10-Q 1 irix-10q_20210403.htm 10-Q irix-10q_20210403.htm

 

 

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 April 3, 2021

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 May 6, 2021 was 15,625,800.

 

 

 


 

 

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 April 3, 2021 and January 2, 2021

5

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Operations for the three months ended April 3, 2021 and March 28, 2020

6

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three months ended April 3, 2021 and March 28, 2020

7

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Stockholder's Equity for the three months ended April 3, 2021 and March 28, 2020

8

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended April 3, 2021 and March 28, 2020

9

 

 

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

10

 

 

 

 

Item 2.

 

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

22

 

 

 

 

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

27

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

45

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

45

 

 

 

 

Item 4.

 

Mine Safety Disclosures

45

 

 

 

 

Item 5.

 

Other Information

45

 

 

 

 

Item 6.

 

Exhibits

46

 

 

 

 

Signatures

47

 

 

 

 

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;

 

the success of our strategic partnership with Topcon;

 

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;

3


 

 

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

 

the future trading prices of our common stock; and

 

our ability to pay dividends in the future.

 

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)

 

 

 

April 3, 2021

 

 

January 2, 2021 (1)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

27,993

 

 

$

11,626

 

Accounts receivable, net of allowance for doubtful accounts of

$250 as of April 3, 2021 and $244 as of January 2, 2021

 

 

8,185

 

 

 

7,289

 

Inventories

 

 

7,042

 

 

 

5,714

 

Prepaid expenses and other current assets

 

 

1,001

 

 

 

730

 

Total current assets

 

 

44,221

 

 

 

25,359

 

Property and equipment, net

 

 

719

 

 

 

449

 

Intangible assets, net

 

 

2,349

 

 

 

68

 

Goodwill

 

 

965

 

 

 

533

 

Operating lease right-of-use assets, net

 

 

1,228

 

 

 

1,428

 

Other long-term assets

 

 

77

 

 

 

132

 

Total assets

 

$

49,559

 

 

$

27,969

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,687

 

 

$

1,148

 

Accrued compensation

 

 

1,873

 

 

 

1,965

 

Accrued expenses

 

 

1,447

 

 

 

990

 

Other current liabilities

 

 

2,274

 

 

 

816

 

Current portion of PPP loan

 

 

2,185

 

 

 

1,249

 

Accrued warranty

 

 

124

 

 

 

166

 

Deferred revenue

 

 

1,812

 

 

 

938

 

Operating lease liabilities

 

 

1,345

 

 

 

1,409

 

Total current liabilities

 

 

12,747

 

 

 

8,681

 

Long-term liabilities:

 

 

 

 

 

 

 

 

PPP loan

 

 

312

 

 

 

1,248

 

Accrued warranty

 

 

81

 

 

 

81

 

Deferred revenue

 

 

10,653

 

 

 

289

 

Operating lease liabilities

 

 

95

 

 

 

282

 

Other long-term liabilities

 

 

22

 

 

 

22

 

Total liabilities

 

 

23,910

 

 

 

10,603

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

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 15,522,809 and 13,899,683 shares

as of April 3, 2021 and January 2, 2021, respectively

 

 

165

 

 

 

148

 

Additional paid-in capital

 

 

84,419

 

 

 

74,181

 

Accumulated other comprehensive income (loss)

 

 

19

 

 

 

(19

)

Accumulated deficit

 

 

(58,954

)

 

 

(56,944

)

Total stockholders’ equity

 

 

25,649

 

 

 

17,366

 

Total liabilities and stockholders’ equity

 

$

49,559

 

 

$

27,969

 

 

(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 January 2, 2021.

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

 

 

 

April 3, 2021

 

 

March 28, 2020

 

Total revenues

 

$

11,959

 

 

$

9,021

 

Cost of revenues

 

 

7,020

 

 

 

5,105

 

Gross profit

 

 

4,939

 

 

 

3,916

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

1,165

 

 

 

719

 

Sales and marketing

 

 

2,982

 

 

 

3,152

 

General and administrative

 

 

2,633

 

 

 

1,698

 

Total operating expenses

 

 

6,780

 

 

 

5,569

 

Loss from operations

 

 

(1,841

)

 

 

(1,653

)

Other income, net

 

 

(161

)

 

 

9

 

Loss from operations before provision for income taxes

 

 

(2,002

)

 

 

(1,644

)

Provision for income taxes

 

