IRIDEX CORP 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview IRIDEX Corporation is an ophthalmic medical technology company focused on the development and commercialization of breakthrough products and procedures used to treat sight-threatening eye conditions, including glaucoma and retinal diseases. Certain of our laser products are powered by our proprietary MicroPulse technology, which is a method of delivering laser energy using a mode which chops the continuous wave laser beam into short, microsecond-long laser pulses. Our products consist of laser consoles, delivery devices and consumable instrumentation, including laser probes. Our laser consoles consist of the following product lines: • Glaucoma – This product line includes our Cyclo G6 ® laser system used for the treatment of glaucoma; • Medical Retina – Our medical retina product line includes our IQ 532 ® and IQ 577 ® laser photocoagulation systems, which are used for the treatment of diabetic macular edema and other retinal diseases, and our PASCAL Synthesis Photocoagulator for the treatment of retinal diseases; and • Surgical Retina – Our surgical retina line of products includes our OcuLight ® TX, OcuLight SL, OcuLight SLx, OcuLight GL and OcuLight GLx laser photocoagulation systems. These systems are often used in vitrectomy procedures, which are used to treat proliferative diabetic retinopathy, macular holes, retinal tears and detachments. Our business generates recurring revenues through sales of consumable products, predominantly single-use laser probe devices and other instrumentation, as well as repair, servicing and extended service contracts for our laser systems. Our laser probes consist of the following product lines: • Glaucoma – Probes used in our glaucoma product line include our patented MicroPulse P3 ® Probe, G-Probe ® and G-Probe Illuminate ® ; and • Surgical Retina – Our surgical retina probes include our EndoProbe ® family of products used in vitrectomy procedures. Ophthalmologists typically use our laser systems in hospital ORs and ambulatory surgical centers (“ASCs”), as well as their offices and clinics. In ORs and ASCs, ophthalmologists use our laser systems with either an indirect laser ophthalmoscope or a consumable, single use MicroPulse P3 Probe, G-Probe , G-Probe Illuminate or EndoProbe. In 2021 and 2020, our products were sold in the United States and Germany predominantly through a direct sales force and internationally (aside from Germany) primarily through Topcon and other independent distributors. Total revenues in 2021 and 2020 were $53.9 million and $36.3 million, respectively. We generated net losses of $5.2 million and $6.3 million in 2021 and 2020, respectively. Cost of revenues consists primarily of the cost of components and sub-systems, assembling, packaging, shipping and testing components at our facility, direct labor and associated overhead, warranty, royalty and amortization of intangible assets and depot service costs. Research and development expenses consist primarily of personnel costs, materials to support new product development and research support provided to clinicians at medical institutions developing new applications which utilize our products and regulatory expenses. Research and development costs have been expensed as incurred. Sales and marketing expenses consist primarily of costs of personnel, sales commissions, travel expenses, advertising and promotional expenses. General and administrative expenses consist primarily of costs of personnel, legal, accounting and other public company costs, insurance and other expenses not allocated to other departments. Impact of COVID-19 to our Business 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 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. For more information on risks associated with the COVID-19 outbreak, see the section titled “Risk Factors” in Item 1A of Part I. 36 Results of Operations - 2021 and 2020 Our fiscal year ends on the Saturday closest to December 31. Fiscal 2021 ended on January 1, 2022 and fiscal 2020 ended on January 2, 2021. Fiscal years 2021 and 2020 included 52 weeks and 53 weeks of operations, respectively. The following table sets forth certain operating data as a percentage of revenues for the periods indicated. FY 2021 FY 2020 January 1, 2022 January 2, 2021 Revenues 100.0 % 100.0 % Cost of revenues 57.6 % 57.2 % Gross margin 42.4 % 42.8 % Operating expenses: Research and development 12.7 % 9.0 % Sales and marketing 27.2 % 33.7 % General and administrative 16.4 % 18.2 % Total operating expenses 56.3 % 60.9 % Loss from operations (13.9 %) (18.1 %) Other income, net 4.3 % 0.8 % Loss from operations before provision for income taxes (9.6 %) (17.3 %) Provision for income taxes 0.1 % 0.1 % Net loss (9.7 %) (17.4 %) Comparison of 2021 and 2020 Revenues. (in thousands) FY 2021 FY 2020 Change in $ Change in % Cyclo G6 $ 13,950 $ 11,273 $ 2,677 23.7 % Retina 31,106 18,087 13,019 72.0 % Other 8,847 6,987 1,860 26.6 % Total revenues $ 53,903 $ 36,347 $ 17,556 48.3 % Our total revenues increased by $17.6 million or 48.3% from $36.3 million in 2020 to $53.9 million in 2021. The increase is