10-Q 1 irix-20240928.htm 10-Q 10-Q
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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 28, 2024

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 Capital 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 November 8, 2024 was 16,636,380.

 


 

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 28, 2024 and December 30, 2023

5

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 28, 2024 and September 30, 2023

6

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 28, 2024 and September 30, 2023

7

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 28, 2024 and September 30, 2023

8

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 28, 2024 and September 30, 2023

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

26

 

 

 

 

Item 4.

 

Controls and Procedures

26

 

 

 

 

PART II. OTHER INFORMATION

27

 

 

 

 

Item 1.

 

Legal Proceedings

27

 

 

 

 

Item 1A.

 

Risk Factors

27

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

46

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

46

 

 

 

 

Item 4.

 

Mine Safety Disclosures

46

 

 

 

 

Item 5.

 

Other Information

46

 

 

 

 

Item 6.

 

Exhibits

47

 

 

 

 

Signatures

48

 

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;
success of our strategic alternatives;
macroeconomic conditions, including impact of global pandemics or other public health emergencies or outbreaks, foreign exchange fluctuation, inflation concerns, and changing interest rates on our business and results of operations;
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 Corporation;
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 and key personnel, and source suppliers;
our ability to raise additional capital;

3


 

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. You should read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q and have filed with the Securities and Exchange Commission (“SEC”) as exhibits to this Quarterly Report on Form 10-Q with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors described in and should be read in conjunction with 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 28, 2024

 

 

December 30, 2023

 

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

3,860

 

 

$

7,034

 

Accounts receivable, net

 

 

5,954

 

 

 

6,727

 

Receivable from related party

 

 

1,826

 

 

 

2,927

 

Inventories

 

 

10,942

 

 

 

9,906

 

Prepaid expenses and other current assets

 

 

1,755

 

 

 

856

 

Total current assets

 

 

24,337

 

 

 

27,450

 

Property and equipment, net

 

 

157

 

 

 

351

 

Intangible assets, net

 

 

1,391

 

 

 

1,642

 

Goodwill

 

 

965

 

 

 

965

 

Operating lease right-of-use assets, net

 

 

2,034

 

 

 

2,632

 

Other long-term assets

 

 

1,270

 

 

 

1,396

 

Total assets

 

$

30,154

 

 

$

34,436

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

6,201

 

 

$

4,499

 

Payable to related party

 

 

579

 

 

 

228

 

Accrued compensation

 

 

1,842

 

 

 

1,619

 

Accrued expenses

 

 

1,007

 

 

 

1,996

 

Convertible note payable, current

 

 

1,314

 

 

 

 

Other current liabilities

 

 

1,579

 

 

 

1,233

 

Deferred revenue, current

 

 

2,335

 

 

 

2,404

 

Operating lease liabilities, current

 

 

995

 

 

 

995

 

Total current liabilities

 

 

15,852

 

 

 

12,974

 

Long-term liabilities:

 

 

 

 

 

 

Deferred revenue

 

 

8,759

 

 

 

10,025

 

Operating lease liabilities

 

 

1,155

 

 

 

1,751

 

Convertible note payable

 

 

1,444

 

 

 

 

Other long-term liabilities

 

 

321

 

 

 

164

 

Total liabilities

 

 

27,531

 

 

 

24,914

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

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 16,636,380 shares as of September 28, 2024 and 16,252,813 as of December 30, 2023

 

 

174

 

 

 

172

 

Additional paid-in capital

 

 

89,565

 

 

 

88,444

 

Accumulated other comprehensive income (loss)

 

 

2

 

 

 

(52

)

Accumulated deficit

 

 

(87,118

)

 

 

(79,042

)

Total stockholders’ equity

 

 

2,623

 

 

 

9,522

 

Total liabilities and stockholders’ equity

 

$

30,154

 

 

$

34,436

 

 

 

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 28, 2024

 

 

September 30, 2023

 

 

September 28, 2024

 

 

September 30, 2023

 

Total revenues

 

$

11,581

 

 

$

12,850

 

 

$

35,973

 

 

$

39,411

 

