What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-12 compared with 2020-11-10 · 35 added, 90 removed, 69 unchanged (64% of the section changed)

27 unchanged sentences

Impact of COVID-19 to our Business

The outbreak of the COVID-19 has been declared a pandemic by the World Health Organization and continues to spread globally.

The spread of COVID-19 has caused public health officials to recommend, and governments to enact, precautions to mitigate the spread of the virus, including travel restrictions and bans, extensive social distancing guidelines and issuing a “shelter-in-place” order in many regions of the world.

The pandemic and these related responses have caused, and are expected to continue to cause a global slowdown of economic activity (including the decrease in demand for a broad variety of goods and services), disruptions in global supply chains and significant volatility and disruption of financial markets.

We have adopted several measures in response to the COVID-19 outbreak including instructing employees to work from home while under shelter-in-place orders, slowing our manufacturing operations, and restricting non-critical business travel by our employees.

Furthermore, we cannot be certain that these actions will mitigate some or all of the negative effects of the pandemic on our business.

The extent of the negative effects of COVID-19 on our financial condition or results of operations remains uncertain.

Any actual effects on our financial condition or results of operations may differ from any estimates reflected in our financial statements, and such effects may not be fully reflected in our financial condition or results of operations until future periods, if at all.

The Company has been deemed an essential business and therefore , has continued to operate in a more limited capacity during the pandemic.

In April and May , following shelter-in-place orders, the Company operated with limited personnel at our facilities to continue essential operations .

In June 2020, we implemented ret urn-to-work phases in conjunction with a social distancing protocol to safely continue essential operations to best meet customer demands in light of the pandemic.

The Company will continue to actively monitor the situation and may take further actions alt ering our business operations that we determine are in the best interests of our employees, customers, communities, business partners, suppliers, and shareholders, or as required by federal, state, or local authorities.

It is not clear what the potential e ffects any such alterations or modifications may have on our business, including the effects on the Company's customers, employees, and prospects, or on our financial results for the remainder of fiscal year 2020.

In the third quarter of 2020, revenue decreased approximately 17% as compared to the same period in 2019.

This decrease was primarily attributed to the decrease in surgical elective procedures using our products, in part caused by limitations on the availability of such procedures and hospitals’ capacities to provide them and delays in capital purchases caused by the general uncertainty in the near term business environment.

The extent to which our operations will be impacted by the outbreak will depend largely on future developments, which are highly uncertain and cannot be accurately predicted, including new information which may emerge concerning the severity of the outbreak and actions by government authorities, hospitals and private businesses to contain the outbreak or recover from its impact, among other things.

Due to the nature of the Company’s business, the availability of elective surgical procedures and customers’ ability to make capital purchases directly impacts the Company’s revenue and operations.

We are actively monitoring the ongoing impact of the COVID-19 pandemic and its impact on elective surgical procedures throughout the U.S.

The COVID-19 pandemic continues to create significant uncertainty in global markets, which has disrupted and harmed, and may continue to disrupt and harm, the Company's business, financial condition, and results of operations.

The extent of the impact of COVID-19 on the Company's operational and financial performance will depend on certain developments, including but not limited to the duration and spread of the outbreak, duration of local, state and federal issued public health orders, impact on our customers and our sales cycles, impact on our employees and impact on regional and worldwide economies and markets in general, all of which are uncertain and cannot be predicted.

We expect our results of operations to be impacted for so long as the COVID-19 pandemic continues.

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Three Months Ended

Nine Months Ended

September 26, 2020

September 28, 2019

September 26, 2020

September 28, 2019

April 3, 2021

March 28, 2020

Total revenues

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Provision for income taxes

The following comparisons are between the three months ended September 26, 2020 and September 28, 2019:

The following comparisons are between the three months ended April 3, 2021 and March 28, 2020:

Three Months Ended

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(in thousands)

September 26, 2020

September 28, 2019

April 3, 2021

March 28, 2020

Total revenues

Our total revenues decreased by $ 1.9 million, or 17.5 %, from $ 10.7 million to $ 8.8 million.

Our business continues to be impacted by the COVID-19 pandemic with sales of our retina products most impacted , followed by other revenues , and our Cyclo G6 products the least impacted .

Revenues from retina products decreased 23.5 %, as a result of capital equipment sales being especially negatively impacted by the pandemi c .

Revenues from Cyclo G6 probes were up as the number of non-incisional MicroPulse Trans s cleral Laser Therapy treatments for glaucoma rebounded, but overall revenues from Cyclo G6 products decreased 6.3 %, as a result of lower Cyclo G6 systems sales .

Other revenues, comprised of service, royalty, freight and legacy G probes, de creased 1 6 .5 % due mainly to a de crease in legacy G probes and royalty revenues.

While we believe that demand for our products remains, the overall capital expenditure landscape within hospitals, surgi-centers and physician offices has been impacted by the general level of uncertainty brought on by COVID-19.

