1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to
Commission File Number: 0-27598
IRIDEX CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 77-0210467
- ------------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
340 PIONEER WAY
MOUNTAIN VIEW, CALIFORNIA 94041
(Address of principal executive offices, including zip code)
(415) 962-8100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes /X/ No / /; (2) Yes /X / No / /
The number of shares of Common Stock, $.01 par value, issued and outstanding as
of September 30, 1996 was 6,339,733.
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IRIDEX CORPORATION
TABLE OF CONTENTS
Page
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Condensed Consolidated Balance Sheets as of September 30, 1996 and
December 31, 1995 3
Condensed Consolidated Statements of Income for the three months and
nine months ended September 30, 1996 and September 30, 1995 4
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 1996 and September 30, 1995 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 7
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURE 15
INDEX TO EXHIBITS 16
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IRIDEX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
ASSETS (UNAUDITED) *
------
Current assets:
Cash and equivalents $14,504 $1,227
Available-for-sale securities 1,044
Accounts receivable, net 3,159 2,478
Inventories 2,296 1,256
Prepaids and other current assets 145 285
Deferred income taxes 795 795
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Total current assets $21,943 $6,041
Property and equipment, net 481 254
Deferred income taxes 100 100
------- ------
Total assets $22,524 $6,395
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 365 $ 293
Accrued expenses 1,205 1,401
Capital lease obligation 11 16
------- ------
Total current liabilities 1,581 1,710
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Stockholders' equity:
Convertible preferred stock, $.01 par value:
Authorized: Series A through D1: 3,783,330 shares;
Issued and outstanding: none in 1996 and 1,891,663 shares in 1995 -- 19
(Liquidation value: $5,219)
Common Stock, $.01 par value:
Authorized: 30,000,000 shares;
Issued and outstanding: 6,339,733 shares in 1996 and 1,505,42 shares in 1995 66 15
Additional paid-in capital 21,066 5,489
Accumulated deficit (189) (838)
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Total stockholders' equity 20,943 4,685
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Total liabilities and stockholders' equity $22,524 $6,395
======= ======
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*Derived from the 1995 audited financial statements.
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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IRIDEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
Sales $ 2,635 $ 2,092 $ 7,538 $ 6,346
Cost of sales 968 647 2,848 2,084
------- ------- ------- -------
Gross profit 1,667 1,445 4,690 4,262
------- ------- ------- -------
Operating expenses:
Research and development 313 203 914 566
Selling, general and administrative 1,177 891 3,342 2,661
------- ------- ------- -------
Total operating expenses 1,490 1,094 4,256 3,227
------- ------- ------- -------
Income from operations 177 351 434 1,035
Other income, net 226 15 524 32
------- ------- ------- -------
Income before provision for income taxes 403 366 958 1,067
Provision for income taxes (161) (147) (309) (444)
------- ------- ------- -------
Net income $ 242 $ 219 $ 649 $ 623
======= ======= ======= =======
Net income per share $ 0.04 $ 0.05 $ 0.10 $ 0.14
======= ======= ======= =======
Shares used in per share calculation 6,750 4,558 6,402 4,544
------- ------- ------- -------
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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IRIDEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
1996 1995
---- ----
Cash flows from operating activities:
Net income $ 649 $ 623
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 142 41
Provision for doubtful accounts (118) (2)
Changes in operating assets and liabilities:
Accounts receivable (563) (133)
Inventories (1,040) (188)
Prepaids and other current assets 140 (14)
Accounts payable 72 223
Accrued expenses (196) 511
-------- -------
Net cash provided by (used in) operating activities (914) 1,061
-------- -------
Cash flows from investing activities:
Acquisition of property and equipment (369) (188)
Purchase of available-for-sale securities (2,044)
Proceeds from sale of available-for-sale securities 1,000
-------- -------
Net cash used in investing activities (1,413) (188)
-------- -------
Cash flows from financing activities:
Payments on bank borrowings -- (175)