Cost of revenues

 

 

7,258

 

 

 

7,229

 

 

 

22,057

 

 

 

22,489

 

Gross profit

 

 

4,323

 

 

 

5,621

 

 

 

13,916

 

 

 

16,922

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

1,299

 

 

 

1,541

 

 

 

4,336

 

 

 

5,135

 

Sales and marketing

 

 

2,646

 

 

 

3,823

 

 

 

9,879

 

 

 

12,370

 

General and administrative

 

 

2,248

 

 

 

1,945

 

 

 

7,501

 

 

 

6,343

 

Total operating expenses

 

 

6,193

 

 

 

7,309

 

 

 

21,716

 

 

 

23,848

 

Loss from operations

 

 

(1,870

)

 

 

(1,688

)

 

 

(7,800

)

 

 

(6,926

)

Other income (expense), net

 

 

(46

)

 

 

(58

)

 

 

(202

)

 

 

346

 

Loss from operations before provision for income taxes

 

 

(1,916

)

 

 

(1,746

)

 

 

(8,002

)

 

 

(6,580

)

Provision for income taxes

 

 

17

 

 

 

8

 

 

 

74

 

 

 

30

 

Net loss

 

$

(1,933

)

 

$

(1,754

)

 

$

(8,076

)

 

$

(6,610

)

Net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.12

)

 

$

(0.11

)

 

$

(0.49

)

 

$

(0.41

)

Diluted

 

$

(0.12

)

 

$

(0.11

)

 

$

(0.49

)

 

$

(0.41

)

Weighted average shares used in computing net loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

16,581

 

 

 

16,231

 

 

 

16,374

 

 

 

16,089

 

Diluted

 

 

16,581

 

 

 

16,231

 

 

 

16,374

 

 

 

16,089

 

 

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 28, 2024

 

 

September 30, 2023

 

 

September 28, 2024

 

 

September 30, 2023

 

Net loss

 

$

(1,933

)

 

$

(1,754

)

 

$

(8,076

)

 

$

(6,610

)

Change in foreign currency translation adjustments

 

 

 

 

 

21

 

 

 

54

 

 

 

5

 

Comprehensive loss

 

$

(1,933

)

 

$

(1,733

)

 

$

(8,022

)

 

$

(6,605

)

 

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 28, 2024

 

Common Stock

 

 

Additional
Paid-in

 

 

Accumulated
Other
Comprehensive

 

 

Accumulated

 

 

Total Stockholders

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Equity

 

Balances, June 29, 2024

 

 

16,449,283

 

 

$

172

 

 

$

89,257

 

 

$

2

 

 

$

(85,185

)

 

$

4,246

 

Issuance of common stock under the stock option plan

 

 

1,875

 

 

 

 

 

 

4

 

 

 

 

 

 

 

 

 

4

 

Issuance of incentive shares under convertible note

 

 

126,968

 

 

 

1

 

 

 

249

 

 

 

 

 

 

 

 

 

250

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

114

 

 

 

 

 

 

 

 

 

114

 

Release of restricted stock, net of taxes paid

 

 

58,254

 

 

 

1

 

 

 

(59

)

 

 

 

 

 

 

 

 

(58

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,933

)

 

 

(1,933

)

Balances, September 28, 2024

 

 

16,636,380

 

 

$

174

 

 

$

89,565

 

 

$

2

 

 

$

(87,118

)

 

$

2,623

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 28, 2024

 

Common Stock

 

 

Additional
Paid-in

 

 

Accumulated
Other
Comprehensive

 

 

Accumulated

 

 

Total Stockholders

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Equity

 

Balances, December 30, 2023

 

 

16,252,813

 

 

$

172

 

 

$

88,444

 

 

$

(52

)

 

$

(79,042

)

 

$

9,522

 

Issuance of common stock under the stock option plan

 

 

2,010

 

 

 

 

 

 

4

 

 

 

 

 

 

 

 

 

4

 

Issuance of incentive shares under convertible note

 

 

126,968

 

 

 

1

 

 

 

249

 

 

 

 

 

 

 

 

 

