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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

þ

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

For the quarterly period ended April 2, 2016

Or

o

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

 

 

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   þ     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes   þ     No   ¨

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

 

Large accelerated filer

 

¨

  

Accelerated filer

 

¨

 

 

 

 

 

 

 

Non-accelerated filer

 

¨  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

þ

 

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

The number of shares of common stock, $0.01 par value, issued and outstanding as of April 25, 2016 was 10,067,339.

 

 

 


 

TABLE OF CONTENTS

 

Items

 

 

Page

 

PART I. FINANCIAL INFORMATION

3

 

Item 1.

 

Condensed Consolidated Financial Statements (Unaudited)

3

 

 

 

Unaudited Condensed Consolidated Balance Sheets as of April 2, 2016 and January 2, 2016

3

 

 

 

Unaudited Condensed Consolidated Statements of Operations for the three months ended April 2, 2016 and April 4, 2015

4

 

 

 

Unaudited Condensed Consolidated Statements of Comprehensive Income for the three months ended April 2, 2016 and April 4, 2015

5

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended April 2, 2016 and April 4, 2015

6

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

7

Item 2.

 

 

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

18

Item 3.

 

 

Quantitative and Qualitative Disclosures about Market Risk

21

Item 4.

 

 

Controls and Procedures

21

 

PART II. OTHER INFORMATION

22

 

Item 1.

 

Legal Proceedings

22

 

Item 1A.

 

Risk Factors

22

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

32

 

Item 3.

 

Defaults Upon Senior Securities

33

 

Item 4.

 

Mine Safety Disclosures

33

 

Item 5.

 

Other Information

33

 

Item 6.

 

Exhibits

34

 

Signature

35

 

Exhibit Index

36

 

 

 

2


 

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 2,

2016

 

 

January 2,

2016 (1)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

10,514

 

 

$

9,995

 

Accounts receivable, net of allowance for doubtful accounts of $143 as of

   April 2, 2016 and $140 as of January 2, 2016

 

 

9,297

 

 

 

9,282

 

Inventories

 

 

11,142

 

 

 

11,106

 

Prepaid expenses and other current assets

 

 

425

 

 

 

386

 

Total current assets

 

 

31,378

 

 

 

30,769

 

Property and equipment, net

 

 

1,055

 

 

 

1,104

 

Intangible assets, net

 

 

264

 

 

 

268

 

Goodwill

 

 

533

 

 

 

533

 

Deferred income taxes

 

 

8,985

 

 

 

8,985

 

Other long-term assets

 

 

148

 

 

 

164

 

Total assets

 

$

42,363

 

 

$

41,823

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,696

 

 

$

2,223

 

Accrued compensation

 

 

1,283

 

 

 

1,572

 

Accrued expenses

 

 

1,635

 

 

 

1,722

 

Accrued warranty

 

 

610

 

 

 

603

 

Deferred revenue

 

 

1,311

 

 

 

1,311

 

Total current liabilities

 

 

7,535

 

 

 

7,431

 

Long-term liabilities:

 

 

 

 

 

 

 

 

Other long-term liabilities

 

 

639

 

 

 

704

 

Total liabilities

 

 

8,174

 

 

 

8,135

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock, $0.01 par value:

 

 

 

 

 

 

 

 

Authorized: 30,000,000 shares;

 

 

 

 

 

 

 

 

Issued and outstanding 10,061,089 and 10,009,408 shares as of April 2, 2016 and as

   of January 2, 2016, respectively

 

 

111

 

 

 

111

 

Additional paid-in capital

 

 

38,386

 

 

 

37,986

 

Accumulated deficit

 

 

(4,308

)

 

 

(4,409

)

Total stockholders’ equity

 

 

34,189

 

 

 

33,688

 

Total liabilities and stockholders’ equity

 

$

42,363

 

 

$

41,823

 

 

(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, 2016.

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

 

 

3


 

IRIDEX Corporation

Condensed Consolidated Statements of Operations

(Unaudited, in thousands except per share data)

 

 

 

Three Months Ended

 

 

 

April 2,

2016

 

 

April 4,

2015

 

Total revenues

 

$

11,931

 

 

$

10,796

 

Cost of revenues

 

 

6,634

 

 

 

5,386

 

Gross profit

 

 

5,297

 

 

 

5,410

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

1,359

 

 

 

1,281

 

Sales and marketing

 

 

2,429

 

 

 

2,071

 

General and administrative

 

 

1,357

 

 

 

1,655

 

Total operating expenses

 

 

5,145

 

 

 

5,007

 

Income from operations

 

 

152

 

 

 

403

 

Other expense, net

 

 

11

 

 

 

7

 

Income from operations before provision for income taxes

 

 

141

 

 

 

396

 

Provision for income taxes

 

 

40

 

 

 

150

 

Net income

 

$

101

 

 

$

246

 

Net income per share:

 

 

 

 

 

 

 

 

Basic

 

$

0.01

 

 

$

0.02

 

Diluted

 

$

0.01

 

 

$

0.02

 

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

 

 

 

 

 

 

 

 

Basic

 

 

10,034

 

 

 

9,868

 

Diluted

 

 

10,140

 

 

 

10,108

 

 

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

 

 

4


 

IRIDEX Corporation

Condensed Consolidated Statements of Comprehensive Income

(Unaudited, in thousands)

 

 

 

Three Months Ended

 

 

 

April 2,

2016

 

 

April 4,

2015

 

Net income

 

$

101

 

 

$

246

 