 

8

 

 

 

7

 

Net loss

 

$

(2,010

)

 

$

(1,651

)

Net loss per share:

 

 

 

 

 

 

 

 

Basic

 

$

(0.14

)

 

$

(0.12

)

Diluted

 

$

(0.14

)

 

$

(0.12

)

Weighted average shares used in computing net loss

   per common share:

 

 

 

 

 

 

 

 

Basic

 

 

14,346

 

 

 

13,786

 

Diluted

 

 

14,346

 

 

 

13,786

 

 

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

 

 

 

April 3, 2021

 

 

March 28, 2020

 

Net loss

 

$

(2,010

)

 

$

(1,651

)

Foreign currency translation adjustments

 

 

38

 

 

 

2

 

Comprehensive loss

 

$

(1,972

)

 

$

(1,649

)

 

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 April 3, 2021

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income (Loss)

 

 

Deficit

 

 

Total

 

Balances, January 2, 2021

 

 

13,899,683

 

 

$

148

 

 

$

74,181

 

 

$

(19

)

 

$

(56,944

)

 

$

17,366

 

Issuance of common stock, net of issuance costs

 

 

1,618,122

 

 

 

16

 

 

 

9,862

 

 

 

 

 

 

 

 

 

 

 

9,878

 

Issuance of common stock under stock option plan

 

 

3,082

 

 

 

1

 

 

 

16

 

 

 

 

 

 

 

 

 

 

 

17

 

Employee stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

366

 

 

 

 

 

 

 

 

 

 

 

366

 

Release of restricted stock, net of taxes paid

 

 

1,922

 

 

 

 

 

 

 

(6

)

 

 

 

 

 

 

 

 

 

 

(6

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

38

 

 

 

 

 

 

 

38

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,010

)

 

 

(2,010

)

Balances, April 3, 2021

 

 

15,522,809

 

 

$

165

 

 

$

84,419

 

 

$

19

 

 

$

(58,954

)

 

$

25,649

 

 

For the three months ended March 28, 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

 

 

 

 

 

 

 

 

 

 

95

 

 

 

 

 

 

 

 

 

 

 

95

 

Release of restricted stock, net of taxes paid

 

 

2,736

 

 

 

 

 

 

 

(2

)

 

 

 

 

 

 

 

 

 

 

(2

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2

 

 

 

 

 

 

 

2

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,651

)

 

 

(1,651

)

Balances, March 28, 2020

 

 

13,787,969

 

 

$

147

 

 

$

73,186

 

 

$

82

 

 

$

(52,266

)

 

$

21,149

 

 

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)

 

 

 

Three Months Ended

 

 

 

April 3, 2021

 

 

March 28, 2020

 

Operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(2,010

)

 

$

(1,651

)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

140

 

 

 

143

 

Stock-based compensation

 

 

366

 

 

 

95

 

Provision for doubtful accounts

 

 

 

 

 

42

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(900

)

 

 

2,292

 

Inventories

 

 

943

 

 

 

(35

)

Prepaid expenses and other current assets

 

 

(271

)

 

 

(290

)

Operating lease right-of-use assets

 

 

200

 

 

 

302

 

Other long-term assets

 

 

53

 

 

 

11

 

Accounts payable

 

 

539

 

 

 

(1,091

)

Accrued compensation

 

 

(91

)

 

 

(681

)

Accrued expenses

 

 

458

 

 

 

(28

)

Accrued warranty

 

 

(42

)

 

 

(140

)

Deferred revenue

 

 

11,238

 

 

 

(108

)

Operating lease liabilities

 

 

(251

)

 

 

(343

)

Other liabilities

 

 

1,458

 

 

 

29

 

Net cash provided by (used in) operating activities

 

 

11,830

 

 

 

(1,453

)

Investing activities:

 

 

 

 

 

 

 

 

Acquisition of property and equipment

 

 

(73

)

 

 

(68

)

Cash paid for business combination, net

 

 

(5,343

)

 

 

 

Net cash used in investing activities

 

 

(5,416

)

 

 

(68

)

Financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock, net of issuance costs

 

 

9,878

 

 

 

 

Proceeds from stock option exercise

 

 

17

 

 

 

 

Taxes paid related to net share settlements of equity awards

 

 

(6

)

 

 

(2

)

Net cash provided by (used in) financing activities

 

 

9,889

 

 

 

(2

)

Effect of foreign exchange rate changes

 

