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Item 8. Financial Statements and Supplementary Data

2021-03-23 compared with 2020-03-13 · 197 added, 206 removed, 549 unchanged (42% of the section changed)

Financial Statements and Supplementary Data.

Our consolidated balance sheets as of December 28, 2019 and December 29, 2018 and the consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of our fiscal years 2019 and 2018 together with the related notes and the report of our independent registered public accounting firm, are on the following pages.

Our consolidated balance sheets as of January 2, 2021 and December 28, 2019 and the consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of our fiscal years 2020 and 2019 together with the related notes and the report of our independent registered public accounting firm, are on the following pages.

Additional required financial information is described in Item 15.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

REPORT OF INDEPENDENT REGIST ERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of IRIDEX Corporation

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of IRIDEX Corporation (a Delaware corporation) and its subsidiaries (the “Company”) as of December 28, 2019 and December 29, 2018, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for each of the two years in the period ended December 28, 2019, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 28, 2019 and December 29, 2018, and the results of its operations and its cash flows for each of the two years in the period ended December 28, 2019, in conformity with accounting principles generally accepted in the United States of America.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for leases in 2019 due to the adoption of the new lease standard.

We have audited the accompanying consolidated balance sheets of IRIDEX Corporation (a Delaware corporation) and its subsidiaries (the “Company”) as of January 2, 2021 and December 28, 2019, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for each of the two years in the period ended January 2, 2021, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of January 2, 2021 and December 28, 2019, and the results of its operations and its cash flows for each of the two years in the period ended January 2, 2021, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

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We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Inventory Valuation - Adjustments for Excess or Obsolete Inventories

As described in Notes 2 and 4 to the consolidated financial statements, the Company has inventories with a carrying value of $5.7 million as of January 2, 2021.

The Company’s inventories are stated at the lower of cost or net realizable value.

Cost is determined on a standard cost basis which approximates actual cost on a first-in, first-out (“FIFO”) method.

Lower of cost or net realizable value is evaluated by considering obsolescence, excessive levels of inventory, deterioration, and other factors.

Adjustments to reduce the cost of inventory to its net realizable value, if required, are made for estimated excess, obsolescence or impaired inventory and are charged to cost of revenues.

The Company’s inventories include demonstration units (“demos”) to facilitate the sale of products to prospective customers and loaners for existing customers to use while their product is under repair.

The principal considerations for our determination that performing procedures relating to net realizable value adjustments to inventories is a critical audit matter are the significant amount of judgement by management in developing the assumptions of the forecasted changes in demand, product life cycle and development plans, component cost trends, product pricing, physical deterioration and quality issues, which in turn led to significant auditor judgement, subjectivity, and effort in performing audit procedures and evaluating audit evidence relating to these factors.

Additionally, for certain new product launches there may be limited historical data with which to evaluate forecasts.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.

These procedures included obtaining an understanding of the Company’s inventory reserve review process, including the assumptions and data underlying the excess and obsolete inventory valuation.

The procedures also included, among others, testing management’s process for developing the estimate of the adjustments for excess or obsolete inventories, testing the completeness and accuracy of the underlying data used in the estimate, and evaluating management’s assumptions of forecasted product demand.

Evaluating management’s demand forecast for reasonableness involved considering historical sales by product, comparing prior period estimates to actual results, and determining whether the demand forecast used was consistent with evidence obtained in other areas of the audit.

We have served as the Company’s auditor since 2007.

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(in thousands, except share and per share data)

December 28, 2019

January 2, 2021

December 28, 2019

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Cash and cash equivalents

Accounts receivable, net of allowance for doubtful accounts of $187 as of December 28, 2019 and $213 as of December 29, 2018

Accounts receivable, net of allowance for doubtful accounts of $244 as of January 2, 2021 and $187 as of December 28, 2019

Prepaid expenses and other current assets

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Accrued expenses

Current portion of PPP loan

Accrued warranty

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30,000,000 shares;

Issued and outstanding 13,785,233 and 13,602,052 shares as of December 28, 2019 and December 29, 2018, respectively

Issued and outstanding 13,899,683 and 13,785,233 shares as of January 2, 2021 and December 28, 2019, respectively

Additional paid-in capital

Accumulated other comprehensive income

Accumulated other comprehensive income (loss)

Accumulated deficit

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(in thousands, except per share data)

December 28, 2019

January 2, 2021

December 28, 2019

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(in thousands)

December 28, 2019

January 2, 2021

December 28, 2019

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Balances, December 29, 2018

Proceeds from issuance of common stock, net of issuance costs

Issuance of common stock under stock option plan

Employee stock-based compensation expense

Release of restricted stock

Release of restricted stock, including net share settlement

Other comprehensive income

Balances, December 28, 2019

Issuance of common stock under stock option plan

Employee stock-based compensation expense

Release of restricted stock

Release of restricted stock, including net share settlement

Other comprehensive income

Balances, December 28, 2019

Balances, January 2, 2021

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

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(in thousands)

December 28, 2019

January 2, 2021

December 28, 2019

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Acquisition of property and equipment

Proceeds from sale of property and equipment

Payment on earn-out liability

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Financing activities:

Proceeds from issuance of common stock, net of issuance costs

Proceeds from stock option exercises

Proceeds from PPP loan

Taxes paid related to net share settlements of equity awards

Net cash (used in) provided by financing activities

Net cash provided by (used in) financing activities

Effect of foreign exchange rate changes

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Supplemental disclosure of cash flow information:

Cash paid during the year for:

Cash (received) paid during the year for:

Supplemental disclosure of non-cash activities:

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Our fiscal year always ends on the Saturday closest to December 31.

