IRIDEX CORP

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of IRIDEX Corporation (“IRIDEX”, the “Company”, “we”, “our”, or “us”) have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the financial statements have been included.

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto, together with management’s discussion and analysis of the Company’s financial condition and results of operations, contained in our Annual Report on Form 10-K for the fiscal year ended December 30, 2023, which was filed with the SEC on March 29, 2024. The results of operations for the three and nine months ended September 28, 2024 and September 30, 2023 are not necessarily indicative of the results for the fiscal year ending December 28, 2024 or any future interim period. The three months ended September 28, 2024 and September 30, 2023 each had 13 weeks. For purposes of reporting the financial results, the Company’s fiscal years end on the Saturday closest to the end of December. Periodically, the Company includes a 53rd week to a year in order to end that year on the Saturday closest to the end of December.

Liquidity and Management Plans

The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. For the nine months ended September 28, 2024, the Company implemented cost savings initiatives to increase operational efficiencies across all departments, which the Company expects will decrease its operating expenses and increase working capital through January 3, 2026. Based on these cost savings initiatives implemented by the Company and the closing of the $3.4 million Note with The Lind Partners, LLC (“Lind”) (with an option to have an additional $1.5 million in a Subsequent Note), management believes it has alleviated substantial doubt about the Company’s ability to satisfy its liquidity needs over the next 12 months.

2. Summary of Significant Accounting Policies

The Company’s significant accounting policies are disclosed in our Annual Report on Form 10-K for the year ended December 30, 2023, which was filed with the SEC on March 29, 2024.

Financial Statement Presentation

The unaudited condensed consolidated financial statements include the accounts of the Company and our wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with 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.

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 the licensees’ net sales of products that utilize our technology. Our revenue is recognized in accordance with Accounting Standards Codification (“ASC”) Topic 606,“Revenue from Contracts with Customers.” 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 has the following revenue transaction types: (1) Product Sale Only, (2) Service Contracts, (3) System Repairs (outside of warranty), (4) Royalty Revenue and (5) Exclusive Distribution Rights.

Product Sale Only: The Company’s products consist of laser consoles, delivery devices and consumable instrumentation, including laser probes. The Company’s products are currently sold for use by ophthalmologists specializing in the treatment of glaucoma and retinal diseases. Inside the United States and Germany the products are sold directly to the end users. In other countries outside of the United States and Germany, the Company utilizes independent, third-party distributors to market and sell the Company’s products. There is no continuing obligation after shipment is made to these distributors.

The Company recognizes revenue from product sales at a point in time subject to the allocation of transaction price to additional performance obligations, if any.

Service Contracts: The Company offers a standard two-year warranty on all system sales. The Company also offers a service contract which is sold to customers in incremental, one-year periods that begin subsequent to the expiration of the standard two-year warranty. The customer can opt to purchase the service contract at the time of the system sale or after the initial system sale.

The Company recognizes revenue from service contracts ratably over the service period. Revenue recognition for the sale of a service contract is largely dependent on the timing of the sale as follows:

a)

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

b)

Service Contract Sale Subsequent to System Sale: If the customer opts to purchase a service contract after the initial system sale, the Company determines the amount of time that has elapsed since the initial system sale. If the service contract is purchased within 60 days of the initial sale, the Company considers this sale to be an additional element of the original sale and allocates the transaction price of the distinct performance obligations in the contract by determining stand-alone selling price using historical pricing net of any variable consideration or discounts to specifically allocate to a particular performance obligation. If the service contract is purchased subsequent to 60 days after the initial sale, the sale of the service contract is deemed a separate contract and is deferred at the selling price and recognized ratably over the extended warranty period as the performance obligation is satisfied.

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

The Company recognizes revenue from system repairs (outside of warranty) at a point in time. When the customer requests repairs from the Company subsequent to the expiration of the standard warranty and outside of a service contract, these repair contracts are considered separate from the initial sale. As such, revenue is recognized as the repair services are rendered and the performance obligation satisfied.

