irix-10q_20180929.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 29, 2018

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

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

 

 

 

Non-accelerated filer

 

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

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

 

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

The number of shares of common stock, $0.01 par value, issued and outstanding as of October 25, 2018 was 13,594,140.

 

 


 

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 29, 2018 and December 30, 2017

3

 

 

 

Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 29, 2018 and September 30, 2017

4

 

 

 

Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 29, 2018 and September 30, 2017

5

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 29, 2018 and September 30, 2017

6

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

7

Item 2.

 

 

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

20

Item 3.

 

 

Quantitative and Qualitative Disclosures about Market Risk

24

Item 4.

 

 

Controls and Procedures

24

 

PART II. OTHER INFORMATION

25

 

Item 1.

 

Legal Proceedings

25

 

Item 1A.

 

Risk Factors

25

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

42

 

Item 3.

 

Defaults Upon Senior Securities

42

 

Item 4.

 

Mine Safety Disclosures

42

 

Item 5.

 

Other Information

42

 

Item 6.

 

Exhibits

43

 

Signature

44

 

 

 

 

 

 

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 29, 2018

 

 

December 30, 2017 (1)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

23,725

 

 

$

21,707

 

Accounts receivable, net of allowance for doubtful accounts of

$213 as of September 29, 2018 and $226 as of December 30, 2017

 

 

8,430

 

 

 

7,863

 

Inventories

 

 

8,725

 

 

 

9,381

 

Prepaid expenses and other current assets

 

 

492

 

 

 

500

 

Total current assets

 

 

41,372

 

 

 

39,451

 

Property and equipment, net

 

 

1,312

 

 

 

1,403

 

Intangible assets, net

 

 

104

 

 

 

116

 

Goodwill

 

 

533

 

 

 

533

 

Other long-term assets

 

 

216

 

 

 

143

 

Total assets

 

$

43,537

 

 

$

41,646

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,552

 

 

$

1,724

 

Accrued compensation

 

 

2,284

 

 

 

2,459

 

Accrued expenses

 

 

2,643

 

 

 

2,153

 

Accrued warranty

 

 

694

 

 

 

1,536

 

Deferred revenue

 

 

2,217

 

 

 

2,520

 

Total current liabilities

 

 

10,390

 

 

 

10,392

 

Long-term liabilities:

 

 

 

 

 

 

 

 

Accrued warranty

 

 

138

 

 

 

199

 

Other long-term liabilities

 

 

400

 

 

 

533

 

Total liabilities

 

 

10,928

 

 

 

11,124

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

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

   issued and outstanding

 

 

 

 

 

 

Common stock, $0.01 par value:

 

 

 

 

 

 

 

 

Authorized: 30,000,000 shares;

 

 

 

 

 

 

 

 

Issued and outstanding 13,594,799 and 11,596,274 shares

as of September 29, 2018 and December 30, 2017, respectively

 

 

145

 

 

 

126

 

Additional paid-in capital

 

 

71,283

 

 

 

59,385

 

Accumulated other comprehensive income

 

 

127

 

 

 

 

Accumulated deficit

 

 

(38,946

)

 

 

(28,989

)

Total stockholders’ equity

 

 

32,609

 

 

 

30,522

 

Total liabilities and stockholders’ equity

 

$

43,537

 

 

$

41,646

 

 

(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 30, 2017.

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 29, 2018

 

 

September 30, 2017

 

 

September 29, 2018

 

 

September 30, 2017

 

Total revenues

 

$

11,320

 

 

$

10,865

 

 

$

31,133

 

 

$

31,350

 

Cost of revenues

 

 

6,744

 

 

 

6,492

 

 

 

18,367

 

 

 

18,017

 

Gross profit

 

 

4,576

 

 

 

4,373

 

 

 

12,766

 

 

 

13,333

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

1,149

 

 

 

1,320

 

 

 

3,154

 

 

 

4,028

 

Sales and marketing

 

