UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 26, 2020

Or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number: 0-27598

 

IRIDEX CORPORATION

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

77-0210467

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

 

1212 Terra Bella Avenue

Mountain View, California

 

94043-1824

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (650) 940-4700

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Class

 

Trading Symbol

 

Name of Exchange on Which Registered

Common Stock, par value $0.01 per share

 

IRIX

 

Nasdaq Global Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes        No   

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes        No   

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

 

 

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes        No   

 

The number of shares of common stock, $0.01 par value, issued and outstanding as of October 22, 2020 was 13,897,563.

 

 

 


TABLE OF CONTENTS

 

Items

 

 

Page

 

 

 

 

PART I. FINANCIAL INFORMATION

5

 

 

 

 

Item 1.

 

Condensed Consolidated Financial Statements (Unaudited)

5

 

 

 

 

 

 

Unaudited Condensed Consolidated Balance Sheets as of September 26, 2020 and December 28, 2019

5

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 26, 2020 and September 28, 2019

6

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 26, 2020 and September 28, 2019

7

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Stockholder's Equity for the three and nine months ended September 26, 2020 and September 28, 2019

8

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 26, 2020 and September 28, 2019

9

 

 

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

10

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

25

 

 

 

 

Item 4.

 

Controls and Procedures

25

 

 

 

 

PART II. OTHER INFORMATION

26

 

 

 

 

Item 1.

 

Legal Proceedings

26

 

 

 

 

Item 1A.

 

Risk Factors

26

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

43

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

43

 

 

 

 

Item 4.

 

Mine Safety Disclosures

43

 

 

 

 

Item 5.

 

Other Information

43

 

 

 

 

Item 6.

 

Exhibits

44

 

 

 

 

Signatures

45

 

 

 

 

2


NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as may, will, should, expects, plans, anticipates, could, intends, target, projects, contemplates, believes, estimates, predicts, potential, or continue or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans, or intentions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:

 

 

our future financial performance, including our expectations regarding our revenue, cost of revenue, gross profit or gross margin, operating expenses (including changes in sales and marketing, research and development and general and administrative expenses), and our ability to achieve and maintain future profitability;

 

the impact of the COVID-19 pandemic and related responses of business and governments to the pandemic on our operations and personnel, and on commercial activity and demand of our products, business operations and results of operations;

 

our ability to raise additional capital;

 

customer acceptance and purchase of our existing products and new products;

 

our ability to maintain and expand our customer base;

 

competition from other products;

 

the impact of foreign currency exchange rate and interest rate fluctuations on our results and sales;

 

the pace of change and innovation in the markets in which we participate and the competitive nature of those markets;

 

our business strategy and our plan to build our business;

 

our ability to effectively manage our growth;

 

our costs of manufacturing and reliance on third party manufacturers;

 

our ability to forecast and meet product demand;

 

our ability to discover defects in our products and systems;

 

our international expansion and sales strategy;

 

our operating results and cash flows;

 

our beliefs and objectives for future operations;

 

our relationships with third parties;

 

our ability to maintain, protect, and enhance our intellectual property rights;

 

our ability to maintain, protect, and enhance our information technology systems and data;

 

our ability to maintain our facilities in good working order;

 

our ability to recover the carrying value of goodwill;

 

the impact of expensing stock options and other equity awards;

 

our ability to successfully defend litigation brought against us;

 

our ability to indemnify our directors and officers;

 

our ability to repay indebtedness and have indebtedness forgiven;

 

our ability to successfully expand in our existing markets and into new markets;

 

sufficiency of cash to meet cash needs for at least the next 12 months;

 

our ability to comply with laws, policies, and regulations that currently apply or become applicable to our business both in the United States and internationally;

 

our ability to attract and retain qualified employees, key personnel, and source suppliers;

 

the future trading prices of our common stock; and

 

our ability to pay dividends in the future.

 

3


In addition, statements that we believe and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

 

You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations, and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors described in the section titled Risk Factors and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. We cannot assure you that the results, events, and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements.

 

The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which such statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to conform such statements to actual results or revised expectations, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make.

