IRIDEX CORP 10-K

Item 8. Financial Statements and Supplementary Data. 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. 42 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 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 These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. 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. 43 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. /s/ BPM LLP We have served as the Company’s auditor since 2007. San Jose, California March 23, 2021 44 IRIDEX Corporation CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data) FY 2020 FY 2019 January 2, 2021 December 28, 2019 ASSETS Current assets: Cash and cash equivalents $ 11,626 $ 12,653 Accounts receivable, net of allowance for doubtful accounts of $244 as of January 2, 2021 and $187 as of December 28, 2019 7,289 9,323 Inventories 5,714 8,174 Prepaid expenses and other current assets 730 401 Total current assets 25,359 30,551 Property and equipment, net 449 730 Intangible assets, net 68 84 Goodwill 533 533 Operating lease right-of-use assets, net 1,428 2,764 Other long-term assets 132 151 Total assets $ 27,969 $ 34,813 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 1,148 $ 2,592 Accrued compensation 1,965 2,398 Accrued expenses 1,806 1,544 Current portion of PPP loan 1,249 — Accrued warranty 166 380 Deferred revenue 938 1,450 Operating lease liabilities 1,409 1,414 Total current liabilities 8,681 9,778 Long-term liabilities: PPP loan 1,248 — Accrued warranty 81 156 Deferred revenue 289 360 Operating lease liabilities 282 1,795 Other long-term liabilities 22 19 Total liabilities 10,603 12,108 Commitments and contingencies (Note 10) 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 13,899,683 and 13,785,233 shares as of January 2, 2021 and December 28, 2019, respectively 148 147 Additional paid-in capital 74,181 73,093 Accumulated other comprehensive income (loss) (19 ) 80 Accumulated deficit (56,944 ) (50,615 ) Total stockholders’ equity 17,366 22,705 Total liabilities and stockholders’ equity $ 27,969 $ 34,813 The accompanying notes are an integral part of these consolidated financial statements. 45 IRIDEX Corporation CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) FY 2020 FY 2019 Year Ended Year Ended January 2, 2021 December 28, 2019 Total revenues $ 36,347 $ 43,447 Cost of revenues 20,789 25,508 Gross profit 15,558 17,939 Operating expenses: Research and development 3,282 3,682 Sales and marketing 12,239 14,852 General and administrative 6,620 8,379 Total operating expenses 22,141 26,913 Loss from operations (6,583 ) (8,974 ) Other income, net 280 209 Loss from operations before provision for income taxes (6,303 ) (8,765 ) Provision for income taxes 26 48 Net loss $ (6,329 ) $ (8,813 ) Net loss per share: Basic $ (0.46 ) $ (0.64 ) Diluted $ (0.46 ) $ (0.64 ) Weighted average shares used in computing net loss per common share: Basic 13,842 13,707 Diluted 13,842 13,707 The accompanying notes are an integral part of these consolidated financial statements. 46 IRIDEX Corporation CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (in thousands) FY 2020 FY 2019 Year Ended Year Ended January 2, 2021 December 28, 2019 Net loss $ (6,329 ) $ (8,813 ) Change in foreign currency translation adjustments (99 ) 10 Comprehensive loss $ (6,428 ) $ (8,803 ) The accompanying notes are an integral part of these consolidated financial statements. 47 IRIDEX Corporation CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except share data) Common Stock Additional Paid-in Accumulated Other Comprehensive Accumulated Shares Amount Capital Income (Loss) Deficit Total FY 2018: Balances, December 29, 2018 13,602,052 $ 145 $ 71,548 $ 70 $ (41,802 ) $ 29,961 Issuance of common stock under stock option plan 210 — Employee stock-based compensation expense 1,703 1,703 Release of restricted stock, including net share settlement 182,971 2 (158 ) (156 ) Other comprehensive income 10 10 Net loss (8,813 ) (8,813 ) FY 2019: Balances, December 28, 2019 13,785,233 147 73,093 80 (50,615 ) 22,705 Employee stock-based compensation expense 1,119 1,119 Release of restricted stock, including net share settlement 114,450 1 (31 ) (30 ) Other comprehensive income (99 ) (99 ) Net loss (6,329 ) (6,329 ) FY 2020: Balances, January 2, 2021 13,899,683 $ 148 $ 74,181 $ (19 ) $ (56,944 ) $ 17,366 The accompanying notes are an integral part of these consolidated financial statements. 48 IRIDEX Corporation CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) FY 2020 FY 2019 Year Ended Year Ended January 2, 2021 December 28, 2019 Operating activities: Net loss $ (6,329 ) $ (8,813 ) Adjustments to reconcile net loss to net cash used in operating activities: Loss on disposal of property and equipment 17 2 Depreciation and amortization 504 688 Change in fair value of earn-out liability — 47 Stock-based compensation 1,119 1,703 Provision for doubtful accounts 181 25 Changes in operating assets and liabilities: Accounts receivable 1,861 (271 ) Inventories 2,382 545 Prepaid expenses and other current assets (328 ) 145 Operating lease right-of-use assets 1,342 1,219 Other long-term assets 27 47 Accounts payable (1,445 ) 76 Accrued compensation (434 ) (563 ) Accrued expenses 259 (752 ) Accrued warranty (289 ) (324 ) Deferred