Fiscal 2019 ended on December 28, 2019 (“FY 2019”) and Fiscal 2018 ended on December 29, 2018 (“FY 2018”).

Fiscal years 2019 and 2018 each included 52 weeks of operations.

Fiscal 2020 ended on January 2, 2021 (“FY 2020”) and Fiscal 2019 ended on December 28, 2019 (“FY 2019”).

Fiscal years 2020 and 2019 included 53 weeks and 52 weeks of operations, respectively.

Use of Estimates.

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Sales Returns Allowance and Allowance for Doubtful Accounts.

We estimate future product returns related to current period product revenue.

We analyze historical returns, and changes in customer demand and acceptance of our products when evaluating the adequacy of the sales returns allowance.

Significant management judgment and estimates must be made and used in connection with establishing the sales returns allowance in any accounting period.

When determining the transaction price, we estimate the variable consideration as the most likely amount to which we expect to be entitled, and we include the estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue will not occur when the uncertainty associated with the variable consideration is resolved.

Material differences may result in the amount and timing of our revenue for any period if management made different judgments or utilized different estimates.

Our provision for sales returns is recorded net of the associated costs.

The balance for the provision for sales returns was $264 thousand and $277 thousand as of December 28, 2019 and December 29, 2018, respectively, and is recorded within the deferred revenue accounts in the consolidated balance sheets.

There was no provision for sales returns as of January 2, 2021 and $264 thousand as of December 28, 2019, which was recorded within the deferred revenue accounts in the consolidated balance sheets.

Similarly management must make estimates regarding the uncollectibility of accounts receivable.

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The allowance for doubtful accounts is based on past payment history with the customer, analysis of the customer’s current financial condition, the aging of the accounts receivable balance, customer concentration and other known factors.

A reconciliation of the changes in our allowance for doubtful accounts balances for th e years ended December 28, 2019 and December 29, 2018 are as follows (in thousands):

A reconciliation of the changes in our allowance for doubtful accounts balances for the years ended January 2, 2021 and December 28, 2019 are as follows (in thousands):

Allowance for doubtful accounts Years ended

December 28, 2019

January 2, 2021

December 28, 2019

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The amortization of the demos is charged to sales and marketing expense while the amortization on the loaners is charged to cost of revenues.

The gross value of demos and loaners was $2.8 million and $3.1 million, respectively and the accumulated amortization was $1.4 million as of December 28, 2019 and December 29, 2018.

The gross value of demos and loaners was $1.9 million and $2.8 million and the accumulated amortization was $1.7 million and $1.4 million as of January 2, 2021 and December 28, 2019, respectively.

The net book value of demos and loaners is charged to cost of revenues when such demos or loaners are sold.

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Operating leases are included in Operating lease right-of-use (“ROU”) assets, net and Operating lease liabilities in our consolidated balance sheets.

As of December 28, 2019, the Company was not a party to finance lease arrangements.

As of January 2, 2021, the Company was not a party to finance lease arrangements.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease.

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The Company performed its annual impairment test during the second quarter of fiscal 2020 and determined that its goodwill was not impaired.

As of December 28, 2019, we had not identified any factors that indicated there was an impairment of our goodwill and determined that no additional impairment analysis was then required.

As of January 2, 2021, we had not identified any factors that indicated there was an impairment of our goodwill and determined that no additional impairment analysis was then required.

Intangible assets with definite lives are amortized over the useful life of the asset.

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If an asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value.

In such circumstances, we conduct an impairment analysis in accordance with Accounting Standard Codification (“ASC”) 350, “Intangibles – Goodwill and Other” (“ASC 350”).

In such circumstances, we conduct an impairment analysis in accordance with Accounting Standards Codification (“ASC”) 350, “Intangibles – Goodwill and Other” (“ASC 350”).

Revenue Recognition.

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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.”

Our revenue is recognized in accordance with ASC 606, “Revenue from Contracts with Customers.

The Company has the following revenue transaction types:

(1) Product Sale Only, (2) Laser Advantage Program (LAP), (3) Extended Warranty, (4) System Repairs (outside of warranty) and (5) Royalty Revenue.

(1) Product Sale Only, (2) Laser Advantage Program (LAP), (3) Service Contracts, (4) System Repairs (outside of warranty) and (5) Royalty Revenue.

Product Sale Only:

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In other countries outside of the United States and Germany, the Company utilizes independent, third-party distributors to market and sell the Company’s products.

There is no continuing obligation subsequent to the shipment to the distributors.

There is no continuing obligation subsequent to the shipment to these distributors .

The Company recognizes revenue from product sale at a point in time.

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(1) identifying the contract with the customer, (2) identifying the performance obligations in the contract, (3) determining expected transaction price, (4) allocating the transaction price to the distinct performance obligations in the contract, and (5) recognizing revenue when (or as) the performance obligations are satisfied .

The Company sometimes enters into LAP contracts with customers.

LAP Program (Discontinued in the second quarter of fiscal year 2019):

The Company entered into LAP contracts with certain customers.

Under the LAP program, the system is given away free of charge and title is transferred after the customer purchases the minimum required number of boxes of probes (classified as disposables).

Customers with older machines have the ability to trade in their old machines for the most current laser equipment offered in the program (G6 Laser) and receive a discount on the program’s minimum purchase requirements.

Customers with older machines have the ability to trade in their old machines for the most current laser equipment offered in the program (Cyclo G6 Laser) and receive a discount on the program’s minimum purchase requirements.

Under ASC 606, this non-cash consideration must be included in the transaction price.