Payment on capital lease obligations (5) (6)
Issuance of common stock, net 15,609 20
-------- -------
Net cash provided by (used in) financing activities 15,604 (161)
-------- -------
Net increase in cash and cash equivalents 13,277 712
Cash and cash equivalents at beginning of period 1,227 684
-------- -------
Cash and cash equivalents at end of period $ 14,504 $ 1,396
======== =======
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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IRIDEX CORPORATION
CONDENSED CONSOLIDATED
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated financial statements at September 30, 1996 and for
the three month and nine month periods then ended are unaudited (except for the
balance sheet information as of December 31, 1995, which is derived from the
Company's audited financial statements) and reflect all adjustments (consisting
only of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the financial position and operating
results for the interim periods. The condensed consolidated financial statements
should be read in conjunction with the financial statements and notes thereto,
together with management's discussion and analysis of financial condition and
results of operations, contained in the Company's Registration Statement on Form
SB-2 (Registration Statement No. 333-00320), which was declared effective by the
Securities and Exchange Commission on February 15, 1996. The results of
operations for the three and nine month periods ended September 30, 1996 are not
necessarily indicative of the results for the year ending December 31, 1996, or
any future interim period.
2. INVENTORIES COMPRISE: (IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(UNAUDITED)
Raw materials and work in progress $ 1,032 $ 614
Finished goods 1,264 642
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Total inventories $ 2,296 $1,256
======= ======
3. AVAILABLE - FOR- SALE SECURITIES
At September 30, 1996, available-for-sale securities consist of one term note
due on July 17, 1997.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion in Management's Discussion and Analysis of Financial
Condition and Results of Operations" contains trend analysis and other
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Actual results could differ materially from those set forth in such
forward-looking statements as a result of the factors set forth under "Factors
Affecting Operating Results @ and other risks detailed in the Company's
Registration Statement on Form SB-2 (Reg. Stmt. No. 333- 00320) declared
effective by the Securities and Exchange Commission on February 15, 1996 and
detailed from time to time in the Company's reports filed with the Securities
and Exchange Commission.
RESULTS OF OPERATIONS
The following table sets forth the percentage of net sales of certain
items in the Company's income statement for the periods indicated.
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
1996 1995 1996 1995
---- ---- ---- ----
Sales .................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales .......................... 36.7 30.9 37.8 32.8
----- ----- ----- -----
Gross profit ........................ 63.3 69.1 62.2 67.2
Operating expenses:
Research and development ............. 11.9 9.7 12.1 8.9
Sales, general and administrative .... 44.7 42.6 44.3 42.0
----- ----- ----- -----
Total operating expenses ............ 56.6 52.3 56.4 50.9
Income from operations ................. 6.7 16.8 5.8 16.3
Other income, net ...................... 8.6 0.7 6.9 0.5
----- ----- ----- -----
Income before provision for income taxes 15.3 17.5 12.7 16.8
Provision for income taxes ............. (6.1) (7.0) (4.1) (7.0)
----- ----- ----- -----
Net income ............................. 9.2% 10.5% 8.6% 9.8%
===== ===== ===== =====
Sales. Sales increased 26.0% to $2.6 million for the three months ended
September 30, 1996 from $2.1 million for the three months ended September 30,
1995. For the nine months ended September 30, 1996, net sales increased 18.8% to
$7.5 million from $6.3 million for the nine months ended September 30, 1995. The
growth in sales over these periods was primarily attributable to increased unit
volume as the Company expanded its product offerings and broadened its customer
base, offset somewhat by slight decreases in average selling prices.
International sales of $1.3 million accounted for 48.0% of sales in the three
months ended September 30, 1996 compared to $1.0 million or 46.5% of sales in
the comparable 1995 period. For the nine months ended September 30, 1996,
international sales accounted for $3.6 million, or 48.0% of sales compared to
$3.1 million, or 48.1% of sales for the nine months ended September 30, 1995.