As used in this Quarterly Report on Form 10-Q, the terms “Company,” “IRIDEX,” “we,” “us” and “our” refer to IRIDEX Corporation, and its consolidated subsidiaries.

4


PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited)

IRIDEX Corporation

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands except share and per share data)

 

 

 

September 26, 2020

 

 

December 28, 2019 (1)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

11,932

 

 

$

12,653

 

Accounts receivable, net of allowance for doubtful accounts of

$278 as of September 26, 2020 and $187 as of December 28, 2019

 

 

6,083

 

 

 

9,323

 

Inventories

 

 

7,004

 

 

 

8,174

 

Prepaid expenses and other current assets

 

 

542

 

 

 

401

 

Total current assets

 

 

25,561

 

 

 

30,551

 

Property and equipment, net

 

 

451

 

 

 

730

 

Intangible assets, net

 

 

72

 

 

 

84

 

Goodwill

 

 

533

 

 

 

533

 

Operating lease right-of-use assets, net

 

 

1,693

 

 

 

2,764

 

Other long-term assets

 

 

149

 

 

 

151

 

Total assets

 

$

28,459

 

 

$

34,813

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,475

 

 

$

2,592

 

Accrued compensation

 

 

1,889

 

 

 

2,398

 

Accrued expenses

 

 

1,682

 

 

 

1,544

 

Current portion of PPP loan

 

 

1,526

 

 

 

 

Accrued warranty

 

 

182

 

 

 

380

 

Deferred revenue

 

 

1,072

 

 

 

1,450

 

Operating lease liabilities

 

 

1,387

 

 

 

1,414

 

Total current liabilities

 

 

9,213

 

 

 

9,778

 

Long-term liabilities:

 

 

 

 

 

 

 

 

PPP loan

 

 

971

 

 

 

 

Accrued warranty

 

 

102

 

 

 

156

 

Deferred revenue

 

 

286

 

 

 

360

 

Operating lease liabilities

 

 

616

 

 

 

1,795

 

Other long-term liabilities

 

 

19

 

 

 

19

 

Total liabilities

 

 

11,207

 

 

 

12,108

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value, 2,000,000 shares authorized, no shares

   issued and outstanding

 

 

 

 

 

 

Common stock, $0.01 par value:

 

 

 

 

 

 

 

 

Authorized: 30,000,000 shares;

 

 

 

 

 

 

 

 

Issued and outstanding 13,897,353 and 13,785,233 shares

as of September 26, 2020 and December 28, 2019, respectively

 

 

148

 

 

 

147

 

Additional paid-in capital

 

 

73,837

 

 

 

73,093

 

Accumulated other comprehensive income

 

 

32

 

 

 

80

 

Accumulated deficit

 

 

(56,765

)

 

 

(50,615

)

Total stockholders’ equity

 

 

17,252

 

 

 

22,705

 

Total liabilities and stockholders’ equity

 

$

28,459

 

 

$

34,813

 

 

(1)

Derived from the audited consolidated financial statements included in the Annual Report on Form 10-K filed with the SEC for the year ended December 28, 2019.

The accompanying notes are an integral part of these condensed consolidated financial statements.

5


IRIDEX Corporation

Condensed Consolidated Statements of Operations

(Unaudited, in thousands except per share data)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 26, 2020

 

 

September 28, 2019

 

 

September 26, 2020

 

 

September 28, 2019

 

Total revenues

 

$

8,803

 

 

$

10,664

 

 

$

24,043

 

 

$

31,685

 

Cost of revenues

 

 

5,149

 

 

 

6,381

 

 

 

14,067

 

 

 

18,596

 

Gross profit

 

 

3,654

 

 

 

4,283

 

 

 

9,976

 

 

 

13,089

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

869

 

 

 

1,007

 

 

 

2,395

 

 

 

2,894

 

Sales and marketing

 

 

2,959

 

 

 

3,508

 

 

 

8,804

 

 

 

11,061

 

General and administrative

 

 

1,672

 

 

 

1,621

 

 

 

5,060

 

 

 

6,491

 

Total operating expenses

 

 

5,500

 

