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EX-32.2 - EX-32.2 - IRIDEX CORPirix-ex322_8.htm
EX-32.1 - EX-32.1 - IRIDEX CORPirix-ex321_6.htm
EX-31.2 - EX-31.2 - IRIDEX CORPirix-ex312_9.htm
EX-31.1 - EX-31.1 - IRIDEX CORPirix-ex311_7.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended September 30, 2017

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

 

 

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 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        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

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

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

 

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

The number of shares of common stock, $0.01 par value, issued and outstanding as of October 19, 2017 was 11,579,817.

 

 


 

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 September 30, 2017 and December 31, 2016

3

 

 

 

Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2017 and October 1, 2016

4

 

 

 

Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2017 and October 1, 2016

5

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and October 1, 2016

6

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

7

Item 2.

 

 

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

17

Item 3.

 

 

Quantitative and Qualitative Disclosures about Market Risk

22

Item 4.

 

 

Controls and Procedures

22

 

PART II. OTHER INFORMATION

23

 

Item 1.

 

Legal Proceedings

23

 

Item 1A.

 

Risk Factors

23

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

38

 

Item 3.

 

Defaults Upon Senior Securities

38

 

Item 4.

 

Mine Safety Disclosures

38

 

Item 5.

 

Other Information

38

 

Item 6.

 

Exhibits

39

 

Signature

40

 

 

 

 

 

 

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)

 

 

 

September 30, 2017

 

 

December 31, 2016 (1)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

22,751

 

 

$

23,747

 

Accounts receivable, net of allowance for doubtful accounts of

$226 as of September 30, 2017 and $230 as of December 31, 2016

 

 

7,390

 

 

 

10,025

 

Inventories

 

 

10,669

 

 

 

11,643

 

Prepaid expenses and other current assets

 

 

671

 

 

 

450

 

Total current assets

 

 

41,481

 

 

 

45,865

 

Property and equipment, net

 

 

1,428

 

 

 

1,534

 

Intangible assets, net

 

 

120

 

 

 

132

 

Goodwill

 

 

533

 

 

 

533

 

Other long-term assets

 

 

48

 

 

 

80

 

Total assets

 

$

43,610

 

 

$

48,144

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,864

 

 

$

1,994

 

Accrued compensation

 

 

2,338

 

 

 

2,346

 

Accrued expenses

 

 

1,680

 

 

 

2,135

 

Accrued warranty

 

 

427

 

 

 

310

 

Deferred revenue

 

 

1,403

 

 

 

1,383

 

Total current liabilities

 

 

7,712

 

 

 

8,168

 

Long-term liabilities:

 

 

 

 

 

 

 

 

      Accrued warranty

 

 

255

 

 

 

293

 

Other long-term liabilities

 

 

541

 

 

 

523

 

Total liabilities

 

 

8,508

 

 

 

8,984

 

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 11,579,379 and 11,304,736 shares

as of September 30, 2017 and December 31, 2016, respectively

 

 

126

 

 

 

124

 

Additional paid-in capital

 

 

58,810

 

 

 

55,158

 

Accumulated deficit

 

 

(23,834

)

 

 

(16,122

)

Total stockholders’ equity

 

 

35,102

 

 

 

39,160

 

Total liabilities and stockholders’ equity

 

$

43,610

 

 

$

48,144

 

 

(1)

Derived from the audited consolidated financial statements included in the Annual Report on Form 10-K filed with the SEC for the year ended December 31, 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

 

 

Nine Months Ended

 

 

 

September 30, 2017

 

 

October 1, 2016

 

 

September 30, 2017

 

 

October 1, 2016

 

Total revenues

 

$

10,865

 

 

$

9,789

 

 

$

31,350

 

 

$

33,628

 

Cost of revenues

 

 

6,492

 

 

 

5,544

 

 

 

18,017

 

 

 

18,352

 

Gross profit

 

 

4,373

 

 

 

4,245

 

 

 

13,333

 

 

 

15,276

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

1,428

 

 

 

1,256

 

 

 

4,452

 

 

 

4,007

 

Sales and marketing

 

 

3,769

 

 

 

2,378

 

 

