Form 1-SA Innovega Inc. For: Jun 30
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 1-SA
☒ SEMIANNUAL REPORT PURSUANT TO REGULATION A
or
☐ SPECIAL FINANCIAL REPORT PURSUANT TO REGULATION A
For the fiscal semiannual period ended: June 30, 2021
Innovega Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 80-02036668 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
11900 NE 1st St, Ste. 300, Bellevue, WA 98005
(Mailing Address of principal executive offices)
(425) 214-7300
Issuer’s telephone number, including area code
In this report, the term “Innovega” “we,” “us” or “the company” refers to Innovega Inc.
This semiannual report on Form 1-SA (the “Report”) may contain forward-looking statements and information relating to, among other things, the company, its business plan and strategy, and its industry. These forward-looking statements are based on the beliefs of, assumptions made by, and information currently available to the company’s management. When used in this Report, the words “estimate,” “project,” “believe,” “anticipate,” “intend,” “expect” and similar expressions are intended to identify forward-looking statements, which constitute forward looking statements. These statements reflect management’s current views with respect to future events and are subject to risks and uncertainties that could cause the company’s actual results to differ materially from those contained in the forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. The company does not undertake any obligation to revise or update these forward-looking statements to reflect events or circumstances after such date or to reflect the occurrence.
Item 1. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes included in Item 3 of this Report. The following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Unless otherwise indicated, latest results discussed below are as of and for the six-month period ended June 30, 2021. The financial statements included in this filing as of and for the six-month period ended June 30, 2021 are unaudited, and may not include year-end adjustments necessary to make those financial statements comparable to audited results, although in the opinion of management all adjustments necessary to make interim statements of operations not misleading have been included.
Overview
Innovega was incorporated under the laws of the State of Delaware on June 16, 2008, as “Innovega Inc.” Innovega is developing a display eyewear system for Extended Reality (XR) applications, which include Augmented, Virtual and Mixed Reality. Innovega’s Extended Reality eyewear system comprises novel, disposable, smart contact lenses or surgically implanted intraocular lenses, and lightweight, stylish display eyewear. The company has developed prototype contact lenses, intraocular lenses, and display eyewear. The contact lenses and intraocular lenses are regulated medical devices and require a market clearance or an approval from regulatory bodies before commercialization. Present contact lenses and intraocular lenses include proprietary two-state light polarizing filters and, in the future, may include other filter components. The display eyewear includes a microdisplay screen, electronics, operating software, and depending on the application may include cameras and other sensors. The contact lenses are currently in Phase III clinical investigations pursuant to FDA market clearance for the new lens material for standard daily wear indications. A subsequent de novo clinical trial must be conducted for the new indication for viewing a near eye wearable display. While daily wear contact lenses are generally classified as Class II, non-significant risk devices, the FDA will make a final ruling for the contact lenses as either Class II, non-significant risk or Class III, significant risk after the de novo submission. The intraocular lenses are optically designed in prototype form and without clinical development. The intraocular lenses are expected to require a de novo regulatory path as a Class III, significant risk device. The display eyewear will be submitted to the FDA for a market clearance as a Class I device before commercialization.
Innovega intends to license its display platform or sell proprietary components to companies that will produce and market Extended Reality lenses and eyewear for applications that could include quality of life enhancement for the sensory impaired, including the visually impaired and legally blind, for the hearing impaired, and for those suffering cognitive or other impairments. Other applications may relate to: anytime and anywhere information and entertainment; telecommunications; video gaming; defense, security and intelligence, and enterprise; surgical visualization and telemedicine; and athlete training and sports analytics.
On March 31, 2021, the company commenced an offering under Regulation A under the Securities Act of 1933 pursuant to which it offered shares of its Series A-1 Preferred Stock (the “Series A-1 Offering”).
| 2 |
Results of operations
Six months ended June 30, 2021 compared to six months ended June 30, 2020
The company did not generate any revenues in the first half of 2020 but did have revenue of $45,040 in the first half of 2021. The revenue was generated as a continuation of a 4th quarter 2020 agreement to provide product and channel consulting relating to a product-level solution for use by the visually impaired, including the legally blind. The company has recorded the accompanying costs as cost of goods sold.
The company’s operating expenses consist primarily of research and development, clinical and regulatory costs, business development, and general and administrative expenses. Research and development costs primarily consist of salaries and benefits of scientific and engineering staff, office expenses for research facilities, research supplies and materials, and consultants. Clinical and regulatory costs primarily consist of salaries and benefits of scientific and engineering staff, supplies and materials, and consultants. Business development costs primarily consist of salaries and benefits of business development employees, marketing expenses, and travel and conference costs. General and administrative costs primarily consist of salaries and benefits of administrative employees, office expenses, legal fees, and other consultants.
| ● | Research and development expenses increased $99,697 to $509,813 for the period ended June 30, 2021 from $410,116 for the period ended June 30, 2020. This 24% increase was primarily driven by increased support overhead (wages, contract labor and lab supplies). | |
| ● | Clinical and regulatory expenses increased $194,116 to $363,288 for the period ended June 30, 2021 from $169,172 for the period ended June 30, 2020. This 115% increase was primarily driven by consultant fees and clinical investigation costs relating to Phase III clinical investigations and regulatory activities. | |
| ● | Business Development expenses increased $74,146 to $149,238 for the period ended June 30, 2021 from $75,092 for the period ended June 30, 2020. This 99% decrease was primarily driven by increased wages and consultant fees. | |
| ● | General and administrative expenses increased $62,480 to $436,100 for the period ended June 30, 2021 from $373,620 for the period ended June 30, 2020. This 17% increase was primarily driven by higher legal and accounting fees, and increased support wages. | |
| ● | Interest expense increased $8,250 to $76,413 for the period ended June 30, 2021 from $68,164 for the period ended June 30, 2020. This 12% increase was due to the issuance of additional shareholder notes. |
As a result of the foregoing, the company generated a net loss of $1,308,434 for the period ended June 30, 2021 compared to a net loss of $1,024,608 for the period ended June 30, 2020 which represents a 28% increase in net loss.
| 3 |
Liquidity and Capital Resources
At June 30, 2021 the company’s cash on hand was $2,036,907. The company is not generating significant revenues and requires the continued infusion of new capital to continue business operations. The company has recorded losses since inception but has raised capital through securities offerings. As of June 30, 2021, the company had net working capital of $1,141,960 and a stockholders’ equity of $68,876. The company has historically been capitalized by private equity offerings, including sales of preferred stock, convertible and SAFE notes. The company plans to continue to raise additional capital through equity issuances, and other usual methods available to an emerging growth company. Absent additional capital, the company may be forced to significantly reduce expenses and could become insolvent.
On March 31, 2021, the company commenced an offering under Regulation A under the Securities Act of 1933 pursuant to which it offered shares of its Series A-1 Preferred Stock (the “Series A-1 Offering”). On May 13, 2021, the company executed a rolling (first) close of its offering. Concurrent with this first closing, the Company issued 1,610,514 shares of Series A-2 Preferred Stock in exchange for the conversion of $5,018,698 of convertible notes, including accrued interest, and 1,123,787 shares of Series A-3 Preferred Stock in exchange for the conversion of $2,331,875 of SAFE notes.