 

 

6,136

 

 

 

16,259

 

 

 

20,446

 

Loss from operations

 

 

(1,846

)

 

 

(1,853

)

 

 

(6,283

)

 

 

(7,357

)

Other income, net

 

 

135

 

 

 

75

 

 

 

153

 

 

 

127

 

Loss from operations before provision for income taxes

 

 

(1,711

)

 

 

(1,778

)

 

 

(6,130

)

 

 

(7,230

)

Provision for income taxes

 

 

8

 

 

 

7

 

 

 

20

 

 

 

22

 

Net loss

 

$

(1,719

)

 

$

(1,785

)

 

$

(6,150

)

 

$

(7,252

)

Net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.12

)

 

$

(0.13

)

 

$

(0.44

)

 

$

(0.53

)

Diluted

 

$

(0.12

)

 

$

(0.13

)

 

$

(0.44

)

 

$

(0.53

)

Weighted average shares used in computing net loss

   per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

13,893

 

 

 

13,768

 

 

 

13,824

 

 

 

13,682

 

Diluted

 

 

13,893

 

 

 

13,768

 

 

 

13,824

 

 

 

13,682

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

6


IRIDEX Corporation

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited, in thousands)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 26, 2020

 

 

September 28, 2019

 

 

September 26, 2020

 

 

September 28, 2019

 

Net loss

 

$

(1,719

)

 

$

(1,785

)

 

$

(6,150

)

 

$

(7,252

)

Foreign currency translation adjustments

 

 

(41

)

 

 

36

 

 

 

(48

)

 

 

32

 

Comprehensive loss

 

$

(1,760

)

 

$

(1,749

)

 

$

(6,198

)

 

$

(7,220

)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

7


IRIDEX Corporation

Condensed Consolidated Statements of Stockholders' Equity

(Unaudited, in thousands, except share data)

 

For the three months ended September 26, 2020

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income

 

 

Deficit

 

 

Total

 

Balances, June 27, 2020

 

 

13,856,969

 

 

$

148

 

 

$

73,619

 

 

$

73

 

 

$

(55,046

)

 

$

18,794

 

Employee stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

243

 

 

 

 

 

 

 

 

 

 

 

243

 

Release of restricted stock, net of taxes paid

 

 

40,384

 

 

 

-

 

 

 

(25

)

 

 

 

 

 

 

 

 

 

 

(25

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(41

)

 

 

 

 

 

 

(41

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,719

)

 

 

(1,719

)

Balances, September 26, 2020

 

 

13,897,353

 

 

$

148

 

 

$

73,837

 

 

$

32

 

 

$

(56,765

)

 

$

17,252

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 26, 2020

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income

 

 

Deficit

 

 

Total

 

Balances, December 28, 2019

 

 

13,785,233

 

 

$

147

 

 

$

73,093

 

 

$

80

 

 

$

(50,615

)

 

$

22,705

 

Employee stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

774

 

 

 

 

 

 

 

 

 

 

 

774

 

Release of restricted stock, net of taxes paid

 

 

112,120

 

 

1

 

 

 

(30

)

 

 

 

 

 

 

 

 

 

 

(29

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(48

)

 

 

 

 

 

 

(48

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,150

)

 

 

(6,150

)

Balances, September 26, 2020

 

 

13,897,353

 

 

$

148

 

 

$

73,837

 

 

$

32

 

 

$

(56,765

)

 

$

17,252

 

 

For the three months ended September 28, 2019

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income

 

 

Deficit

 

 

Total

 

Balances, June 29, 2019

 

 

13,746,959

 

 

$

147

 

 

$

72,685

 

 

$

66

 

 

$

(47,269

)

 

$

25,629

 

Employee stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

158

 

 

 

 

 

 

 

 

 

 

 

158

 

Release of restricted stock, net of taxes paid

 

 

31,913

 

 

0

 

 

 

(50

)

 

 

 

 

 

 

 

 

 

 

(50

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

36

 

 

 

 

 

 

 

36

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,785

)

 

 

(1,785

)

Balances, September 28, 2019

 

 

13,778,872

 

 