Royalty Revenue: The Company has royalty agreements withtwo customers related to the sale of the Company’s intellectual property. Under the terms of these agreements, one customer is to remit a percentage of sales to the Company as the sales occur and one customer is to remit fixed amount royalty payments based on the quantity sold as the sales occur.

The arrangements with three customers are for sales-based licenses of intellectual property, for which the guidance in paragraph ASC 606-10-55-65 applies. Therefore, the Company recognizes revenue at a point in time, only as the subsequent sale occurs. However, the Company notes 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. For the arrangement with one customer, the Company had concluded that there is one combined performance obligation to be satisfied. Therefore, the Company recognizes revenue related to this arrangement over time.

5. Exclusive Distribution Rights: On March 2, 2021, the Company and Topcon Corporation (“Topcon”) entered into a distribution agreement (“Distribution Agreement”), pursuant to which the Company granted Topcon the exclusive right to distribute the Company’s retina and glaucoma products in certain geographies outside the United States. The exclusivity arrangement with Topcon obligates the Company to provide training, customer support, and exclusive territorial rights to Topcon for certain international regions, for a period of 10 years, commencing upon regulatory approval to transfer existing (non-exclusive) distribution rights from the current distributors in those regions to Topcon. The Company has the right to terminate the exclusive distribution rights granted to Topcon for any of the regions at any point in time during the 10 year exclusivity term for a termination fee that is based on a multiple of 1.2 times the revenue generated by the Company in 2019 for the respective region. Management has determined that the exclusivity rights, training, and customer support represents a single combined performance obligation for each region, to be recognized as exclusivity fee revenue on a straight-line basis over the 10 year period for each region, commencing on the date that regulatory approval is obtained for each region, based on the standalone selling price for such combined performance obligation for each region. The estimated fair value of the exclusive distribution rights for all regions combined totaled approximately $14.8 million. Of this amount, management has fully-constrained and returned to Topcon the arrangement fee allocated to Belarus (approximately $0.2 million) because obtaining the necessary regulatory approvals and termination of existing distributor relationship was not feasible. For each of the three months ended September 28, 2024 and September 30, 2023, $0.4 million in revenue related to the exclusive distribution rights were recorded. For each of the nine months ended September 28, 2024 and September 30, 2023, $1.1 million in revenue related to the exclusive distribution rights were recorded.

Costs of Obtaining Revenue Contracts

The Company recognized assets from certain costs incurred to obtain revenue contracts. These costs relate to sales commissions arising from the sale of our products. The costs are considered incremental and recoverable of obtaining revenue contracts with customers. These deferred costs are amortized on a straight-line basis over the estimated period of benefit, which typically ranges from 2 to 3 years. As of September 28, 2024, the Company recognized deferred costs incurred to obtain revenue contracts with customers, net of accumulated amortiza tion, of $42 thousand and included these amounts in Prepaid expenses and other current assets and Other long-term assets in the Company’s condensed consolidated balance sheets. Amortization expense was $19 thousand and $57 thousand for both of thethree and nine months ended September 28, 2024 and September 30, 2023. There wereno impairment expenses for both of thethree and nine months ended September 28, 2024 and September 30, 2023.

Sales commissions that do not represent incremental and recoverable costs of obtaining a contract are expensed as incurred. As a practical expedient, the Company will not recognize such sales commission as a contract asset but rather recognize as an expense when incurred if the amortization period of the asset that the Company would have otherwise recognized is one year or less.

Contract Fulfillment Costs

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 are amortized on a systematic basis that is consistent with the recognition of revenue to which it relates. As of September 28, 2024, the Company recognized deferred costs incurred to fulfill a contract with a customer, net of accumulated amortization, of $0.6 million, and included these amounts in Prepaid expenses and other current assets and Other long-term assets in the Company’s condensed consolidated balance sheets. Amortization expense was $21 thousand and $62 thousand for both of thethree and nine months ended September 28, 2024 and September 30, 2023. There wereno impairment expenses for each ofthree and nine months ended September 28, 2024 and September 30, 2023.

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 condensed consolidated balance sheets. As of September 28, 2024 and December 30, 2023, the Company was not a party to any 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 the 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 the 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.

Concentration of Credit Riskand 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.