250

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

927

 

 

 

 

 

 

 

 

 

927

 

Release of restricted stock, net of taxes paid

 

 

254,589

 

 

 

1

 

 

 

(59

)

 

 

 

 

 

 

 

 

(58

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

54

 

 

 

 

 

 

54

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,076

)

 

 

(8,076

)

Balances, September 28, 2024

 

 

16,636,380

 

 

$

174

 

 

$

89,565

 

 

$

2

 

 

$

(87,118

)

 

$

2,623

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended September 30, 2023

 

Common Stock

 

 

Additional
Paid-in

 

 

Accumulated
Other
Comprehensive

 

 

Accumulated

 

 

Total Stockholders

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Equity

 

Balances, July 1, 2023

 

 

16,206,382

 

 

$

171

 

 

$

87,647

 

 

$

(40

)

 

$

(74,328

)

 

$

13,450

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

371

 

 

 

 

 

 

 

 

 

371

 

Release of restricted stock, net of taxes paid

 

 

26,091

 

 

 

1

 

 

 

(25

)

 

 

 

 

 

 

 

 

(24

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

21

 

 

 

 

 

 

21

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,754

)

 

 

(1,754

)

Balances, September 30, 2023

 

 

16,232,473

 

 

$

172

 

 

$

87,993

 

 

$

(19

)

 

$

(76,082

)

 

$

12,064

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2023

 

Common Stock

 

 

Additional
Paid-in

 

 

Accumulated
Other
Comprehensive

 

 

Accumulated

 

 

Total Stockholders

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Equity

 

Balances, December 31, 2022

 

 

15,989,662

 

 

$

169

 

 

$

86,802

 

 

$

(24

)

 

$

(69,716

)

 

$

17,231

 

Adoption of ASU 2016-13

 

 

 

 

 

 

 

 

 

 

 

 

 

 

244

 

 

 

244

 

Issuance of common stock under the stock option plan

 

 

17,499

 

 

 

 

 

 

37

 

 

 

 

 

 

 

 

 

37

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

1,244

 

 

 

 

 

 

 

 

 

1,244

 

Release of restricted stock, net of taxes paid

 

 

225,312

 

 

 

3

 

 

 

(90

)

 

 

 

 

 

 

 

 

(87

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

5

 

 

 

 

 

 

5

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,610

)

 

 

(6,610

)

Balances, September 30, 2023

 

 

16,232,473

 

 

$

172

 

 

$

87,993

 

 

$

(19

)

 

$

(76,082

)

 

$

12,064

 

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 28, 2024

 

 

September 30, 2023

 

Operating activities:

 

 

 

 

 

 

Net loss

 

$

(8,076

)

 

$

(6,610

)

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

 

 

 

 

 

 

Depreciation and amortization

 

 

449

 

 

 

479

 

Amortization of operating lease right-of-use assets

 

 

598

 

 

 

777

 

Accretion of original issue discount

 

 

59

 

 

 

 

Amortization of debt issuance costs

 

 

72

 

 

 

 

Stock-based compensation

 

 

927

 

 

 

1,244

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

773

 

 

 

363

 

Receivable from related party

 

 

1,101

 

 

 

1,534

 

Inventories

 

 

(1,036

)

 

 

409

 

Prepaid expenses and other current assets

 

 

(899

)

 

 

339

 

Other long-term assets

 

 

126

 

 

 

(227

)

Accounts payable

 

 

1,702

 

 

 

(1,247

)

Payable to related party

 

 

351

 

 

 

(12

)

Accrued compensation

 

 

223

 

 

 

(251

)

Accrued expenses

 

 

(989

)

 

 

(377

)

Deferred revenue

 

 

(1,335

)

 

 

(1,442

)

Operating lease liabilities

 

 

(596

)

 

 

(774

)

Other liabilities

 

 

503

 

 

 

29

 

Net cash used in operating activities

 

 

(6,047

)

 

 

(5,766

)

Investing activities:

 

 

 

 

 

 

Acquisition of property and equipment

 

 

(4

)

 

 

(141

)

Net cash used in investing activities

 