However, the Company has determined that there is no value associated with the old machine and the trade in is essentially offered to encourage customers to purchase more consumables under the program.

However, the Company has determined that there is no value associated with the old machines and the trade in is essentially offered to encourage customers to purchase more consumables under the program .

The Company recognizes revenue from product sales under the LAP program at a point in time.

The Company allocates the transaction price of the distinct performance obligations in the contract by determining stand-alone selling price using historical pricing net of any variable consideration or discounts to specifically allocate to a particular performance obligation .

Extended Warranty:

The Company offers a standard 2-year warranty on all system sales.

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.

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:

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.

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.

Service Contracts:

The Company offers a standard two-year warranty on all system sales.

The Company also offers a service contract which is sold to customers in incremental, one-year periods which begin subsequent to the expiration of the standard two-year warranty.

The customer can opt to purchase the service contract at the time of the system sale or after the initial system sale.

The Company recognizes revenue from service contracts ratably over the service period.

Revenue recognition for the sale of a service contract is largely dependent on the timing of the sale as follows :

Service Contract Sale in Conjunction with System Sale:

If the customer opts to purchase a service contract at the time of the system sale, the Company allocates the transaction price of the distinct performance obligations in the contract by determining stand-alone selling price using historical pricing net of any variable consideration or discounts to specifically allocate to a particular performance obligation .

Service Contract Sale Subsequent to System Sale:

If the customer opts to purchase a service contract after the initial system sale, the Company determines the amount of time that has elapsed since the initial system sale.

If the service contract is purchased within 60 days of the initial sale, the Company considers this sale to be an additional element of the original sale and allocates the transaction price of the distinct performance obligations in the contract by determining stand-alone selling price using historical pricing net of any variable consideration or discounts to specifically allocate to a particular performance obligation.

If the service contract is purchased subsequent to sixty days after the initial sale, the sale of the service contract is deemed a separate contract and is deferred at the selling price and recognized ratably over the extended warranty period as the performance obligation is satisfied .

System Repairs (outside of warranty):

Customers will occasionally request repairs from the Company subsequent to the expiration of the standard warranty and outside of an extended warranty contract.

Customers will occasionally request repairs from the Company subsequent to the expiration of the standard warranty and outside of a service contract .

The Company recognizes revenue from system repairs (outside of warranty) at a point in time.

When the customer requests repairs from the Company subsequent to the expiration of the standard warranty and outside of 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.

When the customer requests repairs from the Company subsequent to the expiration of the standard warranty and outside of a service contract, these repair contracts are considered separate from the initial sale, and as such, revenue is recognized as the repair services are rendered and the performance obligation satisfied .

Royalty Revenue:

The Company has royalty agreements with two customers related to the sale of the Company’s intellectual property.

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.

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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.

There is no change in the Company’s accounting for commissions.

Taxes Collected from Customers and Remitted to Governmental Authorities.

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Costs associated with these service arrangements are recognized as incurred.

A reconciliation of the changes in our deferred revenue balances for the years ended December 28, 2019 and December 29, 2018 are as follows (in thousands):

A reconciliation of the changes in our deferred revenue balances for the years ended January 2, 2021 and December 28, 2019 are as follows (in thousands):

Balance as of December 29, 2018

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Revenue recognized

Deductions from reserves

Balance as of December 28, 2019

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Revenue recognized

Balance as of December 28, 2019

D uring the twelve months ended December 28, 2019 and December 29, 2018, approximately $1.3 million and $1.4 million were recognized pertaining to amounts deferred as of December 29, 2018 and December 30, 2017, respectively.

Deductions from reserves

Balance as of January 2, 2021

During each of the twelve months ended January 2, 2021 and December 28, 2019, approximately $1.3 million was recognized pertaining to amounts deferred as of both December 28, 2019 and December 29, 2018.

We provide reserves for the estimated cost of product warranties at the time revenue is recognized based on historical experience of known product failure rates and expected material and labor costs to provide warranty services.

We generally provide a two-year warranty on our products.

Actual warranty costs incurred have not materially differed from those accrued.

The Company’s warranty policy is applicable to products which are considered defective in their performance or fail to meet the product specifications.

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Warranty costs are reflected in the consolidated statements of operations as costs of revenues.

A reconciliation of the changes in our warranty liability for the years ended December 28, 2019 and December 29, 2018 are as follows (in thousands):

A reconciliation of the changes in our warranty liability for the years ended January 2, 2021 and December 28, 2019 are as follows (in thousands):

Balance as of December 29, 2018

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Adjustment to pre-existing warranties

Balance as of December 28, 2019

Balance as of January 2, 2021

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.

Shipping and handling costs billed to customers amounted to $0.2 million and $0.3 million for fiscal years 2019 and 2018, respectively.

Shipping and handling costs billed to customers amounted to $0.2 million during each of fiscal years 2020 and 2019.

Research and Development.

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The factors used to assess the likelihood of realization include our forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets.

As of December 28, 2019, based on the Company's recent history of losses and its forecasted losses, management believes on the more likely than not basis that a full valuation allowance is required.

Accordingly, as of December 28, 2019, the Company provided a full valuation allowance on its federal and states deferred tax assets.

Accounting for Uncerta inty in Income Taxes .

As of January 2, 2021, based on the Company's recent history of losses and its forecasted losses, management believes on the more likely than not basis that a full valuation allowance is required.

Accordingly, as of January 2, 2021, the Company provided a full valuation allowance on its federal and states deferred tax assets.

Accounting for Uncertainty in Income Taxes.

We account for uncertain tax positions in accordance with ASC 740.

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In accordance with our accounting policy, we recognize accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense.

