and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $151,957 | $171,033 | $592,720 | $415,185 |
| Gross profit | $22,865 | $40,810 | $140,502 | $82,807 |
| Gross margin | 15% | 24% | 24% | 20% |
| Operating expenses | $1,388,575 | $1,132,088 | $3,840,764 | $1,908,247 |
| Net loss | $1,404,321 | $1,100,780 | $3,804,692 | $1,859,094 |
| Loss per share, basic and diluted | $(0.21) | $(0.19) | $(0.61) | $(0.37) |
For the nine months, operating cash outflow was $1.996 million and investing cash outflow was $155,428; financing provided $7.048 million. Cash increased by $4.896 million to $4.976 million at September 30. Current assets were $6.102 million and current liabilities $851,049. Current liabilities included $166,206 of related-party convertible debt and $198,932 due to the parent and affiliates. No other long-term debt is reported on the balance sheet.
Changes versus comparable periods
- Q3 revenue declined 11% year over year, while nine-month revenue rose 43%. Management attributed the quarterly decrease to focus on product improvements, licensing and team expansion, higher digital advertising costs, and uncertain consumer spending.
- Q3 gross margin fell to 15% from 24%, which management attributed primarily to promotional pricing and higher shipping costs. Nine-month gross margin improved to 24% from 20%.
- Nine-month net loss more than doubled, as operating expenses increased substantially with business expansion. Sales and marketing, general and administrative, and research and development costs all rose; research and development also included a reclassification of stock-based compensation.
Outlook, risks, and unusual items
- Management expects operating losses to continue as it invests in growth. It anticipated growth in wholesale and e-commerce sales for the remainder of 2022 and 2023, and slight gross-profit improvement for 2022, partly from expected scale and larger orders. It also expects sales and marketing costs to rise. These are forward-looking expectations, not guarantees.
- The August 2022 IPO generated approximately $7.35 million gross proceeds and approximately $6.19 million net proceeds. The company planned to use proceeds for sales and marketing, inventory, in-store displays, product and Vyrb app development, working capital, and general corporate purposes. Management said available liquidity was expected to fund operations through at least the end of 2023; the MD&A also states at least the next 12 months.
- A July 2022 branded-eyewear license carries minimum royalties of approximately $1 million over five years; less than $25,000 is due in calendar 2023. The agreement has a 10-year base term and may be cancelled by the company during year five.
- The parent, Lucyd Ltd., owned approximately 71% of outstanding shares and provides related-party financing and services. The quarterly management fee increased to $35,000 from $25,000 under an amended agreement. The parent converted $2.002 million of convertible debt into shares in connection with the IPO.
- Risks include the company’s limited operating history and ongoing losses, dependence on successful retail expansion and store reorders, consumer demand, competition, supply-chain and shipping disruption, and potential need for additional financing and shareholder dilution. The company manufactures in Asia and discussed potential COVID-19 and broader economic effects. It reported no current or threatened litigation and no off-balance-sheet arrangements.
- The IPO included warrants; the filing says their exercise price was to adjust on November 15, 2022, to the greater of $3.75 or 100% of the November 14 volume-weighted average price, if that value was below $7.50. The company also reported $1.745 million of unrecognized stock-option expense expected to be recognized over 1.64 years.
Important facts for investors to verify
- Whether retail-store expansion translates into repeat orders: the company reported more than 250 stores selling its products and a 27.7% store re-order ratio at September 30, 2022.
- Cash burn and the assumptions behind management’s liquidity forecast, particularly if operating losses persist or growth requires additional capital.
- Whether gross margins improve as forecast, given promotional pricing, shipping costs, channel mix, and wholesale discounts.
- The terms and potential dilution from the public-offering and underwriter warrants, including the stated exercise-price adjustment.
- Related-party financing, services, and ownership, as well as the timing and amounts of minimum royalty obligations under the eyewear license.