$

147

 

 

$

72,793

 

 

$

102

 

 

$

(49,054

)

 

$

23,988

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 28, 2019

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income

 

 

Deficit

 

 

Total

 

Balances, December 29, 2018

 

 

13,602,052

 

 

$

145

 

 

$

71,548

 

 

$

70

 

 

$

(41,802

)

 

$

29,961

 

Issuance of common stock under stock

   option plan

 

 

210

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

1,398

 

 

 

 

 

 

 

 

 

 

 

1,398

 

Release of restricted stock, net of taxes paid

 

 

176,610

 

 

2

 

 

 

(153

)

 

 

 

 

 

 

 

 

 

 

(151

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

32

 

 

 

 

 

 

 

32

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,252

)

 

 

(7,252

)

Balances, September 28, 2019

 

 

13,778,872

 

 

$

147

 

 

$

72,793

 

 

$

102

 

 

$

(49,054

)

 

$

23,988

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

8


IRIDEX Corporation

Condensed Consolidated Statements of Cash Flows

(Unaudited, in thousands)

 

 

 

Nine Months Ended

 

 

 

September 26, 2020

 

 

September 28, 2019

 

Operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(6,150

)

 

$

(7,252

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

399

 

 

 

534

 

Change in fair value of earn-out liability

 

 

 

 

 

47

 

Stock-based compensation

 

 

774

 

 

 

1,398

 

Provision for doubtful accounts

 

 

138

 

 

 

25

 

Loss on sale of property and equipment

 

 

13

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

3,110

 

 

 

265

 

Inventories

 

 

1,155

 

 

 

(188

)

Prepaid expenses and other current assets

 

 

(141

)

 

 

(43

)

Operating lease right-of-use assets

 

 

1,073

 

 

 

922

 

Other long-term assets

 

 

5

 

 

 

11

 

Accounts payable

 

 

(1,117

)

 

 

(86

)

Accrued compensation

 

 

(510

)

 

 

(1,015

)

Accrued expenses

 

 

135

 

 

 

(726

)

Accrued warranty

 

 

(252

)

 

 

(347

)

Deferred revenue

 

 

(452

)

 

 

(331

)

Operating lease liabilities

 

 

(1,209

)

 

 

(938

)

Net cash used in operating activities

 

 

(3,029

)

 

 

(7,724

)

Investing activities:

 

 

 

 

 

 

 

 

Acquisition of property and equipment

 

 

(87

)

 

 

(125

)

Payment on earn-out liability

 

 

 

 

 

(318

)

Proceeds from sale of property and equipment

 

 

3

 

 

 

 

Net cash used in investing activities

 

 

(84

)

 

 

(443

)

Financing activities:

 

 

 

 

 

 

 

 

Proceeds from PPP loan

 

 

2,497

 

 

 

 

Taxes paid related to net share settlements of equity awards

 

 

(29

)

 

 

(151

)

Net cash provided by (used in) financing activities

 

 

2,468

 

 

 

(151

)

Effect of foreign exchange rate changes

 

 

(76

)

 

 

72

 

Net decrease in cash and cash equivalents

 

 

(721

)

 

 

(8,246

)

Cash and cash equivalents, beginning of period

 

 

12,653

 

 

 

21,194

 

Cash and cash equivalents, end of period

 

$

11,932

 

 

$

12,948

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash (received) paid during the period for income taxes

 

$

(25

)

 

$

19

 

Supplemental disclosure of non-cash activities:

 

 

 

 

 

 

 

 

Transfer of inventory to property and equipment

 

$

36

 

 

$

65

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

9


IRIDEX Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of IRIDEX Corporation (“IRIDEX”, the “Company”, “we”, “our”, or “us”) have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the financial statements have been included.

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto, together with management’s discussion and analysis of the Company’s financial condition and results of operations, contained in our Annual Report on Form 10-K for the fiscal year ended December 28, 2019, which was filed with the Securities and Exchange Commission (“SEC”) on March 13, 2020. The results of operations for the three and nine months ended September 26, 2020 and September 28, 2019 are not necessarily indicative of the results for the fiscal year ending January 2, 2021 or any future interim period. The three and nine months ended September 26, 2020 and September 28, 2019, each had 13 weeks. For purposes of reporting the financial results, the Company’s fiscal years end on the Saturday closest to the end of December. Periodically, the Company includes a 53rd week to a year in order to end that year on the Saturday closest to the end of December.