Other comprehensive income, net of tax

 

 

 

 

 

 

Comprehensive income

 

$

101

 

 

$

246

 

 

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

 

 

5


 

IRIDEX Corporation

Condensed Consolidated Statements of Cash Flows

(Unaudited, in thousands)

 

 

 

Three Months Ended

 

 

 

April 2,

2016

 

 

April 4,

2015

 

Operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

101

 

 

246

 

Adjustments to reconcile net income to net cash provided by operating

   activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

142

 

 

 

120

 

Change in fair value of earn-out liability

 

 

11

 

 

 

8

 

Stock-based compensation

 

 

222

 

 

 

333

 

Provision for doubtful accounts

 

 

 

 

 

22

 

Deferred income taxes

 

 

 

 

 

150

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(15

)

 

 

295

 

Inventories

 

 

(36

)

 

 

(735

)

Prepaid expenses and other current assets

 

 

(39

)

 

 

(79

)

Other long-term assets

 

 

16

 

 

 

11

 

Accounts payable

 

 

473

 

 

 

766

 

Accrued compensation

 

 

(289

)

 

 

(464

)

Accrued expenses

 

 

(70

)

 

 

(123

)

Accrued warranty

 

 

7

 

 

 

42

 

Deferred revenue

 

 

 

 

 

18

 

Other long-term liabilities

 

 

3

 

 

 

7

 

Net cash provided by operating activities

 

 

526

 

 

 

617

 

Investing activities:

 

 

 

 

 

 

 

 

Acquisition of property and equipment

 

 

(89

)

 

 

(397

)

Payment on earn-out liability

 

 

(96

)

 

 

(96

)

Net cash used in investing activities

 

 

(185

)

 

 

(493

)

Financing activities:

 

 

 

 

 

 

 

 

Proceeds from stock option exercises

 

 

245

 

 

 

487

 

Repurchase of common stock

 

 

(59

)

 

 

(192

)

Taxes paid related to net share settlements of equity awards

 

 

(8

)

 

 

(600

)

Net cash provided by (used in) financing activities

 

 

178

 

 

 

(305

)

Net increase (decrease) in cash and cash equivalents

 

 

519

 

 

 

(181

)

Cash and cash equivalents, beginning of period

 

 

9,995

 

 

 

13,303

 

Cash and cash equivalents, end of period

 

$

10,514

 

 

$

13,122

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Income taxes

 

$

1

 

 

$

2

 

 

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

 

 

6


 

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, 2016, which was filed with the Securities and Exchange Commission (“SEC”) on March 31, 2016. The results of operations for the three months ended April 2, 2016 are not necessarily indicative of the results for the fiscal year ending December 31, 2016 or any future interim period. The three month periods ended April 2, 2016 and April 4, 2015, 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, 2016, which was filed with the SEC on March 31, 2016.

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 unaudited 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 and service and support activities. Revenue from product sales is recognized upon receipt of a purchase order and product shipment provided that no significant obligations remain and collectibility is reasonably assured. Shipments are generally made with Free-On-Board (“FOB”) shipping point terms, whereby title passes upon shipment from our dock. Any shipments with FOB receiving point terms are recorded as revenue when the shipment arrives at the receiving point. Cost is recognized as product sales revenue is recognized. The Company’s sales may include post-sales obligations for training or other deliverables. For revenue arrangements such as these, we recognize revenue in accordance with Accounting Standards Codification (“ASC”) 605, “Revenue Recognition, Multiple-Element Arrangements”. The Company allocates revenue among deliverables in multiple-element arrangements using the relative selling price method. Revenue allocated to each element is recognized when the basic revenue recognition criteria is met for each element. The Company is required to apply a hierarchy to determine the selling price to be used for allocating revenue to deliverables: (i) vendor-specific objective evidence of selling price (“VSOE”), (ii) third-party evidence of selling price (“TPE”) and (iii) best estimate of the selling price (“ESP”). In general, the Company is unable to establish VSOE or TPE for all of the elements in the arrangement; therefore, revenue is allocated to these elements based on the Company’s ESP, which the Company determines after considering multiple factors such as management approved pricing guidelines, geographic differences, market conditions, competitor pricing strategies, internal costs and gross margin objectives. These factors may vary over time depending upon the unique facts and circumstances related to each deliverable. As a result, the Company’s ESP for products and services could change. Revenues for post-sales obligations are recognized as the obligations are fulfilled.

7


 

In international regions, we utilize distributors to market and sell our products. We recognize revenue upon shipment for sales to these independent, third-party distributors as we have no continuing obligations subsequent to shipment. Generally our distributors are responsible for all marketing, sales, installation, training and warranty labor coverage for our products. Our standard terms and conditions do not provide price protection or stock retention rights to any of our distributors.

Royalty revenues are typically based on licensees’ net sales of products that utilize our technology and are recognized as earned in accordance with the contract terms when royalties from licensees can be reliably measured and collectibility is reasonably assured, such as upon the earlier of the receipt of a royalty statement from the licensee or upon payment by the licensee.

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 month periods ended April 2, 2016 and April 4, 2015, one single customer accounted for 15% of total revenues. As of April 2, 2016, one customer accounted for approximately 19% of our accounts receivable and as of January 2, 2016, no customer accounted for more than 10% of our accounts receivable.

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.

Revenue related to extended 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.