There were no accrued interest and penalties during the years ended December 28, 2019 and December 29, 2018.

There were no accrued interest and penalties during the years ended January 2, 2021 and December 28, 2019.

Accounting for 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, time-based restricted stock units and performance-based restricted stock units without market conditions are valued at the grant date fair value of the underlying common shares.

Performance-based restricted stock units and performance-based stock options with market conditions are valued using the Monte Carlo simulation model.

We account for stock-based compensation granted to employees and directors, including employees stock option awards 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.

Stock-based compensation is recognized as expense on a ratable basis over the requisite service period of the award.

We value options using the Black-Scholes option pricing model.

Time-based restricted stock units are valued at the grant date fair value of the underlying common shares.

Performance-based restricted stock units without market conditions are valued at grant date fair value of the underlying common shares.

Performance-based RSUs granted with market conditions and performance-based stock options with market conditions are valued using the Monte Carlo simulation model.

The Black-Scholes option pricing model requires the use of highly subjective and complex assumptions which determine the fair value of stock-based awards, including the option’s expected term and the price volatility of the underlying stock.

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Historically, we have not experienced any significant losses related to individual customers or a group of customers in any particular geographic area.

For the years ended December 28, 2019 and December 29, 2018, no single customer accounted for greater than 10% of total revenues.

As of December 28, 2019, one customer accounted for over 10% of our accounts receivable, representing 11%.

As of December 29, 2018, no customer accounted for more than 10% of accounts receivable balance.

For the years ended January 2, 2021 and December 28, 2019, no single customer accounted for greater than 10% of total revenues.

As of January 2, 2021, one customer accounted for over 10% of our accounts receivable, representing 13%.

As of December 28, 2019, one customer accounted for more than 10% of accounts receivable balance, representing 11%.

Our products require approvals from the Food and Drug Administration and international regulatory agencies prior to commercialized sales.

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The loss of any of these suppliers or vendors would potentially require a significant level of hardware and/or software development efforts to incorporate the products or services into our products.

Net Income per Share.

Basic net income per share is based upon the weighted average number of common shares outstanding during the period.

Net Income (Loss) per Share.

Basic net income (loss) per share is based upon the weighted average number of common shares outstanding during the period.

Diluted net income per share is based upon the weighted average number of common shares outstanding and dilutive common stock equivalents outstanding during the period.

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Common stock equivalent shares from unexercised stock options and unvested restricted stock units 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.

See Note 15 - Computation of Basic and Diluted Net Income Per Common Share.

See Note 16 - Computation of Basic and Diluted Net Loss Per Common Share.

Reclassifications

Certain reclassifications have been made to the prior year statements included in these 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 February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases,” which, along with amendments issued in 2018, modified lessee accounting guidance under Topic 840.

This new standard establishes a ROU model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months.

Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement.

ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.

Early adoption is permitted.

In July 2018, the FASB issued ASU 2018-11 which provides an alternative transition method that allows entities to apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.

The Company adopted the requirements of ASU 2016-02 on December 30, 2018, the first day of its fiscal year 2019, using the optional transition method.

The Company elected not to reassess whether any expired or existing contracts are or contain leases, not to reassess the lease classification for any expired or existing leases, not to reassess initial direct costs for any existing leases and not to separate non-lease components from lease components and instead account for each separate lease component and the non-lease components associated with that lease component as a single lease component for new or modified leases.

At adoption date, there was an increase in assets of $4.0 million and liabilities of $4.5 million due to the recognition of the required ROU asset and corresponding liability for all lease obligations that are currently classified as operating leases with the difference of $0.5 million related to existing deferred rent that reduced the ROU asset recorded.

The standard did not have an impact in our consolidated statements of operations.

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 early adopted this standard in fiscal year 2019 and the standard did not have a material impact on our consolidated financial statements.

Certain reclassifications have been made to the prior year consolidated financial statements included in these consolidated financial statements to conform to the current year presentation.

The reclassifications had no impact on previously reported net loss, accumulated deficit, total assets, or total liabilities.

Recent Accounting Standards Not Yet Adopted.

In December 2019, the FAB issued ASU 2019-12, “Income Taxes (Topic 740):

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes” as part of its initiative to reduce complexity in the accounting standards.

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These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.

In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possib le as well as considers counterparty credit risk in our assessment of fair value.

The carrying amounts of our financial assets and liabilities, including cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses as of December 28, 2019 and December 29, 2018, approximate fair value because of the short maturity of these instruments.

As of December 28, 2019 and December 29, 2018, 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 was as follows (in thousands):

As of December 28, 2019

In determining fair value, we utilize 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 our assessment of fair value.

The carrying amounts of our financial assets and liabilities, including cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses as of January 2, 2021 and December 28, 2019, approximate fair value because of the short maturity of these instruments.

The carrying amount of the Company’s PPP loan as of January 2, 2021, approximates its fair value based on the specified interest rate.

As of January 2, 2021 and December 28, 2019, 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 was as follows (in thousands):

As of January 2, 2021

As of December 28, 2019

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Money market funds

Earn-out liability

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 decrease in re-measurement of the contingent earn-out was due to a decrease in expected future revenues to be generated from these acquisitions.

The deal was structured with an earn-out component.

The earn-out liability is included in accrued expenses and other long-term liabilities in the consolidated balance sheets.

Charges related to fair value adjustments for the earn-out liability were $47 thousand and $149 thousand for the fiscal years 2019 and 2018, respectively.

The earn-out liability was fully settled as of December 28, 2019.

The following table presents quantitative information about the inputs and valuation methodologies used for our fair value measurements classified in Level 3 of the fair value hierarchy as of December 29, 2018.

