Annual Report for Fiscal Year Ending December 28, 2024 (Form 10-K)

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

Overview

IRIDEX 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.

Our propriety MicroPulse®Technology and Endpoint Management™ Technology are used for the treatment of glaucoma and retina disorders. Both technologies are offered as optional treatment modes in select laser consoles in addition to the standard continuous-wave ("CW") treatment mode. They allow low-energy, subvisible, tissue-sparing laser therapy by different means: MicroPulse technology uses short, microsecond-long laser pulses that allow tissue to cool between pulses giving physicians finer control of thermal elevation to minimize tissue damage. Endpoint Management technology uses a delivery algorithm to titrate the laser energy. CW laser photocoagulation can stabilize vision over the long term but can also result in varying degrees of vision loss. Both MicroPulse and Endpoint Management technologies have demonstrated clinical efficacy with a safer profile compared to standard high-energy CW laser for the treatment of both retinal diseases and glaucoma.

Our products consist of laser consoles, delivery devices and consumable 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, service 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 operating rooms and ambulatory surgical centers, as well as their offices and clinics. In operating rooms and ambulatory surgical centers, ophthalmologists use our laser systems with either an indirect laser ophthalmoscope or a single-use consumable probe, including MicroPulse P3®, G-Probe®and G-Probe Illuminate®delivery devices, and EndoProbe handpieces. In the offices and clinics, ophthalmologists use our laser systems with either an indirect laser ophthalmoscope or a slit-lamp adapter.

In 2024 and 2023, our products were sold in the United States and Germany predominantly through a direct sales force and internationally (aside from Germany) primarily through independent distributors. Total revenues in 2024 and 2023 were $48.7 million and $51.9 million, respectively. We generated net losses of $8.9 million and $9.6 million in 2024 and 2023, respectively.

Sales to international distributors are made on open credit terms or letters of credit and are currently denominated in U.S. dollars and accordingly, are not subject to risks associated with currency fluctuations. However, increases in the value of the U.S. dollar against any local currencies could cause our products to become relatively more expensive to customers in a particular country or region, leading to reduced revenue or profitability in that country or region. Sales to direct end users transacted through our German office are denominated in Euros and are subject to risks associated with currency fluctuations.

Cost of revenues consists primarily of our direct manufacturing costs which include 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. For certain of our products, we are responsible for the cost of the fully assembled product that is manufactured by a third-party.

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 the new Local Coverage Determination on our Business

During 2024 Local Coverage Determination ("LCD") L37531, relating to Micro-Invasive Glaucoma Surgery (MIGS), was adopted as scheduled became effective for services performed on or after November 17, 2024. We believe the reimbursement limitations created by the new LCD has potential to significantly increase physician interest in and use of Iridex's advanced laser-based treatments for glaucoma.

The new LCD clarifies that treatments performed using Iridex's laser consoles and probes are not MIGS procedures, and thus, Iridex's Cyclo G6® product family is unaffected by the new reimbursement limitations. Iridex's proprietary MicroPulse® and Continuous Wave laser therapies for glaucoma have been adopted by physicians around the globe as effective tools for managing and slowing the progression of glaucoma. Currently, Iridex sells more than 50,000 Cyclo G6 probes per year.

In addition to creating some reimbursement advantages for Iridex's glaucoma treatments in the United States, the LCD creates opportunity to capture more physician attention to the significant clinical benefits of our products, particularly MicroPulse Transscleral Laser Therapy (MPTLT). Our laser procedures are noninvasive, repeatable, and can be utilized to treat patients across a far broader range of glaucoma's progression, whether before, after, or even coincident to MIGS procedures.

The final LCD, L37531, which went into effect on November 17, 2024, provides the following reimbursement limitations:

Impact of Macroeconomic Conditions to our Business

Current macroeconomic conditions exhibit challenges that can affect capital equipment purchasing demand and timing, including recessionary fears, tariffs, trade wars, unexpected changes in taxes or policies, inflation concerns, changing interest rates, as well as other geopolitical uncertainties, have impacted and may continue to impact business spending and the economy as a whole. As a result, we have seen customers extend purchase decision cycles. We have also experienced some demand softness due to pricing effects from the strength of the U.S. dollar that have impacted and may continue to impact our operations.

The macroeconomic conditions on our business and operations remain uncertain, and it is not possible for us to predict the duration and extent to which they will affect our business, future results of operations, and financial condition.

For more information on risks associated with the current macroeconomic conditions, see the sections titled "Risk Factors" in Item 1A of Part I.