A reconciliation of the changes in the Company’s deferred revenue balance for the three months ended April 2, 2016 and April 4, 2015 is as follows:

 

 

 

Three Months Ended

 

(in thousands)

 

April 2,

2016

 

 

April 4,

2015

 

Balance, beginning of period

 

$

1,311

 

 

$

1,179

 

Additions to deferral

 

 

336

 

 

 

323

 

Revenue recognized

 

 

(336

)

 

 

(305

)

Balance, end of period

 

$

1,311

 

 

$

1,197

 

 

Warranty.

The Company generally provides a one to two year warranty on its products, which is accrued for upon shipment of products. Actual warranty costs incurred have not materially differed from those accrued. 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 statement of operations as cost of revenues.

8


 

A reconciliation of the changes in the Company’s warranty liability for the three months ended April 2, 2016 and April 4, 2015 is as follows:

 

 

 

Three Months Ended

 

(in thousands)

 

April 2,

2016

 

 

April 4,

2015

 

Balance, beginning of period

 

$

603

 

 

$

469

 

Accruals for product warranties

 

 

126

 

 

 

112

 

Cost of warranty claims and adjustments

 

 

(119

)

 

 

(70

)

Balance, end of period

 

$

610

 

 

$

511

 

 

Recently Issued and Adopted Accounting Standards.

In May 2014, as part of its ongoing efforts to assist in the convergence of U.S. GAAP and International Financial Reporting Standards (“IFRS”), the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers.” The new guidance sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in U.S. GAAP. The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not addressed completely in the prior accounting guidance. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers, Deferral of the Effective Date”. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted for annual periods beginning after December 15, 2016. We are currently evaluating the impact that this standard will have on the Company’s consolidated financial statements.

In June 2014, the FASB issued ASU 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force)”. The ASU clarifies that entities should treat performance targets that can be met after the requisite service period of a share-based payment award as performance conditions that affect vesting. Therefore, an entity would not record compensation expense (measured as of the grant date without taking into account the effect of the performance target) related to an award for which transfer to the employee is contingent on the entity’s satisfaction of a performance target until it becomes probable that the performance target will be met. The ASU does not contain any new disclosure requirements. The ASU is effective for reporting periods beginning after December 15, 2015. We adopted this standard at the beginning of fiscal 2016 and it did not have a material impact on the Company’s consolidated financial statements.

In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory.” Under this ASU, inventory will be measured at the “lower of cost and net realizable value” and options that currently exist for “market value” will be eliminated. The ASU defines net realizable value as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.” No other changes were made to the current guidance on inventory measurement. ASU 2015-11 is effective for interim and annual periods beginning after December 15, 2016. Early application is permitted and should be applied prospectively. Management is evaluating the provisions of this statement, including which period to adopt, and has not determined what impact the adoption of this standard will have on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, "Leases," amending ASC 842. This ASU requires the Company to recognize on the balance sheet the assets and liabilities for the rights and obligations created by leases with terms of more than twelve months. This ASU also requires disclosures enabling the users of financial statements to understand the amount, timing and uncertainty of cash flows arising from leases. This new standard will become effective for the Company for annual periods beginning after December 15, 2018 (including interim reporting periods within those periods). Early adoption is permitted as of the beginning of an interim or annual reporting period. We are currently evaluating the impact of this new standard on the Company’s consolidated financial statements.

In March 2016, the FASB issued Accounting Standards Update ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting." This ASU affects entities that issue share-based payment awards to their employees. The ASU is designed to simplify several aspects of accounting for share-based payment award transactions, which include the income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows and forfeiture rate calculations. This ASU will become effective for the Company on December 15, 2016 (including interim reporting periods within those periods). Early adoption is permitted in any interim or annual period. If an entity early adopts the amendments in an interim period, any adjustments

9


 

should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. We are currently evaluating the impact of this new standard on the Company’s consolidated financial statements.

 

 

3. Inventories

The components of the Company’s inventories as of April 2, 2016 and January 2, 2016 are as follows:

 

(in thousands)

 

April 2,

2016

 

 

January 2,

2016

 

Raw materials

 

$

4,631

 

 

$

4,578

 

Work in process

 

 

2,146

 

 

 

1,791

 

Finished goods

 

 

4,365

 

 

 

4,737

 

Total inventories

 

$

11,142

 

 

$

11,106

 

 

 

4. Goodwill and Intangible Assets

Goodwill.

The carrying value of goodwill was $0.5 million as of April 2, 2016 and January 2, 2016.

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 first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step quantitative goodwill impairment test. If, after assessing the totality of circumstances, an entity determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then it is required to perform the two-step impairment test. An entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying value. However, an entity also has the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test. 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 2015 and determined that its goodwill was not impaired. As of April 2, 2016, 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:

 

 

 

April 2, 2016

 

 

 

 

January 2, 2016

 

(in thousands)

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

Carrying

Amount

 

 

Remaining Amortization

Life

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

Carrying

Amount

 

Patents

 

$

720

 

 

$

600

 

 

$

120

 

 

Varies

 

$

720

 

 

$

600

 

 

$

120

 

Customer relations

 

 

240

 

 

 

96

 

 

 

144

 

 

9.0  Years

 

 

240

 

 

 

92

 

 

 

148

 

Total

 

$

960

 

 

$

696

 

 

$

264

 

 

 

 

$

960

 

 

$

692

 

 

$

268

 

 

For the three months ended April 2, 2016 and April 4, 2015, amortization expense totaled $4 thousand for each period.

10


 

The amortization of customer relations was charged to sales and marketing expense and the amortization of patents was charged to cost of revenues.