 

64

 

 

 

9

 

Net decrease in cash and cash equivalents

 

 

16,367

 

 

 

(1,514

)

Cash and cash equivalents, beginning of period

 

 

11,626

 

 

 

12,653

 

Cash and cash equivalents, end of period

 

$

27,993

 

 

$

11,139

 

Supplemental disclosure of non-cash activities:

 

 

 

 

 

 

 

 

Transfer of inventory to property and equipment

 

$

27

 

 

$

48

 

 

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 January 2, 2021, which was filed with the Securities and Exchange Commission (“SEC”) on March 23, 2021. The results of operations for the three months ended April 3, 2021 and March 28, 2020 are not necessarily indicative of the results for the fiscal year ending January 1, 2022 or any future interim period. The three months ended April 3, 2021 and March 28, 2020, 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.

  

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 January 2, 2021, which was filed with the SEC on March 23, 2021.

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.

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), (5) Royalty Revenue and (6) Exclusive Distribution Rights.

 

(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.

10


 

 

(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.

 

(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.

 

(6)

Exclusive Distribution Rights: In March 2021, Company entered into a distribution agreement with Topcon Corporation (“Topcon”), pursuant to which the Company granted Topcon the exclusive right to distribute the Company’s retina and glaucoma products in certain geographies outside the United States. The exclusivity arrangement with Topcon obligates the Company to provide training, customer support, and exclusive territorial rights to Topcon for certain international regions, for a period of 10 years, commencing upon regulatory approval to transfer existing (non-exclusive) distribution rights from the current distributors in those regions to Topcon. The agreement further stipulates that $2.0 million of arrangement fee is to be refunded to Topcon in the event that regulatory approval for the Japan region is not obtained within nine months from the date of execution of the agreement.  The Company has the right to terminate the exclusive distribution rights granted to Topcon for any of the regions at any point in time during the 10-year exclusivity term for a termination fee that is based on a multiple of 1.2X the revenue generated by the Company in 2019 for the respective region. Management has determined that the exclusivity rights, training, and customer support represents a single combined performance obligation for each region, to be recognized as exclusivity fee revenue on a straight-line basis over

11


 

 

the 10-year period for each region, commencing on the date that regulatory approval is obtained for each region, based on the Standalone Selling Price ("SSP) for such combined performance obligation for each region. The estimated fair value of the exclusive distribution rights for all regions combined totaled approximately $14.8 million.  Of this amount, management has fully-constrained the arrangement fee allocated to the Japan and Spain regions (totaling approximately $3.5 million, of which $1.5 million was recorded as customer deposit under other current liabilities) because of significant uncertainty regarding obtaining the necessary regulatory approvals and termination of existing distributor relationships in those regions.  As of April 3, 2021, no revenue related to the exclusive distribution rights was recorded for the three months then ended.

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 April 3, 2021 and as of January 2, 2021, 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 months ended April 3, 2021, no single customer accounted for more than 10% of total revenues. For the three months ended March 28, 2020, one customer accounted for more than 10% of total revenues, representing 13%. As of April 3, 2021, two customers accounted for over 10% of our accounts receivable, representing 13% and 12%, respectively. As of January 2, 2021, one customer accounted for more than 10% of our accounts receivable, representing 13%.  

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 and exclusivity fees. 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. Revenue related to exclusivity fees is deferred and recognized over the related exclusivity period.

12


 

A reconciliation of the changes in the Company’s deferred revenue balance for the three months ended April 3, 2021 and March 28, 2020 is as follows:

 

 

 

Three Months Ended

 

 

 

April 3, 2021

 

 

March 28, 2020

 

Balance, beginning of period

 

$

1,227

 

 

$

1,810

 

Additions to deferral

 

 

11,665

 

 

 

433

 

Revenue recognized

 

 

(427

)

 

 

(535

)

Deductions from reserves

 

 

-

 

 

 

(6

)

Balance, end of period

 

 

12,465

 

 

 

1,702

 

Non-current portion of deferred revenue

 

 

10,653

 

 

 

320

 

Current portion of deferred revenue

 

$

1,812

 

 

$

1,382

 

 

During both the three months ended April 3, 2021 and March 28, 2020, approximately $0.4 million were recognized pertaining to amounts deferred as of January 2, 2021 and December 28, 2019. As of April 3, 2021, approximately $10.3 million and $0.9 million of the non-current portion of deferred revenue and current portion of deferred revenue, respectively, pertains to exclusivity fee deferred revenue.

