IRIX · Read the filing

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:

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:

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.

Results of Operations - 2021and 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.

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 %

Comparison of 2021 and 2020

Revenues.

(in thousands) FY 2021 FY 2020 Change in $ Change in %

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.

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

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.

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.

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.

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:

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.

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.

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.

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.

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.

Item 8. Financial Statements and Supplementary Data.

Our consolidated balance sheets as of January 1, 2022 and January 2, 2021 and the consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for each of our fiscal years 2021 and 2020 together with the related notes and the report of our independent registered public accounting firm, are on the following pages. Additional required financial information is described in Item 15.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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 1, 2022 and January 2, 2021, 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 1, 2022, 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 1, 2022 and January 2, 2021, and the results of its operations and its cash flows for each of the two years in the period ended January 1, 2022, 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 Matter

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 6 to the consolidated financial statements, the Company has inventories with a carrying value of $7.6 million as of January 1, 2022. 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 judgment 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 judgment, subjectivity, and effort in performing audit procedures and evaluating audit evidence relating to these factors. Additionally, for certain new product launches there may be limited historical data with which to evaluate forecasts.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included obtaining an understanding of the Company’s inventory reserve review process, including the assumptions and data underlying the excess and obsolete inventory valuation. The procedures also included, among others, testing management’s process for developing the estimate of the adjustments for excess or obsolete inventories, testing the completeness and accuracy of the underlying data used in the estimate, and evaluating management’s assumptions of forecasted product demand. Evaluating management’s demand forecast for reasonableness involved considering historical sales by product, comparing prior period estimates to actual results, and determining whether the demand forecast used was consistent with evidence obtained in other areas of the audit.

/s/ BPM LLP

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

San Jose, California

March 15, 2022

Iridex Corporation

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

ASSETS

Current assets:

Receivable from related party 3,106 —

Prepaid expenses and other current assets 1,071 730

Property and equipment, net 428 449

Intangible assets, net 2,205 68

Operating lease right-of-use assets, net 2,565 1,428

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Payable to related party 627 —

Current portion of PPP loan — 1,249

Operating lease liabilities 927 1,409

Long-term liabilities:

Accrued warranty 58 81

Operating lease liabilities 1,729 282

Other long-term liabilities 25 22

Commitments and contingencies (Note 12)

Stockholders’ equity:

Common stock, $0.01 par value:

Accumulated other comprehensive income (loss) 45 (19 )

Total liabilities and stockholders’ equity $ 48,687 $ 27,969

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

Iridex Corporation

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

Year Ended Year Ended

Operating expenses:

Loss from operations before provision for income taxes (5,185 ) (6,303 )

Provision for income taxes 40 26

Net loss per share:

Weighted average shares used in computing net loss per common share:

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

Iridex Corporation

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

Year Ended Year Ended

Change in foreign currency translation adjustments 64 (99 )

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

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

Employee stock-based compensation expense 1,119 1,119

Other comprehensive income (99 ) (99 )

Issuance of common stock under stock option plan 66,234 1 216 217

Employee stock-based compensation expense 1,628 1,628

Other comprehensive income 64 64

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

Iridex Corporation

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Year Ended Year Ended

Operating activities:

Adjustments to reconcile net loss to net cash used in operating activities:

Gain on PPP loan forgiveness (2,497 ) —

Depreciation and amortization 803 504

Loss on disposal of property and equipment 3 17

Provision for doubtful accounts 37 181

Changes in operating assets and liabilities:

Receivable from related party (3,106 ) —

Prepaid expenses and other current assets (341 ) (328 )

Operating lease right-of-use assets 905 1,342

Other long-term assets (143 ) 27

Payable to related party 627 —

Accrued warranty (89 ) (289 )

Operating lease liabilities (1,076 ) (1,524 )

Other long-term liabilities 285 44

Net cash provided by (used in) operating activities 8,217 (3,237 )