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 a provision 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 three and nine months ended September 28, 2024, one customer, Topcon, accounted for more than 10% of total revenues, each representing 33%. For the three and nine months ended September 30, 2023, one customer, Topcon, accounted for more than 10% of total revenues, representing 34% and 29%, respectively. As of September 28, 2024, one customer, Topcon, accounted for over 10% of our accounts receivable, representing 23%. As of December 30, 2023, one customer, Topcon, accounted for more than 10% of our accounts receivable, representing 30%.

Taxes Collected from Customers and Remitted to Governmental Authorities

Total revenues are recognized net of taxes collected from customers and remitted to governmental authorities in the accompanying condensed consolidated statements of operations.

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.

Deferred Revenue

Deferred revenue represents contract liabilities and exclusivity fees. Revenue related to service contracts is deferred and recognized on a straight-line basis over the period of the applicable service contract. Costs associated with these service arrangements are recognized as incurred. Revenue related to exclusivity fees is deferred and recognized over the related exclusivity period.

A reconciliation of the changes in the Company’s deferred revenue balance for the nine months ended September 28, 2024 and September 30, 2023, is as follows:

During the nine months ended September 28, 2024 and September 30, 2023, approximately $1.9 million and $1.3 million was recognized pertaining to amounts deferred as of December 30, 2023 and December 31, 2022, respectively. As of September 28, 2024, approximately $8.6 million of the non-current portion of deferred revenue and $1.5 million of the current portion of deferred revenue pertain to exclusivity distribution rights deferred revenue.

Warranty

The Company currently provides atwo-year full warranty on its products. The associated costs of these warranties are accrued for upon shipment of the products. The Company’s 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 condensed consolidated statements of operations as cost of revenues.

As warranty reserves do not meet the criteria to have separate captions on the face of the condensed consolidated balance sheet, we removed these captions and included those amounts in other current and long-term liabilities.

Implementation Costs Incurred in a Cloud Computing Service Arrangement

The Company has implemented a new enterprise resource planning (“ERP”) system. The new ERP system operates in a cloud-based environment. The Company concluded that this cloud computing arrangement does not include a license, and therefore, will account for this arrangement as one that is a service contract. The Company capitalized $1.1 million in implementation costs and began utilizing the ERP system near the end of the third quarter of 2023 and is recognizing amortization of the capitalized implementation costs over five years on a straight-line basis. For the nine months ended September 28, 2024 and September 30, 2023 approximately $0.2 million and $12 thousand of amortization expenses were recorded, respectively.

Recent Accounting Standards Not Yet Adopted

In November 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2023-07 “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures”, which expands annual and interim disclosure requirements for reportable segments, primarily through enhanced disclosures about significant segment expenses. ASU 2023-07 is effective for our annual periods beginning after December 15, 2023, and for interim periods beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the potential effect that the updated standard will have on its financial statement disclosures.

In December 2023, the FASB issued ASU 2023-09 “Income Taxes (Topics 740): Improvements to Income Tax Disclosures” to expand the disclosure requirements for income taxes, specifically related to the rate reconciliation and income taxes paid. ASU 2023-09 is effective for the Company’s annual periods beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the potential effect that the updated standard will have on its condensed consolidated financial statement disclosures.

3. Accounts Receivable and Provision for Credit Losses

The Company has trade receivables with various individual customers such as private businesses, hospitals, universities, government and non-profit entities, and distributors. The Company has determined that geography is the similar risk characteristic to pool our trade receivables balances, and accordingly, groups such balances into either the domestic pool or the international pool. The domestic pool is primarily comprised of individual customers, and the international pool is primarily comprised of distributors.

The provision for credit losses represents an estimate of the lifetime expected credit losses inherent in trade receivables as of the consolidated balance sheet date. We assess the adequacy of the provision for credit losses on a quarterly basis based on historical information and current economic conditions and forecasts. Subsequent changes in the provision for credit losses are recorded in current earnings and reversal of previous losses are permitted under the current guidance.