revenue (583 ) (415 ) Operating lease liabilities (1,524 ) (1,274 ) Other long-term liabilities 3 2 Net cash used in operating activities (3,237 ) (7,913 ) Investing activities: Acquisition of property and equipment (97 ) (128 ) Proceeds from sale of property and equipment 4 — Payment on earn-out liability — (381 ) Net cash used in investing activities (93 ) (509 ) Financing activities: Proceeds from PPP loan 2,497 — Taxes paid related to net share settlements of equity awards (30 ) (156 ) Net cash provided by (used in) financing activities 2,467 (156 ) Effect of foreign exchange rate changes (164 ) 37 Net decrease in cash and cash equivalents (1,027 ) (8,541 ) Cash and cash equivalents, beginning of year 12,653 21,194 Cash and cash equivalents, end of year $ 11,626 $ 12,653 Supplemental disclosure of cash flow information: Cash (received) paid during the year for: Income taxes $ (74 ) $ 14 Supplemental disclosure of non-cash activities: Transfer of inventory to property and equipment $ 129 $ 67 The accompanying notes are an integral part of these consolidated financial statements. 49 IRIDEX Corporation Notes to Consolidated Financial Statements 1. Organization Description of Business. IRIDEX Corporation (“IRIDEX”, the “Company”, “we”, “us”, or “our”) is a leading worldwide provider of therapeutic based laser systems, delivery devices and consumable instrumentation used to treat sight-threatening eye diseases in ophthalmology. Our ophthalmology products are sold in the United States and Germany predominantly through a direct sales force and internationally (aside from Germany) primarily through independent distributors. 2. Summary of Significant Accounting Policies Financial Statement Presentation. The consolidated financial statements include the accounts of IRIDEX and our wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Our fiscal year always ends on the Saturday closest to December 31. 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. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“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. Cash and Cash Equivalents. We consider all highly liquid debt instruments with insignificant interest rate risk and an original maturity of three months or less when purchased to be cash equivalents. Our cash equivalents consist primarily of cash deposits in money market funds that are available for withdrawal without restriction. Sales Returns Allowance and Allowance for Doubtful Accounts. 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. 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. We are exposed to credit risk in the event of non-payment by customers to the extent of amounts recorded on the consolidated balance sheets. As sales levels change, the level of accounts receivable would likely also change. In addition, in the event that customers were to delay their payments to us, the levels of accounts receivable would likely increase. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. 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. 50 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): Balance at Balance Beginning of at End of Description the period Additions (Deductions) the period Allowance for doubtful accounts Years ended January 2, 2021 187 181 (124 ) 244 December 28, 2019 213 25 (51 ) 187 Inventories. Inventories are stated at the lower of cost or net realizable value and include on-hand inventory physically held at our facility, sales demo inventory and service loaner inventory. 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. Once the cost of the inventory is reduced, a new lower-cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. Factors influencing these adjustments include changes in demand, product life cycle and development plans, component cost trends, product pricing, physical deterioration and quality issues. Revisions to these adjustments would be required if these factors differ from our estimates. As part of our normal business, we generally utilize various finished goods inventory as either sales demos to facilitate the sale of our products to prospective customers, or as loaners that we allow our existing customers to use while we repair their products. We are amortizing these demos and loaners over an estimated useful life of four years. 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 $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. Property and Equipment. Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated on a straight–line basis over the estimated useful lives of the assets, which is generally three years. Leasehold improvements are amortized over the lesser of their estimated useful lives or the lease term. Repairs and maintenance costs are expensed as incurred. Leases. We determine if an arrangement is a lease at inception. Operating leases are included in Operating lease right-of-use (“ROU”) assets, net and Operating lease liabilities in our consolidated balance sheets. 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. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Under the available practical expedient, we account for the lease and non-lease components as a single lease component. 51 Valuation of Goodwill and Intangible Assets . 