 

4,144

 

 

 

3,769

 

 

 

12,362

 

 

 

10,346

 

General and administrative

 

 

2,343

 

 

 

2,530

 

 

 

7,209

 

 

 

6,804

 

Gain on sale of intellectual property

 

 

-

 

 

 

(175

)

 

 

-

 

 

 

(175

)

Total operating expenses

 

 

7,636

 

 

 

7,444

 

 

 

22,725

 

 

 

21,003

 

Loss from operations

 

 

(3,060

)

 

 

(3,071

)

 

 

(9,959

)

 

 

(7,670

)

Other (expense) income, net

 

 

(8

)

 

 

(16

)

 

 

16

 

 

 

(19

)

Loss from operations before provision for income taxes

 

 

(3,068

)

 

 

(3,087

)

 

 

(9,943

)

 

 

(7,689

)

Provision for income taxes

 

 

6

 

 

 

9

 

 

 

14

 

 

 

23

 

Net loss

 

$

(3,074

)

 

$

(3,096

)

 

$

(9,957

)

 

$

(7,712

)

Net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.26

)

 

$

(0.27

)

 

$

(0.85

)

 

$

(0.67

)

Diluted

 

$

(0.26

)

 

$

(0.27

)

 

$

(0.85

)

 

$

(0.67

)

Weighted average shares used in computing net loss

   per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

11,925

 

 

 

11,569

 

 

 

11,732

 

 

 

11,544

 

Diluted

 

 

11,925

 

 

 

11,569

 

 

 

11,732

 

 

 

11,544

 

 

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 29, 2018

 

 

September 30, 2017

 

 

September 29, 2018

 

 

September 30, 2017

 

Net loss

 

$

(3,074

)

 

$

(3,096

)

 

$

(9,957

)

 

$

(7,712

)

Foreign currency translation adjustments

 

 

86

 

 

 

 

 

 

127

 

 

 

 

Comprehensive loss

 

$

(2,988

)

 

$

(3,096

)

 

$

(9,830

)

 

$

(7,712

)

 

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 29, 2018

 

 

September 30, 2017

 

Operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(9,957

)

 

$

(7,712

)

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

   activities:

 

 

 

 

 

 

 

 

Gain on sale of intellectual property

 

 

 

 

 

(175

)

Depreciation and amortization

 

 

617

 

 

 

660

 

Change in fair value of earn-out liability

 

 

94

 

 

 

122

 

Stock-based compensation

 

 

1,516

 

 

 

1,357

 

Provision for doubtful accounts

 

 

 

 

 

(4

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(567

)

 

 

2,639

 

Inventories

 

 

533

 

 

 

974

 

Prepaid expenses and other current assets

 

 

8

 

 

 

(221

)

Other long-term assets

 

 

(73

)

 

 

32

 

Accounts payable

 

 

828

 

 

 

(130

)

Accrued compensation

 

 

(175

)

 

 

(8

)

Accrued expenses

 

 

335

 

 

 

(347

)

Accrued warranty

 

 

(903

)

 

 

79

 

Deferred revenue

 

 

(303

)

 

 

20

 

Other long-term liabilities

 

 

73

 

 

 

80

 

Net cash used in operating activities

 

 

(7,974

)

 

 

(2,634

)

Investing activities:

 

 

 

 

 

 

 

 

Acquisition of property and equipment

 

 

(391

)

 

 

(542

)

Proceeds from sale of intellectual property

 

 

 

 

 

175

 

Payment on earn-out liability

 

 

(302

)

 

 

(292

)

Net cash used in investing activities

 

 

(693

)

 

 

(659

)

Financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock, net of issuance costs

 

 

10,637

 

 

 

2,263

 

Proceeds from stock option exercises

 

 

97

 

 

 

328

 

Taxes paid related to net share settlements of equity awards

 

 

(176

)

 

 

(294

)

Net cash provided by financing activities

 

 

10,558

 