Liquidity.

We have historically funded our operations primarily through sales of our products to customers, and through common stock and borrowing arrangements. As of September 26, 2020, our principal sources of liquidity consisted of cash and cash equivalents of $11.9 million. We have incurred net losses over the last several years, and as of September 26, 2020, have an accumulated deficit of approximately $56.8 million. We expect to continue to incur operating losses and negative cash flows from operations through October 2, 2021.

We believe our existing cash and cash equivalents will be sufficient to meet our anticipated cash needs over the next 12 months. Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of our spending to support research and development activities, the timing and cost of establishing additional sales and marketing capabilities, the introduction of new and enhanced products and our costs to implement new manufacturing technologies. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. Any debt financing obtained by us in the future could also involve restrictive covenants relating to our capital-raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. Additionally, if we raise additional funds through further issuances of equity, our existing stockholders could suffer significant dilution in their percentage ownership of our company, and any new equity securities we issue could have rights, preferences and privileges senior to those of holders of our common stock. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to grow or support our business and to respond to business challenges could be significantly limited.

 

2. Summary of Significant Accounting Policies

The Company’s significant accounting policies are disclosed in our Annual Report on Form 10-K for the year ended December 28, 2019, which was filed with the SEC on March 13, 2020.

Financial Statement Presentation.

The unaudited condensed consolidated financial statements include the accounts of the Company and our wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates.

The preparation of consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and the related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. In addition, any change in these estimates or their related assumptions could have an adverse effect on our operating results.

10


Revenue Recognition.

Our revenues arise from the sale of laser consoles, delivery devices, consumables, service, and support activities. We also derive revenue from royalties from third parties which are typically based on licensees’ net sales of products that utilize our technology. Our revenue is recognized in accordance with Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers.”

The Company has the following revenue transaction types: (1) Product Sale Only, (2) Laser Advantage Program (LAP), (3) Service Contracts, (4) System Repairs (outside of warranty) and (5) Royalty Revenue.

 

(1)

Product Sale Only: The Company’s products consist of laser consoles, delivery devices and consumable instrumentation, including laser probes. The Company’s products are currently sold for use by ophthalmologists specializing in the treatment of glaucoma and retinal diseases. Inside the United States and Germany the products are sold directly to the end users.  In other countries outside of the United States and Germany, the Company utilizes independent, third-party distributors to market and sell the Company’s products. There is no continuing obligation subsequent to the shipment to these distributors.

The Company recognizes revenue from product sale at a point in time. When a system or disposables are sold without any additional deliverables, the Company recognizes revenue using the five-step model: (1) identifying the contract with the customer, (2) identifying the performance obligations in the contract, (3) determining expected transaction price, (4) allocating the transaction price to the distinct performance obligations in the contract, and (5) recognizing revenue when (or as) the performance obligations are satisfied.

 

(2)

LAP Program: The Company sometimes enters into LAP contracts with customers. Under the LAP program, the system is given away free of charge and title is transferred after the customer purchases the minimum required number of boxes of probes (classified as disposables). Customers with older machines have the ability to trade in their old machines for the most current laser equipment offered in the program (Cyclo G6 Laser) and receive a discount on the program’s minimum purchase requirements. Under ASC 606, this non-cash consideration must be included in the transaction price. However, the Company has determined that there is no value associated with the old machines and the trade in is essentially offered to encourage customers to purchase more consumables under the program.

The Company recognizes revenue from product sales under the LAP program at a point in time. The Company allocates the transaction price of the distinct performance obligations in the contract by determining stand-alone selling price using historical pricing net of any variable consideration or discounts to specifically allocate to a particular performance obligation.