While we believe we have exercised prudent judgment and applied reasonable assumptions, there can be no assurance that in the future, changes in economic conditions or other factors would not cause changes in the financial health of our customers. If the financial health of our customers deteriorates, the timing and level of payments received could be impacted and therefore, could result in a change to our estimated losses.

The following table presents the activity in the provision for credit losses for accounts receivable by pool type for the nine months ended September 28, 2024 (in thousands):

4. Related Party - Topcon

As of September 28, 2024, Topcon holds a 9.9% voting interest in the Company, which qualifies it to be a principal owner and 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 the three and nine months ended September 28, 2024, the Company’s revenues related to Topcon amounted to approximately $3.8 million and $12.0 million, including $0.4 million and $1.1 million, respectively, in recognized exclusive distribution rights revenue. During the three and nine months ended September 30, 2023, the Company’s revenues related to Topcon amounted to approximately $4.3 million and $11.2 million, respectively, including $0.4 million and $1.1 million, respectively, in recognized exclusive distribution rights revenue. The Company’s purchases from Topcon during thethree and nine months ended September 28, 2024 amounted to approximately $0.2 million and $0.5 million, respectively. As of September 28, 2024, the amounts receivable from and payable to Topcon were $1.8 million and $0.6 million, respectively. As of December 30, 2023, the amounts receivable from and payable to Topcon were $2.9 million and $0.2 million, respectively.

5. Inventories

The components of the Company’s inventories as of September 28, 2024 and December 30, 2023 are as follows:

6. Goodwill and Intangible Assets

Goodwill

The carrying value of goodwill was $1.0 million as of both September 28, 2024 and December 30, 2023.

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 year 2024 and determined that its goodwill was not impaired.

Intangible Assets

The following table summarizes the components of gross and net of intangible assets carrying amounts (in thousands):

For each of the nine months ended September 28, 2024, and September 30, 2023 amortization expense totaled $0.3 million.

The amortization of developed technology was charged to research and development expense and the amortization of customer relations and trade names was charged to sales and marketing expense. Estimated future amortization expense for purchased intangible assets is as follows (in thousands):

7. Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:

•

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.

•

Level 2: Directly or indirectly observable inputs as of the reporting date through correlation with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in markets that are not active. Level 2 also includes assets and liabilities that are valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors, are corroborated by readily observable data from actively quoted markets for substantially the full term of the financial instrument.

•

Level 3: Unobservable inputs that are supported by little or no market activity and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible and considers counterparty credit risk in its assessment of fair value.

The carrying amounts of the Company’s financial assets and liabilities, including cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses as of September 28, 2024 and December 30, 2023, approximate fair value because of the short maturity of these instruments.

As of September 28, 2024 and December 30, 2023, financial assets measured and recognized at fair value on a recurring basis and classified under the appropriate level of the fair value hierarchy as described above were as follows (in thousands):

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.

8. Convertible Debt

On August 4, 2024, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with Lind Global Asset Management IX LLC (“Lind”), an entity managed by The Lind Partners, LLC, relating to (i) the issuance and sale to Lind of a senior convertible promissory note in the principal amount of $4.2 million for a purchase price of $3.5 million (the “Initial Note”) and (ii) a subsequent contingent senior convertible promissory note in the amount of $1.8 million for a purchase price of $1.5 million (the “Subsequent Note” and, together with the Initial Note, the “Notes” and together with the Purchase Agreement and the Notes, the “Transaction Documents”). The Initial Note was issued on August 7, 2024 and the Subsequent Note has not been issued as of the date hereof. The Notes are convertible into shares of the Company’s common stock, $0.01 par value (the “Common Stock” and such shares issued upon conversion, the “Note Shares”) at Lind’s option at an initial conversion price of $2.44, subject to any adjustments as set forth in the Notes; provided that no adjustment shall result in a conversion price that is less than $0.39 per share.