 

 

2,297

 

Effect of foreign exchange rate changes

 

 

127

 

 

 

-

 

Net increase (decrease) in cash and cash equivalents

 

 

2,018

 

 

 

(996

)

Cash and cash equivalents, beginning of period

 

 

21,707

 

 

 

23,747

 

Cash and cash equivalents, end of period

 

$

23,725

 

 

$

22,751

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Income taxes

 

$

9

 

 

$

19

 

Supplemental disclosure of non-cash activities:

 

 

 

 

 

 

 

 

Transfer of inventory to property and equipment

 

$

123

 

 

$

 

 

 

 

 

 

 

 

 

 

 

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 30, 2017, which was filed with the Securities and Exchange Commission (“SEC”) on March 14, 2018. The results of operations for the three and nine months ended September 29, 2018 and September 30, 2017 are not necessarily indicative of the results for the fiscal year ending December 29, 2018 or any future interim period. The three and nine months ended September 29, 2018 and September 30, 2017, each had 13 weeks and 39 weeks, respectively. 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 30, 2017, which was filed with the SEC on March 14, 2018.

Financial Statement Presentation.

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

Use of Estimates.

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

Revenue Recognition.

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

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

 

(1)

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

Under the new guidance, there is no change in our revenue recognition for product-sale-only transactions, as compared to revenue recognition for these transactions under the prior revenue recognition standards. For a description of our prior revenue recognition standards, see Note 2 to the consolidated financial statements included as part of our Annual Report on Form 10-K for the period ended December 30, 2017. The Company recognizes revenue from product sale at a point in

7


 

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

 

(2)

VIP/LAP Programs: The Company sometimes enters into VIP or Laser Advantage Program (LAP) contracts with customers. For the VIP program, under the terms of such contracts, the customer is not charged for the system upon the initial agreement, but rather is obligated to purchase a quarterly minimum quantity of Endoprobes (classified as disposables) at a premium during the contract period, such that at the end of the contract period the system has been paid in full. The Company decided to replace its previously utilized VIP program (contract length of two years) with an LAP program (contract length of 12 months or less) beginning in fourth quarter of 2016. Under the LAP program, the system is given away free of charge and title is transferred after the customer purchases the minimum required number of boxes of probes (classified as disposables). Customers with older machines have the ability to trade in their old machines for the most current laser equipment offered in the program (G6 Laser) and receive a discount on the program’s minimum purchase requirements.  Under ASC 606, this non-cash consideration must be included in the transaction price. However, the Company has determined that there is no value associated with the old machine and the trade in is essentially offered to encourage customers to purchase more consumables under the program.

Under the new guidance, there is no change in our revenue recognition for product sales under VIP/LAP programs as compared to revenue recognition for these transactions under the prior revenue recognition standards. The Company recognizes revenue from product sales under VIP/LAP programs at a point in time. For both programs, the Company allocates the transaction price of the distinct performance obligations in the contract by determining stand-alone selling price using historical pricing net of any variable consideration or discounts to specifically allocate to a particular performance obligation.

 

(3)

Extended Warranty: The Company offers a standard 2 year warranty on all system sales (5 years on the laser heads for its IQ 532/577 laser consoles). The Company also offers an extended warranty which is sold to customers in incremental, one-year warranty periods which begin subsequent to the expiration of the standard 2 year warranty. The customer can opt to purchase the extended warranty at the time of the system sale or after the initial system sale.

Under the new guidance, there is no change in our revenue recognition for extended warranty as compared to revenue recognition for these transactions under the prior revenue recognition standards. The Company recognizes revenue from extended warranty ratably over the warranty period.  Revenue recognition for the sale of an extended warranty is largely dependent on the timing of the sale as follows:

 

a.

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

 

b.

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

 

(4)

System Repairs (outside of warranty): Customers will sometime request repairs from the Company subsequent to the expiration of the standard warranty and outside of an extended warranty contract.