 

Future estimated amortization expense (in thousands):

 

 

 

 

2016 (nine months)

 

$

12

 

2017

 

 

78

 

2018

 

 

74

 

2019

 

 

16

 

2020

 

 

16

 

Thereafter

 

 

68

 

Total

 

$

264

 

 

 

5. 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, as well as 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 2, 2016 and January 2, 2016, approximate fair value because of the short maturity of these instruments.

As of April 2, 2016 and January 2, 2016, financial assets and liabilities 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:

 

 

 

April 2, 2016

 

 

January 2, 2016

 

 

 

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

 

$

9,263

 

 

 

 

 

 

 

 

$

9,263

 

 

$

9,212

 

 

 

 

 

 

 

 

$

9,212

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earn-out liability

 

 

 

 

 

 

 

$

920

 

 

$

920

 

 

$

 

 

 

 

 

$

1,005

 

 

$

1,005

 

 

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 financial assets or liabilities. The fair value of the earn-out liability arising from the acquisitions of RetinaLabs, Inc. and Ocunetics, Inc. is classified within Level 3 of the fair value hierarchy since it is based on significant unobservable inputs. The significant unobservable inputs include projected royalties and discount rates to present value the payments. A significant increase (decrease) in the projected royalty payments in isolation could result in a significantly higher (lower) fair value

11


 

measurement and a significant increase (decrease) in the discount rate in isolation could result in a significantly lower (higher) fair value measurement. The fair value of the earn-out liability is calculated on a quarterly basis by the Company based on a collaborative effort of the Company’s operations, finance and accounting groups as additional information becomes available. Any change in the fair value adjustment is recorded in the statement of operations of that period.

The following table presents quantitative information about the inputs and valuation methodologies used for our fair value measurements classified in Level 3 of the fair value hierarchy as of April 2, 2016.

 

As of April 2, 2016

 

Fair Value

(in thousands)

 

 

Valuation

Technique

 

Significant

Unobservable

Input

 

Weighted

Average

(range)

Earn-out liability

 

$

920

 

 

Discounted cash flow

 

Projected royalties

(in thousands)

 

$2,804

($134 - $3,017)

 

 

 

 

 

 

 

 

Discount rate

 

11.47%

(10.23% - 27.00%)

 

A reconciliation of the changes in the Company’s earn-out liability (Level 3 liability) for the three months ended April 2, 2016 and April 4, 2015 is as follows:

 

 

 

Three Months Ended

 

(in thousands)

 

April 2,

2016

 

 

April 4,

2015

 

Balance as of beginning of the period

 

$

1,005

 

 

$

1,423

 

Payments against earn-out

 

 

(96

)

 

 

(96

)

Change in fair value of earn-out liability

 

 

11

 

 

 

8

 

Balance as of the end of the period

 

$

920

 

 

$

1,335

 

 

The earn-out liability is included in accrued expenses and other long-term liabilities in the condensed consolidated balance sheets. Any change in the fair value adjustment is recorded to other expense in the condensed consolidated statements of operations.

 

 

6. 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 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. Restricted stock and time-based restricted stock units are valued at the grant date fair value of the underlying common shares. Performance-based restricted stock units 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.

For the three months ended April 2, 2016, the only active stock-based compensation plan was the 2008 Equity Incentive Plan (the “Incentive Plan”). The terms of awards granted during the three months ended April 2, 2016 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, 2016.

12


 

Summary of Stock Options

The following table summarizes information regarding activity in our stock option plan during the three months ended April 2, 2016:

 

 

 

Number of

Shares

 

 

Weighted

Average

Exercise Price

Per Share

 

 

Aggregate

Intrinsic

Value

(thousands)

 

Outstanding as of January 2, 2016

 

 

551,492

 

 

$

6.92

 

 

 

 

 

Granted

 

 

26,100

 

 

$

10.33

 

 

 

 

 

Exercised

 

 

(53,500

)

 

$

4.59

 

 

 

 

 

Canceled or forfeited

 

 

(13,334

)

 

$

10.18

 

 

 

 

 

Outstanding as of April 2, 2016

 

 

510,758

 

 

$

7.25

 

 

$

1,477

 

 

The weighted average grant date fair value of the options granted under the Company’s stock plans as calculated using the Black-Scholes option-pricing model was $4.14 and $4.61 per share for the three months ended April 2, 2016 and April 4, 2015, respectively.

The Company uses the Black-Scholes option-pricing model to estimate fair value of stock-based awards (options) with the following weighted average assumptions:

 

 

 

Three Months Ended

 

 

 

April 2,

2016

 

 

April 4,

2015

 

Average risk free interest rate

 

 

1.20

%

 

 

1.21

%

Expected life (in years)

 

4.55 years

 

 

4.55 years

 

Dividend yield

 

—%

 

 

—%

 

Average volatility

 

 

47

%

 

 

51

%

 

Option-pricing models require the input of various subjective assumptions, including the option’s expected life and the price volatility of the underlying stock. The expected stock price volatility is based on analysis of the Company’s stock price history over a period commensurate with the expected term of the options, trading volume of the Company’s stock, look-back volatilities and Company specific events that affected volatility in a prior period. The expected term of employee stock options represents the weighted average period the stock options are expected to remain outstanding and is based on the history of exercises and cancellations on all past option grants made by the Company, the contractual term, the vesting period and the expected remaining term of the outstanding options. The risk-free interest rate is based on the U.S. Treasury interest rates whose term is consistent with the expected life of the stock options. No dividend yield is included as the Company has not issued any dividends and does not anticipate issuing any dividends in the future.