Commencing on the date that is one hundred twenty (120) days after the issuance of the applicable Note, provided that no Event of Default (as defined in each of the Notes and further described below) shall have occurred, the Company will repay the Outstanding Principal Amount of such Note in twenty (20) consecutive monthly installments of $210 thousand (the “Monthly Payments”) on each one (1) month anniversary of the issuance date, until the Outstanding Principal Amount of such Note has been paid in full on or prior to the applicable Maturity Date or, if earlier, upon acceleration, repayment, conversion or redemption of such Note in accordance with its terms. At the Company’s option, each month, the Monthly Payments can be made in: (i) cash; (ii) shares of the Common Stock (the “Repayment Shares”); or (iii) a combination of cash and Repayment Shares; provided, that the number of Repayment Shares to be delivered in accordance with clause (ii) or (iii) shall be determined by dividing (X) the portion of the Principal Amount being paid in shares of Common Stock, by (Y) ninety percent (90%) of the average of the five (5) lowest daily VWAPs during the twenty (20) trading days prior to the applicable payment date; provided, further, that no portion of the Principal Amount may be paid in Repayment Shares unless such Repayment Shares (A) may be immediately resold pursuant to Rule 144 (“Rule 144”) under the Securities Act of 1933, as amended (the “1933 Act”), by a person that is not an affiliate of the Company, or (B) are registered for resale under the 1933 Act and the Registration Statement (defined below) is in effect and lawfully usable to effect immediate sales of such Repayment Shares. If the Company makes a Monthly Payment in cash, the Company must also pay Lind a 4% premium of such Monthly Payment and such premium will not be applied towards the Outstanding Principal Amount. Furthermore, with respect to no more than two (2) Monthly Payments, Lind may elect to increase the amount of such Monthly Payment up to $800 thousand; provided that any such increased Monthly Payment is made in Repayment Shares. Following any such increased Monthly Payment, the amount of such increase shall be deducted from the amount of the last Monthly Payment owing under such Note until such Monthly Payment is reduced to zero.

Provided no Event of Default has occurred, from the date that is thirty (30) days following the earlier date on which the Conversion Shares may be (i) offered or sold pursuant to an effective Registration Statement, or (ii) immediately resold under Rule 144 by persons other than the Company’s affiliates or holders of the Conversion Shares that have been the Company’s affiliates at a time during the immediately preceding three (3) months without restriction on the number of shares to be sold or manner of sale, the Company may repay all, but not less than all, of the then Outstanding Principal Amount at a repayment price equal to (a) if the applicable prepayment occurs on or prior to the date that is one hundred and eighty (180) days following the issuance of the applicable Note, 90% of the Outstanding Principal Amount of such Note, (b) if the applicable prepayment occurs on the date that is on or after the date that is one hundred eighty one (181) days following the date of issuance of the applicable Note but prior to the date that is three hundred sixty-five (365) days from the date of issuance of the applicable Note, 93.3333333% of the Outstanding Principal Amount of such Note, and (c) if the applicable prepayment occurs on the date that is on or after the date that is three hundred sixty-six

(366) days following the date of issuance of the applicable Note but on or prior to the applicable Maturity Date, the Outstanding Principal Amount of such Note. If the Company elects to prepay a Note, Lind may elect to convert up to one-third (1/3) of the Outstanding Principal Amount of such Note in connection with the prepayment.

Pursuant to the terms of the Purchase Agreement, the Company issued 126,968 shares of the Common Stock (the “First Incentive Share Installment”) to Lind. In the event the Company fails to repay the Initial Note in full by February 3, 2025 (one hundred eighty (180) days of the issuance date of the Initial Note), the Company shall be required to issue to Lind, on the trading day immediately following such date, additional shares of the Common Stock (the “Second Incentive Share Installment” and, together with the First Incentive Share Installment, the “Incentive Shares”) in an amount equal to $250,000 divided by the greater of (i) the average volume weighted average price of the Common Stock over the five trading days immediately preceding such trading date and (ii) $0.39, subject to any adjustments provided in the Initial Note.

The total number of shares of Common Stock issuable pursuant to the terms of the Transaction Documents is capped at (i) prior to the receipt of Stockholder Approval,3,300,231 (equal to 19.99% of the number of shares of Common Stock outstanding as of August 4, 2024), and (ii) following the receipt of Stockholder Approval,4,952,823 (equal to 30% of the number of shares of Common Stock outstanding as of August 4, 2024).

