FY24 Q1 results for Lucy, Part of TEK

Can armor protect us?

Can Lucyd Armor save us?

Dear reader,

In FY23 Lucy results I wrote Nasdaq-listed LUCY needs 80% Quarter to Quarter growth in revenue and improvement in margin.

Net revenue for the quarter ended March 31, 2024 was $383,471, which was an increase of 165% from the quarter ended March 31, 2023. That sounds impressive. Various share news services are proudly broadcasting this. LUCY shares were up 22% at one point today. This year-over-year increase was primarily attributable to significant volume growth in the e-commerce channel, driven by the Company's strategic advertising and marketing initiatives during the latter portion of 2023 and through the current quarter, combined with recent new product launches (including the Lyte XL and Nautica® Powered by Lucyd collections).

Wonderful. But not so fast. Quarter to Quarter the picture is far less rosy.

$559,759 revenue falls to $383,471 vs my own estimates where an 80% growth to $1m in Q1 would put this on a path to profitability. We are miles away from any such outcome.

On a more positive note, Quarter to Quarter gross profitability increases $187k (to a positive but paltry $6,951 gross profit). The commentary points to discounting due to competitive pressures but analysis shows the prescription lenses generated that $7k profit while non-prescription actually lost money. No one else sells prescription smart glasses so what discount? It’s not at all clear.

Sales falling from 34% to just 4% of sales via reseller partners suggests the strategy of “small independent retailers” has comprehensively failed. LUCY speak to switching to larger retailers but say this will take time. A very disappointing development.

The Blueshift Premium lenses whilst providing a form of differentiation also appears to be an explanation of the high cost of sales of non prescription glasses. Why add this feature and sell it at a loss? It is frustrating to see this has detracted from progress towards break even. The lack of commercial control is disappointing.

LUCY management speak to realising some economies of scale in the cost of frames and in the area of shipping and logistics. However they (confusingly) blame the growth in prescription costs impacting gross margin too. If you compare revenue and cost of sales for prescription and non-prescription then this is completely contradictory.

LUCY say they are working with the current prescription lens provider to explore opportunities to reduce costs and we are also actively in discussions with alternative prescription lens suppliers who may help further lower lens fulfillment costs. It’s not clear why the costs have grown so much and why was there no price agreement in place? It sounds like a lack of commercial control - allowing the supplier to increase prices - have LUCY been taken for a ride?

The long-term goal of shifting the sales mix over time more towards the wholesale channel, which carries higher margins, LUCY claim as such sales to our third-party retail store partners do not include the cost of prescription lenses. Wholesale should never carry higher margins than selling retail (direct) to the end user. Another contradiction to contend with.

Future Outlook

Three new product lines - Eddie Bauer® Reebok® and the Lucyd Armor smart safety glasses line (Previously Lion) are due to launch in 2024. Meanwhile plans to launch new features for the Lucyd app in 2024, including a paid "Pro" version of the app, could provide another potential incremental revenue stream for the Company too.

Harrison Gross, CEO of Innovative Eyewear Inc., commented,

"After several years of rigorous R&D and brand development, I believe we are very well-positioned to capitalize on blooming consumer interest in smart eyewear. Recently, we have seen powerful incumbents such as Apple and Meta bringing renewed interest to smart glasses. We continue to expect that smart eyewear will be a key component of the generative AI revolution, due to their transparent interfaces and ergonomic form factors perfectly suited for voice-based interaction."

Tekcapital owns 5.2 million shares in Innovative Eyewear which is ~40% of the total issued share capital of LUCY. LUCY’s share price has dropped $0.29 to $0.20 since my Q4 update. Ouch.

At today’s market price of $0.20 that ownership is worth $1m/£0.8m or 0.4p/TEK share (TEK is £17.2m market cap total at today’s 9p ask). Because TEK has a controlling interest there’s a 15% mark up on the NAV so 0.46p/TEK share.

Conclusion

1Q24 is a disappointment. Those Investor publications who’ve regurgitated the 165% Revenue Increase year on year “news” have missed the point. You might as well boast that Smart Eyewear sales have increased since the Victorian times also.

The hope now is that Q2 addresses not only the cost of sale challenge but also the sales growth challenge simultaneously. As well as progress the launch of three new brands including one for a completely new type of glasses to a completely new type of customer (B2B Industrial) whereas 100% of marketing has been to B2C fashion and tech savvy consumers. The Armor glasses aren’t a bad idea but are also a huge distraction in a new direction.

$1.02m has been raised post period; but this provides about 2 months additional runway based on current cash burn.

I have finally run out of patience with this holding and am writing it off to zero in my analysis, pending a tremendous turn around in Q2 which I am now sceptical can and will arrive.

For UK investors who hold LUCY as part of TEK, writing off 0.4p per TEK share is actually less than increases at other TEK holdings, for example SALT has increased by 1.2p per TEK share (i.e. 98p/100p bid ask today) in the past 2 weeks.

A NAV of 24.8p excluding LUCY versus a 9p ask is a 62% discount where 189% of the TEK price is covered by the value of LISTED holdings (or 193% if we still include LUCY).

TEK VALUATION

Update 20th May

Interesting to see Intracoastal Capital, L.L.C. have taken a 1m share position on May 9th, which makes them 5.93% owner. TEK’s ownership is 29.65% (not 40% as previously reported) and that other IIs/Hedge Funds have taken a toehold position (Vanguard, Citadel, 2 Sigma, Geode, Creative Planning) March 31st. Just as the Oak Bloke loses patience, it seems others feel more positive about LUCY. 1m shares so $200k isn’t a vast amount but it does display some confidence. They are based in Boca Raton FLA which is Guident’s office location, so maybe that doesn’t mean anything or maybe Intracoastal have got close up and liked what they see? Their web site puts them as Fixed Income (Bonds) traders, so this equity purchase is unusual.

Lucyd have also applied to do a 24 for 1 consolidation which would take the share price above the minimum $1 price under Nasdaq rules.

Regards

The Oak Bloke

Disclaimers:

This is not advice

Micro cap and Nano cap holdings might have a higher risk and higher volatility than companies that are traditionally defined as "blue chip".