 

10,346

 

 

 

7,212

 

General and administrative

 

 

2,422

 

 

 

1,858

 

 

 

6,380

 

 

 

5,546

 

Gain on sale of intellectual property

 

 

(175

)

 

 

-

 

 

 

(175

)

 

 

-

 

Total operating expenses

 

 

7,444

 

 

 

5,492

 

 

 

21,003

 

 

 

16,765

 

Loss from operations

 

 

(3,071

)

 

 

(1,247

)

 

 

(7,670

)

 

 

(1,489

)

Other expense, net

 

 

(16

)

 

 

(51

)

 

 

(19

)

 

 

(83

)

Loss from operations before provision for (benefit from)  income taxes

 

 

(3,087

)

 

 

(1,298

)

 

 

(7,689

)

 

 

(1,572

)

Provision for (benefit from) income taxes

 

 

9

 

 

 

(627

)

 

 

23

 

 

 

(674

)

Net loss

 

$

(3,096

)

 

$

(671

)

 

$

(7,712

)

 

$

(898

)

Net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.27

)

 

$

(0.07

)

 

$

(0.67

)

 

$

(0.09

)

Diluted

 

$

(0.27

)

 

$

(0.07

)

 

$

(0.67

)

 

$

(0.09

)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

11,569

 

 

 

10,129

 

 

 

11,544

 

 

 

10,083

 

Diluted

 

 

11,569

 

 

 

10,129

 

 

 

11,544

 

 

 

10,083

 

 

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

 

 

4


 

IRIDEX Corporation

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited, in thousands)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 2017

 

 

October 1, 2016

 

 

September 30, 2017

 

 

October 1, 2016

 

Net loss

 

$

(3,096

)

 

$

(671

)

 

$

(7,712

)

 

$

(898

)

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss

 

$

(3,096

)

 

$

(671

)

 

$

(7,712

)

 

$

(898

)

 

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)

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30, 2017

 

 

October 1, 2016

 

Operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(7,712

)

 

$

(898

)

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

   activities:

 

 

 

 

 

 

 

 

Gain on sale of intellectual property

 

 

(175

)

 

 

 

Depreciation and amortization

 

 

660

 

 

 

461

 

Change in fair value of earn-out liability

 

 

122

 

 

 

86

 

Stock-based compensation

 

 

1,357

 

 

 

1,270

 

Provision for doubtful accounts

 

 

(4

)

 

 

66

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

2,639

 

 

 

1,290

 

Inventories

 

 

974

 

 

 

(1,572

)

Prepaid expenses and other current assets

 

 

(221

)

 

 

(839

)

Other long-term assets

 

 

32

 

 

 

77

 

Accounts payable

 

 

(130

)

 

 

249

 

Accrued compensation

 

 

(8

)

 

 

2

 

Accrued expenses

 

 

(347

)

 

 

16

 

Accrued warranty

 

 

79

 

 

 

(33

)

Deferred revenue

 

 

20

 

 

 

(6

)

Other long-term liabilities

 

 

80

 

 

 

26

 

Net cash (used in) provided by operating activities

 

 

(2,634

)

 

 

195

 

Investing activities:

 

 

 

 

 

 

 

 

Acquisition of property and equipment

 

 

(542

)

 

 

(792

)

Proceeds from sale of intellectual property

 

 

175

 

 

 

 

Payment on earn-out liability

 

 

(292

)

 

 

(313

)

Net cash used in investing activities

 

 

(659

)

 

 

(1,105

)

Financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock, net of issuance costs

 

 

2,263

 

 

 

 

Proceeds from stock option exercises

 

 

328

 

 

 

650

 

Taxes paid related to net share settlements of equity awards

 

 

(294

)

 

 

(99

)

Repurchase of common stock

 

 

 

 

 

(59

)

Net cash provided by financing activities

 

 

2,297

 

 

 

492

 

Net decrease in cash and cash equivalents

 

 

(996

)

 

 

(418

)

Cash and cash equivalents, beginning of period

 

 

23,747

 

 

 

9,995

 

Cash and cash equivalents, end of period

 

$

22,751

 

 

$

9,577

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Income taxes

 

$

19

 

 

$

37

 

 

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 December 31, 2016, which was filed with the Securities and Exchange Commission (“SEC”) on March 15, 2017. The results of operations for the three and nine months ended September 30, 2017 and October 1, 2016 are not necessarily indicative of the results for the fiscal year ending December 30, 2017 or any future interim period. The three and nine month periods ended September 30, 2017 and October 1, 2016, 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 December 31, 2016, which was filed with the SEC on March 15, 2017.