 

(4

)

 

 

(141

)

Financing activities:

 

 

 

 

 

 

Net proceeds from issuance of convertible note payable

 

 

3,370

 

 

 

 

Cash paid for debt issuance costs

 

 

(493

)

 

 

 

Proceeds for stock option exercises

 

 

4

 

 

 

37

 

Taxes paid related to net share settlements of equity awards

 

 

(58

)

 

 

(87

)

Net cash provided by (used in) financing activities

 

 

2,823

 

 

 

(50

)

Effect of foreign exchange rate changes

 

 

54

 

 

 

16

 

Net decrease in cash and cash equivalents

 

 

(3,174

)

 

 

(5,941

)

Cash and cash equivalents, beginning of period

 

 

7,034

 

 

 

13,922

 

Cash and cash equivalents, end of period

 

$

3,860

 

 

$

7,981

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

Cash paid during the period for income taxes

 

$

17

 

 

$

54

 

Supplemental disclosure of non-cash activities:

 

 

 

 

 

 

Transfer of inventory to property and equipment

 

 

 

 

$

70

 

ROU assets obtained with extension of operating lease

 

 

 

 

$

1,901

 

Issuance of incentive shares under convertible note payable

 

$

250

 

 

 

 

 

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 30, 2023, which was filed with the SEC on March 29, 2024. The results of operations for the three and nine months ended September 28, 2024 and September 30, 2023 are not necessarily indicative of the results for the fiscal year ending December 28, 2024 or any future interim period. The three months ended September 28, 2024 and September 30, 2023 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 and Management Plans

The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. For the nine months ended September 28, 2024, the Company implemented cost savings initiatives to increase operational efficiencies across all departments, which the Company expects will decrease its operating expenses and increase working capital through January 3, 2026. Based on these cost savings initiatives implemented by the Company and the closing of the $3.4 million Note with The Lind Partners, LLC (“Lind”) (with an option to have an additional $1.5 million in a Subsequent Note), management believes it has alleviated substantial doubt about the Company’s ability to satisfy its liquidity needs over the next 12 months.

 

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 30, 2023, which was filed with the SEC on March 29, 2024.

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 condensed 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 the licensees’ net sales of products that utilize our technology. Our revenue is recognized in accordance with Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers.” 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.

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

10


 

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 after shipment is made to these distributors.

The Company recognizes revenue from product sales at a point in time subject to the allocation of transaction price to additional performance obligations, if any.

2.
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 that 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 60 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.
3.
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. As such, revenue is recognized as the repair services are rendered and the performance obligation satisfied.

4.
Royalty Revenue: The Company has royalty agreements with two customers related to the sale of the Company’s intellectual property. Under the terms of these agreements, one customer is to remit a percentage of sales to the Company as the sales occur and one customer is to remit fixed amount royalty payments based on the quantity sold as the sales occur.

The arrangements with three customers are for sales-based licenses of intellectual property, for which the guidance in paragraph ASC 606-10-55-65 applies. Therefore, the Company recognizes revenue at a point in time, only as the subsequent sale occurs. However, the Company notes that such sales being reported by the licensee with a quarter in arrears, 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. For the arrangement with one customer, the Company had concluded that there is one combined performance obligation to be satisfied. Therefore, the Company recognizes revenue related to this arrangement over time.

11


 

5. Exclusive Distribution Rights: On March 2, 2021, the Company and Topcon Corporation (“Topcon”) entered into a distribution agreement (“Distribution Agreement”), 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 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 1.2 times 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 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 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 and returned to Topcon the arrangement fee allocated to Belarus (approximately $0.2 million) because obtaining the necessary regulatory approvals and termination of existing distributor relationship was not feasible. For each of the three months ended September 28, 2024 and September 30, 2023, $0.4 million in revenue related to the exclusive distribution rights were recorded. For each of the nine months ended September 28, 2024 and September 30, 2023, $1.1 million in revenue related to the exclusive distribution rights were recorded.