As of December 29, 2018

(in thousands)

Earn-out liability

Discounted cash flow

Projected royalties

(in thousands)

Discount rate

(10.20% - 27.00%)

The following table provides a reconciliation of the beginning and ending balances of the contingent consideration – cash (Level 3 liabilities) (in thousands):

Balance as of December 30, 2017

Payments against earn-out

Change in fair value of earn-out liability

Balance as of December 29, 2018

Payments against earn-out

Change in fair value of earn-out liability

Balance as of December 28, 2019

The Company does not have any Level 2 and Level 3 financial assets or liabilities.

The components of our inventories are as follows (in thousands):

December 28, 2019

January 2, 2021

December 28, 2019

5 unchanged sentences

The components of our property and equipment are as follows (in thousands):

December 28, 2019

January 2, 2021

December 28, 2019

3 unchanged sentences

Depreciation expense related to property and equipment was $488 thousand and $672 thousand for the fiscal years 2020 and 2019, respectively.

The carrying value of goodwill was $533 thousand as of December 28, 2019 and December 29, 2018, respectively.

The carrying value of goodwill was $533 thousand as of January 2, 2021 and December 28, 2019, respectively.

Goodwill is tested for impairment at least annually or whenever there is a change in circumstances that indicates the carrying value of these assets may be impaired.

2 unchanged sentences

Intangible Assets

The components of our purchased intangible assets as of December 28, 2019 are as follows (in thousands):

The components of our purchased intangible assets as of January 2, 2021 are as follows (in thousands):

Customer relations

6 unchanged sentences

The components of our accrued expenses are as follows (in thousands):

December 28, 2019

January 2, 2021

December 28, 2019

Customer deposits

Earn-out – short term

Distributor commission

Sales and use tax payable

Royalties payable

Deferred rent

Sales and marketing expenses

Professional fees

Legal expenses

Other accrued expenses

Total accrued expenses

In July 2020, the Company agreed with its landlord for its Mountain View, California operating facility to defer rent for six weeks in August and September 2020 totaling approximately $169 thousand without interest to be paid in equal monthly installments from September 2021 to February 2022.

In accordance with the “SEC Staff Q&A – Topic 842 and Topic 840:

Accounting for lease concessions related to the effects of the COVID-19 pandemic”, the Company has accounted for this transaction as if no changes to the lease contract were made, and therefore not as a modification to the original lease.

As such, the Company has recorded the rent expense during the deferral period.

On April 23, 2020, the Company qualified for and received a loan pursuant to the Paycheck Protection Program, a program implemented by the U.S.

Small Business Administration under the Coronavirus Aid, Relief, and Economic Security Act, from a qualified lender (the “PPP Lender”), for an aggregate principal amount of approximately $ 2.5 million (the "PPP Loan").

The PPP Loan bears interest at a fixed rate of 1.0% per annum, with the first six months of interest deferred, has a term of two years, and is unsecured and guaranteed by the U.S.

Small Business Administration.

The principal amount of the PPP Loan is subject to forgiveness under the Paycheck Protection Program upon the Company’s request to the extent that the PPP Loan proceeds are used to pay expenses permitted by the Paycheck Protection Program, including payroll costs, covered rent and mortgage obligations, and covered utility payments incurred by the Company.

On September 22, 2020, the Company submitted the PPP Loan forgiveness application for the entire amount of approximately $2.5 million.

The accrued interest is $17 thousand as of January 2, 2021.

The Company cannot provide assurance that principal and interest amounts under the PPP Loan will be forgiven.

To the extent that all or part of the PPP Loan is not forgiven, the Company will be required to pay interest on the PPP Loan at a rate of 1.0% per annum, and starting in September 2021 principal and interest payments will be required through the maturity date in April 2022.

The terms of the PPP Loan provide for customary events of default including, among other things, payment defaults, breach of representations, and insolvency events.

Department of the Treasury has announced that it will conduct audits for PPP loans that exceed $2 million.

Should we be audited or reviewed by the U.S.

Department of the Treasury or the U.S.

Small Business Administration as a result of the SBA Loan or filing an application for forgiveness or otherwise and receive an adverse outcome in such an audit, we could be required to return the full amount of the SBA Loan and may potentially be subject to civil and criminal fines and penalties.

Commitments and Contingencies

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Our operating lease commitments consist of facility and office equipment leases.

Operating lease expense for fiscal years 2019 and 2018 was approximately $1.4 million and $1.3 million, respectively.

Operating lease expense for fiscal years 2020 and 2019 was approximately $ 1.

3 million and $ 1 .

4 million, respectively.

The weighted average discount rate used in calculating the present value of lease payments was 5.4 %.

As of December 28, 2019, the weighted average remaining lease term for our operating leases was 2.2 years.

The following represents maturities of operating lease liabilities as of December 28, 2019 (in thousands):

As of January 2, 2021 , the weighted average remaining lease term for our operating leases was 1 .2 years .

The following represents maturities of operating lease liabilities as of January 2, 2021 (in thousands):

Lease Payments

4 unchanged sentences

Our purchase commitments consist primarily of non-cancellable purchase orders with vendors to manufacture certain components and ophthalmic instruments.

Future minimum payments for our purchase commitments as of December 28, 2019 are summarized as follows (in thousands):

Future minimum payments for our purchase commitments as of January 2, 2021 are summarized as follows (in thousands):

License Agreements.