Our total revenues increased by $2.9 million, or 32.6%, from $9.0 million to $12.0 million.

Revenues from retina products increased 61.1%, primarily due to inclusion of PASCAL product revenue from our acquisition of TMLS assets and strength of Iridex Retina products, particularly in the international markets .

Revenues from Cyclo G6 products increased 14.6%, as a result of strong performance of our Cyclo G6 Probes in both the US and Internationally.

Other revenues, comprised of service, royalty, freight and legacy G probes, was flat year over year.

While we believe that demand for our products remains and our outlook has improved, the overall capital expenditure landscape within hospitals, surgi-centers and physician offices is still being impacted by the general level of uncertainty brought on by COVID-19.

Until this stabilizes, we anticipate capital expenditures may continue to be deferred.

Gross Profit and Gross Margin.

Gross profit decreased by $0.6 million, or 14.7%, from $4.3 million to $3.7 million.

Gross margin increased by 1.3 percentage points from 40.2% to 41.5%.

The increase in gross margin was primarily attributable to a shift in geographic mix and product mix, partially offset by an increase in the manufacturing overhead rate as a result of fixed overhead expenditures being absorbed over a lower sales volume.

Gross profit increased by $1.0 million, or 26.1%, from $3.9 million to $4.9 million.

Gross margin decreased by 2.1 percentage points from 43.4% to 41.3%.

The decrease in gross margin was primarily attributable to a shift in geographic mix and product mix.

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

Research and Development.

Research and development (“R&D”) expenses decreased by $0.1 million, or 13.7%, from $1.0 million to $0.9 million.

The decrease in spending was primarily attributable to a decrease in consulting expenses.

Research and development (“R&D”) expenses increased by $0.4 million, or 62.0%, from $0.7 million to $1.2 million.

The increase in spending was primarily attributable to increased level of spending on laser systems and inclusion of R&D expense from our acquisition of PASCAL Business.

Sales and Marketing.

Sales and marketing expenses decreased by $0.2 million, or 5.4%, from $3.2 million to $3.0 million.

The decrease was primarily attributable to a decrease in personnel costs as a result of a reduction in headcount, lower commission expense due to lower sales, lower travel expenses and lower marketing program expenses as a consequence of the COVID-19 pandemic reducing business activity.

The decrease was primarily attributable to ongoing pause in marketing activities due to COVID-19 relative to prior year.

General and Administrative.

General and administrative expenses increased by $0.9 million, or 55.1%, from $1.7 million to $2.6 million.

The increase in spending was primarily attributable to an increase in consulting expenses, partially offset by a decrease in personnel costs as a result of a reduction in headcount .

Management anticipates operating with the reduction in headcount and consequently lower costs for the foreseeable future as it continues to focus on managing expenses.

Other Income, Net.

Other income, net was flat at $0.1 million for both periods.

Other income, net, consisted primarily of interest income or expense, foreign currency gain or loss and the change in expense associated with the re-measurement of contingent liabilities.

Income Taxes.

We recorded an income tax provision of $8 thousand and $7 thousand, respectively.

The following comparisons are between the nine months ended September 26, 2020 and September 28, 2019:

Nine Months Ended

(in thousands)

September 26, 2020

September 28, 2019

Total revenues

Our total revenues decreased by $7.6 million, or 24.1%, from $31.7 million to $24.0 million.

Our business has been impacted by the onset of COVID-19 pandemic at the beginning of the year with sales of our retina products most impacted, followed by our Cyclo G6 products, and other revenues the least impacted.

Revenues from retina products decreased 32.8%, driven by a decrease in both domestic and international as capital equipment sales were especially impacted by the pandemic .

Revenues from Cyclo G6 products decreased 17.1%, with a decrease in both Cyclo G6 systems and probes sales.

Other revenues, comprised of service, royalty, freight and legacy G probes, decreased 10.1% due mainly to a decrease in legacy G probes and royalty revenues.

Until this stabilizes, we anticipate capital expenditures may continue to be deferred.

Gross Profit and Gross Margin.

Gross profit decreased by $3.1 million, or 23.8%, from $13.1 million to $10.0 million.

Gross margin increased by 0.2 percentage points from 41.3% to 41.5%.

The increase in gross margin was primarily attributable to favorable geographic and product mix, partially offset by an increase in manufacturing overhead rate as a result of fixed overhead expenditures being absorbed over a lower sales volume.

Research and Development.

Research and development (“R&D”) expenses decreased by $0.5 million, or 17.2%, from $2.9 million to $2.4 million.

The decrease in spending was primarily attributable to a consulting expense and a decrease in personnel costs due to a reduction in headcount .

Sales and Marketing.

Sales and marketing expenses decreased by $2.3 million, or 20.4%, from $11.1 million to $8.8 million.

General and Administrative.

General and administrative expenses decreased by $1.4 million, or 22.0%, from $6.5 million to $5.1 million.

The decrease in spending was primarily attributable to a decrease in personnel costs as a result of a reduction in headcount and lower legal expenses .