 

(3)

Service Contracts: The Company offers a standard two-year warranty on all system sales. The Company also offers a service contract which is sold to customers in incremental, one-year periods which begin subsequent to the expiration of the standard two-year warranty. The customer can opt to purchase the service contract at the time of the system sale or after the initial system sale.

The Company recognizes revenue from service contracts ratably over the service period. Revenue recognition for the sale of a service contract is largely dependent on the timing of the sale as follows:

 

a.

Service Contract Sale in Conjunction with System Sale: If the customer opts to purchase a service contract at  the time of the system sale, the Company allocates the transaction price of the distinct performance obligations in the contract by determining stand-alone selling price using historical pricing net of any variable consideration or discounts to specifically allocate to a particular performance obligation.

 

b.

Service Contract Sale Subsequent to System Sale: If the customer opts to purchase a service contract after the initial system sale, the Company determines the amount of time that has elapsed since the initial system sale. If the service contract is purchased within 60 days of the initial sale, the Company considers this sale to be an additional element of the original sale and allocates the transaction price of the distinct performance obligations in the contract by determining stand-alone selling price using historical pricing net of any variable consideration or discounts to specifically allocate to a particular performance obligation. If the service contract is purchased subsequent to sixty days after the initial sale, the sale of the service contract is deemed a separate contract and is deferred at the selling price and recognized ratably over the extended warranty period as the performance obligation is satisfied.

 

(4)

System Repairs (outside of warranty): Customers will occasionally request repairs from the Company subsequent to the expiration of the standard warranty and outside of a service contract.

The Company recognizes revenue from system repairs (outside of warranty) at a point in time. When the customer requests repairs from the Company subsequent to the expiration of the standard warranty and outside of a service contract, these repair contracts are considered separate from the initial sale, and as such, revenue is recognized as the repair services are rendered and the performance obligation satisfied.

11


 

(5)

Royalty Revenue: The Company has royalty agreements with two customers related to sale of the Company’s intellectual property. Under the terms of these agreements, the customer is to remit a percentage of sales to the Company.

Since these arrangements are for sales-based licenses of intellectual property, for which the guidance in paragraph ASC 606-10-55-65 applies, the Company recognizes revenue only as the subsequent sale occurs. However, the Company notes that such sales being reported by the licensee with a quarter in arrear, such revenue is recognized at the time it is reported and paid by the licensee given that any estimated variable consideration would have to be fully constrained due to the unpredictability of such estimate and the unavoidable risk that it may lead to significant revenue reversals.

The Company elected the practical expedient allowing it to not recognize as a contract asset the commission paid to its salesforce on the sale of its products as an incremental cost of obtaining a contract with a customer but rather recognize such commission as expense when incurred as the amortization period of the asset that the Company would have otherwise recognized is one year or less.

Leases.

We determine if an arrangement is a lease at inception. Operating leases are included in Operating lease right-of-use (“ROU”) assets, net and Operating lease liabilities in our condensed consolidated balance sheets. As of September 26, 2020 and as of December 28, 2019, the Company was not a party to finance lease arrangements.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

Under the available practical expedient, we account for the lease and non-lease components as a single lease component.

Concentration of Credit Risk.

Our cash and cash equivalents are deposited in demand and money market accounts. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and therefore, bear minimal risk.

We market our products to distributors and end-users throughout the world. Sales to international distributors are generally made on open credit terms and letters of credit. Management performs ongoing credit evaluations of our customers and maintains an allowance for potential credit losses. Historically, we have not experienced any significant losses related to individual customers or a group of customers in any particular geographic area. For the three and nine months ended September 26, 2020, no single customer accounted for more than 10% of total revenues. For the three and nine months ended September 28, 2019, no single customer accounted for more than 10% of total revenues. As of September 26, 2020, no customer accounted for over 10% of our accounts receivable. As of December 28, 2019, one customer accounted for more than 10% of our accounts receivable, representing 11%.  

Taxes Collected from Customers and Remitted to Governmental Authorities.

Taxes collected from customers and remitted to governmental authorities are recognized on a net basis in the accompanying condensed consolidated statements of operations.

Shipping and Handling Costs.

Our shipping and handling costs billed to customers are included in revenues and the associated expense is recorded in cost of revenues for all periods presented.