The company received gross proceeds in May and June 2021 amounting to $1,576,227 and offering costs, which were recorded as a reduction in capital in excess of par value, totalled $303,875, resulting in net proceeds of $1,272,352. The Series A-1 Offering continues to be active and subsequent closings have occurred and the gross offering proceeds were approximately $3 million as of September 9, 2021.
The company estimates that the proceeds raised from the Series A-1 Offering can continue to fund the company’s current rate of operations through 2021 without raising additional capital. However, the company has determined that additional capital will be required for expanding the operations of the company.
| 4 |
Issuances of Equity, Convertible Notes and Other Indebtedness
Since inception, the company has primarily funded operations through the issuance of equity securities, convertible notes, and SAFE notes.
The company received total proceeds of $5,341,106 from issuances of Preferred Stock in the years 2017 through 2018. The company also received total proceeds of $149,089 from issuances of Common Stock from inception through December 31, 2020.
On March 31, 2021, the SEC qualified an offering of its Series A-1 Preferred Stock, (the “Series A-1 Offering”). As of December 31, 2020, Innovega has raised $0 in gross proceeds from this offering. As of the date of this Special Financial Report, it has raised total gross proceeds of approximately $3 million from this offering.
The company estimates that the proceeds raised from the Series A-1 Offering can continue to fund the company’s current rate of operations through 2021 without raising additional capital. However, the company has determined that additional capital raising activity will be critical for expanding the operations of the company.
The company has previously issued both convertible debt and SAFE notes. In 2019, the company issued convertible promissory notes and SAFE notes for proceeds of $2,402,337 (net of issuance costs of $78,256) and $500,000, respectively. In 2020, and as of December 31, 2020, the company issued an additional $1,831,875 SAFE notes.
The combined principal amount and the accrued interest of the convertible debt and SAFE notes were $4,812,467 and $176,868 as of December 31, 2020.
The accrued interest on the convertible notes was $63,498 and $176,868 as of December 31, 2019, and December 30, 2020, respectively.
All convertible notes have been converted into Series A-2 Preferred Stock as a result of the initial closing of the Series A-1 Offering, which occurred on May 13, 2021 (“Initial Closing”). The valuation at time of conversion was $32,000,000. All outstanding SAFE notes were automatically converted into Series A-3 Preferred stock also as a result of the Initial Closing.
The Company had a shareholder note in the amount of $100,000 which was fully repaid in 2020, together with $19,627 of accrued interest. In 2020, the Company borrowed $100,000 from company CEO, Stephen Willey, in the form of a Promissory note, earning an interest rate of 1% per month. In March 2021, the company borrowed an additional $100,000 from company CEO, Stephen Willey, in the form of a Promissory note, earning an interest rate of 1% per month. Also in March 2021, the Company borrowed $500,000 from three investors earning an interest rate of 1% per month, of which $50,000 was repaid in September 2021 and the remaining $450,000 in borrowings are due on demand.
In 2020, the Company borrowed $112,420 from the US Small Business Administration under the Payroll Protection Program (PPP). This loan was forgiven in April 2021.
The company currently has no material commitments for capital expenditures.
| 5 |
Trend Information
Markets
The company’s business prospects will be affected by the backdrop of market opportunities and industry dynamics. In 2021, Facebook IQ forecast between 2020 and 2024, a “6x increase in global spending on Virtual Reality (VR) and Augmented Reality (AR) In an article published by VentureBeat on April 25, 2020, the author referenced the following key elements of recent analyst forecasts:
Virtual Reality (VR)
| ● | Sales of VR headset in 2020 will fall below sales in 2018. The bulk and uncomfortable nature of all existing headsets has greatly disappointed users who expected that over time the form-factor would improve. It has not. |
| ○ | This information is important as it suggests that the failure of this market presents the need for the Innovega technology. Success of the market appears to be dependent on the solution to the comfort and performance limitations that exist today. To the Company’s knowledge, Oculus and Sony remain the only major suppliers. Company management believe the Company could develop VR smart glasses that users would find attractive. |
Augmented Reality (AR)
| ● | By the end of 2019, 900 million users had downloaded AR applications onto their smartphones. By 2024, it is believed that this number of users could surge to over 2.5 billion. |
| ○ | This information is important to the company since the growth of AR will depend on the value and return on investment delivered to users. In turn, the value to the user will depend on the quality of the smart glasses’ user interface and the applications that it can deliver. The growing base of AR-enabled smartphones is encouraging developers to make available new and useful applications and content. Analysts believe that in order for users to fully leverage this vital base of applications and content, they will require innovation in smart glasses technologies. |
| ● | Consumer smart glasses will initially be tethered to smart phones and thus access their content and capabilities. Apple has described its plan to release smart glasses as early as 2024. If this occurs, it is forecast that soon thereafter, smart glasses sales could reach tens of millions of units, and AR revenues could increase from a present $8 billion to $60 billion. |
| ○ | This information is important to the Company since consumer smart glass markets cannot grow until the AR ecosystem and relevant content are developed. Apple, Google, and Facebook have described their intent to develop these ecosystems and content. The company believes that these systems must be fully available for smart glasses developers to offer the required value to consumers. The Company’s go-to-market plan involves high-value solutions for vertical markets, preferring not to serve needs of consumer markets in advance of vital ecosystems and content. |
| ● | Developers of smart glasses have responded to the lack of mass market ecosystem by identifying vertical markets where a tailored application can be developed. Microsoft has achieved success in commercializing its Hololens headset for use by enterprise workers and more recently by the military. Analysts estimate that sales of enterprise smart glasses will remain in the hundreds of thousands of units through 2021, but could reach millions of units by 2024. |
| ○ | The company believes that pre-2023, its management should place its focus on delivering high value to select vertical markets. |
| ● | Since vertical markets will depend on well-defined and bundled applications, the majority of revenues will be earned from sale of purpose-built smart glasses hardware. |
| ○ | This information suggests the company should pursue a commercial strategy of developing and sharing smart glasses reference designs to select licensee partners that dominate specific vertical markets whose end-user needs are well-documented and yet remain under-served. |
Consistent with these forecasts and recommendations that those developing wearable displays should initially pursue opportunities in vertical markets, the company elected to develop smart glasses and contact lenses for the visually impaired, including legally blind, patient community whose needs are well-documented and under-served. This is a non-enterprise application that enables the company to avoid the high level of competition that is already building in the enterprise sector. Following a success in serving the visually impaired patients, the company plans to review other patient markets including the hearing impaired, those patients with dual sensory losses, and other health care markets.
Once it has proved its business model in one or more health care markets, the company will investigate opportunities to license its technology for use in non-medical vertical markets such as public safety and prosumer applications. When ecosystems become available to support consumer and other mass-market applications, the Company will also assess these potential opportunities.
Item 2. Other Information
In the belief of management, no other information that would be required to be reported on Form 1-U is required to be reported as of the date of this Report.
| 6 |
Item 3. Financial Statements
Innovega Inc.