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Stockholders’ Equity

1998 Stock Plan.

The 1998 Stock Plan (the “1998 Plan”), as amended, provides for the granting to employees (including officers and non-employee directors) of incentive stock options and for the granting to employees (including officers and non-employee directors) and consultants of nonstatutory stock options, stock purchase rights (“SPRs”), restricted stock, restricted stock units (“RSUs”), performance shares, performance units and stock appreciation rights.

The exercise price of incentive stock options and stock appreciation rights granted under the 1998 Plan must be at least equal to the fair market value of the shares at the time of grant.

With respect to any recipient who owns stock possessing more than 10% of the voting power of our outstanding capital stock, the exercise price of any option or SPR granted must be at least equal to 110% of the fair market value at the time of grant.

Options granted under the 1998 Plan are exercisable at such times and under such conditions as determined by the administrator;

generally over a four year period.

The maximum term of incentive stock options granted to any recipient must not exceed ten years;

provided, however, that the maximum term of an incentive stock option granted to any recipient possessing more than 10% of the voting power of our outstanding capital stock must not exceed five years.

In the case of SPRs, unless the administrator determines otherwise, we have a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser’s employment with us for any reason (including death or disability).

Such repurchase option lapses at a rate determined by the administrator.

The purchase price for shares repurchased is the original price paid by the purchaser.

The form of consideration for exercising an option or stock purchase right, including the method of payment, is determined by the administrator.

The 1998 Plan expired in February 2008.

2008 Equity Incentive Plan.

2 unchanged sentences

In 2014, 2017, 2018 and 2019, the stockholders approved an amendment to the Incentive Plan for purposes of complying with Section 162(m) of the Internal Revenue Code of 1986, as amended, to increase the share reserve under the Incentive Plan, and to make certain other amendments to the terms of the Incentive Plan.

The maximum aggregate number of shares that may be awarded and sold under the Incentive Plan is 3,850,000 shares plus any shares subject to stock options or similar awards granted under the 1998 Plan that expire or otherwise terminate without having been exercised in full and shares issued pursuant to awards granted under the 1998 Plan that are forfeited to us on or after February 23, 2008, which was the date the 1998 Plan expired.

The following table represents the shares activity and the total number of shares a vailable for grant under the Incentive Plan:

The maximum aggregate number of shares that may be awarded and sold under the Incentive Plan is 3,850,000 shares plus any shares subject to stock options or similar awards granted under the 1998 Plan that expire or otherwise terminate without having been exercised in full and shares issued pursuant to awards granted under the 1998 Stock Plan (the “1998 Plan”) that are forfeited to us on or after February 23, 2008, which was the date the 1998 Plan expired.

The following table represents the shares activity and the total number of shares available for grant under the Incentive Plan:

Balances as of December 29, 2018

2 unchanged sentences

Restricted stock granted

Options cancelled

Options cancelled or forfeited

Awards cancelled

Balances as of December 28, 2019

Additional shares reserved

Options granted

Restricted stock granted

Options cancelled

Options cancelled or forfeited

Awards cancelled

Balances as of December 28, 2019

Balances as of January 2, 2021

Awards (RSU, PSU, RSA) with a per share or unit purchase price lower than 100% of the fair market value of the Company's common stock on the date of grant under the 2008 Equity Incentive Plan, as amended, are counted against shares authorized under the plan as one and one-half shares of common stock for each share.

1 unchanged sentence

The following table shows stock-based compensation expenses by functional area in the consolidated statements of operations for 2020 and 2019 (in thousands):

December 28, 2019

January 2, 2021

December 28, 2019

5 unchanged sentences

Stock-based compensation expense capitalized to inventory was immaterial for 2020 and 2019.

As of December 28, 2019, there was $3.1 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements under the Incentive Plan.

As of January 2, 2021, there was $2.0 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements under the Incentive Plan.

The cost is expected to be recognized over a weighted-average period of 2.05 years.

10 unchanged sentences

Options cancelled or forfeited

Balances as of December 28, 2019

The following table summarizes information with respect to stock options outstanding and exercisable as of December 28, 2019:

Balances as of January 2, 2021

The following table summarizes information with respect to stock options outstanding and exercisable as of January 2, 2021:

Options Outstanding

20 unchanged sentences

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 our stock price history over a per iod commensurate with the expected term of the options, trading volume of our stock, look-back volatilities and Company specific events that affected volatility in a prior period.

The expected stock price volatility is based on analysis of our stock price history over a period commensurate with the expected term of the options, trading volume of our 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, the contractual term, the vesting period and the expected remaining term of the outstanding options.

1 unchanged sentence

Treasury interest rates whose term is consistent with the expected life of the stock options.

No dividend yield is included as we have not issued any dividends and does not anticipate issuing any dividends in th e future.

Information regarding stock options outstanding, exercisable and expected to vest as of December 28, 2019 is summarized below:

No dividend yield is included as we have not issued any dividends and does not anticipate issuing any dividends in the future.

Information regarding stock options outstanding, exercisable and expected to vest as of January 2, 2021 is summarized below:

Weighted Average

3 unchanged sentences

Options exercisable

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between our closing stock price on the last trading day of fiscal 2019 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 28, 2019.

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between our closing stock price on the last trading day of fiscal 2020 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on January 2, 2021.

This amount is subject to change due to changes to the fair market value of our common stock.

The total intrinsic value of options exercised for fiscal years 2019 and 2018 was approximately $0 thousand and $72 thousand, respectively.

The total intrinsic value of options exercised for each of fiscal years 2020 and 2019 was approximately $0 thousand.

Restricted Stock Units

Effective for the 2018 fiscal year and thereafter, each non-employee member of the Board of Directors receives an annual equity award of either restricted stock or RSU, at the election of such Board member, in each case equal to $40 thousand worth of our common stock (determined at the fair market value of the shares at the time such award is granted) under our Incentive Plan.