Investing activities:

Acquisition of property and equipment (213 ) (97 )

Cash paid for business combination, net (5,343 ) —

Proceeds from sale of property and equipment — 4

Net cash used in investing activities (5,556 ) (93 )

Financing activities:

Proceeds from issuance of common stock, net of issuance costs 9,878 —

Proceeds for stock option exercise 217 —

Taxes paid related to net share settlements of equity awards (629 ) (30 )

Proceeds from PPP loan — 2,497

Net cash provided by financing activities 9,466 2,467

Effect of foreign exchange rate changes 99 (164 )

Net increase (decrease) in cash and cash equivalents 12,226 (1,027 )

Cash and cash equivalents, beginning of year 11,626 12,653

Cash and cash equivalents, end of year $ 23,852 $ 11,626

Supplemental disclosure of cash flow information:

Cash paid (received) during the year for:

Income taxes $ 15 $ (74 )

Supplemental disclosure of non-cash activities:

Transfer of inventory to property and equipment 118 129

ROU assets obtained with the modification of operating lease $ 2,042 $ —

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

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 2021 ended on January 1, 2022 (“FY 2021”) and Fiscal 2020 ended on January 2, 2021 (“FY 2020”). Fiscal years 2021 and 2020 included 52 weeks and 53 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 either January 1, 2022 and January 2, 2021.

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.

A reconciliation of the changes in our allowance for doubtful accounts balances for the years ended January 1, 2022 and January 2, 2021 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

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 $2.0 million and $1.9 million and the accumulated amortization was $1.7 million and $1.7 million as of January 1, 2022 and January 2, 2021, 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.

Under the available practical expedient, we account for the lease and non-lease components as a single lease component.

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 2021 and determined that its goodwill was not impaired. As of January 1, 2022, 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), (5) Royalty Revenue and (6) Exclusive Distribution Rights.

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.

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.

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:

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.

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.

In January 2022, the Company received approximately $1.8 million from Topcon, representing the $2.0 million previously held back, net of the approximately $0.2 million that the Company constrained for Belarus.

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.

The Company 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 the Company’s consolidated balance sheets. There was no amortization during fiscal year 2021.

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 1, 2022 and January 2, 2021 are as follows (in thousands):

Additions to deferral 1,610

Revenue recognized (2,190 )

Deductions from reserves (3 )

Additions to deferral 14,503

Revenue recognized (2,445 )

During each of the twelve months ended January 1, 2022 and January 2, 2021, approximately $0.9 million and $1.3 million were recognized pertaining to amounts deferred as of January 2, 2021 and December 28, 2019, respectively.

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 1, 2022 and January 2, 2021 are as follows (in thousands):

Accruals for product warranties 128

Cost of warranty claims (108 )

Adjustment to pre-existing warranties (309 )

Accruals for product warranties 105

Cost of warranty claims (158 )

Adjustment to pre-existing warranties (36 )

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 $0.3 million and $0.2 million during fiscal years 2021 and 2020, respectively.

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 $0.2 million in 2021 and $0.1 million in 2020 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 1, 2022, 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 1, 2022, the Company provided a full valuation allowance on its federal and states deferred tax assets.

Accounting for Uncertainty in Income Taxes.

We account for uncertain tax positions in accordance with ASC 740. 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 1, 2022 and January 2, 2021.

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 year ended January 1, 2022, one customer, Topcon, accounted for greater than 10% of total revenues, representing 21%. For the year ended January 2, 2021, no single customer accounted for greater than 10% of total revenues. As of January 1, 2022, two customers, including Topcon, accounted for over 10% of our accounts receivable, representing 31% and 11%, respectively. As of January 2, 2021, one customer accounted for more than 10% of accounts receivable balance, representing 13%.

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 18 - Computation of Basic and Diluted Net Loss Per Common Share.

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.

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 the Company’s 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 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 Company adopted ASU 2019-12 in fiscal year 2021 and the standard did not have a material impact on its consolidated financial statements.