Balance Sheet
| June 30 | 31-Dec | |||||||
| 2021 | 2020 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | 2,036,907 | $ | 1,506,369 | ||||
| Accounts receivable | - | - | ||||||
| Other current assets | 84,991 | 102,859 | ||||||
| Total current assets | 2,121,898 | 1,609,228 | ||||||
| PROPERTY AND EQUIPMENT, net | 80,901 | 95,727 | ||||||
| INTANGIBLE ASSETS, net | 604,144 | 503,642 | ||||||
| OTHER ASSETS | 5,334 | 5,334 | ||||||
| Total assets | $ | 2,812,277 | $ | 2,213,931 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable | $ | 358,336 | $ | 217,290 | ||||
| Accrued expenses | 220,100 | 576,305 | ||||||
| SBA Loans | - | 118,420 | ||||||
| Related Party Notes payable, current | 400,000 | 100,000 | ||||||
| SAFE note, net | - | 2,311,529 | ||||||
| Convertible notes, net | - | 2,476,040 | ||||||
| Accrued note interest, current portion | 1,502 | 176,868 | ||||||
| Total current liabilities | 979,938 | 5,976,452 | ||||||
| LONG-TERM LIABILITIES | ||||||||
| Accrued deferred wages and comp time | 1,463,463 | 1,118,816 | ||||||
| Related Party Notes payable | 300,000 | - | ||||||
| Total liabilities | 2,743,401 | 7,095,268 | ||||||
| STOCKHOLDERS’ DEFICIT | ||||||||
| Common Stock, $0.0001 par value, 23,000,000 authorized and 9,407,968 outstanding at June 30, 2020; 50,000,000 authorized and 9,447,968 outstanding at June 30, 2021 | 944 | 944 | ||||||
| Series Seed Preferred Stock, $0.0001 par value, 3,518,238 authorized and outstanding at June 30, 2020, and June 30, 2021 | 352 | 352 | ||||||
| Series A-1 to A-3 Preferred Stock, $0.0001 par value, 0 authorized and outstanding at June 30, 2020, and 7,734,301 authorized and 3,259,711 outstanding at June 30, 2021 | 326 | - | ||||||
| Additional paid in capital | 12,089,992 | 5,831,671 | ||||||
| Accumulated deficit | (12,022,738 | ) | (10,714,304 | ) | ||||
| Total stockholders’ equity (deficit) | 68,876 | (4,881,337 | ) | |||||
| Total liabilities, and stockholders’ deficit | $ | 2,812,277 | $ | 2,213,931 | ||||
Accompanying notes are an integral part of these financial statements
| F-1 |
Innovega Inc.
Statements of Operations
| June 30 | June 30 | |||||||
| 2021 | 2020 | |||||||
| REVENUE | $ | 45,040 | $ | - | ||||
| COST OF GOODS SOLD | 13,577 | - | ||||||
| Gross profit | 31,463 | - | ||||||
| OPERATING EXPENSES | ||||||||
| Independent research and development | 509,813 | 410,116 | ||||||
| Clinical and regulatory costs | 363,288 | 169,172 | ||||||
| Business development | 149,238 | 75,092 | ||||||
| General and administrative expenses | 436,100 | 373,620 | ||||||
| Operating loss | (1,426,976 | ) | (1,028,000 | ) | ||||
| Interest income | 122 | 3,392 | ||||||
| Interest expense | - | - | ||||||
| Loan Forgiveness | 118,420 | - | ||||||
| LOSS BEFORE INCOME TAXES | (1,308,434 | ) | (1,024,608 | ) | ||||
| INCOME TAXES | - | - | ||||||
| NET LOSS | $ | (1,308,434 | ) | $ | (1,024,608 | ) | ||
| Weighted average vested common shares outstanding: | ||||||||
| Basic | 9,407,968 | 9,407,968 | ||||||
| Diluted | 9,407,968 | 9,407,968 | ||||||
| Net loss per common share | ||||||||
| Basic | $ | (0.14 | ) | $ | (0.11 | ) | ||
| Diluted | $ | (0.14 | ) | $ | (0.11 | ) | ||
Accompanying notes are an integral part of these unaudited financial statements
| F-2 |
Innovega Inc.
Statements of Stockholders’ Equity (Deficit)
For the Period Ended June 30, 2021
| Additional | Total | |||||||||||||||||||||||||||
| Common Shares | Preferred Shares | Paid-in | Accumulated | Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||
| Balance at December 31, 2019 | 9,407,968 | $ | 940 | 3,518,238 | $ | 352 | $ | 5,792,587 | $ | (8,402,836 | ) | $ | (2,608,957 | ) | ||||||||||||||
| Preferred, Seed Series | - | |||||||||||||||||||||||||||
| Stock compensation expense | - | - | - | - | 38,688 | - | 38,688 | |||||||||||||||||||||
| Exercise of warrants | 40,000 | 4 | - | - | 396 | - | 400 | |||||||||||||||||||||
| Net loss | - | - | - | - | - | (2,311,468 | ) | (2,311,468 | ) | |||||||||||||||||||
| Balance at December 31, 2020 | 9,447,968 | $ | 944 | 3,518,238 | $ | 352 | $ | 5,831,671 | $ | (10,714,304 | ) | $ | (4,881,337 | ) | ||||||||||||||
| Preferred, Seed Series | 3,259,711 | 326 | 6,258,321 | 6,258,647 | ||||||||||||||||||||||||
| Stock compensation expense | - | - | - | - | - | - | ||||||||||||||||||||||
| Exercise of warrants | - | - | - | - | ||||||||||||||||||||||||
| Net loss | - | - | - | - | - | (1,308,434 | ) | (1,308,434 | ) | |||||||||||||||||||
| Balance at June 30, 2021 | 9,447,968 | $ | 944 | 6,777,949 | $ | 678 | $ | 12,089,992 | $ | (12,022,738 | ) | $ | 68,876 | |||||||||||||||
Accompanying notes are an integral part of these unaudited financial statements
| F-3 |
Innovega Inc.
Statements of Cash Flows
| June 30 | June 30 | |||||||
| 2021 | 2020 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | $ | (1,308,434 | ) | $ | (1,024,608 | ) | ||
| Adjustments to reconcile net cash to net loss | ||||||||
| Depreciation and amortization | 43,502 | 36,698 | ||||||
| Stock compensation expense | - | - | ||||||
| Changes in operating assets and liabilities | ||||||||
| Accounts receivable | - | - | ||||||
| Other current assets | 17,868 | (294,390 | ) | |||||
| Accounts payable | 141,046 | 112,474 | ||||||
| Accrued expenses | (100,626 | ) | 246,219 | |||||
| Accrued deferred wages | (29,351 | ) | (16,991 | ) | ||||
| Net cash used in operating activities | (1,235,995 | ) | (940,598 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Purchases of fixed assets | (11,440 | ) | - | |||||
| Acquisition of intangible assets | (117,737 | ) | (73,981 | ) | ||||
| Net cash used in investing activities | (129,177 | ) | (73,981 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Issuance of common stock | - | - | ||||||
| Proceeds from shareholder note issuance | 600,000 | - | ||||||
| Proceeds from SAFE notes, net of costs | (12,058 | ) | 637,221 | |||||
| Proceeds from Preferred Stock, net of costs | 1,307,768 | - | ||||||
| Net cash provided by financing activities | 1,895,710 | 637,221 | ||||||
| NET INCREASE (DECREASE) IN CASH | 530,538 | (377,358 | ) | |||||
| CASH, beginning of period | 1,506,369 | 1,665,454 | ||||||
| CASH, end of period | $ | 2,036,907 | $ | 1,288,096 | ||||
| CASH PAID FOR INTEREST | $ | 27,887 | $ | 335 | ||||
| CASH PAID FOR TAXES | $ | - | $ | - | ||||
Accompanying notes are an integral part of these unaudited financial statements
| F-4 |
Innovega Inc.