The $4.2 million convertible debt was issued with an original issue discount (“OID”) of $0.7 million. In addition, the Company incurred $0.9 million debt issuance costs, including $0.5 million legal expenses, $250 thousand relating to the First Incentive Share Installment and $105 thousand in commitment fees. During both the three and nine month period ended September 28, 2024, $58 thousand of the original issue discount (as an interest expense) and $72 thousand debt issuance costs (as operating expenses) were recorded on a straight-line basis over the term of the debt. The accretion of the OID and amortization of debt issuance costs under that method is deemed materially consistent with the effective interest rate method.

As of September 28, 2024, the convertible note payable outstanding totaled $2.7 million of debt, net of the remaining balances of $0.6 million of OID and $0.8 million of debt issuance costs. As of September 28,2024, the short term and long term debt (Notes Payable) were $1.3 million and $1.4 million, respectively.

The following represents the payments of notes payables as of September 28, 2024 (in thousands):

9. Leases and Commitments and Contingencies

Operating Leases

Our operating leases consist of facility and office equipment leases. Operating lease expenses for each of the nine months ended September 28, 2024 and September 30, 2023 was $0.8 million. The weighted average discount rate used in calculating the present value of lease payments was 4.8%. As of September 28, 2024, the weighted average remaining lease term for our operating leases was 1.9 years.

The following represents maturities of operating lease liabilities as of September 28, 2024 (in thousands):

Purchase Commitments

Our purchase commitments consist primarily of non-cancellable purchase commitments with vendors to manufacture certain components and ophthalmic instrumentation. As of September 28, 2024, our future minimum payments through fiscal year 2027 for our purchase commitments were approximately $12.1 million, with $11.3 million committed for the next 12 months.

Indemnities

We enter into standard indemnification arrangements in the 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 that 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. Although the results of litigation and claims cannot be predicted with certainty, we currently believe that the final outcome of these ordinary course matters will not have a material adverse effect on our business, condensed consolidated operating results, financial condition or cash flows. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

10. Stock-Based Compensation

The Company accounts for stock-based compensation granted to employees and directors, including stock option awards, restricted stock and restricted stock units (“RSUs”) in accordance with FASB ASC Topic 718, “Compensation – Stock Compensation” (“ASC 718”). Accordingly, stock-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized as an expense over the employee’s service period. The Company recognizes compensation expense on a ratable basis over the requisite service period of the award.

The Company values options using the Black-Scholes option pricing model. Time-based RSUs are valued at the grant date fair value of the underlying common shares. Performance-based RSUs 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.

2008 Equity Incentive Plan, as amended.

The terms of awards granted during the nine months ended September 28, 2024 were consistent with those described in the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 30, 2023.

The following table shows stock-based compensation expense included in the condensed consolidated statements of operations for thethree and nine months ended September 28, 2024 and September 30, 2023 (in thousands):

Stock-based compensation expense capitalized to inventory was immaterial for the nine months ended September 28, 2024 and September 30, 2023.

As of September 28, 2024, there was $1.6 million of total unrecognized compensation cost, net of expected forfeitures, related to non-vested stock-based compensation arrangements. The cost is expected to be recognized over a weighted average period of 1.87 years.

Summary of Stock Options

The following table summarizes stock options information during thenine months ended September 28, 2024:

The weighted average grant date fair value of the options granted was $1.66 and $1.32 per share for thenine months ended September 28, 2024 and September 30, 2023, respectively.

The Company uses the Black-Scholes option-pricing model to estimate the fair value of stock-based awards (options) with the following weighted-average assumptions:

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 an analysis of the Company’s stock price history over a period commensurate with the expected term of the options, trading volume of the Company’s 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 by the Company, 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 the Company hasnot issued any dividends and does not anticipate issuing any dividends in the future.

Information regarding stock options outstanding, vested, expected to vest, and exercisable as of September 28, 2024 is summarized below:

The aggregate intrinsic value in the table above represents the pre-tax intrinsic value, based on the Company’s closing price as of September 28, 2024, that would have been received by option holders had all option holders exercised their stock options as of that date. This amount changes based on the fair market value of the Company’s common stock. The total intrinsic value of options exercised for the nine months ended September 28, 2024 and September 30, 2023 was approximately$1 thousand and $4 thousand, respectively.