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 exceeds 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 2020 and determined that its goodwill was not impaired. 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. We review our amortizing intangible assets for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. An asset is considered impaired if its carrying amount exceeds the future non-discounted net cash flow the asset is expected to generate. 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 Standards Codification (“ASC”) 350, “Intangibles – Goodwill and Other” (“ASC 350”). 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 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) Service Contracts, (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 glaucoma and retinal diseases. Inside the United States and Germany the products are sold directly to the end users. In other countries outside of the United States and Germany, the Company utilizes independent, third-party distributors to market and sell the Company’s products. There is no continuing obligation subsequent to the shipment to these distributors . The Company recognizes revenue from product sale at a point in 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) 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 (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 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 . (3) 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. 52 The Company recognizes revenue from service contracts ratably over the service period. Revenue recognition for the sale of a service contract is largely dependent on the timing of the sale as follows : a. Service Contract Sale in Conjunction with System Sale: If the customer opts to purchase a service contract at the time of the system sale, the Company allocates the transaction price of the distinct performance obligations in the contract by determining stand-alone selling price using historical pricing net of any variable consideration or discounts to specifically allocate to a particular performance obligation . b. Service Contract Sale Subsequent to System Sale: If the customer opts to purchase a service contract after the initial system sale, the Company determines the amount of time that has elapsed since the initial system sale. If the service contract is purchased within 60 days of the initial sale, the Company considers this sale to be an additional element of the original sale and allocates the transaction price of the distinct performance obligations in the contract by determining stand-alone selling price using historical pricing net of any variable consideration or discounts to specifically allocate to a particular performance obligation. If the service contract is purchased subsequent to 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 . (4) System Repairs (outside of warranty): Customers will occasionally request repairs from the Company subsequent to the expiration of the standard warranty and outside of a service contract . The Company recognizes revenue from system repairs (outside of warranty) at a point in time. When the customer requests repairs from the Company subsequent to the expiration of the standard warranty and outside of a service contract, these repair contracts are considered separate from the initial sale, 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. 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. 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 consolidated statements of operations as well as accrued expenses to the degree which is appropriate. 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 period. Costs associated with these service arrangements are recognized as incurred. 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): FY 2018: Balance as of December 29, 2018 $ 2,225 Additions to deferral 2,168 Revenue recognized (2,564 ) Deductions from reserves (19 ) FY 2019: Balance as of December 28, 2019 1,810 Additions to deferral 1,610 Revenue recognized (2,190 ) Deductions from reserves (3 ) FY 2020: Balance as of January 2, 2021 $ 1,227 53 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. Warranty. 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. The Company’s warranty policy is applicable to products which are considered defective in their performance or fail to meet the product specifications. Additionally, from time to time, specific warranty accruals may be made if unforeseen technical problems arise. If estimates are determined to be greater than the actual amounts necessary, we may reverse a portion of such provisions in future periods. 