The Company expects revenues from international sales to continue to account for
a substantial portion of its sales. The increase in revenue from international
sales of approximately $.3 million for the three months ended September 30, 1996
is primarily due to the international shipments of the OcuLight GL in the
quarter ended September 30, 1996. While the OcuLight GL was introduced in the
third quarter of 1996, the Company's ability to ship the OcuLight GL in volume
domestically was negatively affected by delays in receiving FDA approval and
delivery problems with a sole source component. The Company expects future
growth in sales to be primarily derived from sales of the OcuLight GL for the
balance of 1996 and during 1997.
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Gross Profit. The Company's gross profit increased 15.4% to $1.7
million for the three months ended September 30, 1996 from $1.4 million for the
three months ended September 30, 1995. For the nine months ended September 30,
1996, gross profit increased 10.0% to $4.7 million from $4.3 million for the
nine months ended September 30, 1995. Gross profit as a percentage of net sales
for the three and nine months ended September 30, 1996 were 63.3% and 62.2%,
respectively, as compared to 69.1% and 67.2%, respectively, for the three and
nine months ended September 30, 1995, due primarily to increased fixed costs
incurred to support expansion of the Company's business and the introduction of
the OcuLight GL. In addition, increasing competition has resulted in a downward
trend in average selling prices of the Company's products. The Company expects
continued competitive pressure on the prices of its products and therefore a
lower gross profit in future periods. The Company intends to continue its
efforts to reduce the cost of components and thereby mitigate the impact of
price reductions on its gross profits. The Company also expects its gross profit
to continue to fluctuate due to changes in the relative proportions of domestic
and international sales, costs associated with new product introductions and a
variety of other factors. During the first three quarters of 1996, while the
Company waited for FDA approval of the OcuLight GL, the Company built up its
inventory of the OcuLight IR in anticipation of allocating substantial
manufacturing resources to produce the OcuLight GL in the fourth quarter of
1996. When the introduction of the OcuLight GL was delayed due to delays in FDA
approval and the inability to obtain certain components, the Company experienced
increases in inventory levels and manufacturing labor inefficiencies. The
Company expects to devote most of its manufacturing capacity to the assembly of
the OcuLight GL during the next three months. The Company expects to reduce
inventory of the OcuLight IR over the next two quarters.
Research and Development. Research and development expenses increased
by 54.2% to $.3 million for the three months ended September 30, 1996 from $.2
million for the three months ended September 30, 1995. For the nine months ended
September 30, 1996, research and development expenses increased 61.5% to $.9
million from $.6 million for the nine months ended September 30, 1995,
increasing as a percentage of net sales to 12.1% for the nine months ended
September 30, 1996 from 8.9% for the comparable prior year nine month period.
The increase in research and development expenses during this period was
primarily attributable to an increase in personnel as the Company strengthened
its product development efforts, particularly those directed at the introduction
of the OcuLight GL. The Company expects these expenses for research and
development to continue to increase in absolute dollars during the remainder of
1996 in connection with the completion of the development of the delivery
systems for its visible light photocoagulator system and thereafter in
connection with other new product development activities.
Sales, General and Administrative. Sales, general and administrative
expenses grew by 32.1% to $1.2 million for the three months ended September 30,
1996 from $.9 million for the three months ended September 30, 1995. For the
nine months ended September 30, 1996, sales, general and administrative expenses
increased 25.6% to $3.3 million from $2.7 million for the nine months ended
September 30, 1995, increasing as a percentage of net sales to 44.3% for the
nine months ended September 30, 1996 from 42.0% for the comparable prior year
nine month period. The increases in sales, general and administrative expenses
were primarily due to the hiring of additional marketing and administrative
employees to address new opportunities, to support expanding unit volumes and
the expenses associated with the marketing launch of the OcuLight GL. During
1995, the Company began implementing a new management information system in
manufacturing and expects to continue to expand this system throughout the
Company through 1997. The Company expects these expenses to continue to increase
during the remainder of 1996 and the first half of 1997 to support the
increasing unit shipment volumes and additional employees.