3. Significant Transactions

On March 2, 2021, the Company entered into a series of strategic transactions with Topcon, headquartered in Tokyo, Japan, in which (i) the Company purchased substantially all of the tangible and intangible assets of Topcon Medical Laser Systems, Inc. (“TMLS”) related to laser products previously manufactured and sold by TMLS, including the Pattern Scanning Laser (“PASCAL”) products, under the tradename “PASCAL” (altogether, the “PASCAL Business”); (ii) Topcon acquired an equity interest in the Company, comprised of the issuance of 1,618,122 shares of the Company’s common stock at $6.18 per share (as determined based on the average of the Nasdaq Official Closing Price of the Company’s common stock for the five trading days immediately preceding March 2, 2021); (iii) the Company granted Topcon the exclusive right to distribute certain of its products (including the PASCAL products) in certain international regions (the “Exclusive Distribution Rights”) and (iv) Topcon and the Company entered into the Manufacturing Services Agreement regarding transition of regulatory authorizations relating to, and manufacturing and supply of, the PASCAL products for a specified post-closing transition period. The transaction is expected to result in net proceeds to the Company of approximately $19.5 million (of which $17.5 million was received on March 10, 2021 with the remaining $2.0 million received on January 31, 2022. The net proceeds have been allocated on a fair value basis as follows (in thousands):

1) Issuance of common stock (before issuance costs) $ 10,000

2) Grant of exclusive distribution rights 14,800

3) Purchase of tangible and intangible assets (5,343 )

The purchase of tangible and intangible assets has been recognized as an acquisition of a business with the relative fair value of the net consideration allocated to the tangible and intangible assets based on their preliminary estimated fair values as of the acquisition date.

Refer to Note 2. Summary of Significant Accounting Policies for the recognition of revenue under ASC 606 for the grant of exclusive distribution rights.

Acquisition of substantially all of TMLS’ assets including the rights to the PASCAL product.

On March 10, 2021, the Company completed the purchase of substantially all of the tangible and intangible assets of TMLS, which was an established leader in manufacturing and selling laser products under the tradename “PASCAL.” The acquisition has been recognized as an acquisition of a business and the purchase price (approximately $5.3 million) has been preliminarily allocated to tangible and identified intangible assets acquired based on their estimated fair values. As additional information becomes available, the Company may further revise the preliminary purchase price allocation during the remainder of the measurement period (which will not exceed 12 months from March 10, 2021). Any such revisions or changes may be material.

The following table presents the preliminary allocation of the total purchase price:

Estimated Fair Value (in thousands)

Computers and Software 102

Manufacturing and Office Equipment 112

Other tangible assets 78

Developed Technology 900

In-process Research and Development (IPR&D) 1,000

Trade names and Trademarks 300

Customer Relationships 100

Developed technology relates to PASCAL products, a pattern scanning laser used for retinal treatments, and was valued using the multi-period excess earnings method under the income approach. This method reflects the present value of the projected cash flows that are expected to be generated by the developed technology less charges representing the contribution of other assets to those cash flows. The economic useful life is estimated to be seven years, as determined based on the technology cycle related to the developed technology, and the estimated cash flows over the forecast period.

IPR&D pertains to an upcoming release of PASCAL products and has been valued using the multi-period excess earnings method under the income approach.

Trade names and Trademarks pertain to the “PASCAL” trade name, and the fair value was determined by applying the relief-from-royalty method under the income approach. The economic useful life is estimated to be nine years, based on the expected life of the trade name and the cash flows anticipated over the forecast period.

Customer relationships represent the fair value of future projected revenue that will be derived from sales of products to existing customers of the PASCAL Business, with an estimated useful life of seven years.

Goodwill is primarily attributable to the assembled workforce and anticipated synergies and economies of scale expected from the integration of the PASCAL Business. Substantially all goodwill is deductible for tax purposes.