Under the new guidance, there is no change in our revenue recognition for system repairs (outside warranty) as compared to revenue recognition for these transactions under the prior revenue recognition standards. The Company recognizes revenue from system repairs (outside of warranty) at a point in time. When the customer request repairs from the Company subsequent to the expiration of the standard warranty and outside of an extended warranty contracts, these repair contracts are considered separate from the initial sale, and as such, revenue is recognized as the repair services are rendered and the performance obligation satisfied.

 

(5)

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

8


 

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

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

Concentration of Credit Risk.

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

We market our products to distributors and end-users throughout the world. Sales to international distributors are generally made on open credit terms and letters of credit. Management performs ongoing credit evaluations of our customers and maintains an allowance for potential credit losses. Historically, we have not experienced any significant losses related to individual customers or a group of customers in any particular geographic area. For the three months ended September 29, 2018 one customer accounted for more than 10% of total revenues, representing 11%. For the nine months ended September 29, 2018, no single customer accounted for more than 10% of total revenues. During the three and nine months ended September 30, 2017, no single customer accounted for more than 10% of total revenues. As of September 29, 2018, one customer accounted for over 10% of our accounts receivable, representing 18%. As of December 30, 2017, 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.

Deferred revenue represents contract liabilities. 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. The deferred revenue balance is expected to be recognized over the next 12 months.

A reconciliation of the changes in the Company’s deferred revenue balance for the nine months ended September 29, 2018 and September 30, 2017 is as follows:

 

 

 

Nine Months Ended

 

 

 

September 29, 2018

 

 

September 30, 2017

 

Balance, beginning of period

 

$

2,520

 

 

$

1,383

 

Additions to deferral

 

 

1,426

 

 

 

981

 

Revenue recognized

 

 

(1,729

)

 

 

(961

)

Balance, end of period

 

$

2,217

 

 

$

1,403

 

 

Warranty.

The Company currently provides a two year full warranty on its products. In addition, in March 2017, the Company began to offer a five year warranty on the laser heads for its IQ 532/577 laser consoles. The associated costs of these warranties are accrued for upon shipment of the products. The Company had previously provided a one to two year warranty on its product. Actual warranty costs incurred have not materially differed from those accrued. In March 2018, we have reversed the warranty expense associated with products shipped outside of the United States that were accrued in December 2017 as these reserves are no longer deemed required. 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.

9


 

A reconciliation of the changes in the Company’s warranty liability for the nine months ended September 29, 2018 and September 30, 2017 is as follows:

 

 

 

Nine Months Ended

 

 

 

September 29, 2018

 

 

September 30, 2017

 

Balance, beginning of period

 

$

1,735

 

 

$

603

 

Accruals for product warranties

 

 

298

 

 

 

319

 

Cost of warranty claims

 

 

(1,201

)

 

 

(240

)

Balance, end of period

 

$

832

 

 

$

682

 

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 Adopted Accounting Standards.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers (Topic 606) (“ASC 606”), which, along with amendments issued in 2015, 2016 and 2017, replaces nearly all current U.S. GAAP guidance on this topic with a comprehensive revenue measurement and recognition standard and expanded disclosure requirements. This new guidance provides a five-step analysis in determining when and how revenue is recognized. Under the new guidance, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. In addition, the new guidance requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.

As part of our assessment and implementation plan, we evaluated our policies, procedures and internal controls. In preparation for adoption of the standard, the Company has implemented internal controls to enable the preparation of financial information, including the assessment of the impact of the standard. The Company has adopted this guidance using the modified retrospective method in the first quarter of fiscal 2018. Under the modified retrospective method, the new standards apply to all new contracts initiated on or after the effective date, and for contracts which have remaining obligations as of the effective date, an adjustment to the opening balance of retained earnings is required. Based on the results of the procedures taken in adopting this standard, we determined that our accounting for revenues under the then prescribed standard (ASC 605) was not different from the new ASC 606 standard. As such, we did not have any adjustments to our opening balance of our retained earnings.