Income Taxes. The Company's effective tax rate decreased to 40.0% for
the three months ended September 30, 1996 from 40.2% for the three months ended
September 30, 1995. For the nine months ended September 30, 1996, the effective
tax rate decreased to 32.3% from 41.6% for the nine months ended September 30,
1995. These rates differ from the federal statutory rate primarily due to the
utilization of tax credits.
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LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Company's primary sources of liquidity
included cash and cash equivalents and available-for-sale securities of $15.5
million.
During the nine-month period ended September 30, 1996, the Company used
$.9 million in operating activities. Sources of cash included net income of $.6
million offset by increases in inventories of $1.0 million and increases in
accounts receivable of $.7 million. The increase in inventories is primarily due
to the purchase of components for the Company's new visible light laser
photocoagulator, the OcuLight GL, shipments of which were unexpectedly delayed
in the third quarter due to the unavailability of a sole source component and
delayed FDA approval and to purchases of components for the Company's other
products. During the first three quarters of 1996, while the Company waited for
FDA approval of the OcuLight GL, the Company built up its inventory of the
OcuLight IR in anticipation of allocating substantial manufacturing resources to
produce the OcuLight GL in the fourth quarter of 1996. When the introduction of
the OcuLight GL was delayed due to delays in FDA approval and the inability to
obtain certain components, the Company experienced increases in inventory levels
and manufacturing labor inefficiencies. The Company expects to devote most of
its manufacturing capacity to the assembly of the OcuLight GL during the next
three months. The Company expects to reduce inventory of the OcuLight IR over
the next two quarters.
The Company used $1.4 million in investing activities during the nine
months ended September 30, 1996. Investing activities consisted of the
acquisition of $.4 million of property and equipment used in the development and
production of the new OcuLight GL product and acquisition of $1.0 million of
available-for-sale securities.
In February 1996, the Company sold 1,982,500 shares of its Common Stock
in connection with its initial public offering ("IPO"). The net proceeds of this
offering were approximately $15.6 million after deducting underwriting discounts
and commissions and expenses of the offering. The Company has used a portion of
the net proceeds from the IPO for purchases of inventory, leasehold improvements
and payment of certain accrued liabilities. The Company believes that, based on
current estimates, its current cash balances and net cash provided by operating
activities will be sufficient to meet its working capital and capital
expenditure requirements through 1997.
FACTORS AFFECTING OPERATING RESULTS
Dependence on Existing Products and on Market Acceptance of Infrared
Photocoagulators. To date, substantially all of the Company's revenues have been
derived from sales of its OcuLight Diode Laser Photocoagulator system (the
"OcuLight IR System"), an infrared, invisible light, semiconductor-based laser
console and interchangeable delivery devices, into the ophthalmic medical device
market. The Company expects that sales of the OcuLight IR System will continue
to account for a majority of the Company's revenues at least through 1996. The
ophthalmic community historically has used argon-gas photocoagulators which
produce visible light and the substantial majority of photocoagulators sold for
ophthalmic purposes are argon-gas. Because sales of the Company's OcuLight IR
System represent a significant portion of the infrared laser market, increased
sales of the Company's infrared system will depend on the rate at which users
convert to infrared photocoagulators. Equipment purchasing decisions may be
based on a number of factors, in addition to price and performance. For example,
many ophthalmologists have been trained in medical school to use visible lasers
and may be reticent to change to infrared lasers. There can be no assurance that
the OcuLight IR System will continue to be accepted by the market or that other
competitive treatments will not be developed, and therefore that sales derived
from the OcuLight IR System will continue to grow at historical rates or be
sustainable at current sales levels. Any decline in the demand for the OcuLight
IR System or any failure of sales derived from such products to meet the
Company's expectations would have a material adverse effect on the business,
results of operations and financial condition of the Company.