 

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 three months ended April 3, 2021 and March 28, 2020 is as follows:

 

 

 

Three Months Ended

 

 

 

April 3, 2021

 

 

March 28, 2020

 

Balance, beginning of period

 

$

247

 

 

$

536

 

Accruals for product warranties

 

 

19

 

 

 

31

 

Cost of warranty claims

 

 

(21

)

 

 

(78

)

Adjustment to pre-existing warranties

 

 

(40

)

 

 

(93

)

Balance, end of period

 

$

205

 

 

$

396

 

 

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 total assets, total liabilities and net loss or accumulated deficit.

Recently Adopted Accounting Standards.

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 Company adopted ASU 2019-12 in fiscal year 2021 and the standard did not have a material impact on its condensed consolidated financial statements.

 

3. Significant Transactions

On March 2, 2021, the Company entered into a series of strategic transactions with Topcon, headquartered in Tokyo Japan, pursuant to which (i) the Company purchased substantially all of the tangible and intangible assets of Topcon Medical Laser Systems, Inc. (“TMLS”) related to laser products previously manufactured and sold by TMLS, including the Pattern Scanning Laser (PASCAL) products, under the tradename “PASCAL” altogether, the “PASCAL Business”, (ii) Topcon acquired an equity interest in the Company, comprised of the issuance of 1,618,122 shares of the Company’s common stock at $6.18 per share (as determined based on the average of the Nasdaq Official Closing Price of the Company’s common stock for the five trading days immediately preceding March 2, 2021), and (iii) the Company granted Topcon the exclusive right to distribute certain of its products (including the PASCAL laser products) in certain international regions (the “Exclusive Distribution Rights”) and (iv) Topcon and the Company entered into the Manufacturing Services Agreement regarding transition of regulatory authorizations relating to, and manufacturing and supply of,

13


 

the PASCAL products for a specified post-closing transition period. The transaction is expected to result in net proceeds to the Company of approximately $19.5 million (of which $17.5 million was received on March 10, 2021 with the remaining $2.0 million expected to be received later only if, as of the exclusive distribution rights start date, the Company has (A) begun the process of transferring to Topcon the exclusive distribution right in Japan, which process shall be evidenced by a copy of a written notice or letter sent by the Company to the existing distributor in Japan under which it has exercised its right of termination or non-renewal in accordance with the terms of the applicable existing distributor agreement and (B) used its commercially reasonable efforts to obtain a written acknowledgement by such existing distributor to assign and transfer all supporting documents in such existing distributor’s possession that are necessary for Topcon to effectuate the transfer of exclusive distribution rights to Topcon in Japan.). The net proceeds have been allocated on a fair value basis as follows (in thousands):

 

1)

Sale of equity interest (before issuance costs)

 

$

10,000

 

2)

Grant of exclusive distribution rights

 

 

14,800

 

3)

Purchase of tangible and intangible assets

 

 

(5,343

)

 

Net Proceeds

 

$

19,457

 

 

The purchase of tangible and intangible assets has been recognized as an acquisition of a business with the relative fair value of the net consideration allocated to the tangible and intangible assets based on their preliminary estimated fair values as of the acquisition date.  

Refer to Note 2. Summary of Significant Accounting Policies for the recognition of revenue under ASC 606 for the grant of exclusive distribution rights.

Acquisition of substantially all of TMLS’ assets including the rights to the PASCAL product.

On March 10, 2021, the Company completed the purchase of substantially all of the tangible and intangible assets of TMLS, which was an established leader in manufacturing and selling laser products under the tradename “PASCAL”. The acquisition has been recognized as an acquisition of a business and the purchase price (approximately $5.3 million) has been preliminarily allocated to tangible and identified intangible assets acquired based on their estimated fair values.  As additional information becomes available, the Company may further revise the preliminary purchase price allocation during the remainder of the measurement period (which will not exceed 12 months from March 10, 2021).  Any such revisions or changes may be material.