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

7


 

result, the Company’s ESP for products and services could change. Revenues for post-sales obligations are recognized as the obligations are fulfilled.

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 and nine month periods ended September 30, 2017 and October 1, 2016 no single customer accounted for more than 10% of total revenues. As of September 30, 2017, one customer accounted for 12% of our accounts receivable and no customer accounted for over 10% of our accounts receivable as of December 31, 2016.

For the three month period ended September 30, 2017, one supplier accounted for 14% of our purchases and no supplier accounted for over 10% of our purchases for the nine month period then ended. For the three and nine month periods ended October 1, 2016 no supplier accounted for over 10% of our purchases.

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 nine months ended September 30, 2017 and October 1, 2016 is as follows:

 

 

Nine Months Ended

 

 

 

September 30, 2017

 

 

October 1, 2016

 

Balance, beginning of period

 

$

1,383

 

 

$

1,311

 

Additions to deferral

 

 

981

 

 

 

1,025

 

Revenue recognized

 

 

(961

)

 

 

(1,031

)

Balance, end of period

 

$

1,403

 

 

$

1,305

 

 

Warranty.

In March 2017, the Company began offering a 5 year warranty on the laser heads for its IQ 532/577 laser consoles. The Company has previously provided 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

8


 

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.

A reconciliation of the changes in the Company’s warranty liability for the nine months ended September 30, 2017 and October 1, 2016 is as follows:

 

 

 

Nine Months Ended

 

 

 

September 30, 2017

 

 

October 1, 2016

 

Balance, beginning of period

 

$

603

 

 

$

603

 

Accruals for product warranties

 

 

319

 

 

 

318

 

Cost of warranty claims

 

 

(240

)

 

 

(351

)

Balance, end of period

 

$

682

 

 

$

570

 

Reclassifications.

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

 

Recently Issued and Adopted Accounting Standards.

In May 2014, as part of its ongoing efforts to assist in the convergence of accounting principles generally accepted in the United States (“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 (Topic 606).” 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. The ASU provides alternative methods of initial adoption and is effective for annual and interim periods beginning after December 15, 2017. The FASB has issued several updates to the standard which i) defer the original effective date from January 1, 2017 to January 1, 2018, while allowing for early adoption as of January 1, 2017 (ASU 2015-14); ii) clarify the application of the principal versus agent guidance (ASU  2016-08); iii) clarify the guidance on inconsequential and perfunctory promises and licensing (ASU 2016-10); and (iv) clarify the guidance on certain sections of the guidance providing technical corrections and improvements (ASU 2016-10). In May 2016, the FASB issued ASU 2016-12, “Revenue from Contracts with Customers (Topic 606) Narrow-Scope Improvements and Practical Expedients”, to address certain narrow aspects of the guidance including collectibility criterion, collection of sales taxes from customers, noncash consideration, contract modifications and completed contracts. This issuance does not change the core principle of the guidance in the initial topic issued in May 2014. We currently anticipate adopting the standard using the modified retrospective method. We are currently evaluating the impact of this new standard on our consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, "Leases," amending ASC 842. This ASU requires us 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 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 our consolidated financial statements.

In October 2016, the FASB issued ASU 2016-16 to ASC 740 "Income Taxes," which simplifies the recording of an inter-entity transfer of assets other than inventory. The new guidance requires that a company recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The new guidance becomes effective for annual reporting periods beginning after December 15, 2017 and must be applied using a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the adoption period. We are currently evaluating the impact of this guidance on our financial statements and the timing of adoption.