In August 2016, the FASB issued ASU 2016-15 “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” The amendment gives guidance and reduces diversity in practice with respect to certain types of cash flows. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments 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. The adoption of this standard in fiscal year 2018 did not have a material impact 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. The adoption of this standard in fiscal year 2018 did not have a material impact on the Company’s consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting.” The amendments in ASU 2017-09 include guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. These amendments require the entity to account for the effects of a modification unless all of the following conditions are met: the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or value using an alternative measurement method) of the original award immediately before the original award is modified; the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. This guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, with early adoption permitted. The adoption of this standard in fiscal year 2018 did not have a material impact on the Company’s consolidated financial statements.

10


 

In March 2018, the FASB issued ASU 2018-05, “Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118.” ASU 2018-05 formally amended ASC Topic 740, Income Taxes (“ASC 740”) for the guidance previously provided by SEC Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance for the application of ASC 740 in the reporting period in which the U.S. Tax Cuts and Jobs Act (the “Tax Reform Act”) was signed into law. The adoption of this standard in fiscal year 2018 did not have a material impact on the Company’s consolidated financial statements.

Recent Accounting Standards Not Yet Adopted.

In February 2016, the FASB issued ASU 2016-02, “Leases,” which, along with amendments issued in 2018, modified lessee accounting guidance under Topic 840. 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 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. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.

In July 2018, the FASB issued ASU 2018-09, “Codification Improvements,” which clarifies and makes minor improvements to the Codification. The amendments impacts various areas, such as Subtopic 220-10, Income Statement-Reporting Comprehensive Income-Overall; Subtopic 718-740, Compensation-Stock Compensation-Income Taxes; and Subtopic 820-10, Fair Value Measurement-Overall. The guidance is effective for annual periods beginning after December 15, 2018. The Company is currently evaluating the effect of the adoption of this guidance on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement,” which removes, modifies and adds certain disclosure requirements on fair value measurements. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the effect of the adoption of this guidance on its consolidated financial statements.

3. Inventories

The components of the Company’s inventories as of September 29, 2018 and December 30, 2017 are as follows:

 

 

 

September 29, 2018

 

 

December 30, 2017

 

Raw materials

 

$

3,229

 

 

$

4,147

 

Work in process

 

 

824

 

 

 

1,567

 

Finished goods

 

 

4,672

 

 

 

3,667

 

Total inventories

 

$

8,725

 

 

$

9,381

 

 

4. Goodwill and Intangible Assets

Goodwill.

The carrying value of goodwill was $0.5 million as of September 29, 2018 and December 30, 2017.

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. The Company reviews goodwill for impairment on an annual basis or whenever events or changes in circumstances indicate the carrying value may not be recoverable. The Company performs an annual impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceed the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects from any tax deductible goodwill carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The Company has determined that it has a single reporting unit for purposes of performing its goodwill impairment test. As the Company uses the market approach to assess impairment, its common stock price is an important component of the fair value calculation. If the Company’s stock price continues to experience significant price and volume fluctuations, this will impact the fair value of the reporting unit and can lead to potential impairment in future periods. The Company performed its annual impairment test during the second quarter of fiscal year 2018 and determined that its goodwill was not impaired. As of September 29, 2018, 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.

11


 

Intangible Assets.

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

 

 

 

September 29, 2018

 

 

 

 

December 30, 2017

 

 

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

Carrying

Amount

 

 

Remaining

Amortization Life

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

Carrying

Amount

 

Customer relations

 

 

240

 

 

 

136

 

 

 

104

 

 

6.50 Years

 

 

240

 

 

 

124

 

 

 

116

 

 

For the nine months ended September 29, 2018 and September 30, 2017, 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:

 

 

 

 

2018 (three months)

 

$

4

 

2019

 

 

16

 

2020

 

 

16

 

2021

 

 

16

 

2022

 

 

16

 

Thereafter

 

 

36

 

Total

 

$

104

 

 

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 29, 2018 and December 30, 2017, approximate fair value because of the short maturity of these instruments.