Deferred Revenue.

Deferred revenue represents contract liabilities. Revenue related to service contracts is deferred and recognized on a straight-line basis over the period of the applicable service contract. Costs associated with these service arrangements are recognized as incurred.

12


A reconciliation of the changes in the Company’s deferred revenue balance for the nine months ended September 26, 2020 and September 28, 2019 is as follows:

 

 

 

Nine Months Ended

 

 

 

September 26, 2020

 

 

September 28, 2019

 

Balance, beginning of period

 

$

1,810

 

 

$

2,225

 

Additions to deferral

 

 

1,067

 

 

 

1,580

 

Revenue recognized

 

 

(1,516

)

 

 

(1,892

)

Deductions from reserves

 

 

(3

)

 

 

(19

)

Balance, end of period

 

 

1,358

 

 

 

1,894

 

Non-current portion of deferred revenue

 

 

286

 

 

 

366

 

Current portion of deferred revenue

 

$

1,072

 

 

$

1,528

 

 

During the nine months ended September 26, 2020 and September 28, 2019, approximately $1.0 million and $1.2 million were recognized pertaining to amounts deferred as of December 28, 2019 and December 29, 2018, respectively.

 

Warranty.

The Company currently provides a two-year full warranty on its products. The associated costs of these warranties are accrued for upon shipment of the products. The Company’s warranty policy is applicable to products which are considered defective in their performance or fail to meet the product specifications. Warranty costs are reflected in the condensed consolidated statements of operations as cost of revenues.

A reconciliation of the changes in the Company’s warranty liability for the nine months ended September 26, 2020 and September 28, 2019 is as follows:

 

 

 

Nine Months Ended

 

 

 

September 26, 2020

 

 

September 28, 2019

 

Balance, beginning of period

 

$

536

 

 

$

860

 

Accruals for product warranties

 

 

85

 

 

 

219

 

Cost of warranty claims

 

 

(108

)

 

 

(232

)

Adjustment to pre-existing warranties

 

 

(229

)

 

 

(334

)

Balance, end of period

 

$

284

 

 

$

513

 

 

Reclassifications.

Certain reclassifications have been made to the prior year financial statements included in these condensed consolidated financial statements to conform to the current year presentation. The reclassifications had no impact on previously reported net loss or accumulated deficit.

Recent Accounting Standards Not Yet Adopted.

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” as part of its initiative to reduce complexity in the accounting standards. The standard eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The standard also clarifies and simplifies other aspects of the accounting for income taxes. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. The Company is currently evaluating the impact that this guidance will have on its financial position and results of operations, if any.

3. Inventories

The components of the Company’s inventories as of September 26, 2020 and December 28, 2019 are as follows:

 

 

 

September 26, 2020

 

 

December 28, 2019

 

Raw materials

 

$

2,411

 

 

$

2,043

 

Work in process

 

 

601

 

 

 

1,111

 

Finished goods

 

 

3,992

 

 

 

5,020

 

Total inventories

 

$

7,004

 

 

$

8,174

 

 

13


4. Goodwill and Intangible Assets

Goodwill.

The carrying value of goodwill was $0.5 million as of September 26, 2020 and December 28, 2019.

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. The Company reviews goodwill for impairment on an annual basis or whenever events or changes in circumstances indicate the carrying value may not be recoverable. The Company performs an annual impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceed the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects from any tax-deductible goodwill carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The Company has determined that it has a single reporting unit for purposes of performing its goodwill impairment test. As the Company uses the market approach to assess impairment, its common stock price is an important component of the fair value calculation. If the Company’s stock price continues to experience significant price and volume fluctuations, this will impact the fair value of the reporting unit and can lead to potential impairment in future periods. The Company performed its annual impairment test during the second quarter of fiscal year 2020 and determined that its goodwill was not impaired. As of September 26, 2020, the Company had not identified any factors that indicated there was an impairment of its goodwill and determined that no additional impairment analysis was then required.

Intangible Assets.

The following table summarizes the components of gross and net intangible asset balances (in thousands):

 

 

 

September 26, 2020