Summary of RSUs

Information regarding RSUs activity for thenine months ended September 28, 2024 is summarized below:

11. Income Taxes

Provision for Income Tax

The Company calculates its interim tax provision in accordance with the provisions of ASC Topic 740-270, Income Taxes; Interim Reporting. For interim periods, the Company estimates its annual effective income tax rate and applies the estimated rate to the year-to-date income or loss before income taxes. The Company also computes the tax provision or benefit related to items reported separately and recognizes the items net of their related tax effect in the interim periods in which they occur. The Company also recognizes the effect of changes in enacted tax laws or rates in the interim periods in which the changes occur. The Company recorded a provision for income tax of $74 thousand and $30 thousand for the nine months ended September 28, 2024 and September 30, 2023, respectively.

Deferred Income Taxes

The Company accounts for income taxes in accordance with ASC Topic 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. 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 assets will not be realized. As of the second quarter of fiscal year 2024, based on the Company’s recent history of losses and its forecasted losses, management believes it is more likely than not that a full valuation allowance is required. Accordingly, the Company continues to provide a full valuation allowance on its federal and states deferred tax assets.

Uncertain Tax Positions

The Company accounts for its uncertain tax positions in accordance with ASC 740. As of December 30, 2023, the Company had$1.4 million of unrecognized tax benefits, none of the unrecognized tax benefits would result in a change in the Company’s effective tax rate if recognized in future years.

The Company is not aware of any other uncertain tax positions that could result in significant additional payments, accruals, or other material deviation in this estimate during the fiscal year.

The Company is subject to United States federal income tax as well as to income taxes in state jurisdictions. The Company’s federal and state income tax returns are open to examination by tax authorities forthree years andthree tofive years, respectively.

12. Computation of Basic and Diluted Net Loss Per Share

Basic and diluted net loss per share is based upon the weighted average number of common shares outstanding during the period. Common stock equivalents consist of incremental common shares issuable upon the exercise of stock options, and the release (vesting) of RSUs and awards and are calculated under the treasury stock method. Common stock equivalent shares from unexercised stock options, and unvested RSUs and awards 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.

For the three months ended September 28, 2024 and September 30, 2023, potential shares from stock options and RSUs totaling 2,640,263 and 2,272,510 shares, respectively, were excluded from the computation of diluted weighted average shares outstanding. For the nine months ended September 28, 2024 and September 30, 2023, potential shares from stock options and RSUs totaling 2,800,477 and 2,280,017 shares, respectively, were excluded from the computation of diluted weighted average shares outstanding.

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

13. Business Segments

The Company operates inone segment: ophthalmology. The Company develops, manufactures and markets medical devices. Our revenues arise from the sale of consoles, delivery devices, consumables, service, and support activities.

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

(1) Includes service contract revenues of $47 thousand and $0.4 million, and $0.4 million and $1.2 million recognized during thethree and nine months ended September 28, 2024 and September 30, 2023, respectively. Includes $0.4 million and $1.1 million recognized revenue related to the exclusive distribution rights during both of thethree and nine months ended September 28, 2024 and September 30, 2023, respectively. Other also includes revenues from paid service, royalty, freight and legacy G probes.

Revenue information shown by geographic region, based on the sales destination, is as follows (in thousands):

Revenues are attributed to countries based on the location of end customers.

Other than the United States, the Netherlands accounted for at least 10% of the Company’s revenues during thethree and nine months ended September 28, 2024, representing 13.1% and 15.2%, respectively. Other than the United States, the Netherlands accounted for at least 10% of the Company’s revenues during the three and nine months ended September 30, 2023, representing 20% and 16%, respectively. The United States accounted for 47.2% and 47.8% of revenues for the three months ended September 28, 2024and September 30, 2023, respectively, and 45.5% and 49.9% for the nine months ended September 28, 2024 and September 30, 2023, respectively.