Each equity award or RSU vests in full on the one-year anniversary of the date of grant provided that the non-employee member continues to serve on the Board through such date.

The Lead Independent Director or the Chairman of the Board of Directors receives an additional annual equity award of either restricted stock or RSU, equal to $10 thousand worth of our common stock.

Each equity award vests in full on the earlier of the one-year anniversary of the date of grant or the Company’s next annual meeting of stockholders, provided that the non-employee member continues to serve on the Board through such date.

Summary of Restricted Stock Units

1 unchanged sentence

The estimated compensation expense is based on the fair value of our common stock on the date of grant.

Information regarding the restricted stock units outstanding, vested and expected to vest as of December 28, 2019 is summarized below:

Information regarding the restricted stock units outstanding, vested and expected to vest as of January 2, 2021 is summarized below:

Value (thousands)

5 unchanged sentences

These net-share settlements had the effect of share repurchases as they reduced and retired the number of shares that would have otherwise been issued as a result of the release and did not represent an expense to us.

For the fiscal year ended December 28, 2019 , 222,371 shares of restricted stock units were released with an intrinsic value of approximately $1.0 million.

For the fiscal year ended January 2, 2021 , 128,624 shares of

restricted stock units were released with an intrinsic value of approximately $ 0 .

We withheld 14 , 174 shares to satisfy approximately $ 30 thousand of employees’ minimum tax obligation on the released restricted stock units.

Information regarding the RSU activity during the years ended December 28, 2019 and December 29, 2018 is summarized below:

Information regarding the RSU activity during the years ended January 2, 2021 and December 28, 2019 is summarized below:

Grant Date Fair

7 unchanged sentences

Restricted stock units forfeited

Outstanding as of December 28, 2019

During the year ended December 28, 2019, the Company awarded 295,357 restricted stock units at a weighted average grant date fair value of $2.28 per share.

Of this amount, 92,417 stock units represent performance-based shares that are subject to service and performance vesting conditions with a weighted average grant date fair value of $1.90 per share.

Performance-based RSUs without market 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 requisite service period, if it is expected that the performance criteria will be met.

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.

Outstanding as of January 2, 2021

During the year ended January 2, 2021, the Company awarded 371,877 restricted stock units at a weighted average grant date fair value of $1.90 per share.

There were no grants for performance-based shares that are subject to service and performance vesting conditions.

Employee Benefit Plan

1 unchanged sentence

Employees may contribute up to 15% of their annual compensation to the plan, limited to a maximum amount set by the Internal Revenue Service.

The plan also provides for Company contributions at the discretion of the Board of Directors.

In 2019 and 2018, total matching contributions made by the Company were $219 thousand and $233 thousand, respectively.

The plan also provides for Company contributions at the discretion of the Company.

The Company did not make matching contributions during 2020.

In 2019, total matching contributions made by the Company was $219 thousand.

Loss from operations before provision for income taxes was comprised of the following:

December 28, 2019

January 2, 2021

December 28, 2019

1 unchanged sentence

The provision for income taxes includes:

December 28, 2019

January 2, 2021

December 28, 2019

1 unchanged sentence

Our effective tax rate differs from the statutory federal income tax rate as shown in the following schedule:

December 28, 2019

January 2, 2021

December 28, 2019

7 unchanged sentences

The tax effect of temporary differences and carryforwards that give rise to significant portions of the net deferred tax assets are presented below (in thousands):

December 28, 2019

January 2, 2021

December 28, 2019

6 unchanged sentences

Stock compensation

Other tax credits

Net deferred tax asset

2 unchanged sentences

Our accounting for deferred taxes involves the evaluation of a number of factors concerning the realizability of our deferred tax assets.

Assessing the realizability of deferred tax assets is dependent upon several factors, including the likelihood and amount, if any, of future taxable income in relevant jurisdictions during t he periods in which those temporary differences become deductible.

Assessing the realizability of deferred tax assets is dependent upon several factors, including the likelihood and amount, if any, of future taxable income in relevant jurisdictions during the periods in which those temporary differences become deductible.

Our management forecasts taxable income by considering all available positive and negative evidence including our history of operating income or losses and our financial plans and estimates which are used to manage the business.

1 unchanged sentence

The amount of deferred tax assets considered realizable is subject to adjustment in future periods if estimates of future taxable income are reduced.

As of December 28, 2019, based on the Company's recent history of losses and its forecasted losses, management believes on the more likely than not basis that a full valuation allowance is required.

As of January 2, 2021, based on the Company's recent history of losses 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 2020, the Company provided a full valuation allowance on its federal and state deferred tax assets.

As of December 28, 2019, the Company had federal and state net operating loss (“NOL”) carry forwards of $41.9 million and $24.2 million respectively.

As of January 2, 2021, the Company had federal and state net operating loss (“NOL”) carry forwards of $47.7 million and $23.3 million, respectively.

The federal NOL will begin to expire in 2033 and the state NOL will begin to expire in 2021.

8 unchanged sentences

In accordance with our accounting policy, we recognize accrued interests and penalties related to unrecognized tax benefits as a component of income tax expense.

There is no accrued interest and penalty during the year ended December 28, 2019.

There is no accrued interest and penalty during the year ended January 2, 2021.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

December 28, 2019

January 2, 2021

December 28, 2019

1 unchanged sentence

Additions based upon tax positions related to the current year

Additions based upon tax positions related to the prior year

Balance at the end of the year

If the ending balance of $1.2 million of unrecognized tax benefits at December 28, 2019 were recognized, $0 of the recognition would affect the income tax rate.