12


 

As of September 29, 2018 and December 30, 2017, 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 29, 2018

 

 

As of December 30, 2017

 

 

 

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

 

$

22,844

 

 

$

 

 

$

 

 

$

22,844

 

 

$

20,950

 

 

$

 

 

$

 

 

$

20,950

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earn-out liability

 

$

 

 

$

 

 

$

364

 

 

$

364

 

 

$

 

 

$

 

 

$

572

 

 

$

572

 

 

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.

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 29, 2018 and December 30, 2017.

 

As of  September 29, 2018

 

Fair Value

(in thousands)

 

 

Valuation

Technique

 

Significant

Unobservable

Input

 

Weighted

Average

(range)

Earn-out liability

 

$

364

 

 

Discounted cash flow

 

Projected royalties

(in thousands)

 

$1,314

 

 

 

 

 

 

 

 

Discount rate

 

10.35%

(10.20% - 27.00%)

 

 

 

 

 

 

 

 

 

 

 

As of December 30, 2017

 

Fair Value

(in thousands)

 

 

Valuation

Technique

 

Significant

Unobservable

Input

 

Weighted

Average

(range)

Earn-out liability

 

$

572

 

 

Discounted cash flow

 

Projected royalties

(in thousands)

 

$1,622

 

 

 

 

 

 

 

 

Discount rate

 

10.90%

(10.90% - 27.00%)

 

A reconciliation of the changes in the Company’s earn-out liability (Level 3 liability) for the nine months ended September 29, 2018 and September 30, 2017 is as follows:

 

 

 

Nine Months Ended

 

(in thousands)

 

September 29, 2018

 

 

September 30, 2017

 

Balance as of beginning of the period

 

$

572

 

 

$

694

 

Payments against earn-out

 

 

(302

)

 

 

(292

)

Change in fair value of earn-out liability

 

 

94

 

 

 

122

 

Balance as of the end of the period

 

$

364

 

 

$

524

 

 

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.

13


 

6. Commitments and Contingencies

Operating Lease Commitments.

Our operating lease commitments consist primarily of our facility lease and various office and computer equipment leases. As of September 29, 2018, our total future minimum lease payments through fiscal year 2022 under current operating leases was approximately $4.9 million.

Purchase Commitments.

Our purchase commitments consist primarily of non-cancellable purchase commitments with vendors to manufacture certain components and ophthalmic instrumentation. As of September 29, 2018, our future minimum payments through fiscal year 2019 for our purchase commitments was approximately $13.4 million.

Indemnities.

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

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

Legal Proceedings.

In January 2018, we filed a lawsuit against Quantel Medical, S.A., Quantel USA, Inc., and Quantel, S.A. (collectively, “Quantel”) in the U.S. District Court for the Northern District of California. The lawsuit alleges that Quantel products infringe U.S. Patent No. 7,771,417, that Quantel breached an earlier agreement between Quantel and the Company, and that Quantel has infringed upon the Company’s MicroPulse® trademark, Registration No. 4550188 on the principal register. Quantel previously had a limited license to the asserted Company patent and trademark. Our complaint filed in connection with this matter asserts that the license was terminated in early 2017 for material breach, but that Quantel continued to use our intellectual property without authorization.

On March 8, 2017, OD-OS GmbH noticed an opposition to the Company’s European Patent No. currently EP 1 856 774 at the European Patent Office (“EPO”). On June 8, 2018, Quantel intervened in the Opposition. Oral proceedings on the opposition took place on July 13, 2018. At the conclusion of those proceedings, the EPO’s Opposition Division communicated that it would move to revoke the patent. The formal written decision from the Opposition Division was issued on October 1, 2018. The Company filed its notice of appeal on October 10, 2018.