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Dependence on Successful Development and Introduction of Visible
Photocoagulator. The Company has developed a new semiconductor-based
photocoagulator system, the OcuLight GL, that emits visible light similar to the
light emitted by argon-gas lasers currently used. The Company has devoted
significant resources to the development and commercial introduction of the
OcuLight GL which it introduced during the third quarter of 1996. The Company
believes that the growth of its sales, if any, will be substantially dependent
upon the success of this visible light laser system. The process of successfully
developing and introducing a new product involves a significant amount of risk.
Unexpected difficulties may occur in the manufacturing process. For example, the
Company has been experiencing delays in its manufacturing of the OcuLight GL due
to the inability of a supplier of a sole-source component to deliver components
in volume and on a timely basis. The Company is working with this supplier to
resolve these difficulties. Additionally, once introduced, despite testing by
the Company, quality and reliability problems may arise which may result in
reduced bookings, manufacturing rework costs, delays in collecting accounts
receivable, additional service and warranty costs and a decline in the Company's
competitive position. Moreover, the Company believes that recommendations by
ophthalmologists and clinicians for use of this laser will be essential for its
market acceptance. Ophthalmologists and clinicians will not recommend this laser
or related treatments unless they conclude, based upon clinical data and other
factors, that it is a beneficial alternative to other technologies and
treatments, including more established argon gas lasers. There can be no
assurance that this visible laser system will be manufactured on a
cost-effective and timely basis and achieve market acceptance. Additionally,
even if this visible light photocoagulator system achieves initial market
acceptance, it will compete directly with established argon-based and other
photocoagulator systems currently sold by the Company's competitors and new
systems being introduced by competitors and the Company expects to experience
significant competitive pressures. Failure of the OcuLight GL system to achieve
market acceptance for any reason would have a material adverse effect on the
Company's business, results of operations and financial condition.
Dependence on Development of New Products and New Applications. The
Company's future success will depend upon, among other factors, its ability to
develop, obtain regulatory approval, manufacture and introduce on a timely and
cost-effective basis as well as successfully sell and achieve market acceptance
of new products and applications and enhanced versions of existing products. The
extent of, and rate at which, market acceptance and penetration are achieved by
future products, including the new visible light photocoagulator system, is a
function of many variables, including price, safety, efficacy, reliability,
marketing and sales efforts, the development of new applications for these
products and general economic conditions affecting purchasing patterns. Even if
the Company's products achieve clinical acceptance, there can be no assurance
that the Company can successfully manage the introduction of such products into
the ophthalmic or other markets. The failure of the Company to successfully
develop and introduce new products or enhanced versions of existing products
would have a material adverse effect on the Company's business, operating
results and financial condition. The Company is seeking to expand the market for
its existing and new products by working with clinicians and third parties to
identify new applications for its products, validating new procedures which
utilize its products and responding more effectively to new procedures. There
can be no assurance that the Company's efforts to develop new applications for
its products will be successful, that it can obtain regulatory approvals to use
its products in new clinical applications in a timely manner, or at all, or gain
satisfactory market acceptance for such new applications. Failure to develop and
achieve market acceptance of new applications would have a material adverse
effect on the Company's business, results of operations and financial condition.
Dependence on Key Manufacturers and Suppliers. The Company relies on
third parties to manufacture substantially all of the components used in its
products, although the Company assembles critical subassemblies as well as the
final product at its facility in Mountain View, California. There are risks
associated with the use of independent manufacturers, including unavailability
of or delays in obtaining adequate supplies of components and potentially
reduced control of quality, production costs and the timing of delivery. The
Company has qualified two or more sources for most of the components used in its
products. Certain semiconductor laser components purchased
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from SDL, Inc. ("SDL") are not readily available from other suppliers. The
Company is currently experiencing delays in its manufacturing of the OcuLight GL
due to the inability of a supplier of a sole-source component to deliver
components in volume and on a timely basis. The Company is working with this
supplier to resolve these difficulties. While the Company is currently seeking
to qualify additional suppliers for this component and other components, it will
require time to complete qualification of a second supplier and to obtain
components from such a second source. The process of qualifying suppliers is
ongoing, particularly as new products are introduced and may be lengthy. The
Company does not have long-term or volume purchase agreements with any of its
suppliers and currently purchases components on a purchase order basis. No
assurance can be given that these components will be available in the quantities
required by the Company, on reasonable terms, or at all. Establishing its own
capabilities to manufacture these components would require significant scale-up
expenses and additions to facilities and personnel and could significantly
decrease the Company's profit margins. In addition, the Company intends to move
to a new, larger facility in 1997. There can be no assurance that the Company's
operations will not be disrupted during such move, possibly causing a material
adverse effect on the Company's results of operations. The Company's business,
results of operations and financial condition would be adversely affected if it
is unable to continue to obtain components as required at a reasonable cost or
if it is unable to obtain larger facilities as needed.