Notes to the Financial Statements
As of and For the Periods Ended June 30, 2021 and December 31, 2020
Note 1 – Organization and Basis of Presentation
Organization – Innovega Inc. (the Company) was incorporated in the state of Delaware. The Company designs and develops contact lenses and display eyewear for virtual reality and augmented reality applications for the leisure and professional markets.
Basis of presentation – The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and reflect all adjustments that, in the opinion of the Company’s management, are necessary for a fair presentation of the financial position and results of operations for the periods ended June 30, 2021 and 2020, and December 31, 2020.
Certain risks and uncertainties – The Company operates in a highly regulated environment. The Company’s business also involves inherent risks, which include, among others, dependence on key personnel, reliance on single source vendors, availability of raw materials, and patentability of the Company’s products under development and liquidity constraints. Any of the technologies covering the Company’s existing products under development could become obsolete or diminished in value by discoveries and developments of other organizations. The Company has not yet commenced principal operations. There is a risk that the Company does not successfully secure sufficient funding or assets required to commence principal operations.
Liquidity and management’s plans – These financial statements have been prepared assuming the Company will continue as a going concern, which contemplates realization of assets and satisfaction of liabilities in the normal course of business. From inception through December 31, 2020, the Company has financed its operations through private debt and equity financings, as it has not generated any revenues from product sales to date. It has incurred losses since inception, has an accumulated deficit of $10,714,304 at December 31, 2020, and will require additional capital through the issuance of debt or equity securities to finance the continued development of the business. Management plans to sustain operations through deferring wages, additional preferred stock sales, convertible debt financing, debt financing from third parties, or other financing arrangements with financial institutions. During 2019 and 2020, the Company issued SAFE notes for $500,000 and $1,831,875. The Company also issued convertible notes totalling $2,480,592 during 2019. The Company may need to raise additional debt or equity financing to fund operations, which may or may not be available. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Note 2 – Summary of Significant Accounting Policies
Use of estimates – The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates relate to the valuation of stock-based compensation expense, forecasts used in assessing the Company’s liquidity disclosures, and useful lives of property and equipment and intangible assets. Actual results could differ from those estimates.
| F-5 |
Innovega Inc.
Notes to the Financial Statements
As of and For the Periods Ended June 30, 2021 and December 31, 2020
Note 2 – Summary of Significant Accounting Policies (continued)
Fair value of financial instruments – The Company’s financial instruments consist of cash and cash equivalents. The fair value of the Company’s financial instruments approximates their recorded values due to the short-term maturities of these financial instruments.
The Company establishes the fair value of its assets and liabilities using the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The current accounting guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Quoted prices for similar assets or liabilities in active markets or inputs that are observable.
Level 3 – Inputs that are unobservable.
The fair value of warrants issued during prior periods was estimated on the date of issuance using the Black-Scholes method with the following assumptions:
| 2019 | 2018 | |||||||
| Expected term | 5 years | 5 years | ||||||
| Stock price on grant date | $ | 0.38 | $ | 0.38 | ||||
| Interest rate | 2.39 | % | 2.83 | % | ||||
| Volatility | 120 | % | 123 | % | ||||
| Dividend yield | 0 | % | 0 | % | ||||
Cash and cash equivalents – Cash and cash equivalents include highly liquid investments with an original maturity of three months or less on the date of purchase.
Concentration of credit risk – Financial instruments that potentially expose the Company to concentrations of credit risk consist principally of cash and cash equivalents, which are held with financial institutions in amounts that may exceed federally insured limits. The Company has not experienced any losses on its deposits of cash and cash equivalents since inception.
Property and equipment, net – Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Laboratory equipment is depreciated over a three-year life, computer equipment is depreciated over a two-year life, and furniture and fixtures are depreciated over a seven-year life. Leasehold improvements are stated at cost and amortized using the straight-line method over the remaining lease term.
| F-6 |
Innovega Inc.
Notes to the Financial Statements
As of and For the Periods Ended June 30, 2021 and December 31, 2020
Note 2 – Summary of Significant Accounting Policies (continued)
Intangible assets, net – It is the Company’s policy to capitalize patent filing fees for patents in which they believe they will receive an economic benefit. Intangible assets consist primarily of patent filing fees (Note 5). Intangible assets are amortized using the straight-line method over their useful lives of up to 20 years.
Impairment of long-lived assets – The Company reviews the carrying value of long-lived assets used in operations whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Factors that would necessitate an impairment assessment include a significant adverse change in the extent or manner in which an asset is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset, or a significant decline in the observable market value of an asset, among others. As of June 30, 2021 and December 31, 2020, there were no indicators of impairment of long-lived assets.
Research and development costs – All research and development costs are charged to expense as incurred, except for certain supplies, which are expensed when used.
Revenue Recognition – The company has historically derived its revenue primarily from government grants and contracts. Cost reimbursement grant and contract revenue is recognized and recorded as related research expenses are incurred. The Company receives reimbursement for both direct costs and allocated indirect costs. Direct and indirect costs reimbursed by United States government agencies are subject to review and audit by such agencies. Advances received but not yet earned under the various research grants and contracts are reported as deferred revenue. Revenue in the current year is from a cost-plus based collaboration agreement received for providing the product and channel development services relating to an LV&B (low-vision and blindness) product-level solution.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” The Company adopted the new standard as of January 1, 2020, utilizing a modified retrospective transition method. Adoption of the new standard resulted in no changes for revenue recognition as the Company recognized revenue in 2020 once certain engineering and clinical services were provided.
Advertising expense – The Company expenses advertising costs as they are incurred. Advertising expense for the periods ended June 31, 2020 and December 31, 2020 was approximately $992 and $997, respectively.
Income taxes – The Company records deferred tax assets and liabilities resulting from temporary differences between the tax basis of assets and liabilities, and their reported amounts in the financial statements that will result in taxable deductions or income in future years. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the date of change. A valuation allowance is established when necessary to reduce deferred income tax assets to the amount expected to be realized.
| F-7 |
Innovega Inc.
Notes to the Financial Statements
As of and For the Periods Ended June 30, 2021 and December 31, 2020
Note 2 – Summary of Significant Accounting Policies (continued)
Stock-based compensation – Compensation costs related to equity instruments granted are generally recognized at the grant-date fair value of the awards. Additionally, the Company accounts for forfeitures as they occur. No related tax benefits of the stock-based compensation costs have been recognized since the Company’s inception.
For the periods ended June 30, 2021 and December 31, 2020, the Company recognized $0 and $38,688, respectively, in stock-based compensation expense associated with equity awards granted to employees, directors, or officers of the Company or to third-party consultants.
Equity instruments awarded to non-employees are periodically remeasured as the underlying awards vest, unless the instruments are fully vested, immediately exercisable, and non-forfeitable on the date of grant.