The following table shows stock-based compensation expense included in the condensed consolidated statements of operations for the three months ended April 2, 2016 and April 4, 2015:

 

 

 

Three Months Ended

 

 

 

April 2,

2016

 

 

April 4,

2015

 

Cost of revenues

 

$

51

 

 

$

67

 

Research and development

 

 

32

 

 

 

79

 

Sales and marketing

 

 

40

 

 

 

59

 

General and administrative

 

 

99

 

 

 

128

 

 

 

$

222

 

 

$

333

 

 

Stock-based compensation expense capitalized to inventory was immaterial for the quarters ended April 2, 2016 and April 4, 2015.

Occasionally, the Company will grant stock-based instruments to non-employees. During the three months ended April 2, 2016 and April 4, 2015, the amount of stock-based compensation related to non-employee options was not material.  

13


 

Information regarding stock options outstanding, vested and expected to vest and exercisable as of April 2, 2016 is summarized below:

 

 

 

Number of

Shares

 

 

Weighted

Average

Exercise Price

 

 

Weighted

Average

Remaining

Contractual

Life (Years)

 

 

Aggregate

Intrinsic Value

(thousands)

 

Options outstanding

 

 

510,758

 

 

$

7.25

 

 

 

4.74

 

 

$

1,477

 

Options vested and expected to vest

 

 

467,617

 

 

$

7.14

 

 

 

4.64

 

 

$

1,404

 

Options exercisable

 

 

229,415

 

 

$

6.07

 

 

 

3.72

 

 

$

923

 

 

The aggregate intrinsic value in the table above represents the pre-tax intrinsic value, based on the Company’s closing price as of April 1, 2016, that would have been received by option holders had all option holders exercised their stock options as of that date. This amount changes based on the fair market value of the Company’s stock. The total intrinsic value of options exercised for the three months ended April 2, 2016 and April 4, 2015 was approximately $285 thousand and $745 thousand, respectively.

As of April 2, 2016, there was $3.3 million of total unrecognized compensation cost, net of expected forfeitures, related to non-vested stock-based compensation arrangements under the Incentive Plan. The cost is expected to be recognized over a weighted average period of 2.59 years.

Summary of Restricted Stock Units and Awards

Information regarding the restricted stock units activity for the three months ended April 2, 2016 is summarized below:

 

 

 

Number

of Shares

 

Outstanding as of January 2, 2016

 

 

147,589

 

Restricted stock units granted

 

 

210,000

 

Restricted stock units released

 

 

(5,600

)

Restricted stock units cancelled

 

 

 

Outstanding as of April 2, 2016

 

 

351,989

 

 

On March 1, 2016, the Board approved an award of performance-based restricted stock units (“PRSUs”) to our President and Chief Executive Officer, and to five executives of the Company. The total target number of PRSUs is 210,000. Each PRSU represents the right to receive one share of the Company’s common stock and is subject to the terms of the Company’s 2008 Equity Incentive Plan (the “Plan”) and the applicable performance-based restricted stock unit award agreement under the Plan. The PRSUs will become eligible to vest (“vesting eligible PRSUs”) if the Company’s stock price (measured based on the average, trailing, 60 day closing price of a share of the Company’s common stock) achieves one or more of the four specified stock price performance goals, measured during four performance periods covering each of the Company’s fiscal years 2016 through 2019. The achievement of each performance goal results in 25% of the target number of PRSUs becoming vesting eligible PRSUs. The maximum number of PRSUs that can vest under the PRSU award is 100% of the target number of PRSUs. If any of the performance goals are met, vesting of the PRSUs additionally is subject to the executive’s continued service with the Company through the applicable vesting date as follows. Any PRSUs that become eligible to vest will be scheduled to vest on an annual basis on the last day of the performance period (provided that the first vesting date for any PRSUs that become eligible to vest during a particular performance period will be delayed until the performance results are certified). However, the maximum number of PRSUs that can vest prior to the last performance period will be limited as follows: (i) upon completion of a particular performance period vesting will be limited to 25% of the target number of PRSUs even if more than one stock price goal is achieved during that period (and if more than one stock price goal is achieved, the PRSUs will become eligible to vest at a future date, subject to clause (ii)), and (ii) vesting will be limited to no more than 50% of the target number of PRSUs even if more than two stock price goals are achieved prior to the last performance period (and in that instance, any PRSUs that become eligible to vest would vest on the last day of the final performance period. In the event of a change in control of the Company, the performance periods will end and a final measurement of the Company’s stock price will occur. For this final measurement, the Company’s stock price will be determined based on the value of the consideration that common stockholders receive in the change in control. Upon the final measurement, any vesting eligible PRSUs that become eligible to vest will vest in full on the closing of the change in control, and any PRSUs that have not become eligible to vest will be scheduled to vest based on continued service (but not subject to any further performance criteria), on the last day of the Company’s fiscal year 2019. If, on or after the change in control, the executive’s employment is terminated without cause, a prorated number of the then unvested PRSUs will accelerate vesting based on the total period following the change in control during which the executive provided services.

14


 

To the extent that the market condition is not met, the PRSUs will not vest and will be cancelled. Utilizing the Monte Carlo simulation technique, which incorporated assumptions for the expected holding period, risk-free interest rate, stock price volatility and dividend yield, the fair value at grant date of these restricted stock units was $1.7 million. Compensation expense is recognized ratably during the period the RSU’s are expected to vest.

 For the three months ended April 2, 2016, there were no restricted awards granted or released.  As of April 2, 2016, total restricted stock awards outstanding was 2,513.