4. Related Party - Topcon

Topcon holds 10.2% voting interest in the Company, which qualifies it to be a principal owner considered a related party, even though it currently does not have significant influence over the Company’s operations.

Topcon resells certain of our products as our exclusive distributor in certain international regions. At the same time, the Company also purchases certain raw materials from Topcon. During fiscal year 2021, the Company’s revenues related to Topcon amounted to approximately $11.1 million, including $0.6 million recognized exclusive distribution rights revenue. The Company’s purchases from Topcon during fiscal year 2021 amounted to $1.1 million. As of January 1, 2022, the amounts receivable from and payable to Topcon were $3.1 million and $0.6 million, respectively.

5. 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:

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 1, 2022 and January 2, 2021, 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 1, 2022 and January 2, 2021, 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):

Fair Value Measurements Fair Value Measurements

(in thousands) Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total

Assets:

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.

6. Inventories

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

7. Property and Equipment

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

Less: accumulated depreciation and amortization (13,386 ) (12,775 )

Property and equipment, net $ 428 $ 449

Depreciation expense related to property and equipment was $640 thousand and $488 thousandfor the fiscal years 2021 and 2020, respectively.

8. Goodwill

The carrying value of goodwill was $965 thousand and $533 thousand as of January 1, 2022 and January 2, 2021, respectively.

In March 2021, the Company recorded approximately $0.4 million goodwill in connection with its purchase of the PASCAL Business.

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. The Company reviews goodwill for impairment on an annual basis or whenever events or changes in circumstances indicate the carrying value may not be recoverable. The Company performs an annual impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceed the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects from any tax-deductible goodwill carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The Company has determined that it has a single reporting unit for purposes of performing its goodwill impairment test. As the Company uses the market approach to assess impairment, its common stock price is an important component of the fair value calculation. If the Company’s stock price continues to experience significant price and volume fluctuations, this will impact the fair value of the reporting unit and can lead to potential impairment in future periods. The Company performed its annual impairment test during the second quarter of fiscal year 2021 and determined that its goodwill was not 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 2021 and 2020.

9. Intangible Assets

The components of our purchased intangible assets as of January 1, 2022 are as follows (in thousands):

In-process R&D 7 Years — 1,000 — 1,000 Not applicable

Patents Varies — 600 600 — Varies

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

Patents Varies — 600 600 — Varies

Aggregate amortization expense for fiscal years 2021 and 2020 were $163 thousand and $16 thousand, respectively. The amortization of developed technology was charged to research and development expense and the customer relations and trade names were charged to sales and marketing expense.

Estimated future amortization expense for purchased intangible assets is as follows (in thousands):

Fiscal Year:

10. Accrued Expenses and Other Current Liabilities

The components of our accrued expenses and other current liabilities are as follows (in thousands):

Legal and professional fees $ 379 $ 326

Sales and marketing expenses 238 116

Temporary help and consulting 215 36

Royalties payable 97 89

Accrued rent — 169

Tax payable 73 —

Total accrued expenses $ 1,575 $ 990

Other miscellaneous — 14

Total other current liabilities $ 1,098 $ 816

11. Paycheck Protection Program (“PPP”) Loan

On April 23, 2020, the Company qualified for and received a loan pursuant to the PPP, a program implemented by the U.S. Small Business Administration (the “SBA”) 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. To the extent that all or part of the PPP Loan is not forgiven, the Company would have been required to pay interest on the PPP Loan at a rate of

1.0% per annum. The terms of the PPP Loan provide for customary events of default including, among other things, payment defaults, breach of representations, and insolvency events.

In June 2021, the Company was notified by Silicon Valley Bank that its PPP Loan, including accrued interest, has been fully forgiven by the SBA. We recognized a $2.5 million gain on PPP Loan forgiveness, included in Other income, net in the consolidated statements of operations for the fiscal year ended January 1, 2022.