primarily due to the increase in sales of our retina products, Cyclo G6 products and other revenues compared to prior year when our business was severely impacted by the COVID-19 pandemic. Revenues from retina products increased by 72.0% driven by an increase in sales of our Iridex retina products in both domestic and international markets compared to prior year when capital equipment sales were especially impacted by the COVID-19 pandemic, and an increase due to the inclusion of PASCAL product revenue from our acquisition of TMLS assets, particularly in the international markets. Revenues from G6 products increased by 23.7%, driven primarily by an increase in Cyclo G6 probes sales in both domestic and international markets and increase in Cyclo G6 systems sales in international market. Other revenues, comprised of service, royalty, freight, legacy G probes and revenue related to exclusive distribution rights, increased 26.6% primarily due to an increase in service revenue and the revenue related to exclusive distribution rights . 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 and the spread of other variants. Until this pandemic subsides, we anticipate capital expenditures may continue to be deferred. Gross Profit . Gross profit increased by $7.3 million or 46.7% from $15.6 million in 2020 to $22.8 million in 2021. Gross margin decreased by 0.4% from 42.8% in 2020 to 42.4% in 2021. The decrease in gross margin was primarily attributable to unfavorable geographic and product mix, partially offset by a decrease in manufacturing overhead rate as a result of fixed overhead expenditures being absorbed over a higher sales volume. Gross margins are expected to continue to fluctuate primarily due to changes in the relative proportions of domestic and international sales, the product mix of sales, manufacturing variances, total unit volume changes that lead to greater or lesser production efficiencies and sales returns. 37 Research and Development . R&D expenses increased by $3.6 million or 109.3% from $3.3 million in 2020 to $6.9 million in 2021. The increase in spending was primarily attributable to an increased level of spending on the development of laser systems and the inclusion of R&D expense from our acquisition of the PASCAL Business (as defined in Note 3 of the Notes to Consolidated Financial Statements). Sales and Marketing. Sales and marketing expenses increased by $2.4 million or 19.6%, from $12.2 million in 2020 to $14.6 million in 2021. The increase was primarily attributable to an increase in personnel costs due to an increase in headcount, higher commission expense because of higher sales and higher travel expenses compared to prior year when the COVID-19 pandemic greatly reduced our business activity. General and Administrative. General and administrative expenses increased by $2.2 million or 33.8% from $6.6 million in 2020 to $8.9 million in 2021. The increase was primarily attributable to an increase in personnel costs due to higher bonus accrual and the increase in legal and consulting expenses associated with the acquisition of the PASCAL Business and the execution of the Distribution Agreement with Topcon. Other Income, Net. Other income, net amounted to $2.3 million in 2021 and $0.3 million in 2020. Other income, net, consisted primarily of interest income or expense and foreign currency gain or loss. We recognized a $2.5 million gain on forgiveness of the PPP Loan (as defined in Note 11 of the Notes to Consolidated Financial Statements) as other income during the fiscal year 2021. Income Taxes. We recorded a provision for income taxes of $40 thousand for the year ended January 1, 2022 compared to $26 thousand for the year ended January 2, 2021. The effective tax rate for the year ended January 1, 2022 was negative 0.77% compared to an effective tax rate of negative 0.41% for the year ended January 2, 2021. The income tax valuation allowance was $21.3 million at the end of 2021 compared to $18.8 million at the end of 2020. Liquidity and Capital Resources Liquidity is our ability to generate sufficient cash flows from operating activities to meet our obligations and commitments. In addition, liquidity includes the ability to obtain appropriate financing or to raise capital. Comparison of 2021 and 2020 As of January 1, 2022, we had cash and cash equivalents of $23.9 million and working capital of $29.7 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 $8.2 million in 2021 compared to net cash used in operating activities of $3.2 million in 2020. The increase in net cash used in operating activities, expressed in direct cash flow terms, was primarily due to the payment received for the exclusive distribution rights and increase in cash receipts from customers, partially offset by higher vendor payments and higher payroll because of higher headcount. During 2021, net cash used in investing activities was $5.6 million, which consisted primarily of the purchase of the PASCAL Business for $5.3 million. Net cash used in investing activities during 2020 was $0.1 million, which consisted of capital expenditures. During 2021, net cash provided by financing activities was $9.5 million, primarily from the net proceeds arising from the issuance of common stock and proceeds from stock option exercises, partially offset by payroll taxes related to the net share settlement of equity awards. Net cash provided by financing activities during 2020 was $2.5 million, primarily from the proceeds from the PPP Loan, pursuant to the Payroll Protection Program established under the Coronavirus Aid, Relief, and Economic Security Act. We have historically funded our operations primarily through sales of our products to customers, and through common stock and borrowing arrangements. As of January 1, 2022, our principal sources of liquidity consisted of cash and cash equivalents of $23.9 million. We have incurred net losses over the last several years, and as of January 1, 2022, have an accumulated deficit of approximately $62.2 million. We expect to continue to incur operating losses and negative cash flows from operations through December 31, 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 38 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 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. Critical Accounting Policies Revenue Recognition . Our revenues arise from the sale of laser consoles, delivery devices, consumables, service, and support activities. We also derive revenue from royalties from third parties which are typically based on licensees’ net sales of products that utilize our technology. Our revenue is recognized in accordance with Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers.” We have the following revenue transaction types: (1) Product Sale Only, (2) Laser Advantage Program (“LAP”), (3) Service Contracts, (4) System Repairs (outside of warranty), (5) Royalty Revenue and (6) Exclusive Distribution Rights. (1) Product Sale Only: Our products consist of laser consoles, delivery devices and consumable instrumentation, including laser probes. Our 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, we utilize independent, third-party distributors to market and sell our products. There is no continuing obligation after shipment is made to these distributors . We recognize revenue from product sale at a point in time. When a system or disposables are sold without any additional deliverables, we recognize 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: We entered into LAP contracts with 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, we have 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 . We recognize revenue from product sales under the LAP program at a point in time. We allocate 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: We offer a standard two-year warranty on all system sales. We also offer 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. We recognize 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, we allocate 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, we determine 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, we consider this sale to be an additional element of the original sale and allocates the transaction price of the distinct performance obligations in 39 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 60 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 us subsequent to the expiration of the standard warranty and outside of a service contract . We recognize revenue from system repairs (outside of warranty) at a point in time. When the customer requests repairs from us 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: We have royalty agreements with two customers related to sale of our intellectual property. Under the terms of these agreements, the customer is to remit a percentage of sales to us. Since these arrangements are for sales-based licenses of intellectual property, for which the guidance in paragraph ASC 606-10-55-65 applies, we recognize revenue only as the subsequent sale occurs. However, we note that such sales being reported by the licensee with a quarter in arrears, 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 . (6) Exclusive Distribution Rights: In March 2021, we entered into a distribution agreement with Topcon, pursuant to which we granted Topcon exclusive right to distribute our retina and glaucoma products in certain geographies outside the United States. The exclusivity arrangement with Topcon obligates us to provide training, customer support and exclusive territorial rights to Topcon for certain international regions, for a period of 10 years, commencing upon regulatory approval to transfer existing (non-exclusive) distribution rights from the current distributors in those regions to Topcon. The agreement further stipulates that $2.0 million of arrangement fee is held back and will not be paid in the event that regulatory approval for the Japan region is not obtained within nine months from the date of execution. We have the right to terminate the exclusive distribution rights granted to Topcon for any of the regions at any point in time during the 10-year exclusivity term for a termination fee that is based on a multiple of 1.2 times the revenue generated by us in 2019 for the respective region. We determined that the