 

Stock Repurchase Program.

          In February 2013, the Board of Directors approved a one year $3.0 million stock repurchase program that replaced the prior two year $4.0 million stock repurchase program. In February 2014, the Board of Directors approved the extension of the plan for an additional year. In July 2014, the Board of Directors approved an extension of the plan for an additional year and authorized an additional $3.0 million of stock repurchases. In August 2015, the Board of Directors approved a further extension of the plan for another year and authorized an additional $2.0 million of stock repurchases. During the three months ended April 2, 2016, the Company repurchased 6,544 shares at an average price of $9.00 per share. As of April 2, 2016, we have repurchased 843,785 shares for approximately $6.7 million under this current program and we are authorized to purchase up to an additional $1.0 million in common shares under the stock repurchase program. See Item 2, Unregistered Sales of Equity Securities and Use of Proceeds in Part II, Other Information, for additional information.

 

 

7. Income Taxes  

Provision for Income Tax.

The Company calculates its interim tax provision in accordance with the provisions of ASC 740-270, Income Taxes; Interim Reporting. For interim periods, the Company estimates its annual effective income tax rate and applies the estimated rate to the year-to-date income or loss before income taxes. The Company also computes the tax provision or benefit related to items reported separately and recognizes the items net of their related tax effect in the interim periods in which they occur. The Company also recognizes the effect of changes in enacted tax laws or rates in the interim periods in which the changes occur.  The Company recorded a provision for income taxes of $40 thousand and $150 thousand for the three months ended April 2, 2016 and April 4, 2015, respectively.

Deferred Income Taxes.

The Company accounts for income taxes in accordance with ASC topic 740, Income Taxes (“ASC 740”), which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. ASC 740 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax assets will not be realized. In the fourth quarter of fiscal year 2014, the Company's management determined, based on the Company's recent history of earnings coupled with its forecasted profitability that it is more likely than not that all of its federal and the majority of its state deferred tax assets will be realized in the foreseeable future.  Accordingly, in the fourth quarter of fiscal year 2014, the Company released $9.2 million of valuation allowance against most of its deferred tax assets except for the California Research and Development Credits. The Company maintains the same positions as of April 2, 2016 and will reevaluate the position on a quarterly basis.

Uncertain Tax Positions.

The Company accounts for its uncertain tax positions in accordance with ASC 740.  As of January 2, 2016, the Company had $0.9 million of unrecognized tax benefits of which $0.4 million of unrecognized tax benefits would result in a change in the Company’s effective tax rate if recognized in future years.

The Company is not aware of any other uncertain tax positions that could result in significant additional payments, accruals, or other material deviation in this estimate during the fiscal year.

The Company files U.S. federal and state returns. The tax years 2008 to 2015 remain open in several jurisdictions, none of which have individual significance.

 

 

15


 

8. Computation of Basic and Diluted Net Income Per Common Share

Basic net income per share is based upon the weighted average number of common shares outstanding during the period. Diluted net income per share is based upon the weighted average number of common shares outstanding and dilutive common stock equivalents outstanding during the period. Common stock equivalents consist of incremental common shares issuable upon the exercise of stock options, and the release (vesting) of restricted stock units and awards and are calculated under the treasury stock method. Common stock equivalent shares from unexercised stock options, and unvested restricted stock units and awards are excluded from the computation for periods in which we incur a net loss or if the exercise price of such options is greater than the average market price of our common stock for the period as their effect would be anti-dilutive.

For the three months ended April 2, 2016 and April 4, 2015, stock options to purchase 205,012 and 191,221 shares, respectively, were excluded from the computation of diluted weighted average shares outstanding.

A reconciliation of the numerator and denominator of basic and diluted net income per common share is provided as follows:

 

 

 

Three Months Ended

 

 

 

April 2,

2016

 

 

April 4,

2015

 

Numerator:

 

 

 

 

 

 

 

 

Net income

 

$

101

 

 

$

246

 

Denominator:

 

 

 

 

 

 

 

 

Weighted average shares of common stock (basic)

 

 

10,034

 

 

 

9,868

 

Effect of dilutive stock options

 

 

86

 

 

 

221

 

Effect of dilutive contingent shares

 

 

20

 

 

 

19

 

Weighted average shares of common stock (diluted)

 

 

10,140

 

 

 

10,108

 

Per share data:

 

 

 

 

 

 

 

 

Basic income per share

 

$

0.01

 

 

$

0.02

 

Diluted income per share

 

$

0.01

 

 

$

0.02

 

 

 

9. Business Segments

The Company operates in one segment, ophthalmology. The Company develops, manufactures and markets medical devices. Our revenues arise from the sale of consoles, delivery devices, consumables, service and support activities.

Revenue information shown by geographic region, based on the location at which each sale originates, is as follows:

 

 

 

Three Months Ended

 

(in thousands)

 

April 2,

2016

 

 

April 4,

2015

 

United States

 

$

5,848

 

 

$

5,581

 

Europe

 

 

2,291

 

 

 

2,314

 

Rest of Americas

 

 

620

 

 

 

996

 

Asia/Pacific Rim

 

 

3,172

 

 

 

1,905

 

 

 

$

11,931

 

 

$

10,796

 

 

Revenues are attributed to countries based on location of end customers. Two countries including United States accounted for more than 10% of the Company’s revenues. United States accounted for 49.0% and 51.7% of revenues for the three month periods ended April 2, 2016 and April 4, 2015, respectively. China accounted for 14.4% and 4.9% of revenues for the three month periods ended April 2, 2016 and April 4, 2015, respectively.