12. 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.On April 30, 2021, we amended our lease to reduce the portion of the premises leased by the Company and extend the lease term through August 31, 2024. There are no further options or rights to extend the term of this lease.

Our operating lease commitments consist of facility and office equipment leases. Operating lease expense for fiscal years 2021 and 2020 was approximately $1.1 million and $1.3 million, respectively. The weighted average discount rate used in calculating the present value of lease payments was 4.8%. As of January 1, 2022, the weighted average remaining lease term for our operating leases was 2.6 years.

The following represents maturities of operating lease liabilities as of January 1, 2022 (in thousands):

Fiscal Year Operating Lease Payments

Total lease payments 2,826

Less: Imputed interest (170 )

Total future minimum lease payments $ 2,656

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 1, 2022 were approximately $18.0 million.

License Agreements.

We are obligated to pay royalties equivalent to 1% to 5% of sales on certain products under certain license agreements with termination dates through the end of 2033. Royalty expense, charged to cost of revenues, was approximately $0.4 million and $0.3 million for fiscal years 2021 and 2020, 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.

13. 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, 2019 and 2021, 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 4,850,000 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

Restricted stock granted (557,816 )

Options cancelled or forfeited 257,662

Additional shares reserved 1,000,000

Restricted stock granted (257,397 )

Options cancelled or forfeited 159,048

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 2021 and 2020 (in thousands):

Year Ended Year Ended

Research and development 87 (4 )

General and administrative 695 561

Total stock-based compensation expense $ 1,628 $ 1,119

Stock-based compensation expense capitalized to inventory was immaterial for 2021 and 2020.

As of January 1, 2022, there was $2.7 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 2.00 years.

Summary of Stock Options

The following table summarizes information regarding activity in our stock option plans during the fiscal years ended 2021 and 2020 (in thousands except share and per share data):

Outstanding Options

Number of Shares Weighted Average Exercise Price

Options exercised — —

Options cancelled or forfeited (257,662 ) 7.23

Options cancelled or forfeited (159,048 ) 5.14

The following table summarizes information with respect to stock options outstanding and exercisable as of January 1, 2022:

Options Outstanding Options Vested and Exercisable

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

Average risk free interest rate 0.89 % 0.25 %

Expected life (in years) 4.45 years 4.55 years

Dividend yield — —

Average volatility 73.9 % 62.4 %

The weighted average grant date fair value of options granted as calculated using the Black-Scholes option pricing was $3.81 and $1.06 per share for the fiscal years 2021 and 2020, respectively.

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 1, 2022 is summarized below:

Shares Exercise Price Life (years) (thousands)

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 2021 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 1, 2022. This amount is subject to change due to changes to the fair market value of our common stock. The total intrinsic value of options exercised for fiscal years 2021 and 2020 were approximately $251 thousand and $0 thousand, respectively.

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 1, 2022 is summarized below:

Restricted stock units vested and expected to vest 221,439 1.02 $ 1,353

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, 2021, of $6.11.

The majority of the restricted stock units that were released in fiscal year 2021 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 1, 2022, 381,974 shares of restricted stock units were released with an intrinsic value of approximately $2.7 million. We withheld 89,842 shares to satisfy approximately $629 thousand of employees’ minimum tax obligation on the released restricted stock units.

Information regarding the RSU activity during the years ended January 1, 2022 and January 2, 2021 is summarized below:

Number of Shares Weighted Average Grant Date Fair Value

Restricted stock units released (128,624 ) $ 2.14

Restricted stock units forfeited (129,535 ) $ 5.48

Restricted stock units released (381,974 ) $ 7.07

Restricted stock units forfeited (60,714 ) $ 4.16

During the year ended January 1, 2022, the Company awarded 171,598 restricted stock units at a weighted average grant date fair value of $6.78 per share. Of this amount, 5,000 performance-based shares that are subject to service and performance vesting conditions with a weighted average grant date fair value of $8.34 per share.