The Company generally grants stock options to purchase common stock with exercise prices equal to the value of the underlying stock, as determined by the Board of Directors on the date the equity award was granted. The Board of Directors determines the value of the underlying stock by considering a number of factors, including third party valuation, historical and projected financial results, the risks the Company faced at the time, the preferences of the Company’s preferred stockholders, and the lack of liquidity of the Company’s common stock.
The fair value of options granted to employees and non-employees during the prior period was estimated on the date of grant using the Black-Scholes method with the following assumptions:
| 2020 | ||||
| Expected term | 6 years | |||
| Interest rate | 0.35 | % | ||
| Volatility | 61 | % | ||
| Dividend yield | 0 | % | ||
| Stock Price | $ | 0.37 | ||
The Company estimates the term of the award for employees using the simplified method. For non-employees, the Company uses the contractual term, which is generally 10 years, as the expected term. As the Company does not have a public trading history for its common shares, the expected volatility incorporates historical volatility of similar entities whose share prices are publicly available. The risk-free interest rate is based upon U.S. Treasury securities with remaining terms similar to the expected term of the share-based awards.
| F-8 |
Innovega Inc.
Notes to the Financial Statements
As of and For the Periods Ended June 30, 2021 and December 31, 2020
Note 2 – Summary of Significant Accounting Policies (continued)
Recently issued accounting pronouncements – In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize assets and liabilities for leases currently classified as operating leases. Under the new standard a lessee will recognize a liability on the balance sheet representing the lease payments owed, and a right-of-use-asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and lease liabilities. The new standard is effective for the Company on January 1, 2022. Early adoption of the standard is permitted. At this time, the Company believes the most significant impact to the financial statements will relate to the recording of a right of use asset and the associated liability. The Company has determined that it will not early adopt the standard and is currently evaluating the impact of the standard on the financial statements.
In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for share-based payments granted to nonemployees for goods and services. Under the ASU, most of the guidance on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. As a result, most of the guidance in ASC 718 associated with employee share-based payments, including most requirements related to classification and measurement, applies to nonemployee share-based payment arrangements. For all entities, the amendments are effective for annual periods beginning after December 15, 2019, and interim periods within annual periods beginning after December 15, 2020. Early adoption is permitted for any entity in any interim or annual period for which financial statements have not been issued or made available for issuance, but not before an entity adopts ASC 606. The Company has adopted ASU 2018-07 in 2020 without material impact.
Subsequent events – The Company evaluated subsequent events through Sept 9, 2021, the date on which these financial statements were available to be issued (see Note 16).
Note 3 – Earnings per Share Attributable to Common Stockholders
Basic earnings per share is computed by dividing net income attributable to common shareholders by the weighted-average number of common shares outstanding during the period without consideration for common stock equivalents. Diluted net income per share attributable to common shareholders is computed by dividing net income by the weighted-average number of common shares outstanding during the period and potentially dilutive common share equivalents, including stock options, restricted stock units and restricted stock awards, except in cases where the effect of the common stock equivalent would be antidilutive. Potential common stock equivalents consist of common stock issuable upon exercise of stock options and vesting of restricted stock units and restricted stock awards using the treasury stock method. All potentially dilutive shares are anti-dilutive for both years due to the Company’s net loss.
| F-9 |
Innovega Inc.
Notes to the Financial Statements
As of and For the Periods Ended June 30, 2021 and December 31, 2020
Note 3 – Earnings per Share Attributable to Common Stockholders (continued)
| June 30, 2021 | June 30, 2020 | |||||||
| Basic earnings per share: | ||||||||
| Net loss attributable to common stockholders (numerator) | $ | (1,308,434 | ) | $ | (1,024,608 | ) | ||
| Weighted-average common shares outstanding (denominator) | 9,427,968 | 9,407,968 | ||||||
| Basic earnings per share | $ | (0.14 | ) | $ | (0.11 | ) | ||
| Diluted earnings per share: | ||||||||
| Net loss attributable to common stockholders (numerator) | $ | (1,308,434 | ) | $ | (1,024,608 | ) | ||
| Weighted-average common shares outstanding (denominator) | 9,427,968 | 9,407,968 | ||||||
| Diluted earnings per share | $ | (0.14 | ) | $ | (0.11 | ) | ||
The potential dilutive effects of converting all outstanding convertible notes, SAFE notes and warrants are outlined below. Convertible and SAFE notes were converted in May 2021 as part of the Series A preferred stock offering.
| 2021 | 2020 | |||||||
| Preferred shares | 6,777,949 | 3,518,238 | ||||||
| Convertible notes | 0 | 1,600,880 | ||||||
| SAFE notes | 0 | 1,121,094 | ||||||
| Warrants | 132,514 | 132,514 | ||||||
| Stock options | 2,045,281 | 2,045,281 | ||||||
Note 4 – Property and Equipment, Net
Property and equipment consist of the following at June 30, 2021 and December 31, 2020:
| 2021 | 2020 | |||||||
| Computer Equipment and Software | $ | 112,518 | $ | 112,518 | ||||
| Laboratory Equipment | $ | 267,642 | $ | 256,202 | ||||
| Furniture and Fixtures | $ | 2,577 | $ | 2,577 | ||||
| Less accumulated depreciation | (301,836 | ) | (275,570 | ) | ||||
| $ | 80,901 | $ | 95,727 | |||||
Depreciation expense related to property and equipment was $26,266 and $23,520 for the periods ended June 30, 2021 and 2020, respectively.
| F-10 |
Innovega Inc.
Notes to the Financial Statements
As of and For the Periods Ended June 30, 2021 and December 31, 2020
Note 5 – Intangible Assets, Net
Intangible assets consist of the following at June 30, 2021 and December 31, 2020:
| 2021 | 2020 | |||||||
| Capitalized patent filing fees | $ | 807,303 | $ | 689,566 | ||||
| Less accumulated amortization | (203,160 | ) | (185,924 | ) | ||||
| $ | 604,143 | $ | 503,642 | |||||
The Company has determined the patent filing fees to have an original useful life of 20 years based upon the estimated period the Company will obtain future economic benefit from the related patents. The patent filing fees are amortized over the estimated life using the straight-line method. Amortization expense of $17,236 and $13,178 for the periods ended June 30, 2021 and 2020, respectively, was recorded within general and administration expense. Estimated amortization expense related to intangible assets for the years ending December 31 are as follows:
| 2021 (July through December) | $ | 17,929 | ||
| 2022 | 35,858 | |||
| 2023 | 35,858 | |||
| 2024 | 35,858 | |||
| 2025 | 35,858 | |||
| Thereafter | 442,782 | |||
| $ | 604,143 |
Note 6 – Shareholder Notes
One note totaling $100,000 plus accrued interest was paid off in 2020. A new note from the CEO for $100,000 was issued in July 2020 at an interest rate of 1% per month. Additionally, four new notes totaling $600,000 were issued in 2021 with $300,000 classified as short-term debt and the other $300,000 classified as long-term debt. In September, 2021, one note for $50,000 plus accrued interest was fully repaid.
Note 7 – Convertible Notes
During 2019, the Company issued convertible notes (2019 Notes) for total proceeds, net of issuance costs of $126,772, of $2,402,337. All notes have a maturity date of January 22, 2021, and accrue simple interest at 5% per annum. All notes have a 20% conversion discount of the original issue price of new preferred stock. All convertible notes converted to Series A-2 Preferred Stock in May 2021.