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 January 2, 2021 and December 28, 2019 are as follows (in thousands): FY 2018: Balance as of December 29, 2018 $ 860 Accruals for product warranties 283 Cost of warranty claims (296 ) Adjustment to pre-existing warranties (311 ) FY 2019: Balance as of December 28, 2019 536 Accruals for product warranties 128 Cost of warranty claims (108 ) Adjustment to pre-existing warranties (309 ) FY 2020: Balance as of January 2, 2021 $ 247 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 during each of fiscal years 2020 and 2019. Research and Development. Research and development expenditures are charged to operations as incurred. Advertising. Advertising and promotion costs are expensed as they are incurred; such costs were approximately $0.1 million in 2020 and $0.3 million in 2019 and are included in sales and marketing expenses in the accompanying consolidated statements of operations. Income Taxes. We account for income taxes in accordance with ASC 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. Under ASC 740, the liability method is used in accounting for income taxes. Deferred tax assets and liabilities are determined based on the differences between financial reporting and the tax basis of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. 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 asset will not be realized. We annually evaluate the realizability of our deferred tax assets by assessing our valuation allowance and by adjusting the amount of such allowance, if necessary. 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 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. 54 Accounting for Uncertainty in Income Taxes. We account for uncertain tax positions in accordance with ASC 740. ASC 740 seeks to reduce the diversity in practice associated with certain aspects of measurement and recognition in accounting for income taxes. ASC 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax provision that an entity takes or expects to take in a tax return. Additionally, ASC 740 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. Under ASC 740, an entity may only recognize or continue to recognize tax positions that meet a "more-likely-than-not" threshold. 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 January 2, 2021 and December 28, 2019. Accounting for Stock-Based Compensation. 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. The Monte Carlo simulation model incorporates assumptions for the holding period, risk-free interest rate, stock price volatility and dividend yield. Concentration of Credit Risk and Other Risks and Uncertainties. Our cash and cash equivalents are deposited in demand and money market accounts. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand 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 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. Our future products may not receive required approvals. If we were denied such approvals, or if such approvals were delayed, it would have a material adverse impact on our business, results of operations and financial condition. Reliance on Certain Suppliers. Certain components and services used to manufacture and develop our products are presently available from only one or a limited number of suppliers or vendors. 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 (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. Common stock equivalents consist of incremental common shares issuable upon the exercise of stock options and 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 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 16 - Computation of Basic and Diluted Net Loss Per Common Share. 55 Reclassifications 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 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. The standard eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The standard also clarifies and simplifies other aspects of the accounting for income taxes. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. The Company is currently evaluating the impact that this guidance will have on its financial position and results of operations, if any. 3. Fair Value Measurement 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, 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 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 $ 11,051 $ — $ — $ 11,051 $ 10,711 $ — $ — $ 10,711 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 and Level 3 financial assets or liabilities. 56 4 . Inventories The components of our inventories are as follows (in thousands): FY 2020 FY 2019 January 2, 2021 December 28, 2019 Raw materials $ 2,236 $ 2,043 Work in process 548 1,111 Finished goods 2,930 5,020 Total inventories $ 5,714 $ 8,174 5. Property and Equipment The components of our property and equipment are as follows (in thousands): FY 2020 FY 2019 January 2, 2021 December 28, 2019 Equipment $ 10,760 $ 10,594 Leasehold improvements 2,464 2,490 Less: accumulated depreciation and amortization (12,775 ) (12,354 ) Property and equipment, net $ 449 $ 730 Depreciation expense related to property and equipment was $488 thousand and $672 thousand for the fiscal years 2020 and 2019, respectively. 6. Goodwill 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. The determination of whether any potential impairment of goodwill exists is based upon an impairment test performed in accordance with ASC 350. There was no impairment of goodwill recognized during fiscal years 2020 and 2019. 