During fiscal year 2021, 56,900 stock awards were modified to clarify the performance condition. The total incremental expense for these modifications resulted in an additional stock-based compensation expense of $0.4 million recorded within cost of sales and operating expenses on the consolidated statement of operations for the fiscal year 2021.

14. 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. In 2021, the Company made $201 thousand worth of total matching contributions. The Company did not make matching contribution during 2020.

15. Income Taxes

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

Year Ended Year Ended

The provision for income taxes includes:

Year Ended Year Ended

Current:

Federal $ — $ —

Deferred:

Federal 1 1

Provision for income taxes $ 40 $ 26

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

Year Ended Year Ended

Income tax provision at statutory rate 21.0 % 21.0 %

State income taxes, net of federal benefit 7.6 % 0.9 %

Permanent differences 17.1 % (2.8 )%

Research and development credits 2.3 % 0.4 %

Change in valuation allowance (47.4 )% (23.3 )%

Foreign rate differential (0.2 )% 0.4 %

Effective tax rate (0.8 )% (0.4 )%

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):

Year Ended Year Ended

Research and development credits 3,582 3,273

Deferred revenue 82 81

Net deferred tax liabilities $ (25 ) $ (22 )

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 1, 2022, 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 2021, the Company provided a full valuation allowance on its federal and state deferred tax assets.As of January 1, 2022, the Company had federal and state net operating loss (“NOL”) carry forwards of $55.4 million and $26.2 million, respectively. The federal NOL will begin to expire in 2033 and the state NOL will begin to expire in 2022.

The Company has federal and state research credit carry forwards of approximately $2.2 million and $3.1 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 1, 2022.

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

Year Ended Year Ended

Balance at the beginning of the year $ 1,220 $ 1,192

Additions based upon tax positions related to the current year 88 28

Balance at the end of the year $ 1,308 $ 1,220

If the ending balance of $1.3 million of unrecognized tax benefits at January 1, 2022 were recognized, $0 of the recognition would affect the income tax rate. The Company does not anticipate any material change in our unrecognized tax benefitsover 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 2021 remain open in several jurisdictions, none of which have individual significance.

16. 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 1, 2022 and January 2, 2021, there were no amounts outstanding.

17. Business Segments and Geographical Information

We operate in one segment, ophthalmology. Substantially all of our long-term assets are located in the U.S. 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):

Year Ended Year Ended

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

Year Ended Year Ended

Revenues are attributed to countries based on location of end customers. Other than the United States, Japan accounted for more than 10% of the Company’s revenues during fiscal year 2021, representing 13.5%. The United States accounted for 47.4% of revenues in 2021. For fiscal year 2020 no individual country accounted for more than 10% of our sales, except for the United States, which accounted for 53.1%.

18. 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):

Year Ended Year Ended

Numerator:

Denominator:

Weighted average shares of common stock (basic) 15,421 13,842

Weighted average shares of common stock (diluted) 15,421 13,842

Per share data:

Basic net loss per share $ (0.34 ) $ (0.46 )

Diluted net loss per share $ (0.34 ) $ (0.46 )

As of January 1, 2022 and January 2, 2021, stock options, restricted stock units and restricted stock awards of 1,655,218 and 1,407,410 shares, respectively, were excluded from the computation of diluted weighted average shares outstanding because to do so would have been anti-dilutive.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures.

Our management, with the participation of our Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act. In designing and evaluating our disclosure controls and procedures, management recognizes that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Based on management’s evaluation, our Principal Executive Officer and Principal Financial Officer concluded that, as of January 1, 2022, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control over Financial Reporting.

Our management is responsible for establishing and maintaining adequate internal control over the Company’s financial reporting. There are inherent limitations in the effectiveness of any internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even any effective internal control can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of any internal control may vary over time. Our management assessed the effectiveness of the company’s internal control over financial reporting as of January 1, 2022. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on our assessment using those criteria, our management concluded that, as of January 1, 2022, our internal control over financial reporting is effective.