Quarterly Fluctuations in Operating Results. Although the Company has
been profitable on an annual and quarterly basis for the last three years, the
Company's sales and operating results have varied substantially on a quarterly
basis and such fluctuations are expected to continue in future periods. The
Company believes that its gross margins in 1996 will continue to be lower than
gross margins in 1995, primarily because of increases in fixed costs incurred to
support expansion of the Company's business, costs associated with the
introduction of the OcuLight GL and the downward trend in average selling
prices, primarily due to increased competition. In addition, the Company expects
to ship a greater proportion of its new product, the OcuLight GL,
internationally than domestically during the fourth quarter of 1996. The gross
margins on international shipments of the OcuLight GL are significantly lower
than the gross margins on domestic shipments of the OcuLight GL, primarily due
to the introductory promotional pricing in place with the Company's
international distributors, which will continue at least through the first
calendar quarter of 1997. The Company anticipates that unit shipments of the
OcuLight GL to its international distributors may drop as a percentage of total
OcuLight GL shipments for a period of time after the introductory pricing period
ends as distributors ship units to their customers that were purchased at the
lower introductory price. The Company expects to incur increased operating
expenses in the remainder of 1996 associated with the introduction of the
OcuLight GL. Increases may result in lower operating margins in the remainder of
1996. The ability of the Company to increase its operating margins during the
remainder of 1996 and thereafter will depend primarily on continued receipt of
sole source components and qualification of a second source, successful and
timely manufacturing of the OcuLight GL and market acceptance of the OcuLight GL
as well as increased sales of the other existing OcuLight IR Systems. The
Company's operating results are affected by a number of factors, many of which
are beyond the Company's control. Factors contributing to these fluctuations
include the timing of the introduction and market acceptance of new products or
product enhancements by the Company and its competitors, the cost and
availability of components and subassemblies, changes in pricing by the Company
and its competitors, the timing of the development and market acceptance of new
applications for the Company's products, the relatively long and highly variable
sales cycle for the Company's products to hospitals and other health care
institutions, fluctuations in economic and financial market conditions and
resulting changes in customers' or potential customers' budgets and increased
product development costs. Continued inability to obtain adequate quantities of
a sole- source component for the OcuLight GL may adversely impact the Company's
ability to ship the OcuLight GL in the fourth quarter of 1996. In addition to
these factors, the Company's quarterly results have been and are expected to
continue to be affected by seasonal factors. The Company manufactures its
products to forecast rather than to outstanding purchase orders, and products
are typically shipped shortly after receipt of a purchase order. While backlog
increased in the third quarter of 1996 because of manufacturing difficulties,
the Company does not expect significant backlog in the future and the amount of
backlog at any particular date is generally not indicative of its future level
of sales. Although
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the Company's manufacturing procedures are designed to assure rapid response to
customer orders, they may in certain instances create a risk of excess or
inadequate inventory levels if orders do not match forecasts. The Company has
increased its inventory of the OcuLight IR system during the first three
quarters of 1996 in anticipation of allocating substantial manufacturing
resources to produce the OcuLight GL in the fourth quarter of 1996. The Company
expects to reduce inventory of the OcuLight IR over the next two quarters. The
Company's expense levels are based, in part, on expected future sales. If sales
levels in a particular quarter do not meet expectations, the Company may be
unable to adjust operating expenses quickly enough to compensate for the
shortfall, and the Company's results of operations may be adversely affected. In
addition, the Company has historically made a significant portion of each
quarter's product shipments near the end of the quarter. If that pattern
continues, even short delays in shipment of products at the end of a quarter
could have a material adverse effect on results of operations for such quarter.