Loan costs are amortized over the loan period. The unamortized balance of the loan costs was $4,552 as of December 31, 2020.
| F-11 |
Innovega Inc.
Notes to the Financial Statements
As of and For the Periods Ended June 30, 2021 and December 31, 2020
Note 8 – SAFE Notes
The Company issued SAFE notes in the amount of $1,831,875 and $500,000 for the years ended December 31, 2020 and 2019 for total proceeds, net of issuance costs of $20,346, of $2,311,529. All convertible notes converted to Series A-3 Preferred Stock in May 2021.
Note 9 – SBA Loans
The Company borrowed $112,420 in April 2020 from the US Small Business Administration under the Payroll Protection Program (PPP). The Company also borrowed $6,000.00 in April from the US Small Business Administration under the Economic Injury Disaster Loan (EIDL). The PPP loan was forgiven in April 2021 and both loans were written off then.
Note 10 – Stockholders’ Deficit
Preferred Stock
The following is a summary of terms for the preferred stock:
This summary does not purport to be complete and is qualified in its entirety by the provisions of the Company’s Second Amended and Restated Certificate of Incorporation and Bylaws.
Each share of Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share at the office of the company or any transfer agent for the Preferred Stock into that number of fully-paid, nonassessable shares of Common Stock determined by dividing the Original Issue Price for the relevant series by the Conversion Price for such series. (The number of shares of Common Stock into which each share of Preferred Stock of a series may be converted is hereinafter referred to as the “Conversion Rate” for each such series.)
The Original Issue Price is $1.6583 per share for the Series Seed Preferred Stock, $3.00 per share for the Series A-1 Preferred Stock, $1.66829 per share for the Series A-2 Preferred Stock and $2.075 per share for the Series A-3 Preferred Stock (subject to customary adjustments including for: (i) stock splits, (ii) anti-dilution adjustments from issuing new shares of common stock (with specified exceptions) at less than the conversion price and (iii) the effects a reorganization or reclassification of its common stock as set forth in the Second Amended and Restated Certificate of Incorporation).
Each share of Preferred Stock shall automatically be converted into fully-paid, non-assessable shares of Common Stock at the then effective Conversion Rate for such share (i) immediately prior to the closing of a firm commitment underwritten initial public offering pursuant to an effective registration statement filed under the Securities Act of 1933, as amended covering the offer and sale of Common Stock, provided that aggregate gross proceeds to the company are not less than $5,000,000 , (ii) upon the receipt by the company of a written request for such conversion from the holders of a majority of the Preferred Stock then outstanding (voting as a single class and on an as-converted basis) or, if later, the effective date for conversion specified in such requests, or (iii) upon the prior cumulative conversion of a majority of the Preferred Stock.
| F-12 |
Innovega Inc.
Notes to the Financial Statements
As of and For the Periods Ended June 30, 2021 and December 31, 2020
Note 10 – Stockholders’ Deficit (continued)
Liquidation Rights. Subject to the rights of any series of Preferred Stock that ranks on liquidation prior to the Designated Preferred Stock, in the event of any liquidation, dissolution or winding up of the company, either voluntary or involuntary, the holders of the Designated Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets of the company to the holders of the Common Stock by reason of their ownership of such stock, an amount per share for each share of Designated Preferred Stock held by them equal to the greater of (i) the Liquidation Preference specified for such share of Designated Preferred Stock, plus all declared but unpaid dividends (if any) on such share of Designated Preferred Stock, or such lesser amount as may be approved by the holders of the majority of the outstanding shares of Designated Preferred Stock or (ii) such amount per share as would have been payable had all shares of Designated Preferred Stock been converted into Common Stock pursuant to the Second Amended and Restated Certificate of Incorporation prior to such liquidation, dissolution or winding up of the company.
After the payment or setting aside for payment to the holders of Preferred Stock of the full amounts specified, the entire remaining assets of the company legally available for distribution shall be distributed pro rata to holders of the company and any other series of Preferred Stock entitled to continued participation in such distributions, in proportion to the number of shares of Common Stock held by them with equal priority, with the shares of such series of Preferred Stock being treated for this purpose as if they had been converted to shares of Common Stock at the then applicable conversion rate.
Dividends – In any calendar year, the holders of outstanding shares of Preferred Stock shall be entitled to receive dividends, when, as and if declared by the Board of Directors, out of any assets at the time legally available therefor, at the Dividend Rate specified for such shares of Preferred Stock payable in preference and priority to any declaration or payment of any Distribution on common stock in such calendar year. No Distributions shall be made with respect to the common stock unless dividends on the Preferred Stock have been declared in accordance with the preferences stated herein and all declared dividends on the Preferred stock have been paid or set aside for payment to the preferred stockholders. The right to receive dividends on shares of Preferred Stock shall not be cumulative, and no right to dividends shall accrue to holders of Preferred Stock by reason of the fact that dividends on said shares are not declared or paid. Subject to the rights of any series of Preferred Stock then outstanding that has a right to receive dividends prior to or on a parity with any series of Designated Preferred Stock, payment of any dividends to the holders of Preferred Stock shall be on a pro rata, pari passu basis in proportion to the Dividend Rates for each series of Preferred Stock.
After the payment or setting aside for payment of the dividends described above, any additional dividends (other than dividends on Common Stock payable solely in Common Stock) set aside or paid in any fiscal year shall be set aside or paid among the holders of the Designated Preferred Stock (and any other series of Preferred Stock entitled to share in such additional dividends) and Common Stock then outstanding in proportion to the greatest whole number of shares of Common Stock which would be held by each such holder if all shares of Preferred Stock were converted at the then-effective Conversion Rate.
Voting – Holders of preferred stock and the holders of common stock shall vote together and not as separate classes. Holders of preferred stock are entitled to the number of votes equal to the number of shares of common stock into which the shares of preferred stock held by such holder could be converted as of the record date. Each holder of shares of common stock are entitled to one vote for each share thereof held.
| F-13 |
Innovega Inc.
Notes to the Financial Statements
As of and For the Periods Ended June 30, 2021 and December 31, 2020
Note 10 – Stockholders’ Deficit (continued)
Redemption – Except in the case of a liquidation event, preferred stock is not redeemable.
Additional rights – The holders of the Preferred Stock are entitled to certain protective provisions that require the company to obtain the approval (by vote or written consent as provided by law) of the holders of a majority of the outstanding shares of the Preferred Stock (in addition to any other vote required by law or the Certificate of Incorporation or bylaws of the company), any such act or transaction or transactions effected without such approval being null and void ab initio and of no force or effect:
Amend, alter or repeal any provision of our Certificate of Incorporation or bylaws (including pursuant to a merger) if such action would materially adversely alter the rights, preferences, privileges or powers of, or restrictions provided for the benefit of the outstanding Preferred Stock;
Increase or decrease (other than for decreases resulting from conversion of the Preferred Stock) the authorized number of shares of any class of capital stock;
Authorize or create (by reclassification or otherwise) any new class or series of capital stock having rights, powers, or privileges set forth in the Certificate of Incorporation of the company, as then in effect, that are senior to or on a parity with any series of Preferred Stock, provided, that the designation of shares of undesignated Preferred Stock into a new series of Preferred Stock having rights, preferences or privileges senior to or on parity with any series of Designated Preferred Stock will not be deemed to adversely alter the rights, preferences, privileges or powers of, or restrictions provided for the benefit of the outstanding Preferred Stock;
Redeem or repurchase any shares of Common Stock or Preferred Stock (other than pursuant to employee or consultant agreements giving the company the right to repurchase shares upon the termination of services pursuant to the terms of the applicable agreement); or Liquidate, dissolve, or wind-up the business and affairs of the Corporation, or consent, agree or commit to do any of the forgoing; and
Amend the Section providing for the above-referenced protections.