Management anticipates operating with the reduction in headcount and consequently lower costs for the foreseeable future as it continues to focus on managing expenses.

Other Income, Net.

Other income, net amounted to $0.2 million, compared to other income, net of $0.1 million.

Other income, net, consisted primarily of interest income or expense, foreign currency gain or loss and the change in expense associated with the re-measurement of contingent liabilities.

The increase in spending was primarily attributable to an increase in legal and consulting expenses associated with PASCAL Business acquisition and execution of the Exclusive Distribution agreement with Topcon.

Other Income (Expense), Net.

Other expense, net was $0.2 million, compared to other income, net of $9 thousand.

Other income (expense), net, consisted primarily of interest income or expense, foreign currency gain or loss.

Income Taxes.

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In addition, liquidity includes the ability to obtain appropriate financing or to raise capital.

As of September 26, 2020, we had cash and cash equivalents of $11.9 million and working capital of $16.3 million compared to cash and cash equivalents of $12.7 million and working capital of $20.8 million as of December 28, 2019.

Net cash used in operating activities was $3.0 million in the nine months ended September 26, 2020 compared to $7.7 million in the nine months ended September 28, 2019.

The decrease in net cash used in operating activities, expressed in direct cash flow terms, was primarily due to lower vendor payments and lower employee compensation, partially offset by a reduction in cash receipts from customers.

For the nine months ended September 26, 2020, net cash used in investing activities was $0.1 million, which consisted of capital expenditures.

Net cash used in investing activities for the nine months ended September 28, 2019 was $0.4 million, which consisted of $0.1 million on capital expenditures and $0.3 million for payment of the contingent earn-out liability.

For the nine months ended September 26, 2020, net cash provided by financing activities was $2.5 million, primarily from the proceeds from a U.S.

Small Business Association Loan (the “SBA Loan”) pursuant to the Payroll Protection Program (“PPP”) established under the CARES Act.

For the nine months ended September 28, 2019, net cash used in financing activities was $0.2 million, which consisted of payroll taxes related to net share settlement of equity awards.

As of April 3, 2021, we had cash and cash equivalents of $28.0 million and working capital of $31.5 million compared to cash and cash equivalents of $11.6 million and working capital of $16.7 million as of January 2, 2021.

Net cash provided by operating activities was $11.8 million in the three months ended April 3, 2021 compared to net cash used in operating activities of $1.5 million in the three months ended March 28, 2020.

The increase in net cash provided by operating activities, expressed in direct cash flow terms, was primarily due to the payment received for the distribution exclusivity fee and timing of vendor payments.

For the three months ended April 3, 2021, net cash used in investing activities was $5.4 million, which consisted primarily of the purchase of PASCAL Business.

Net cash used in investing activities for the three months ended March 28, 2020 was $0.1 million, which consisted of capital expenditures.

For the three months ended April 3, 2021, net cash provided by financing activities was $9.9 million, primarily from the net proceeds arising from the issuance of common stock .

For the three months ended March 28, 2020, net cash used in financing activities was immaterial.

W e have historically funded our operations primarily through sales of our products to customers, and through common stock and borrowing arrangements.

As of September 26, 2020, our principal sources of liquidity consisted of cash and cash equivalents of $11.9 million.

We have incurred net losses over the last several years, and as of September 26, 2020, have an accumulated deficit of approximately $56.8 million.

We expect to continue to incur operating losses and negative cash flows from operations through October 2, 2021.

We believe our existing cash and cash equivalents will be sufficient to meet our a nticipated cash needs over the next 12 months.

As of April 3, 2021, our principal sources of liquidity consisted of cash and cash equivalents of $28.0 million.

We have incurred net losses over the last several years, and as of April 3, 2021, have an accumulated deficit of approximately $58.9 million.

We expect to continue to incur operating losses and negative cash flows from operations through April 2, 2022.

We believe our existing cash and cash equivalents will be sufficient to meet our anticipated cash needs over the next 12 months.

Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of our spending to support research and development activities, the timing and cost of establishing additional sales and marketing capabilities, the introduction of new and enhanced products and our costs to implement new manufacturing technologies.

In the event that additional financing is required from outside sources, we may not be able to raise it o n terms acceptable to us or at all.

In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all.

Any debt financing obtained by us in the future could also involve restrictive covenants relating to our capital-raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions.

Additionally, if we raise additional funds through further issuances of equity, our existing stockholders could suffer significant dilution in their percentag e ownership of our company, and any new equity securities we issue could have rights, preferences and privileges senior to those of holders of our common stock.

Additionally, if we raise additional funds through further issuances of equity, our existing stockholders could suffer significant dilution in their percentage ownership of our company, and any new equity securities we issue could have rights, preferences and privileges senior to those of holders of our common stock.

If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to grow or support our business and to respond to business challenges could be significantly limited.

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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-Q

Item 2. Management’s Discussion and Analysis