In late May of 2018, Quantel applied to the Paris District Court in Paris, France for a ruling that its products do not infringe the French Part of Iridex’s European Patent at issue in the opposition, EP 1 856 774. A scheduling conference is set for November 6, 2018.

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

 

14


 

7. Stockholders’ Equity and Stock-Based Compensation

Common Stock

In September 2018, the Company completed its registered underwritten public offering of 1,916,667 shares of the Company’s common stock at a public offering price of $6.00 per share, pursuant to an underwriting agreement with Stifel, Nicolaus & Company, Incorporated, as representative of the underwriters named therein. The resulting aggregate net proceeds to the Company from the common stock offering was approximately $10.6 million, after deducting underwriting discount and offering expenses.

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 29, 2018, the only active stock-based compensation plan was the 2008 Equity Incentive Plan, or Incentive Plan. The terms of awards granted during the nine months ended September 29, 2018 were consistent with those described in the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 30, 2017.

The following table shows stock-based compensation expenses included in the condensed consolidated statements of operations for the three and nine months ended September 29, 2018 and September 30, 2017:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

(in thousands)

 

September 29, 2018

 

 

September 30, 2017

 

 

September 29, 2018

 

 

September 30, 2017

 

Cost of revenues

 

$

23

 

 

$

39

 

 

$

68

 

 

$

131

 

Research and development

 

 

94

 

 

 

104

 

 

 

214

 

 

 

215

 

Sales and marketing

 

 

169

 

 

 

59

 

 

 

348

 

 

 

238

 

General and administrative

 

 

387

 

 

 

319

 

 

 

886

 

 

 

773

 

 

 

$

673

 

 

$

521

 

 

$

1,516

 

 

$

1,357

 

 

Stock-based compensation expense capitalized to inventory was immaterial for the nine months ended September 29, 2018 and September 30, 2017.

Occasionally, the Company will grant stock-based instruments to non-employees. During the nine months ended September 29, 2018 and September 30, 2017, the amount of stock-based compensation related to non-employee options was not material.  

Summary of Stock Options.

The following table summarizes information regarding activity under the Incentive Plan during the nine months ended September 29, 2018:

 

 

 

Number of

Shares

 

 

Weighted

Average

Exercise Price

Per Share

 

 

Aggregate

Intrinsic

Value

(thousands)

 

Outstanding as of December 30, 2017

 

 

857,311

 

 

$

9.49

 

 

 

 

 

Granted

 

 

136,435

 

 

$

6.22

 

 

 

 

 

Exercised

 

 

(23,750

)

 

$

4.10

 

 

 

 

 

Canceled or forfeited

 

 

(62,286

)

 

$

10.48

 

 

 

 

 

Outstanding as of September 29, 2018

 

 

907,710

 

 

$

9.07

 

 

$

132

 

15


 

 

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 $2.47 and $3.55 per share for the three months ended September 29, 2018 and September 30, 2017, 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 $2.34 and $3.75 per share for the nine months ended September 29, 2018 and September 30, 2017, 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 29, 2018

 

 

September 30, 2017

 

 

September 29, 2018

 

 

September 30, 2017

 

Average risk free interest rate

 

 

2.95

%

 

 

1.80

%

 

 

2.71

%

 

 

1.79

%

Expected life (in years)

 

4.55 years

 

 

4.55 years

 

 

4.55 years

 

 

4.55 years

 

Dividend yield

 

—%

 

 

—%

 

 

—%

 

 

—%

 

Average volatility

 

 

41

%

 

 

42

%

 

 

41

%

 

 

42

%

 

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.