As a result of the above factors, sales for any future quarter are not
predictable with any significant degree of accuracy and operating results in any
period should not be considered indicative of the results to be expected for any
future period. There can be no assurance that the Company will remain profitable
in the future or that operating results will not vary significantly.
Dependence on Collaborative Relationships. The Company has entered into
collaborative relationships with academic medical centers and physicians in
connection with the research and development and clinical testing of its
products. The Company plans to collaborate with third parties to develop and
commercialize existing and new products. In May 1996, the Company executed an
agreement with PDT, Inc. ("PDT"), a maker of photodynamic drugs, under which the
Company and PDT will collaborate to develop a device which will emit a laser
beam to activate a photodynamic drug being developed by PDT to achieve a desired
therapeutic result. The development of this new photodynamic system will require
at least three years and significant financial and other resources. There can be
no assurance that this collaborative development effort will continue or that it
will result in the successful development and introduction of a photodynamic
system. The Company believes that these current and future relationships are
important because they would allow the Company greater access to funds, to
research, development and testing resources and to manufacturing, sales and
distribution resources. However, the amount and timing of resources to be
devoted to these activities are not within the Company's control. There can be
no assurance that such parties will perform their obligations as expected or
that the Company's reliance on others for clinical development, manufacturing
and distribution of its products will not result in unforeseen problems.
Further, there can be no assurance that the Company's collaborative partners
will not develop or pursue alternative technologies either on their own or in
collaboration with others, including the Company's competitors, as a means of
developing or marketing products for the diseases targeted by the collaborative
programs and by the Company's products. The failure of any current or future
collaboration efforts could have a material adverse effect on the Company's
ability to introduce new products or applications and therefore could have a
material adverse effect on the Company's business, results of operations and
financial condition.
Dependence on International Sales. The Company derives, and expects to
continue to derive, a large portion of its revenue from international sales. In
1994, 1995 and for the first nine months of fiscal 1996, the Company's
international sales were $3.4 million, $4.2 million, and $3.6 million, or 47.8%,
47.7% and 48.0%, respectively, of total sales. Therefore, a large portion of the
Company's revenues will continue to be subject to the risks associated with
international sales, including fluctuations in foreign currency exchange rates,
shipping delays, generally longer receivables collection periods, changes in
applicable regulatory policies, international monetary conditions, domestic and
foreign tax policies, trade restrictions, duties and tariffs, and economic and
political instability. Each of these factors could have a significant impact on
the Company's ability to deliver products on a competitive and timely basis.
Government Regulation. The medical devices marketed and manufactured by
the Company are subject to extensive regulation by the FDA and, in some
instances, by foreign and state governments. Pursuant to the Federal Food, Drug
and Cosmetic Act of 1976, as amended, and the regulations promulgated
thereunder, the FDA regulates
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13
the clinical testing, manufacture, labeling, sale, distribution and promotion of
medical devices. Before a new device can be introduced into the market, the
manufacturer must obtain market clearance through either the 510(k) premarket
notification process or the lengthier premarket approval ("PMA") application
process. Obtaining these approvals can take a long time and delay the
introduction of a product. For example, the introduction of the OcuLight GL in
the United States was delayed about three months from the Company's expectations
due to the longer than expected time period required to obtain FDA approval.