The following table presents the preliminary allocation of the total purchase price:

 

 

 

Estimated Fair

Value

 

 

 

(in thousands)

 

Inventory

 

$

2,319

 

Computers and Software

 

 

102

 

Manufacturing and Office Equipment

 

 

112

 

Other tangible assets

 

 

78

 

Developed Technology

 

 

900

 

In-process Research and Development (IPR&D)

 

 

1,000

 

Trade names and Trademarks

 

 

300

 

Customer Relationships

 

 

100

 

Goodwill

 

 

432

 

Total

 

$

5,343

 

 

Developed technology relates to PASCAL products, a pattern scanning laser used for retinal treatments, and was valued using the multi-period excess earnings method under the income approach. This method reflects the present value of the projected cash flows that are expected to be generated by the developed technology less charges representing the contribution of other assets to those cash flows. The economic useful life is estimated to be 7 years, as determined based on the technology cycle related to the developed technology, and the estimated cash flows over the forecast period.

IPR&D pertains to an upcoming release of PASCAL products and has been valued using the multi-period excess earnings method under the income approach.

Trade names and Trademarks pertain to the “PASCAL” trade name, and the fair value was determined by applying the relief-from-royalty method under the income approach. The economic useful life is estimated to be 9 years, based on the expected life of the trade name and the cash flows anticipated over the forecast period.

14


 

Customer relationships represent the fair value of future projected revenue that will be derived from sales of products to existing customers of the TMLS Business, with an estimated useful life of 7 years.

Goodwill is primarily attributable to the assembled workforce and anticipated synergies and economies of scale expected from the integration of the TMLS Business. Substantially all goodwill is deductible for tax purposes. 

4. Inventories

The components of the Company’s inventories as of April 3, 2021 and January 2, 2021 are as follows:

 

 

 

April 3, 2021

 

 

January 2, 2021

 

Raw materials

 

$

3,827

 

 

$

2,236

 

Work in process

 

 

534

 

 

 

548

 

Finished goods

 

 

2,681

 

 

 

2,930

 

Total inventories

 

$

7,042

 

 

$

5,714

 

 

5. Goodwill and Intangible Assets

Goodwill.

The carrying value of goodwill was $1.0 million and $0.5 million as of April 3, 2021 and January 2, 2021, respectively.

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.

In March 2021, the Company recorded approximately $0.4 million goodwill in connection with its purchase of the PASCAL Business. As of April 3, 2021, 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):

 

 

 

April 3, 2021

 

 

 

 

January 2, 2021

 

 

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

Carrying

Amount

 

 

Remaining

Amortization Life

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

Carrying

Amount

 

Customer relationships

 

$

340

 

 

$

177

 

 

$

163

 

 

5.77 Years

 

$

240

 

 

$

172

 

 

$

68

 

Developed technology

 

 

900

 

 

 

11

 

 

 

889

 

 

6.92 Years

 

 

 

 

 

 

 

 

 

 

 

 

Trade names

 

 

300

 

 

 

3

 

 

 

297

 

 

8.92 Years

 

 

 

 

 

 

 

 

 

 

 

 

In-process R&D

 

 

1,000

 

 

 

 

 

 

1,000

 

 

Not applicable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

2,540

 

 

$

191

 

 

$

2,349

 

 

 

 

$

240

 

 

$

172

 

 

$

68

 

 

15


 

 

For the three months ended April 3, 2021 and March 28, 2020, amortization expense totaled $19 thousand and $4 thousand, respectively.

The amortizations of customer relationships and trade names were charged to sales and marketing expense. The amortization for developed technology was charged to research and development expense. Future estimated amortization expense excluding in-process R&D (in thousands):

 

Fiscal Year:

 

 

 

 

2021 (nine months)

 

$

144

 

2022

 

 

192

 

2023

 

 

192

 

2024

 

 

192

 

2025

 

 

180

 

Thereafter

 

 

449

 

Total

 

$

1,349

 

 

6. Fair Value Measurements

Fair value is defined as 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. The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:

 

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.

 

Level 2: Directly or indirectly observable inputs as of the reporting date through correlation with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in markets that are not active. Level 2 also includes assets and liabilities that are valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors, are corroborated by readily observable data from actively quoted markets for substantially the full term of the financial instrument.

 

Level 3: Unobservable inputs that are supported by little or no market activity and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible and considers counterparty credit risk in its assessment of fair value.

The carrying amounts of the Company’s financial assets and liabilities, including cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses as of April 3, 2021 and January 2, 2021, approximate fair value because of the short maturity of these instruments. The carrying amount of the Company’s PPP loan as of April 3, 2021, approximates its fair value based on the specified interest rate.