The company has entered into an Amended and Restated Stockholders’ Agreement with certain holders of shares of common stock (individually a the “Common Holder” and collectively the “Common Holders”), the holders of shares of Series Seed Preferred Stock, and the holders of Series A-1 Preferred Stock, Series A-2 Preferred Stock and Series A-3 Preferred Stock (individually, an “Investor” and collectively, the “Investors” and together with the Common Holders, the “Stockholders”).
The company and its existing stockholders are in the process of entering into an Amended and Restated Stockholders’ Agreement. Purchasers of the Series A-1Preferred Stock will also enter into the Amended and Restated Stockholders Agreement. Pursuant to the Amended and Restated Stockholders’ Agreement, at each annual meeting of the stockholders of the company or any meeting of the stockholders of the company at which members of the Board of Directors are to be elected by the stockholders, the stockholders who are parties to this Agreement will agree to vote their shares to elect:
| F-14 |
Innovega Inc.
Notes to the Financial Statements
As of and For the Periods Ended June 30, 2021 and December 31, 2020
Note 10 – Stockholders’ Deficit (continued)
two (2) Officer Designees (as defined below) as Common Directors;
one (1) Common Designee (as defined below) as a Common Director; and
one (1) Series Seed Designee (as defined below) as the Series Seed Director.
The designees to the Board described above, (each a “Designee”) are selected as follows:
The “Officer Designees” shall be Stephen Willey and Jerome Legerton for so long as Stephen Willey and Jerome Legerton remain officers, employees or consultants of the company, except that if Stephen Willey or Jerome Legerton declines or is unable to serve, their successors shall be designated by the holders of a majority of the shares of common stock held by the Common Holders.
The “Common Designee” shall be chosen by the Common Holders holding at least a majority of the shares of Common Stock held by all Common Holders, and who will initially be Shane Kim.
The “Series Seed Designee” shall be chosen by the Investors holding at least a majority of the outstanding shares of Series Seed Preferred Stock subject to the approval of the other members of the Board, whose consent shall not be unreasonably withheld, and who will initially be Jeff Bradley.
| F-15 |
Innovega Inc.
Notes to the Financial Statements
As of and For the Periods Ended June 30, 2021 and December 31, 2020
Note 10 – Stockholders’ Deficit (continued)
Common stock reserved for future issuance – Common stock and Series Seed Preferred stock reserved for future issuance consists of the following at June 30, 2021 and December 31, 2020:
| June 30, 2021 | December 31, 2020 | |||||||
| Common Shares | ||||||||
| Authorized | 50,000,000 | 20,000,000 | ||||||
| Issued | 9,447,968 | 9,447,968 | ||||||
| Remaining to be issued | 40,552,032 | 10,552,032 | ||||||
| Series Seed Preferred | ||||||||
| Authorized | 3,518,238 | 3,518,238 | ||||||
| Issued | 3,518,238 | 3,518,238 | ||||||
| Remaining to be issued | - | - | ||||||
| Series A-1 Preferred | ||||||||
| Authorized | 5,000,000 | - | ||||||
| Issued | 567,496 | - | ||||||
| Remaining to be issued | 4,432,504 | - | ||||||
| Series A-2 Preferred | ||||||||
| Authorized | 1,610,514 | - | ||||||
| Issued | 1,610,514 | - | ||||||
| Remaining to be issued | - | - | ||||||
| Series A-3 Preferred | ||||||||
| Authorized | 1,123,787 | - | ||||||
| Issued | 1,123,787 | - | ||||||
| Remaining to be issued | - | - | ||||||
| Undesignated Preferred Stock | ||||||||
| Authorized | 5,000,000 | - | ||||||
| Issued | - | - | ||||||
| Remaining to be issued | 5,000,000 | - | ||||||
| F-16 |
Innovega Inc.
Notes to the Financial Statements
As of and For the Periods Ended June 30, 2021 and December 31, 2020
Note 11 – Stock Option Plan
Stock options – In 2008, the Company adopted the 2008 Equity Incentive Plan (the Equity Incentive Plan) that provides for the issuance of up to 1,000,000 incentive and nonqualified common stock options to employees, directors, officers, and consultants of the Company. As of January 1, 2016, the Company had authorized the issuance of up to 1,950,000 incentive and nonqualified common stock options. On June 11, 2017, the Company authorized an additional 1,952,732 shares of common stock for issuance under the Plan. As of December 31, 2017, there were 2,231,274 shares available for grant under the Plan. The Equity Incentive Plan provides for the grant of incentive stock option and non-statutory stock options awards to eligible recipients. Recipients of incentive stock options shall be eligible to purchase shares of the Company’s common stock at an exercise price equal to no less than the estimated fair market value of such stock on the date of grant. The contractual term of options granted under the Equity Incentive Plan is four years. The options generally vest over the requisite service period of four years. The following table summarizes the Company’s stock option activity:
| Outstanding at December 31, 2019 | 1,950,000 | |||
| Vested at end of year | 1,443,761 | |||
| Shares expected to vest | 506,239 | |||
| Vested and expected to vest | 1,950,000 | |||
| Granted during the year | 95,281 | |||
| Outstanding at December 31, 2020 | 2,045,281 | |||
| Vested at end of year | 1,742,121 | |||
| Shares expected to vest | 303,160 | |||
| Vested and expected to vest | 2,045,281 | |||
| Outstanding at June 30, 2021 | 2,490,104 | |||
| Vested at end of year | 1,938,598 | |||
| Shares expected to vest | 417,306 | |||
| Vested and expected to vest | 1,938,598 | |||
| Granted during the year | 255,623 |
The weighted-average grant-date fair value per share of options granted during the periods ended June 30, 2021 and December 31, 2020, was $0.75 and $0.37, respectively. The intrinsic value for the periods June 30, 2021 and December 31, 2020, was $282,240 for both periods.
| F-17 |
Innovega Inc.
Notes to the Financial Statements
As of and For the Periods Ended June 30, 2021 and December 31, 2020
Note 11 – Stock Option Plan (continued)
During the periods ended June 30, 2021 and December 31, 2020, 205,907 and 298,360 and options vested, respectively, with weighted-average grant-date fair value per share at June 30, 2021 and December 31, 2020, of $0.24 and $0.23, respectively.
At June 30, 2021, there were 417,306 unvested options outstanding that have a weighted-average life of 3.1 years, which have a weighted-average grant-date fair value per share of $0.24. For the period ended June 30, 2021, the Company granted 166,736 stock options to consultants.