7. Intangible Assets The components of our purchased intangible assets as of January 2, 2021 are as follows (in thousands): Useful Lives FY 2020 Annual Amortization Gross Carrying Value Accumulated Amortization Net Carrying Value Useful Lives Remaining Customer relations 15 Years $ 16 $ 240 $ 172 $ 68 4.25 Years Patents Varies — 600 600 — Varies $ 16 $ 840 $ 772 $ 68 The components of our purchased intangible assets as of December 28, 2019 are as follows (in thousands): Useful Lives FY 2019 Annual Amortization Gross Carrying Value Accumulated Amortization Net Carrying Value Useful Lives Remaining Customer relations 15 Years $ 16 $ 240 $ 156 $ 84 5.25 Years Patents Varies — 600 600 — Varies $ 16 $ 840 $ 756 $ 84 Aggregate amortization expense for each of the fiscal years 2020 and 2019 was $16 thousand. The amortization of customer relations was charged to sales and marketing expense. 57 Estimated future amortization expense for purchased intangible assets is as follows (in thousands): Fiscal Year: 2021 $ 16 2022 16 2023 16 2024 16 2025 4 Total $ 68 8. Accrued Expenses The components of our accrued expenses are as follows (in thousands): FY 2020 FY 2019 January 2, 2021 December 28, 2019 Customer deposits $ 802 $ 775 Royalties payable 89 89 Sales and marketing expenses 116 100 Professional fees 125 147 Legal expenses 201 120 Accrued rent 169 — Other accrued expenses 304 313 Total accrued expenses $ 1,806 $ 1,544 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. 9. PPP Loan 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. The U.S. 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. 10. Commitments and Contingencies Operating Lease Commitments. We lease our operating facilities in Mountain View, California, under a non-cancelable operating lease through February 28, 2022. There are no remaining options to extend or renew the terms of this lease. 58 Our operating lease commitments consist of facility and office equipment leases. 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 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): Fiscal Year Operating Lease Payments 2021 $ 1,467 2022 268 2023 16 2024 — 2025 — Total lease payments 1,751 Less: Imputed interest (60 ) Total future minimum lease payments $ 1,691 Purchase Commitments. 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 January 2, 2021 are summarized as follows (in thousands): Fiscal Year Purchase Commitments 2021 $ 9,160 License Agreements. We are obligated to pay royalties equivalent to 5% of sales on certain products under certain license agreements with termination dates through the end of 2021. Royalty expense, charged to cost of revenues, was approximately $0.3 million and $0.4 million for fiscal years 2020 and 2019, respectively. Indemnification Arrangements . We enter into standard indemnification arrangements in our 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 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. From time to time, we may be involved in legal proceedings arising in the ordinary course of business. In general, management believes that ordinary course of business matters will not have a material adverse effect on our financial position or results of operations and are adequately covered by our liability insurance. However, it is possible that cash flows or results of operations could be materially affected in any particular period by the unfavorable resolution of one of more of these contingencies or because of the diversion of management’s attention and the incurrence of significant expenses. 59 1 1 . Stockholders’ Equity 2008 Equity Incentive Plan. On June 11, 2008, the shareholders approved the adoption of the 2008 Equity Incentive Plan, (the “Incentive Plan”). There are no material changes in the Incentive Plan from the 1998 Plan. 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 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: Shares Available for Grant Balances as of December 29, 2018 700,962 Additional shares reserved 1,000,000 Options granted (853,650 ) Restricted stock granted (443,036 ) Options cancelled or forfeited 314,786 Awards cancelled 388,461 Balances as of December 28, 2019 1,107,523 Options granted (523,650 ) Restricted stock granted (557,816 ) Options cancelled or forfeited 257,662 Awards cancelled 194,303 Balances as of January 2, 2021 478,022 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. When cancelled, these shares are added back to the Plan as one and one-half shares. The following table shows stock-based compensation expenses by functional area in the consolidated statements of operations for 2020 and 2019 (in thousands): FY 2020 FY 2019 Year Ended Year Ended January 2, 2021 December 28, 2019 Cost of revenues $ 133 $ 75 Research and development (4 ) 174 Sales and marketing 429 409 General and administrative 561 1,045 Total stock-based compensation expense $ 1,119 $ 1,703 Stock-based compensation expense capitalized to inventory was immaterial for 2020 and 2019. 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. 