Noncompliance with applicable requirements, including good manufacturing
practices ("GMP"), can result in, among other things, fines, injunctions, civil
penalties, recall or seizure of products, total or partial suspension of
production, failure of the government to grant premarket clearance or premarket
approval for devices, withdrawal of marketing approvals, and criminal
prosecution. The FDA also has the authority to request repair, replacement or
refund of the cost of any device manufactured or distributed by the Company. The
failure of the Company to obtain government approvals or any delays in receipt
of such approvals would have a material adverse effect on the Company's
business, results of operations and financial condition.
Management of Growth. The Company has recently experienced, and may
continue to experience growth in the number of its employees, the scope of its
operating and financial systems and the geographic area of its operations. This
growth has resulted in new and increased responsibilities for management
personnel and has placed and continues to place a significant strain upon the
Company's management, operating, inventory and financial systems and resources.
To accommodate recent growth and to compete effectively and manage future
growth, if any, the Company will be required to continue to implement and
improve operational, financial and management information systems, procedures
and controls on a timely basis and to expand, train, motivate and manage its
work force. The Company has been implementing a new management information
system in manufacturing and expects to continue this implementation throughout
the Company through 1997. The Company's future success will depend on the
successful installation of this system as well as on the ability of its current
and future executive officers to operate effectively, both independently and as
a group. There can be no assurance that the Company's personnel, systems,
procedures and controls will be adequate to support the Company's existing and
future operations. Any failure to implement and improve the Company's
operational, financial and management systems or to expand, train, motivate or
manage employees could have a material adverse effect on the Company's business,
results of operations and financial condition. In addition, the Company intends
to move to a new, larger facility in 1997. There can be no assurance that the
Company's operations will not be disrupted during such move, possibly causing a
material adverse effect on the Company's results of operations.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.1 Statement Regarding Computation of Net Income Per
Share
27.1 Financial Data Schedule
(b) Reports on Form 8-K
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14
No reports on Form 8-K have been filed during the period for which this
report is filed.
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15
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IRIDEX CORPORATION
(Registrant)
Date: November 6, 1996 By: /s/ Timothy A. Marcotte
-------------------------
Timothy A. Marcotte
Chief Financial Officer
(Principal Financial and
Principal Accounting Officer)
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16
INDEX TO EXHIBITS
EXHIBIT PAGE
11.1 Statement Regarding Computation of Net Income Per Share 17
27.1 Financial Data Schedule 18
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1
EXHIBIT 11.1
IRIDEX CORPORATION
COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
Weighted average shares outstanding
Common stock ........................................................... 6,339 1,285 4,860 1,240
Conversion of preferred stock .......................................... -- 2,837 946 2,837
Common equivalent shares pursuant to Staff Accounting Bulletin No. 83(2) -- 273 273 273
Conversion of stock options under the treasury stock method ............ 411 163 323 194
------ ------ ------ ------
Weighted average common shares and equivalents ............................. 6,750 4,558 6,402 4,544
====== ====== ====== ======
Net income ................................................................. $ 242 $ 219 $ 649 $ 623
====== ====== ====== ======
Net income per share ....................................................... $ 0.04 $ 0.05 $ 0.10 $ 0.14
====== ====== ====== ======
(1) There is no difference between primary and fully diluted net income per
share.
(2) Pursuant to Securities & Exchange Commission's Staff Accounting Bulletin
No. 83, all securities issued during the period from January 17, 1995
through the filing date of the initial public offering (January 16,1996),
are included in the calculation of Common Stock equivalents as if
outstanding for all periods prior to the effective date of the initial
public offering (February 15, 1996), even if anti-dilutive. The Common
Stock warrants of stock options are computed using the Treasury Stock
Method, using the estimated initial public offering price and applicable
exercise prices.
-17-
5
1,000
9-MOS
DEC-31-1996
JAN-01-1996
SEP-30-1996
14,504
1,044
3,424
265
2,296
21,943
955
474
22,524
1,581
0
0
0
66
20,877
22,524
7,538
7,538
2,848
7,104
0
0
(524)
958
309
649
0
0
0
649
.10
.10