exclusivity rights, training and customer support represents a single combined performance obligation for each region, to be recognized as exclusivity fee revenue on a straight-line basis over the 10-year period for each region, commencing on the date that regulatory approval is obtained for each region, based on the Standalone Selling Price (“SSP”) for such combined performance obligation for each region. The estimated fair value of the exclusive distribution rights for all regions combined totaled approximately $14.8 million. Of this amount, we fully constrained the arrangement fee allocated to Belarus (approximately $0.2 million recorded as customer deposit under Other current liabilities) because obtaining the necessary regulatory approvals and termination of existing distributor relationship is not feasible. As of January 1, 2022, $0.6 million in revenue related to the exclusive distribution rights was recorded for the fiscal year then ended. In January 2022, we received approximately $1.8 million from Topcon, representing the $2.0 million previously held back, net of the approximately $0.2 million that we constrained for Belarus. We elected the practical expedient allowing us to not recognize as a contract asset the commission paid to our salesforce on the sale of our 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 we would have otherwise recognized is one year or less. We recognized an asset from the costs incurred to fulfill a contract. These costs relate directly and must be incurred to satisfy performance obligations on certain specific contract with a customer. These costs are expected to be recovered over time and will be amortized on a systematic basis that is consistent with the recognition of revenue to which it relates. As of January 1, 2022, recognized deferred costs incurred to fulfill a contract with a customer amounted to $0.3 million, included in Prepaid expenses and other current assets and Other long-term assets in our consolidated balance sheets. There was no amortization during fiscal year 2021. 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 40 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, obsolete 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. Sales Returns Allowance and Allowance for Doubtful Accounts. We estimate future product returns related to current period product revenue. We analyze historical returns, and changes in customer demand and acceptance of our products when evaluating the adequacy of the sales returns allowance. Significant management judgment and estimates must be made and used in connection with establishing the sales returns allowance in any accounting period. 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. 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 increase the level of accounts receivable would likely also increase. In addition, in the event that customers were to delay their payments to us, the levels of accounts receivable would likely also 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. 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. Additionally, from time to time, specific warranty accruals may be made if unforeseen technical problems arise. Alternatively, if estimates are determined to be greater than the actual amounts necessary, we may reverse a portion of such provisions in future periods . Our warranty policy is applicable to products which are considered defective in their performance or fail to meet the product specifications. Warranty costs are reflected in the consolidated statements of operations as cost of revenues. 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 1, 2022, based on our 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 1, 2022, we provided a full valuation allowance on our federal and state deferred tax assets. 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 was no accrued interest and penalties during the year ended January 1, 2022. 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 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 41 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 . 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 1, 2022, we were 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. Foreign Currency Assets and liabilities of foreign operation with non-U.S. Dollar functional currency are translated to U.S. Dollars using exchange rates in effect at the end of the period. Revenue and expenses are translated to U.S. Dollars using rates that approximate those in effect during the period. The resulting translation adjustments are included in our Consolidated Balance Sheets in the stockholders’ equity section as a component of accumulated other comprehensive loss (loss). Recently Adopted Accounting Standards. In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 Company adopted ASU 2019-12 in fiscal year 2021 and the standard did not have a material impact on its consolidated financial statements. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. As a “smaller reporting company,” as defined in Rule 12b-2 of the Exchange Act, we are not required to provide the information called for by this Item.