In accounting for stock options with performance conditions, the Company assesses the probability that performance conditions will be achieved and, if probable, compensation cost is accrued and recognized ratably over the estimated service period to achieve the performance conditions. If the Company assesses that is not probable the performance conditions will be achieved, no compensation cost is recognized. None of the stock options that have been granted to consultants have been exercised.
Note 12 – Income Taxes
Significant components of the Company’s deferred tax assets at December 31 are shown below. A valuation allowance of $4,173,536 has been recorded at December 31, 2020, to offset the deferred tax assets as realization of such assets does not meet the “more likely than not” threshold. The change in the valuation allowance was $1,195,436 for the year ended December 31, 2020.
| 2020 | ||||
| Deferred tax assets | ||||
| Accrual to cash | $ | 541,408 | ||
| Property and equipment | 6,132 | |||
| Net operating loss carryforwards | 3,742,985 | |||
| Deferred loan costs | 33,264 | |||
| Total deferred tax assets | $ | 4,323,789 | ||
| Less valuation allowance | $ | (4,323,789 | ) | |
| Total deferred tax assets | $ | - | ||
| Deferred tax liabilities | ||||
| Intangibles | $ | (150,253 | ) | |
| Total deferred tax liabilities | $ | (150,253 | ) | |
| Net deferred tax assets | $ | - | ||
| F-18 |
Innovega Inc.
Notes to the Financial Statements
As of and For the Periods Ended June 30, 2021 and December 31, 2020
Note 12 – Income Taxes (continued)
At December 31, 2020, the Company has federal net operating loss carryforwards of $8,774,038. The federal loss carryforwards begin to expire in 2031 unless previously utilized. Utilization of the net operating loss may be subject to a substantial annual limitation due to ownership change limitations that may have occurred or that could occur in the future, as required by IRC Section 382.
The Company applies authoritative guidance relating to the accounting for uncertainty in income taxes. The guidance outlines the recognition threshold and measurement attributes for financial statement disclosure of tax positions taken, or expected to be taken, on a tax return. The impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more likely than not to be sustained upon audit by the relevant taxing authority. An uncertain tax position will not be recognized if it has a less than 50% likelihood of being sustained. There are no unrecognized tax benefits included in the Company’s balance sheet at December 31, 2020. The Company has not recorded any interest or penalties due to uncertain tax positions.
The Company’s effective tax rate differs from the amount computed by applying the statutory federal income tax rate of 21% to pre-tax losses due to the effects of nondeductible items and the valuation allowance. The Company files an income tax return in the U.S. Federal, Florida and California jurisdictions. The Company’s statute of limitations remains open for years 2015 through 2020.
Note 13 – Commitments and Contingencies
Operating leases – The Company leases office space in San Diego, California and Bellevue, Washington.
Rental expense for the periods ended June 30, 2021 and 2020, totalled $24,103 and $28,213, respectively.
As of June 30, 2021, future minimum rental payments required under operating leases and services agreements that have initial or remaining noncancelable lease terms in excess of one year are as follows:
| 2021 | $ | 38,832 |
Note 14 – Related Parties
The Company engages Global Ophthalmic Consultants, LLC to perform certain clinical lab consulting and support services for the Company. Dr. Jerome Legerton, Innovega’s Chief Regulatory and Clinical Officer, is also a principal of Global Ophthalmic Consultants, LLC. During the periods ended June 30, 2021 and 2020, the Company paid Global Ophthalmic Consultants, LLC $0 and $38,790, respectively. As of the periods ending June 30, 2021 and 2020, the Company had no outstanding amounts due, or receivables from, Global Ophthalmic Consultants, LLC.
| F-19 |
Innovega Inc.
Notes to the Financial Statements
As of and For the Periods Ended June 30, 2021 and December 31, 2020
Note 14 – Related Parties (continued)
The Company borrowed $200,000 from the CEO, Stephen Willey, as three shareholder notes each at an interest rate of 1% per month. The first note for $100,000 was in July 2020 and the other two notes for $50,000 each were in March 2021.
The Company also borrowed $100,000 from the Chief Clinical Officer, Jerome Legerton, in March 2021 at an interest rate of 1% per month. In March 2021, the Company also borrowed $50,000 from an investor and a Director, Jeffrey Bradley, and $350,000 from an investor, Brian Chou, each at an interest rate of 1% per month.
The note for $50,000 to Jeffrey Bradley was repaid in full, including all accrued interest, in September 2021.
Note 15 – Defined Contribution Plan
The Company has established a 401(k) plan, a defined contribution plan for its employees, with eligibility commencing on an employee’s date of hire. Contributions to the 401(k) plan are based on a percentage of the employee’s gross compensation, limited by Internal Revenue Service guidelines for such plans. The Company made matching contributions to the plan for the periods ending June 30, 2021 and 2020, of $32,520 and $28,530, respectively.
Note 16 – Subsequent Events
In 2021, the Company has filed Form 1-A with the Securities and Exchange Commission (SEC) as part of its planned Reg A+ Offering. The Company was notified on February 4, 2021 that the firm’s Form 1-A was accepted by the SEC. The Form 1-A was qualified by the SEC on March 31, 2021. As of September 9, 2021, the Company has raised total gross proceeds of approximately $$3 million from this Series A-1 Offering.
The $50,000 loaned to Jeffrey Bradley, Director, was repaid in full, including all accrued interest, in September 2021.
Management is currently evaluating the recent outbreak of the COVID-19 virus and its impact on the Company’s operations and financial performance and has concluded that while it is reasonably possible that the virus could have a negative effect on the fair value of the Company and results of operations, the specific impact is not readily determinable as of the date of these financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
The Company leased its headquarters on a month-to-month basis under a lease agreement that expires on November 30, 2021. A new office lease located at 11031 Via Frontera, San Diego, California was signed in September 2021 for a 62-month term commencing on December 1, 2021 and ending on January 31, 2027. The lease includes: (i) an option to renew the lease on an additional three-year term and (ii) a one-time option to terminate this Lease on the last day of the thirty sixth (36th) full calendar month of the lease term. The Company will lease 5,243 square feet at an average weighted cost of approximately $1.65 per square foot.
| F-20 |
Item 4. Exhibits
The documents listed in the Exhibit Index of this report are incorporated by reference or are filed with this Report, in each case as indicated below.
| 7 |
SIGNATURES
Pursuant to the requirements of Regulation A, the issuer has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in San Diego, State of California, on, September 24, 2021.
| INNOVEGA INC. | ||
| By | /s/ Stephen Willey | |
| Stephen Willey, | ||
| Chief Executive Officer | ||
| The following persons in the capacities and on the dates indicated have signed this Report. | ||
| /s/ Stephen Willey | ||
| Stephen Willey, | ||
| Chief Executive Officer, Principal Financial Officer, Principal Accounting Officer, Director | ||
| Date: | September 24, 2021 | |
| /s/ Jerome Legerton | ||
| Jerome Legerton, | ||
| Chief Clinical & Regulatory Officer, Secretary and Director | ||
| Date: | September 24, 2021 | |
| /s/ Shane Kim | ||
| Shane Kim, | ||
| Director | ||
| Date: | September 24, 2021 | |
| /s/ Jeff Bradley | ||
| Jeff Bradley, | ||
| Director | ||
| Date: | September 24, 2021 | |
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