 

9


 

3. Inventories

The components of the Company’s inventories as of September 30, 2017 and December 31, 2016 are as follows:

 

 

 

September 30, 2017

 

 

December 31, 2016

 

Raw materials

 

$

5,003

 

 

$

5,331

 

Work in process

 

 

1,864

 

 

 

2,337

 

Finished goods

 

 

3,802

 

 

 

3,975

 

Total inventories

 

$

10,669

 

 

$

11,643

 

 

 

4. Goodwill and Intangible Assets

Goodwill.

The carrying value of goodwill was $0.5 million as of September 30, 2017 and December 31, 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 performs an annual impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceed the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects from any tax deductible goodwill carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The Company has determined that it has a single reporting unit for purposes of performing its goodwill impairment test. As the Company uses the market approach to assess impairment, its common stock price is an important component of the fair value calculation. If the Company’s stock price continues to experience significant price and volume fluctuations, this will impact the fair value of the reporting unit and can lead to potential impairment in future periods. The Company performed its annual impairment test during the second quarter of fiscal 2017 and determined that its goodwill was not impaired. As of September 30, 2017, 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:

 

 

 

September 30, 2017

 

 

 

 

December 31, 2016

 

 

 

Gross

Carrying Amount

 

 

Accumulated

Amortization

 

 

Net

Carrying

Amount

 

 

Remaining Amortization Life

 

Gross

Carrying Amount

 

 

Accumulated

Amortization

 

 

Net

Carrying

Amount

 

Customer relations

 

 

240

 

 

 

120

 

 

 

120

 

 

7.50 Years

 

 

240

 

 

 

108

 

 

 

132

 

 

For the nine months ended September 30, 2017 and October 1, 2016, amortization expense totaled $12 thousand for each period.

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):

 

Fiscal Year:

 

 

 

 

2017 (three months)

 

$

4

 

2018

 

 

16

 

2019

 

 

16

 

2020

 

 

16

 

2021

 

 

16

 

Thereafter

 

 

52

 

Total

 

$

120

 

 

In August 2017, we closed the sale of certain intellectual property. Proceeds from the sale were $175 thousand.

 

10


 

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 September 30, 2017 and December 31, 2016, approximate fair value because of the short maturity of these instruments.

As of September 30, 2017 and December 31, 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:

 

 

 

As of  September 30, 2017

 

 

As of December 31, 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

 

$

22,149

 

 

$

 

 

$

 

 

$

22,149

 

 

$

8,270

 

 

$

 

 

$

 

 

$

8,270

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earn-out liability

 

$

 

 

$

 

 

$

524

 

 

$

524

 

 

$

 

 

$

 

 

$

694

 

 

$

694

 

 

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 acquisition of RetinaLabs, 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 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.

11


 

The following tables present 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 September 30, 2017 and December 31, 2016.

 

As of  September 30, 2017

 

Fair Value

(in thousands)

 

 

Valuation

Technique

 

Significant

Unobservable

Input

 

Weighted

Average

(range)

Earn-out liability

 

$

524

 

 

Discounted cash flow

 

Projected royalties

(in thousands)

 

$1,719

 

 

 

 

 

 

 

 

Discount rate

 

10.89%

(10.89% - 27.00%)

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2016

 

Fair Value

(in thousands)

 

 

Valuation

Technique

 

Significant

Unobservable

Input

 

Weighted

Average

(range)

Earn-out liability

 

$

694

 

 

Discounted cash flow

 

Projected royalties

(in thousands)

 

$2,154

 

 

 

 

 

 

 

 

Discount rate

 

11.22%

(11.22% - 27.00%)

 

A reconciliation of the changes in the Company’s earn-out liability (Level 3 liability) for the nine months ended September 30, 2017 and October 1, 2016 is as follows:

 

 

 

Nine Months Ended

 

(in thousands)

 

September 30, 2017

 

 

October 1, 2016

 

Balance as of beginning of the period

 

$

694

 

 

$

1,005

 

Payments against earn-out

 

 

(292

)

 

 

(313

)

Change in fair value of earn-out liability

 

 

122

 

 

 

86

 

Balance as of the end of the period

 

$

524

 

 

$

778

 

 

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 with market conditions are valued using the Monte Carlo simulation model. The Black-Scholes option pricing model requires the use of highly subjective and complex assumptions which determine the fair value of stock-based awards, including the option’s expected term and the price volatility of the underlying stock. The Monte Carlo simulation model incorporates assumptions for the holding period, risk-free interest rate, stock price volatility and dividend yield.