Costs of Obtaining Revenue Contracts

The Company recognized assets from certain costs incurred to obtain revenue contracts. These costs relate to sales commissions arising from the sale of our products. The costs are considered incremental and recoverable of obtaining revenue contracts with customers. These deferred costs are amortized on a straight-line basis over the estimated period of benefit, which typically ranges from 2 to 3 years. As of September 28, 2024, the Company recognized deferred costs incurred to obtain revenue contracts with customers, net of accumulated amortization, of $42 thousand and included these amounts in Prepaid expenses and other current assets and Other long-term assets in the Company’s condensed consolidated balance sheets. Amortization expense was $19 thousand and $57 thousand for both of the three and nine months ended September 28, 2024 and September 30, 2023. There were no impairment expenses for both of the three and nine months ended September 28, 2024 and September 30, 2023.

Sales commissions that do not represent incremental and recoverable costs of obtaining a contract are expensed as incurred. As a practical expedient, the Company will not recognize such sales commission as a contract asset but rather recognize as an expense when incurred if the amortization period of the asset that the Company would have otherwise recognized is one year or less.

Contract Fulfillment Costs

The Company recognized an asset from the costs incurred to fulfill a contract. These costs relate directly and must be incurred to satisfy performance obligations on certain specific contract with a customer. These costs are expected to be recovered over time and are amortized on a systematic basis that is consistent with the recognition of revenue to which it relates. As of September 28, 2024, the Company recognized deferred costs incurred to fulfill a contract with a customer, net of accumulated amortization, of $0.6 million, and included these amounts in Prepaid expenses and other current assets and Other long-term assets in the Company’s condensed consolidated balance sheets. Amortization expense was $21 thousand and $62 thousand for both of the three and nine months ended September 28, 2024 and September 30, 2023. There were no impairment expenses for each of three and nine months ended September 28, 2024 and September 30, 2023.

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 28, 2024 and December 30, 2023, the Company was not a party to any 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 the 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 the 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 and Other Risks and Uncertainties

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.

12


 

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 a provision 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 28, 2024, one customer, Topcon, accounted for more than 10% of total revenues, each representing 33%. For the three and nine months ended September 30, 2023, one customer, Topcon, accounted for more than 10% of total revenues, representing 34% and 29%, respectively. As of September 28, 2024, one customer, Topcon, accounted for over 10% of our accounts receivable, representing 23%. As of December 30, 2023, one customer, Topcon, accounted for more than 10% of our accounts receivable, representing 30%.

Taxes Collected from Customers and Remitted to Governmental Authorities

Total revenues are recognized net of taxes collected from customers and remitted to governmental authorities 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.

A reconciliation of the changes in the Company’s deferred revenue balance for the nine months ended September 28, 2024 and September 30, 2023, is as follows:

 

 

Nine Months Ended

 

 

 

September 28, 2024

 

 

September 30, 2023

 

Balance, beginning of period

 

$

12,429

 

 

$

14,153

 

Additions to deferral

 

 

958

 

 

 

938

 

Revenue recognized

 

 

(2,293

)

 

 

(2,380

)

Balance, end of the period

 

 

11,094

 

 

 

12,711

 

Non-current portion of deferred revenue

 

 

8,759

 

 

 

10,472

 

Current portion of deferred revenue

 

$

2,335

 

 

$

2,239

 

 

During the nine months ended September 28, 2024 and September 30, 2023, approximately $1.9 million and $1.3 million was recognized pertaining to amounts deferred as of December 30, 2023 and December 31, 2022, respectively. As of September 28, 2024, approximately $8.6 million of the non-current portion of deferred revenue and $1.5 million of the current portion of deferred revenue pertain to exclusivity distribution rights 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.

As warranty reserves do not meet the criteria to have separate captions on the face of the condensed consolidated balance sheet, we removed these captions and included those amounts in other current and long-term liabilities.

 

Implementation Costs Incurred in a Cloud Computing Service Arrangement

The Company has implemented a new enterprise resource planning (“ERP”) system. The new ERP system operates in a cloud-based environment. The Company concluded that this cloud computing arrangement does not include a license, and therefore, will account for this arrangement as one that is a service contract. The Company capitalized $1.1 million in implementation costs and began utilizing the ERP system near the end of the third quarter of 2023 and is recognizing amortization of the capitalized implementation costs over five years on a straight-line basis. For the nine months ended September 28, 2024 and September 30, 2023 approximately $0.2 million and $12 thousand of amortization expenses were recorded, respectively.