One customer accounted for 15% of total revenues for the three month periods ended April 2, 2016 and no customer accounted for more than 10% of total revenues for the three month periods ended April 4, 2015.

One customer accounted for approximately 19% of accounts receivable balance as of April 2, 2016. No customer accounted for more than 10% of accounts receivable balance as of January 2, 2016.

 

 

16


 

10. Subsequent Events

The Company has evaluated subsequent events and has concluded that no subsequent events that require disclosure in the financial statements have occurred since the quarter ended April 2, 2016. 

 

 

 

17


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q contains trend analysis and other 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, such as statements relating to our anticipated levels of future sales; our operating results and long term growth; market acceptance and adoption of our products and our outlook for system sales; our gross margin goals and performance; the success of our efforts to reduce costs and manage cash flows; general economic conditions, including changes in foreign currency rates, and levels of international sales; corporate strategy; effects of seasonality; inspections by and approvals required by the Food and Drug Administration (“FDA”); our current and future liquidity and capital requirements; our stock repurchase program; levels of future investment in research and development and sales and marketing efforts; and our product distribution strategies with Alcon, Inc.; and compliance of our devices and products with various environmental laws and regulations. In some cases, forward-looking statements can be identified by terminology, such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential,” “continue,” or the negative of such terms or other comparable terminology. These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to differ materially from those expressed or implied by such forward-looking statements, including as a result of the factors set forth under “Factors That May Affect Future Operating Results” and other risks detailed in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2016 and detailed from time to time in our reports filed with the Securities and Exchange Commission. The reader is cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date of this quarterly report on Form 10-Q. We undertake no obligation to update such forward-looking statements to reflect events or circumstances occurring after the date of this report.

Overview

IRIDEX Corporation is a leading worldwide provider of therapeutic based laser systems, delivery devices and consumable instrumentation used to treat sight-threatening eye diseases in ophthalmology. Our ophthalmology products are sold in the United States through direct and independent sales forces and internationally through approximately 70 independent distributors into over 100 countries.

We manage and evaluate our business in one reporting segment – ophthalmology. We break down this segment by geography – Domestic (U.S.) and International (the rest of the world). In addition, we review trends by laser system sales (consoles and durable delivery devices) and recurring sales (single-use laser probes and other associated instrumentation (“consumables”) and service and support).

Our ophthalmology revenues arise primarily from the sale of our laser systems (IQ, Oculight and recently introduced Cyclo G6), consumables and service and support activities. Our current family of IQ products includes IQ 532 and IQ 577 laser photocoagulation systems and our OcuLight products include OcuLight TX, OcuLight GL, OcuLight GLx, OcuLight SL, and OcuLight SLx laser photocoagulation systems. Our Cyclo G6 Glaucoma Laser System is an 810nm, infrared laser designed to treat patients diagnosed with a range of glaucoma disease states. This glaucoma laser platform consists of a family of single-use probes that connect to an intuitive, user-friendly laser console. The product received FDA approval in January 2015, and commenced commercial sales in March 2015. Certain of our laser systems are capable of performing our patented Fovea-Friendly MicroPulse laser photocoagulation in addition to conventional continuous wavelength photocoagulation offered by all of our laser systems. Towards the end of 2012, we introduced the TxCell Scanning Laser Delivery System, a durable delivery device which operates with our IQ 532 and IQ 577 laser consoles. The TxCell Scanning Laser Delivery System saves significant time in a variety of laser photocoagulation procedures by allowing physicians to deliver the laser in a multi-spot scanning mode, a more efficient method for these procedures than the traditional single spot mode, and facilitates the use of the laser console in MicroPulse mode. The majority of our recurring revenues come from the sale of laser probes and our current family of laser probes includes a wide variety of products in 20, 23, 25 and 27 gauge for vitreoretinal surgery along with our recently patented MicroPulse P3 (“MP3”) and G-Probe for glaucoma surgery.

Sales to international distributors are made on open credit terms or letters of credit and are currently denominated in U.S. dollars and accordingly, are not subject to risks associated with currency fluctuations. However, increases in the value of the U.S. dollar against any local currencies could cause our products to become relatively more expensive to customers in a particular country or region, leading to reduced revenue or profitability in that country or region.

Cost of revenues consists primarily of the cost of purchasing components and sub-systems, assembling, packaging, shipping and testing components at our facility, direct labor and associated overhead; warranty, royalty and amortization of intangible assets; and depot service costs.

Research and development expenses consist primarily of personnel costs and materials to support new product development; and regulatory expenses. Research and development costs have been expensed as incurred.

18


 

Sales and marketing expenses consist primarily of costs of personnel, sales commissions, travel expenses, advertising and promotional expenses.

General and administrative expenses consist primarily of costs of personnel, legal, accounting, public company costs, insurance and other expenses not allocated to other departments.