2008 Equity Incentive Plan.

For the nine months ended September 30, 2017, the only active stock-based compensation plan was the 2008 Equity Incentive Plan (the “Incentive Plan”). The terms of awards granted during the nine months ended September 30, 2017 were consistent with those described in the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016.

On June 14, 2017, the stockholders approved an increase of 650,000 shares of Common Stock reserved for issuance under the Incentive Plan.

12


 

Summary of Stock Options

The following table summarizes information regarding activity under the Incentive Plan during the nine months ended September 30, 2017:

 

 

 

Number of

Shares

 

 

Weighted

Average

Exercise Price

Per Share

 

 

Aggregate

Intrinsic

Value

(thousands)

 

Outstanding as of December 31, 2016

 

 

470,985

 

 

$

8.69

 

 

 

 

 

Granted

 

 

465,900

 

 

$

10.05

 

 

 

 

 

Exercised

 

 

(55,752

)

 

$

5.89

 

 

 

 

 

Canceled or forfeited

 

 

(52,607

)

 

$

10.50

 

 

 

 

 

Outstanding as of September 30, 2017

 

 

828,526

 

 

$

9.53

 

 

$

601

 

 

The weighted average grant date fair value of the options granted under the Incentive Plan as calculated using the Black-Scholes option-pricing model was $3.55 and $6.37 per share for the three months ended September 30, 2017 and October 1, 2016, respectively. The weighted average grant date fair value of the options granted under the Incentive Plan as calculated using the Black-Scholes option-pricing model was $3.75 and $5.23 per share for the nine months ended September 30, 2017 and October 1, 2016, 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

 

 

Nine Months Ended

 

 

 

September 30, 2017

 

 

October 1, 2016

 

 

September 30, 2017

 

 

October 1, 2016

 

Average risk free interest rate

 

 

1.80

%

 

 

1.03

%

 

 

1.79

%

 

 

1.10

%

Expected life (in years)

 

4.55 years

 

 

4.55 years

 

 

4.55 years

 

 

4.55 years

 

Dividend yield

 

—%

 

 

—%

 

 

—%

 

 

—%

 

Average volatility

 

 

42

%

 

 

46

%

 

 

42

%

 

 

46

%

 

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 and nine months ended September 30, 2017 and October 1, 2016:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 2017

 

 

October 1, 2016

 

 

September 30, 2017

 

 

October 1, 2016

 

Cost of revenues

 

$

39

 

 

$

3

 

 

$

131

 

 

$

84

 

Research and development

 

 

104

 

 

 

39

 

 

 

215

 

 

 

90

 

Sales and marketing

 

 

59

 

 

 

38

 

 

 

238

 

 

 

119

 

General and administrative

 

 

319

 

 

 

390

 

 

 

773

 

 

 

977

 

 

 

$

521

 

 

$

470

 

 

$

1,357

 

 

$

1,270

 

 

Stock-based compensation expense capitalized to inventory was immaterial for the nine months ended September 30, 2017 and October 1, 2016.

Occasionally, the Company will grant stock-based instruments to non-employees. During the nine months ended September 30, 2017 and October 1, 2016, the amount of stock-based compensation related to non-employee options was not material.  

13


 

Information regarding stock options outstanding, vested, expected to vest, and exercisable as of September 30, 2017 is summarized below:

 

 

 

Number of

Shares

 

 

Weighted

Average

Exercise Price

 

 

Weighted

Average

Remaining

Contractual

Life (Years)

 

 

Aggregate

Intrinsic Value

(thousands)

 

Options outstanding

 

 

828,526

 

 

$

9.53

 

 

 

5.45

 

 

$

601

 

Options vested and expected to vest

 

 

743,785

 

 

$

9.45

 

 

 

5.30

 

 

$

597

 

Options exercisable

 

 

272,008

 

 

$

7.94

 

 

 

3.39

 

 

$

555

 

 

The aggregate intrinsic value in the table above represents the pre-tax intrinsic value, based on the Company’s closing price as of September 30, 2017, 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 common stock. The total intrinsic value of options exercised for the three months ended September 30, 2017 and October 1, 2016 was approximately $31 thousand and $187 thousand, respectively, and the nine months ended September 30, 2017 and October 1, 2016 was approximately $328 thousand and $735 thousand, respectively.