As of April 3, 2021 and January 2, 2021, financial assets measured and recognized at fair value on a recurring basis and classified under the appropriate level of the fair value hierarchy as described above were as follows:

 

 

 

As of April 3, 2021

 

 

As of January 2, 2021

 

 

 

Fair Value Measurements

 

 

Fair Value Measurements

 

(in thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

27,657

 

 

$

 

 

$

 

 

$

27,657

 

 

$

11,051

 

 

$

 

 

$

 

 

$

11,051

 

 

The Company’s Level 1 financial assets are money market funds whose fair values are based on quoted market prices. The Company does not have any Level 2 and Level 3 financial assets or liabilities.

7. PPP Loan

On April 23, 2020, the Company qualified for and received a loan pursuant to the Paycheck Protection Program, a program implemented by the U.S. Small Business Administration under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, from a qualified lender (the “PPP Lender”), for an aggregate principal amount of approximately $2.5 million (the "PPP Loan"). The PPP Loan bears interest at a fixed rate of 1.0% per annum, with the first six months of interest deferred, has a term of two years, and is

16


 

unsecured and guaranteed by the U.S. Small Business Administration. The principal amount of the PPP Loan is subject to forgiveness under the Paycheck Protection Program upon the Company’s request to the extent that the PPP Loan proceeds are used to pay expenses permitted by the Paycheck Protection Program, including payroll costs, covered rent and mortgage obligations, and covered utility payments incurred by the Company. On September 22, 2020, the Company submitted the PPP Loan forgiveness application for the entire amount of approximately $2.5 million. The accrued interest is $23 thousand as of April 3, 2021. The Company cannot provide assurance that principal and interest amounts under the PPP Loan will be forgiven. To the extent that all or part of the PPP Loan is not forgiven, the Company will be required to pay interest on the PPP Loan at a rate of 1.0% per annum, and starting in September 2021 principal and interest payments will be required through the maturity date in April 2022. The terms of the PPP Loan provide for customary events of default including, among other things, payment defaults, breach of representations, and insolvency events.

The U.S. Department of the Treasury has announced that it will conduct audits for PPP loans that exceed $2 million. Should the Company be audited or reviewed by the U.S. Department of the Treasury or the U.S. Small Business Administration as a result of the SBA Loan or filing the application for forgiveness or otherwise and receive an adverse outcome in such an audit, we could be required to return the full amount of the SBA Loan and may potentially be subject to civil and criminal fines and penalties.           

8. Commitments and Contingencies

COVID-19.

The COVID-19 pandemic has created and may continue to create significant uncertainty in global markets, which has disrupted and harmed, and may continue to disrupt and harm, the Company's business, financial condition, and results of operations. The extent of the impact of COVID-19 on the Company's operational and financial performance will depend on certain developments, including but not limited to the duration and spread of the outbreak, duration of local, state and federal issued public health orders, impact on our customers and our sales cycles, impact on our employees and impact on regional and worldwide economies and markets in general, all of which are uncertain and cannot be predicted.

Operating Lease Commitments.

Our operating lease commitments consist of facility and office equipment leases. Operating lease expenses for the three months ended April 3, 2021 and March 28, 2020 were approximately $0.3 million during each period. The weighted average discount rate used in calculating the present value of lease payments was 5.4%. As of April 3, 2021, the weighted average remaining lease term for our operating leases was 1.1 years.

The following represents maturities of operating lease liabilities as of April 3, 2021 (in thousands):

 

Fiscal Year

 

Operating

Lease Payments

 

Remainder of 2021 (9 months)

 

$

1,131

 

2022

 

 

302

 

2023

 

 

50

 

2024

 

 

3

 

2025

 

 

 

Total lease payments

 

 

1,486

 

Less: Imputed interest

 

 

(46

)

Total lease liabilities

 

$

1,440

 

 

On April 30, 2021, the First Amendment to that certain Triple Net Lease dated April 26, 2017 between the Company and ZIC 1212 Terra Bella LLC (“First Amendment”) was executed, among other things, to reduce the portion of premises leased by the Company and extend the lease term through August 31, 2024. 

Pursuant to the First Amendment, the base monthly rent for the reduced premises of approximately 29,830 square feet, ranges from $84,121 to $93,070, for the period May 1, 2021 to August 31, 2024.  The Company is also responsible for the payment of certain operating expenses and taxes during the term. The Lease provides the landlord with a termination right, which can be exercised by the landlord by giving written notice to the Company at least thirty (30) months prior to the effective date of the termination.