Results of Operations - 2024 and 2023

Our fiscal year ends on the Saturday closest to December 31. Fiscal year 2024 ended on December 28, 2024 and fiscal year 2023 ended on December 30, 2023. Fiscal years 2024 and 2023 each included 52 weeks of operations.

The following table sets forth certain operating data as a percentage of revenues for the periods indicated.

		Year Ended
		December 28, 2024				December 30, 2023
Revenues			100.0	%			100.0	%
Cost of revenues			59.9	%			58.0	%
Gross margin			40.1	%			42.0	%
Operating expenses:
Research and development			11.2	%			13.2	%
Sales and marketing			25.8	%			31.3	%
General and administrative			20.1	%			16.9	%
Total operating expenses			57.1	%			61.4	%
Loss from operations			(17.0	%)			(19.4	%)
Other income (expense), net			(1.1	%)			1.0	%
Loss from operations before provision for income taxes			(18.1	%)			(18.4	%)
Provision for income taxes			0.1	%			0.2	%
Net loss			(18.2	%)			(18.6	%)

Comparison of 2024 and 2023

Revenues

		Year Ended								Change in $				Change in %
		December 28, 2024				December 30, 2023
Cyclo G6		$	12,697			$	13,461			$	(764	)			(5.7	%)
Retina			27,827				29,445				(1,618	)			(5.5	%)
Other			8,145				8,963				(818	)			(9.1	%)
Total revenues		$	48,669			$	51,869			$	(3,200	)			(6.2	%)

Our total revenues decreased by $3.2 million or 6.2% from $51.9 million in 2023 to $48.7 million in 2024. The decrease was driven by softer demand in our Glaucoma and Retina product lines, and by lower royalties due to the expiration of licensed patents.

While we believe that the market for our products remains strong, the overall capital expenditure landscape within hospitals, surgical centers and physician offices may continue to be negatively impacted by the persistent macroeconomic concerns discussed above.

Gross Profit

Gross profit decreased by $2.3 million or 10.6% from $21.8 million in 2023 to $19.5 million in 2024. Gross margin decreased by 1.9% from 42.0% in 2023 to 40.1% in 2024. The decrease in gross margin was driven by lower revenues and higher manufacturing overhead absorbed by less revenue.

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

Research and Development

Research and development expenses decreased by $1.4 million or 20.2% from $6.8 million in 2023 to $5.4 million in 2024. Spending on investment in new and expanded products decreased as we completed prior projects. In 2024 we also implemented cost savings measures including reductions in workforce that resulted in lower headcount expenses.

Sales and Marketing

Sales and marketing expenses decreased by $3.6 million or 22.5%, from $16.2 million in 2023 to $12.6 million in 2024. The decrease in 2024 was related to our cost savings measures, including reductions in workforce that resulted in lower headcount expenses, lower consulting, travel expenses, and lower tradeshows and public relations expenses, partially offset by increases in bonus and clinical studies expenses.

General and Administrative

General and administrative expenses increased by $1.1 million or 11.8% from $8.7 million in 2023 to $9.8 million in 2024. The increase is primarily due to higher consulting costs and deal related legal expenses, partially offset by lower ERP implementation expenses.

Other Income (Expense), Net

Other expense, net amounted to $0.5 million in 2024 and other income, net amounted $0.5 million in 2023. Other income, net, consisted primarily of interest income or expense and foreign currency gain or loss. Other expenses increased primarily due to interest paid on amortization of loan expenses related to the Lind transaction.

Income Taxes

We recorded a provision for income taxes of $68 thousand for the year ended December 28, 2024 compared to $90 thousand for the year ended December 30, 2023. The effective tax rate for the years ended December 28, 2024 and December 30, 2023, were both negative 0.8%.

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 2024 and 2023

As of December 28, 2024, we had cash and cash equivalents of $2.4 million and working capital of $7.0 million compared to cash and cash equivalents of $7.0 million and working capital of $14.5 million as of December 30, 2023.

Net cash used in operating activities was $7.3 million in 2024 compared to net cash used in operating activities of $6.7 million in 2023. The increase in net cash used in operating activities, expressed in direct cash flow terms, was primarily due to cash used in inventory, prepaids, deferred revenue and accrued expenses, partially offset by decreases in cash paid to accounts payable and increased cash collections from accounts receivable.

During 2024, net cash used in investing activities was $13 thousand for capital expenditures. During 2023, net cash used in investing activities was $109 thousand for capital expenditures.

During 2024, net cash provided by financing activities was $2.6 million, primarily from net proceeds of $3.4 million from issuance of a senior convertible promissory note payable to Lind partially offset by $0.5 million debt issuance costs and $0.2 million payments to the note were payable to Lind. During 2023, net cash used in financing activities was $5 thousand, primarily from payroll taxes related to net share settlement of equity awards partially offset by the net proceeds arising from the proceeds from stock option exercises.