If the ending balance of $1.2 million of unrecognized tax benefits at January 2, 2021 were recognized, $0 of the recognition would affect the income tax rate.

The Company does not anticipate any material change in our unrecognized tax benefits over the next twelve months.

8 unchanged sentences

The Loan Agreement expired in November 2, 2019 and was amended (First Amendment to the Loan Agreement) to extend through January 1, 2020.

In January 2020, the Company reduced the credit line to match its expected borrowing base, which is reflected in Second Amendment to The Loan Agreement providing for up to $8.0 million Revolving Loan Facility through January 1, 2021.

As of December 28, 2019 and December 29, 2018, there were no amounts outstanding.

In January 2020, the Company reduced the credit line to match its expected borrowing base, which is reflected in the Second Amendment to the Loan Agreement providing for up to $8.0 million Revolving Loan Facility through January 1, 2021.

The Third Amendment to the Loan Agreement was executed in December 2020 to extend the term through April 1, 2022.

As of January 2, 2021 and December 28, 2019, there were no amounts outstanding.

Business Segments and Geographical Information

3 unchanged sentences

Revenue information shown by product is as follows (in thousands):

December 28, 2019

January 2, 2021

December 28, 2019

3 unchanged sentences

Revenue information shown by geographic region is as follows (in thousands):

December 28, 2019

January 2, 2021

December 28, 2019

6 unchanged sentences

A reconciliation of the numerator and denominator of basic and diluted net income per common share is provided as follows (in thousands, except per share amounts):

December 28, 2019

January 2, 2021

December 28, 2019

2 unchanged sentences

Per share data:

Basic net (loss) income per share

Diluted net (loss) income per share

As of December 28, 2019 and December 29, 2018, stock options, restricted stock units and restricted stock awards of 1,162,049 and 1,196,352 shares, respectively, were excluded from the computation of diluted weighted average shares outstanding because to do so would have been anti-dilutive.

Basic net loss per share

Diluted net loss per share

As of January 2, 2021 and December 28, 2019, stock options, restricted stock units and restricted stock awards of 1,407,410 and 1,162,049 shares, respectively, were excluded from the computation of diluted weighted average shares outstanding because to do so would have been anti-dilutive.

Subsequent Events

On March 2, 2021, the Company entered into a series of strategic transactions with Topcon Corporation (“Topcon”), Topcon America Corporation (the “Investor”) and Topcon Medical Laser Systems, Inc.

(the “Seller”), pursuant to which (i) the Company and the Seller entered into an asset purchase agreement dated March 2, 2021, pursuant to which the Company acquired substantially all the assets (except for cash and cash equivalents) of the Seller (the “Transferred Assets”) (the “Asset Purchase Agreement”), (ii) Topcon and the Company entered into a distribution agreement dated March 2, 2021, pursuant to which the Company granted Topcon the exclusive right to distribute the Company’s retina and glaucoma products in certain geographies outside the United States (the “Distribution Agreement”), (iii) pursuant to an investment agreement dated March 2, 2021 (the “Investment Agreement”) the Investor acquired 1,618,122 shares of the Company’s Common Stock for an aggregate purchase price of $10 million (the “Shares”) and (iv) the Company and Investor entered into a registration rights agreement dated March 2, 2021 (the “Registration Rights Agreement”) with respect to the registration of the Shares for resale.

Pursuant to the Asset Purchase Agreement, the transferred assets include substantially all of the Seller’s assets including the rights to the Seller’s PASCAL product (the “Transferred Assets”).

The Company assumed only those liabilities arising after the closing in connection with the Transferred Assets.

In the Asset Purchase Agreement, the Company and the Seller made certain customary representations and warranties and agreed to certain customary covenants.

The Agreement provides that the Company and the Seller will each indemnify the other for losses arising from certain breaches of the Agreement and for certain other liabilities subject to customary caps and deductibles.

The Company plans to offer employment to certain of the employees of the Seller and sublease the Seller’s current Livermore facility from Topcon.

The Closing occurred on March 10, 2021.

Pursuant to the Distribution Agreement, the Company appointed Topcon as the exclusive distributor of the Company’s glaucoma and retina products, including Seller’s PASCAL product, in certain countries outside of the United States.

Topcon agreed to use commercially reasonable efforts to commercialize the Company’s products in each region throughout the territory, including achieving certain sales baselines by product category and region.

If Topcon fails to achieve the baselines in a region, the Company will have the right to, subject to payment of a fee, terminate Topcon’s appointment in such region.

The Distribution Agreement and Topcon’s appointment will, unless terminated earlier, continue on a country-by-country basis for a period of ten (10) years from the date exclusivity is granted .

The Distribution Agreement includes customary termination rights and effects of termination, including a termination for convenience right in favor of Topcon and, subject to payment of a fee, a termination right in favor of the Company upon a change of control of the Company.

The net proceeds to the Company from the transactions reflected in the Asset Purchase Agreement and the Distribution Agreement are $ 9.5 million .

Pursuant to the Investment Agreement, Shares are subject to a six-month lockup.

In the six months following the purchase of the Shares, the Investor shall have the right to participate on a pro rata basis in subsequent issuances of Common Stock or equivalents by the Company or any of its subsidiaries.

Pursuant to the Registration Rights Agreement the Company has committed to register the Shares for resale within the same period of time and there are standard penalty provisions if the Company fails to register the Shares for resale within such period.

The Investment Agreement and the Registration Rights Agreement are subject to customary representations and warranties, covenants and indemnification provisions.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

1 unchanged sentence

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data