60 Summary of Stock Options The following table summarizes information regarding activity in our stock option plans during the fiscal years ended 2020 and 2019 (in thousands except share and per share data): Outstanding Options Number of Shares Weighted Average Exercise Price Balances as of December 29, 2018 844,898 $ 8.84 Options granted 853,650 4.55 Options exercised (210 ) 3.49 Options cancelled or forfeited (314,786 ) 9.20 Balances as of December 28, 2019 1,383,552 $ 6.11 Options granted 523,650 2.13 Options exercised — — Options cancelled or forfeited (257,662 ) 7.23 Balances as of January 2, 2021 1,649,540 $ 4.67 The following table summarizes information with respect to stock options outstanding and exercisable as of January 2, 2021: Options Outstanding Options Vested and Exercisable Range of Exercise Prices Number of Shares Outstanding Weighted Average Remaining Contractual Life (years) Weighted Average Exercise Price Number of Shares Exercisable Weighted Average Exercise Price $1.70 - $2.12 32,400 6.01 $ 1.85 5,018 $ 1.82 $2.13 - $2.13 434,950 6.67 $ 2.13 — $ — $2.18 - $4.33 174,200 5.73 $ 2.75 41,016 $ 3.12 $4.60 - $4.85 30,000 5.28 $ 4.73 12,813 $ 4.72 $4.92 - $4.92 600,000 5.38 $ 4.92 237,500 $ 4.92 $4.98 - $8.29 168,100 4.36 $ 5.76 98,921 $ 5.94 $8.33 - $11.16 174,428 2.15 $ 9.67 162,989 $ 9.69 $12.85 - $12.85 15,000 2.81 $ 12.85 15,000 $ 12.85 $14.61 - $14.61 20,000 3.18 $ 14.61 18,751 $ 14.61 $16.29 - $16.29 462 2.56 $ 16.29 462 $ 16.29 $1.70 - $16.29 1,649,540 5.27 $ 4.67 592,470 $ 6.76 The determination of the fair value of options granted is computed using the Black-Scholes option pricing model with the following weighted average assumptions: Employee Stock Option Plan FY 2020 FY 2019 Average risk free interest rate 0.25 % 1.75 % Expected life (in years) 4.55 years 4.55 years Dividend yield — — Average volatility 62.4 % 45.6 % The weighted average grant date fair value of options granted as calculated using the Black-Scholes option pricing was $1.06 and $1.65 per share for the fiscal years 2020 and 2019, respectively. 61 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 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. 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 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: Number of Weighted Average Weighted Average Remaining Contractual Aggregate Intrinsic Value Shares Exercise Price Life (years) (thousands) Options outstanding 1,649,540 $ 4.67 5.27 $ 217 Options vested and expected to vest 1,454,695 $ 4.86 5.17 $ 175 Options exercisable 592,470 $ 6.76 4.10 $ 9 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 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. 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 We recognize the estimated compensation expense of restricted stock units, net of estimated forfeitures, over the vesting term. 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 January 2, 2021 is summarized below: Number of Shares Weighted Average Remaining Contractual Life (years) Aggregate Intrinsic Value (thousands) Restricted stock units outstanding 524,851 0.70 $ 1,317 Restricted stock units vested and expected to vest 467,764 0.64 $ 1,174 The intrinsic value of the restricted stock units is calculated based on the closing price of our shares as quoted on the Nasdaq Global Market on the last trading day of the fiscal year, December 31, 2020, of $2.51. The majority of the restricted stock units that were released in fiscal year 2020 were net-share settled such that we withheld shares with value equivalent to the employees’ minimum statutory obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. The total shares withheld were based on the value of the restricted stock units on their release date as determined by our closing stock price. 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 January 2, 2021 , 128,624 shares of 62 restricted stock units were released with an intrinsic value of approximately $ 0 . 3 million. 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 January 2, 2021 and December 28, 2019 is summarized below: Number of Shares Weighted Average Grant Date Fair Value Outstanding as of December 29, 2018 597,121 $ 9.08 Restricted stock units granted 295,357 $ 2.28 Restricted stock units released (222,371 ) $ 4.32 Restricted stock units forfeited (258,974 ) $ 8.41 Outstanding as of December 28, 2019 411,133 $ 7.19 Restricted stock units granted 371,877 $ 1.90 Restricted stock units released (128,624 ) $ 2.14 Restricted stock units forfeited (129,535 ) $ 5.48 Outstanding as of January 2, 2021 524,851 $ 5.10 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. 12. Employee Benefit Plan We have a plan known as the Iridex Corporation Profit Sharing/401(k) Plan to provide retirement benefits through the deferred salary deductions for substantially all U.S. employees. 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 Company. The Company did not make matching contributions during 2020. In 2019, total matching contributions made by the Company was $219 thousand. 13. Income Taxes Loss from operations before provision for income taxes was comprised of the following: FY 2020 FY 2019 Year Ended Year Ended January 2, 2021 December 28, 2019 United States $ (6,486 ) $ (8,711 ) Foreign 183 (54 ) Total $ (6,303 ) $ (8,765 ) The provision for income taxes includes: FY 2020 FY 2019 Year Ended Year Ended January 2, 2021 December 28, 2019 Current: Federal $ — $ — State 12 19 Foreign 11 27 23 46 Deferred: Federal 1 1 State 2 1 3 2 Provision for income taxes $ 26 $ 48 63 Our effective tax rate differs from the statutory federal income tax rate as shown in the following schedule: FY 2020 FY 2019 Year Ended Year Ended January 2, 2021 December 28, 2019 Income tax provision at statutory rate 21.0 % 21.0 % State income taxes, net of federal benefit 0.9 % 2.8 % Permanent differences (2.8 )% (3.4 )% Research and development