We have historically funded our operations primarily through sales of our products to customers, and through common stock and borrowing arrangements. As of December 28, 2024, our principal sources of liquidity consisted of cash and cash equivalents of $2.4 million. We have incurred net losses over the last several years, and as of December 28, 2024, have an accumulated deficit of approximately $88.0 million. We may continue to incur operating losses and negative cash flows from operations.

Management evaluates whether there are relevant conditions and events that, in the aggregate, raise substantial doubt about our ability to continue as a going concern and to meet its obligations as they become due within one year after the date that the financial statements are issued.

The accompanying consolidated financial statements have been prepared assuming we will continue as a going concern. For the year ended December 28, 2024, we implemented cost savings initiatives to increase operational efficiencies across all departments, which we expect will decrease our operating expenses and increase working capital through March 29, 2026. Based on these cost savings initiatives implemented by us and the issuance of the $3.4 million senior convertible promissory note to Lind, management believes we have alleviated substantial doubt about our ability to satisfy our liquidity needs over the next 12 months.

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 rates, 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 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."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 have 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.

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

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. As such, revenue is recognized as the repair services are rendered and the performance obligation satisfied.

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, we recognize revenue at a point in time, 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. For the arrangement with one customer, we concluded that there is one combined performance obligation to be satisfied. Therefore, we recognize revenue related to this arrangement over time.

Costs of Obtaining Revenue Contracts

We 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. 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 December 28, 2024 and December 30, 2023, we recognized deferred costs incurred to obtain revenue contracts with customers, net of accumulated amortization, of $0.2 million and included these amounts in Prepaid expenses and other current assets and Other long-term assets in our consolidated balance sheets. Amortization expense was $146 thousand and $105 thousand, respectively, for the fiscal years ended December 28, 2024 and December 30, 2023. There were no impairment expenses for both the fiscal years ended December 28, 2024 and December 30, 2023, respectively.

Sales commissions that do not represent incremental and recoverable costs of obtaining a contract are expensed as incurred. As a practical expedient, we 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 we would have otherwise recognized is one year or less.

Contract Fulfillment Costs

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 are amortized on a systematic basis that is consistent with the recognition of revenue to which it relates. As of December 28, 2024 and December 30, 2023, we recognized deferred costs incurred to fulfill a contract with a customer, net of accumulated amortization, of $0.6 million and $0.7 million, respectively, and included these amounts in Prepaid expenses and other current assets and Other long-term assets in our consolidated balance sheets. Amortization expense was $83 thousand, for the fiscal years ended December 28, 2024 and December 30, 2023. There were no impairment expenses for both the fiscal years ended December 28, 2024 and December 30, 2023.

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, 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.

Provision for Credit Loss and Sales Returns

We estimate future sales 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 collectability 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 provision for credit losses for estimated losses resulting from the inability of our customers to make required payments. The provision for credit losses 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. In 2024, based on our history of earnings and our forecasted losses, we believe on the more likely than not basis that a full valuation allowance is required. Accordingly, in the fourth quarter of fiscal year 2024, 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 December 28, 2024.

Accounting for Stock-Based Compensation

We account for stock-based compensation granted to employees and directors, including employees' stock option awards and restricted stock units at grant date, based on the fair value of the award. Stock-based compensation is recognized as expense on a ratable basis over the requisite service period of the award.

We value options using the Black-Scholes option pricing model. Time-based restricted stock units are valued at the grant date fair value of the underlying common shares. Performance-based restricted stock units without market conditions are valued at grant date fair value of the underlying common shares. Performance-based restricted stock units 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 December 28, 2024, 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. ROU assets and operating lease 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 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 operations 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 income (loss).

Recently Adopted Accounting Standards

In November 2023, the Financial Standards Accounting 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. The amendment is effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The amendment should be applied retrospectively to all prior periods presented in the financial statements. We adopted this ASU on December 31, 2023 with no material impact on our consolidated financial statements. The required segment disclosures are included above.

Recent Accounting Standards Not Yet Adopted

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 our annual periods beginning January 1, 2025, with early adoption permitted. We are currently evaluating the potential effect that the updated standard will have on our consolidated financial statement disclosures.

In November 2024, the FASB issued ASU 2024-03 ''Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses'', which requires disclosure of disaggregated information about certain income statement expense line items on an annual and interim basis. This update will be effective for fiscal years beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027. Early adoption is permitted. As this accounting standard only impacts disclosures, it will not have a material impact on the Company's consolidated financial statements.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.