 

Purchase Commitments.

Our purchase commitments consist primarily of non-cancellable purchase commitments with vendors to manufacture certain components and ophthalmic instrumentation. As of April 3, 2021, our future minimum payments through fiscal year 2022 for our purchase commitments were approximately $13.9 million.

17


 

Indemnities.

We enter into standard indemnification arrangements in the ordinary course of business. Pursuant to these arrangements, we indemnify, hold harmless, and agree to reimburse the indemnified parties for losses suffered or incurred by the indemnified parties (generally our business partners or customers) in connection with any trade secret, copyright, patent or other intellectual property infringement claim by any third-party with respect to our products. The term of these indemnification agreements is generally perpetual any time after the execution of the agreement. The maximum potential amount of future payments that we could be required to make under these agreements is not determinable. We have never incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, we believe the estimated fair value of these agreements is minimal.

We have entered into indemnification agreements with our directors and officers that may require us to indemnify our directors and officers against liabilities that may arise by reason of their status or service as directors or officers, other than liabilities arising from willful misconduct of a culpable nature. These agreements also require us to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified and to make good faith determination whether or not it is practicable for us to obtain directors and officers insurance. We currently have directors and officers liability insurance.

Legal Proceedings.

From time to time, we may be involved in legal proceedings arising in the ordinary course of business. Although the results of litigation and claims cannot be predicted with certainty, we currently believe that the final outcome of these ordinary course matters will not have a material adverse effect on our business, operating results, financial condition or cash flows. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

 

 

9. Stockholders’ Equity and Stock-Based Compensation

Stock-Based Compensation

The Company accounts for stock-based compensation granted to employees and directors, including employees stock option awards, restricted stock and restricted stock units (“RSUs”) in accordance with ASC 718, “Compensation – Stock Compensation” (“ASC 718”). Accordingly, stock-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized as expense over the employee’s service period. The Company recognizes compensation expense on a ratable basis over the requisite service period of the award.

The Company values options using the Black-Scholes option pricing model. Time-based RSUs are valued at the grant date fair value of the underlying common shares. Performance-based RSUs without market conditions are valued at grant date fair value of the underlying common shares. Performance-based RSUs granted with market conditions and performance-based stock options with market conditions are valued using the Monte Carlo simulation model. The Black-Scholes option pricing model requires the use of highly subjective and complex assumptions which determine the fair value of stock-based awards, including the option’s expected term and the price volatility of the underlying stock. The Monte Carlo simulation model incorporates assumptions for the holding period, risk-free interest rate, stock price volatility and dividend yield.

2008 Equity Incentive Plan.

The terms of awards granted during the three months ended April 3, 2021 were consistent with those described in the consolidated financial statements included in our Annual Report on Form 10-K for the year ended January 2, 2021.

The following table shows stock-based compensation expense included in the condensed consolidated statements of operations for the three months ended April 3, 2021 and March 28, 2020:

 

 

 

Three Months Ended

 

(in thousands)

 

April 3, 2021

 

 

March 28, 2020

 

Cost of revenues

 

$

47

 

 

$

24

 

Research and development

 

 

36

 

 

 

(31

)

Sales and marketing

 

 

98

 

 

 

39

 

General and administrative

 

 

185

 

 

 

63

 

 

 

$

366

 

 

$

95

 

 

Stock-based compensation expense capitalized to inventory was immaterial for the three months ended April 3, 2021 and March 28, 2020.

As of April 3, 2021, there was $1.6 million of total unrecognized compensation cost, net of expected forfeitures, related to non-vested stock-based compensation arrangements. The cost is expected to be recognized over a weighted average period of 2.02 years.  

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Summary of Stock Options.

The following table summarizes stock options information during the three months ended April 3, 2021:

 

 

 

Number of

Shares

 

 

Weighted

Average

Exercise Price

Per Share

 

 

Aggregate

Intrinsic

Value

(thousands)

 

Outstanding as of January 2, 2021

 

 

1,649,540

 

 

$

4.67

 

 

 

 

 

Granted

 

 

16,000

 

 

 

4.90

 

 

 

 

 

Exercised

 

 

(3,082

)

 

 

5.29

 

 

 

 

 

Canceled or forfeited

 

 

(99,061

)

 

 

4.54

 

 

 

 

 

Outstanding as of April 3, 2021

 

 

1,563,397