Information regarding stock options outstanding, vested, expected to vest, and exercisable as of September 29, 2018 is summarized below:

 

 

 

Number of

Shares

 

 

Weighted

Average

Exercise Price

 

 

Weighted

Average

Remaining

Contractual

Life (Years)

 

 

Aggregate

Intrinsic Value

(thousands)

 

Options outstanding

 

 

907,710

 

 

$

9.07

 

 

 

5.06

 

 

$

132

 

Options vested and expected to vest

 

 

848,436

 

 

$

9.09

 

 

 

5.00

 

 

$

126

 

Options exercisable

 

 

384,468

 

 

$

9.07

 

 

 

3.87

 

 

$

87

 

 

The aggregate intrinsic value in the table above represents the pre-tax intrinsic value, based on the Company’s closing price as of September 29, 2018, 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 nine months ended September 29, 2018 and September 30, 2017 was approximately $71 thousand and $328 thousand, respectively.  

As of September 29, 2018, there was $5.9 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 2.91 years.

16


 

Summary of Restricted Stock Units and Awards

Information regarding the restricted stock units (“RSUs”) activity for the nine months ended September 29, 2018 is summarized below:

 

 

 

Number

of Shares

 

Outstanding as of December 30, 2017

 

 

361,148

 

Restricted stock units granted

 

 

408,750

 

Restricted stock units released

 

 

(76,399

)

Restricted stock units forfeited

 

 

(6,750

)

Outstanding as of September 29, 2018

 

 

686,749

 

 

During the nine months ended September 29, 2018, the Company awarded 408,750 restricted stock units at a weighted-average grant date fair value of $7.86 per share.

RSUs granted with market conditions are valued using a 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. 72,870 RSUs with market conditions were granted during the nine months ended September 29, 2018.

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. During the nine months ended September 29, 2018, the Company awarded 165,330 RSUs granted with performance conditions. 

Information regarding the restricted stock awards activity during the nine months ended September 29, 2018 is summarized below:

 

 

 

Number

of Shares

 

Outstanding as of December 30, 2017

 

 

4,301

 

Restricted stock awards granted

 

 

 

Restricted stock awards released

 

 

(4,301

)

Outstanding as of September 29, 2018

 

 

 

 

8. 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 $14 thousand and $23 thousand for the nine months ended September 29, 2018 and September 30, 2017, respectively.

In December 2017, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No.118 (SAB 118) to provide guidance on the application of the Tax Reform Act when a company does not have necessary information available, prepared, or analyzed to reflect the effects of the Tax Reform Act. SAB 118 provides guidance for companies under three scenarios (1) measurement of certain income tax effects is complete, (2) measurement of certain income tax effect can be reasonably estimated, and (3) measurement of certain income tax effects cannot be reasonably estimated.  Companies are to complete the accounting under ASC 740 in regards to the Tax Reform Act within a measurement period that does not extend one year from the date of enactment (i.e., December 22, 2018).  The Company is still within the measurement period as of the end of the third quarter of 2018 and the Company is continuing to review the impact of the adoption of the Tax Reform Act on the Company.     

17


 

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 2017, 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 2017, 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 30, 2017, the Company had $1.0 million of unrecognized tax benefits, none of the 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.   

 

9. 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 three months ended September 29, 2018 and September 30, 2017, potential shares from stock options, RSUs and Restricted Stock Awards (“RSAs”) totaling 1,436,320 and 842,775 shares, respectively, were excluded from the computation of diluted weighted average shares outstanding. For the nine months ended September 29, 2018 and September 30, 2017, potential shares from stock options, RSUs and RSAs totaling 1,253,843 and 868,198 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 loss per common share is provided as follows:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

(in thousands except per share data)

 

September 29, 2018

 

 

September 30, 2017

 

 

September 29, 2018

 

 

September 30, 2017

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(3,074

)

 

$

(3,096

)

 

$

(9,957

)

 

$

(7,712

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of

   common stock (basic)

 

 

11,925

 

 

 

11,569

 

 

 

11,732

 

 

 

11,544

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of

   common stock (diluted)

 

 

11,925

 

 

 

11,569

 

 

 

11,732

 

 

 

11,544

 

Per share data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net loss per share

 

$

(0.26

)

 

$