 

As of September 30, 2017, there was $3.9 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 3.41 years.

Summary of Restricted Stock Units and Awards

Information regarding the restricted stock units (“RSUs”) activity for the nine months ended September 30, 2017 is summarized below:

 

 

 

Number

of Shares

 

Outstanding as of December 31, 2016

 

 

335,805

 

Restricted stock units granted

 

 

112,391

 

Restricted stock units released

 

 

(67,197

)

Restricted stock units forfeited

 

 

(30,789

)

Outstanding as of September 30, 2017

 

 

350,210

 

 

During the nine months ended September 30, 2017, the Company awarded 112,391 restricted stock units at a weighted-average grant date fair value of $11.28 per share.

RSUs granted with market conditions are valued using the Monte Carlo simulation model and compensation expense is recognized ratably during the service period even if the market condition is not satisfied. To the extent that the market condition is not met, the RSUs will not vest and will be cancelled. No RSUs with market conditions were granted during the nine months ended September 30, 2017.

RSUs granted with performance conditions are valued at the grant date fair value of the underlying common shares. The Company makes a determination regarding the probability of the performance criteria being achieved and compensation expense is recognized ratably over the vesting period, if it is expected that the performance criteria will be met.

Information regarding the RSUs granted with performance conditions activity for the nine months ended September 30, 2017 is summarized below:

 

 

 

Number

of Shares

 

Outstanding as of December 31, 2016

 

 

1,289

 

Restricted stock awards granted

 

 

4,301

 

Restricted stock awards released

 

 

(1,289

)

Outstanding as of September 30, 2017

 

 

4,301

 

 

14


 

During the nine months ended September 30, 2017, the Company awarded 4,301 RSUs granted with performance conditions at a weighted-average grant date fair value of $9.30 per share.

 

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 tax of $23 thousand and an income tax benefit of $674 thousand for the nine months ended September 30, 2017 and October 1, 2016, 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. As of the fourth quarter of fiscal year 2016, based on the Company’s recent history of earnings and its forecasted losses, management believes on the more likely than not basis that a full valuation allowance is required. Accordingly, in the fourth quarter of fiscal year 2016, the company provided a full valuation allowance on its federal and states deferred tax assets.

Uncertain Tax Positions.

The Company accounts for its uncertain tax positions in accordance with ASC 740. As of December 31, 2016, the Company had $1.0 million of unrecognized tax benefits none 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 is subject to United States federal income tax as well as to income taxes in state jurisdictions. The Company’s federal and state income tax returns are open to examination by tax authorities for three years and three-to-five years, respectively.   

 

 

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

 

Basic and diluted net loss per share is based upon the weighted average number of common shares 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 nine months ended September 30, 2017 and October 1, 2016, stock options, RSUs, and Restricted Stock Awards (“RSAs”) to purchase 1,178,736 and 799,480 shares, respectively, were excluded from the computation of diluted weighted average shares outstanding.

15


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 2017

 

 

October 1, 2016

 

 

September 30, 2017

 

 

October 1, 2016

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(3,096

)

 

$

(671

)

 

$

(7,712

)

 

$

(898

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock (basic)

 

 

11,569

 

 

 

10,129

 

 

 

11,544

 

 

 

10,083

 

Effect of dilutive preferred shares

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Weighted average shares of common stock (diluted)

 

 

11,569

 

 

 

10,129

 

 

 

11,544

 

 

 

10,083

 

Per share data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net loss per share

 

$

(0.27

)

 

$

(0.07

)

 

$

(0.67

)

 

$

(0.09

)

Diluted net loss per share

 

$

(0.27

)

 

$

(0.07

)

 

$

(0.67

)

 

$