Results of Operations

The following table sets forth certain operating data as a percentage of revenues:

 

 

 

Three Months Ended

 

 

 

 

April 2,

2016

 

 

April 4,

2015

 

 

Revenues

 

 

100.0

%

 

 

100.0

%

 

Cost of revenues

 

 

55.6

%

 

 

49.9

%

 

Gross margin

 

 

44.4

%

 

 

50.1

%

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

 

11.4

%

 

 

11.9

%

 

Sales and marketing

 

 

20.4

%

 

 

19.2

%

 

General and administrative

 

 

11.4

%

 

 

15.3

%

 

Total operating expenses

 

 

43.2

%

 

 

46.4

%

 

Income from operations

 

 

1.2

%

 

 

3.7

%

 

Other expense, net

 

 

0.1

%

 

 

0.0

%

 

Income from operations before provision for income taxes

 

 

1.1

%

 

 

3.7

%

 

Provision for income taxes

 

 

0.3

%

 

 

1.4

%

 

Net income

 

 

0.8

%

 

 

2.3

%

 

 

The following comparisons are between the three month periods ended April 2, 2016 and April 4, 2015:

Revenues.

 

(in thousands)

 

Three Months

Ended

April 2, 2016

 

 

Three Months

Ended

April 4, 2015

 

 

Change in $

 

 

Change in %

 

Systems – domestic

 

$

2,212

 

 

$

2,081

 

 

$

131

 

 

 

6.3

%

Systems – international

 

 

4,546

 

 

 

3,497

 

 

 

1,049

 

 

 

30.0

%

Recurring revenues

 

 

5,173

 

 

 

5,218

 

 

 

(45

)

 

 

6.3

%

Total revenues

 

$

11,931

 

 

$

10,796

 

 

$

1,135

 

 

 

10.5

%

 

Our total revenues increased $1.1 million, or 10.5%, from $10.8 million to $11.9 million for the quarter just ended. The increase is due mainly to the increase in our international systems sales, which increased $1.0 million, or 30.0%, from $3.5 million to $4.5 million. This was primarily a result of an increase in sales to the Asia region. Our domestic systems sales increased $0.1 million, or 6.3%, from $2.1 million to $2.2 million. The increase in our domestic systems sales was fueled mainly by sales of our Cyclo G6 laser systems, which more than offset the decrease in sales of our legacy products. Our recurring revenues, which include sales of our consumable products, service, and royalties, were flat overall at $5.2 million. Sales of our proprietary Cyclo G6 MP3 probes and G-Probes increased in the quarter from the prior year, but were offset by a decline in royalties, and sales of our legacy endoprobes.

Gross Profit and Gross Margin.

Gross profit was $5.3 million compared with $5.4 million, a decrease of $0.1 million or 2.1%. Gross margin was 44.4% compared with 50.1%, a decrease of 5.7 percentage points. The decrease in gross margin was attributable primarily to special introductory prices for the Cyclo G6 glaucoma laser system, sales mix; both in terms of product and geography, and a decrease in average selling price due to the foreign currency exchange rates on the international sales.

19


 

Gross margins as a percentage of revenues are expected to continue to fluctuate due to changes in the relative proportions of domestic and international sales, the product mix of sales, introduction of new products, manufacturing variances, total unit volume changes that lead to greater or lesser production efficiencies and a variety of other factors.

Research and Development.

Research and development (“R&D”) expenses increased $0.1 million, or 6.1%, from $1.3 million to $1.4 million. The increase in spending was attributable primarily to an increase in headcount and associated costs.

Sales and Marketing.

Sales and marketing expenses increased $0.4 million, or 17.3%, from $2.1 million to $2.4 million. The increase in spending was attributable to an increase in general selling and marketing expenses.

General and Administrative.

General and administrative expenses decreased $0.3 million, or 18.0%, from $1.7 million to $1.4 million. The decrease in spending was attributable primarily to decreases in legal expenses, bonus, and salary and related costs.

Other Expense, Net.

Other expense, net amounted to $11 thousand and $7 thousand and consisted primarily of additional expense recorded for the fair value re-measurement of the contingent liabilities incurred as a result of our prior acquisitions.

Income Taxes.

For the three months ended April 2, 2016 and April 4, 2015, we recorded an income tax provision of $40 thousand and $150 thousand, respectively.

Liquidity and Capital Resources.

Liquidity is our ability to generate sufficient cash flows from operating activities to meet our obligations and commitments. In addition, liquidity includes the ability to obtain appropriate financing or to raise capital

As of April 2, 2016, we had cash and cash equivalents of $10.5 million and working capital of $23.8 million compared to cash and cash equivalents of $10.0 million and working capital of $23.3 million as of January 2, 2016.

For the three months ended April 2, 2016, net cash of $0.5 million was provided by operating activities, which was generated by net income of $0.1 million and the add back of non-cash items of $0.4 million, partially offset by changes in operating assets and liabilities by $0.1 million. We used $0.2 million net cash in investing activities; $0.1 million on capital expenditures and $0.1 million for payment of the contingent earn-out liability. $0.2 million net cash was provided by financing activities; exercises of employee stock options generated $0.3 million which was partially offset by $0.1 million net cash used to purchase stock under our stock repurchase program and to pay payroll withholding taxes related to net shares settlement of equity awards.  

Management is of the opinion that the Company’s current cash and cash equivalents together with our ability to generate cash flows from operations provide sufficient liquidity to operate for the next 12 months.

Contractual Obligations and Commitments.

Our contractual obligations and commitments as of April 2, 2016 are as follows:

 

(in thousands)

 

Total

 

 

Less than1 Year

 

 

1-3 years

 

 

3-5 years

 

 

More than 5 years

 

Operating leases payments

 

$

2,962

 

 

$

741

 

 

$

2,221

 

 

$

 

 

$

 

Purchase commitments

 

 

10,448

 

 

 

8,034

 

 

 

2,414

 

 

 

 

 

 

 

Total obligations

 

$

13,410

 

 

$

8,775

 

 

$

4,635

 

 

$

 

 

$