This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report is not subject to attestation by our independent registered public accounting firm.

Changes in Internal Control over Financial Reporting.

There were no changes in our internal control over financial reporting that occurred during the fourth quarter of fiscal year 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting, as defined in Rule 13a-15(f) and 15(d)-15(f) under the Exchange Act.

Inherent Limitations on Effectiveness of Controls

Our management, including our Principal Executive Officer and Principal Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more persons or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Item 9B. Other Information

Not applicable.

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.

Not applicable.

PART III

Certain information required by Part III has been omitted from this Form 10-K. This information is instead incorporated herein by reference to our definitive Proxy Statement, which we will file within 120 days after the end of our fiscal year pursuant to Regulation 14A in time for our Annual Meeting of Stockholders to be held in 2022.

Item 10. Directors, Executive Officers and Corporate Governance

The information required by this item will be contained in our definitive proxy statement to be filed with the SEC in connection with our 2022 Annual Meeting of Stockholders (the “Proxy Statement”), which is expected to be filed not later than 120 days after the end of our fiscal year ended January 1, 2022 and is incorporated in this report by reference.

Item 11. Executive Compensation

The information required by this item will be set forth in the Proxy Statement and is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this item will be set forth in the Proxy Statement and is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information required by this item will be set forth in the Proxy Statement and is incorporated herein by reference.

Item 14. Principal Accountant Fees and Services.

The information required by this item will be set forth in the Proxy Statement and is incorporated herein by reference.

PART IV

Item 15. Exhibits and Financial Statement Schedules

Page in Form 10-K Report

1. Index to Financial Statements

Report of Independent Registered Public Accounting Firm (PCAOB ID: 207) 43

Consolidated Balance Sheets as of January 1, 2022 and January 2, 2021 45

Notes to Consolidated Financial Statements 50

2. Financial Statement Schedule

Schedules have been omitted because they are either not required, not applicable, or the required information is included in the consolidated financial statements or notes thereto.

3. Exhibits

Exhibit Index

Exhibit No. Incorporated by Reference

Description Form File No. Exhibit Filing Date Filed Herewith

10.2 Form of Indemnification Agreement with directors and officers. X

Exhibit No. Incorporated by Reference

Description Form File No. Exhibit Filing Date Filed Herewith

Exhibit No. Incorporated by Reference

Description Form File No. Exhibit Filing Date Filed Herewith

23.1 Consent of BPM LLP, Independent Registered Public Accounting Firm. X

24.1 Power of Attorney (included on signature page). X

101.SCH Inline XBRL Taxonomy Extension Schema Document.

101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document.

104 Cover Page Interactive Data File (embedded within the Inline XBRL document).

* Indicates a management contract or compensatory plan or arrangement.

(P) Print filing.

Trademark Acknowledgments

IRIX US Equity

IRIX · 10-K · period ended 2022-01-01

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Item 8. Financial Statements and Supplementary Data.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Item 9A. Controls and Procedures

Item 9B. Other Information

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.

Item 10. Directors, Executive Officers and Corporate Governance

Item 11. Executive Compensation

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item 13. Certain Relationships and Related Transactions, and Director Independence

Item 14. Principal Accountant Fees and Services.

Item 15. Exhibits and Financial Statement Schedules

IRIX US Equity☆

IRIX · 10-K · period ended 2022-01-01

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Item 8. Financial Statements and Supplementary Data.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Item 9A. Controls and Procedures

Item 9B. Other Information

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.

Item 10. Directors, Executive Officers and Corporate Governance

Item 11. Executive Compensation

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item 13. Certain Relationships and Related Transactions, and Director Independence

Item 14. Principal Accountant Fees and Services.

Item 15. Exhibits and Financial Statement Schedules

IRIX US Equity