Recent Accounting Standards Not Yet Adopted

In November 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2023-07 “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures”, which expands annual and interim disclosure requirements for reportable segments, primarily through enhanced disclosures about significant segment expenses. ASU 2023-07 is effective for our annual periods beginning after December 15, 2023, and for interim periods beginning after December 15, 2024, with

13


 

early adoption permitted. The Company is currently evaluating the potential effect that the updated standard will have on its financial statement disclosures.

In December 2023, the FASB issued ASU 2023-09 “Income Taxes (Topics 740): Improvements to Income Tax Disclosures” to expand the disclosure requirements for income taxes, specifically related to the rate reconciliation and income taxes paid. ASU 2023-09 is effective for the Company’s annual periods beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the potential effect that the updated standard will have on its condensed consolidated financial statement disclosures.

3. Accounts Receivable and Provision for Credit Losses

The Company has trade receivables with various individual customers such as private businesses, hospitals, universities, government and non-profit entities, and distributors. The Company has determined that geography is the similar risk characteristic to pool our trade receivables balances, and accordingly, groups such balances into either the domestic pool or the international pool. The domestic pool is primarily comprised of individual customers, and the international pool is primarily comprised of distributors.

The provision for credit losses represents an estimate of the lifetime expected credit losses inherent in trade receivables as of the consolidated balance sheet date. We assess the adequacy of the provision for credit losses on a quarterly basis based on historical information and current economic conditions and forecasts. Subsequent changes in the provision for credit losses are recorded in current earnings and reversal of previous losses are permitted under the current guidance.

While we believe we have exercised prudent judgment and applied reasonable assumptions, there can be no assurance that in the future, changes in economic conditions or other factors would not cause changes in the financial health of our customers. If the financial health of our customers deteriorates, the timing and level of payments received could be impacted and therefore, could result in a change to our estimated losses.

The following table presents the activity in the provision for credit losses for accounts receivable by pool type for the nine months ended September 28, 2024 (in thousands):

 

 

Domestic

 

 

International

 

 

Total

 

Balance, beginning of period

 

$

(94

)

 

$

(52

)

 

$

(146

)

Change to provision

 

 

16

 

 

 

18

 

 

 

34

 

Balance, end of period

 

$

(78

)

 

$

(34

)

 

$

(112

)

 

4. Related Party - Topcon

As of September 28, 2024, Topcon holds a 9.9% voting interest in the Company, which qualifies it to be a principal owner and considered a related party, even though it currently does not have significant influence over the Company’s operations.

Topcon resells certain of our products as our exclusive distributor in certain international regions. At the same time, the Company also purchases certain raw materials from Topcon. During the three and nine months ended September 28, 2024, the Company’s revenues related to Topcon amounted to approximately $3.8 million and $12.0 million, including $0.4 million and $1.1 million, respectively, in recognized exclusive distribution rights revenue. During the three and nine months ended September 30, 2023, the Company’s revenues related to Topcon amounted to approximately $4.3 million and $11.2 million, respectively, including $0.4 million and $1.1 million, respectively, in recognized exclusive distribution rights revenue. The Company’s purchases from Topcon during the three and nine months ended September 28, 2024 amounted to approximately $0.2 million and $0.5 million, respectively. As of September 28, 2024, the amounts receivable from and payable to Topcon were $1.8 million and $0.6 million, respectively. As of December 30, 2023, the amounts receivable from and payable to Topcon were $2.9 million and $0.2 million, respectively.

5. Inventories

The components of the Company’s inventories as of September 28, 2024 and December 30, 2023 are as follows:

 

 

 

September 28, 2024

 

 

December 30, 2023

 

Raw materials

 

$

4,625

 

 

$

5,288

 

Work in process

 

 

15

 

 

 

156

 

Finished goods