credits 0.4 % 0.4 % Change in valuation allowance (23.3 )% (21.3 )% Foreign rate differential 0.4 % (0.3 )% Other 3.0 % 0.3 % Effective tax rate (0.4 )% (0.5 )% 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): FY 2020 FY 2019 Year Ended Year Ended January 2, 2021 December 28, 2019 Net operating losses $ 11,769 $ 10,426 Research and development credits 3,273 3,175 Accruals and reserves 2,382 2,334 Deferred revenue 81 54 Property and equipment 307 316 Intangible assets 328 370 Stock compensation 658 657 Net deferred tax asset 18,798 17,332 Valuation allowance (18,820 ) (17,351 ) Net deferred tax liabilities $ (22 ) $ (19 ) 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 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. These assumptions require significant judgment about future taxable income. 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 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 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. The Company has federal and state research credit carry forwards of approximately $2.0 million and $2.9 million, respectively. The federal research credit will begin to expire in 2027 and the state research credit can be carried forward indefinitely. In the event of a change in ownership as defined by IRC sections 382 and 383, the usage of the above mentioned NOLs and credits may be limited. The Company accounts for uncertain tax positions in accordance with ASC 740, “Income Taxes”. ASC 740 seeks to reduce the diversity in practice associated with certain aspects of measurement and recognition in accounting for income taxes. ASC 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax provision that an entity takes or expects to take in a tax return. Additionally, ASC 740 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. Under ASC 740, an entity may only recognize or continue to recognize tax positions that meet a "more likely than not" threshold. 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 January 2, 2021. 64 A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands): FY 2020 FY 2019 Year Ended Year Ended January 2, 2021 December 28, 2019 Balance at the beginning of the year $ 1,192 $ 1,155 Additions based upon tax positions related to the current year 28 37 Balance at the end of the year $ 1,220 $ 1,192 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. The unrecognized tax benefits may change during the next year for items that arise in the ordinary course of business. The Company files U.S. federal and state returns. The tax years 2012 to 2020 remain open in several jurisdictions, none of which have individual significance. 14. Loan and Security Agreement In November 2016, the Company entered into a Loan and Security Agreement (“Loan Agreement”) with Silicon Valley Bank providing for up to $15.0 million secured revolving loan facility (“Revolving Loan Facility”), with availability subject to an accounts receivable borrowing base formula. Borrowings under the Revolving Loan Facility accrue interest at a per annum rate equal to the Wall Street Journal Prime Rate as in effect from time to time, plus 1.5%. The Loan Agreement does not include any financial covenants. 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 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. 15. Business Segments and Geographical Information We operate in one segment, ophthalmology. We develop, manufacture and market medical devices. Our revenues arise from the sale of consoles, delivery devices, consumables, service and support activities. Revenue information shown by product is as follows (in thousands): FY 2020 FY 2019 Year Ended Year Ended January 2, 2021 December 28, 2019 G6 $ 11,272 $ 13,070 Retina 18,088 22,879 Other(1) 6,987 7,498 Total revenues $ 36,347 $ 43,447 (1) Other includes service contract revenues of $1,263 and $1,363 recognized during fiscal years 2020 and 2019, respectively. Other also includes revenues from paid service, royalty, freight and legacy G probes. Revenue information shown by geographic region is as follows (in thousands): FY 2020 FY 2019 Year Ended Year Ended January 2, 2021 December 28, 2019 United States $ 19,312 $ 22,270 Europe 8,006 9,894 Americas, excluding the U.S. 1,967 2,857 Asia/Pacific Rim 7,062 8,426 $ 36,347 $ 43,447 65 Revenues are attributed to countries based on location of end customers. For fiscal years 2020 and 2019 no individual country accounted for more than 10% of our sales, except for the United States, which accounted for 53.1% and 51.3% of revenues in 2020 and 2019, respectively. 16. Computation of Basic and Diluted Net Loss Per Common Share 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): FY 2020 FY 2019 Year Ended Year Ended January 2, 2021 December 28, 2019 Numerator: Net loss $ (6,329 ) $ (8,813 ) Denominator: Weighted average shares of common stock (basic) 13,842 13,707 Weighted average shares of common stock (diluted) 13,842 13,707 Per share data: Basic net loss per share $ (0.46 ) $ (0.64 ) Diluted net loss per share $ (0.46 ) $ (0.64 ) 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. 17. 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. 66 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. 67 I tem 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable.