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 June 30, 1997
[ ] 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 August 1, 1997 was 6,405,783.
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IRIDEX CORPORATION
TABLE OF CONTENTS
Page
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Condensed Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996 3
Condensed Consolidated Statements of Income for the three months and six months
ended June 30, 1997 and June 30, 1996 4
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 1997 and June 30, 1996 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 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURE 17
INDEX TO EXHIBITS 18
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IRIDEX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
1997 1996
---------- -----------
(unaudited) *
ASSETS
Current assets:
Cash and cash equivalents $ 9,970 $ 14,107
Available-for-sale securities 4,110 1,007
Accounts receivables, net 5,131 5,390
Inventories 2,571 1,859
Prepaids and other current assets 516 122
Deferred income taxes 519 519
-------- --------
Total current assets 22,817 23,004
Available-for-sale securities, long term 996 --
Property and equipment, net 838 655
Deferred income taxes 48 48
-------- --------
Total assets $ 24,699 $ 23,707
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 759 $ 535
Accrued expenses 1,745 1,684
Current portion of capital lease obligations 6 8
-------- --------
Total current liabilities 2,510 2,227
Capital lease obligations, net of current portion -- 2
-------- --------
Total liabilities 2,510 2,229
-------- --------
Stockholders' equity:
Common Stock, $.01 par value:
Authorized: 30,000,000 shares;
Issued and outstanding: 6,406,079 shares as of 6/30/97
and 6,350,180 shares as of 12/31/96 64 63
Additional paid-in capital 21,273 21,248
Unrealized gains/losses on available-for-sale securities (14) --
Retained earnings 866 167
-------- --------
Total stockholders' equity 22,189 21,478
-------- --------
Total liabilities and stockholders' equity $ 24,699 $ 23,707
======== ========
- ----------
*Derived from the 1996 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ --------------------
1997 1996 1997 1996
--------- ------- ------- --------
Sales $ 4,356 $ 2,486 $ 7,676 $ 4,903
Cost of sales 1,843 948 3,280 1,880
------- ------- ------- -------
Gross profit 2,513 1,538 4,396 3,023
------- ------- ------- -------
Operating expenses:
Research and development 471 331 892 601
Selling, general and administrative 1,400 1,109 2,724 2,165
------- ------- ------- -------
Total operating expenses 1,871 1,440 3,616 2,766
------- ------- ------- -------
Income from operations 642 98 780 257
Other income, net 160 206 315 298
------- ------- ------- -------
Income before provision for income taxes 802 304 1,095 555
Provision for income taxes (288) (122) (396) (148)
------- ------- ------- -------
Net income $ 514 $ 182 $ 699 $ 407
======= ======= ======= =======
Net income per share $ 0.08 $ 0.03 $ 0.11 $ 0.07
======= ======= ======= =======
Shares used in per share calculation 6,668 6,758 6,654 6,227
------- ------- ------- -------
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)
SIX MONTHS ENDED
JUNE 30,
------------------
1997 1996
------- ------
Cash flows from operating activities:
Net income $ 699 $ 407
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Depreciation 161 72
Provision for doubtful accounts 10 (118)
Changes in operating assets and liabilities:
Accounts receivable 249 12
Inventories (712) (612)
Prepaids and other current assets (394) 148
Deferred income taxes --
Accounts payable 224 326
Accrued expenses 61 (406)
-------- --------
Net cash (used in) provided by operating activities 298 (171)
-------- --------
Cash flows from investing activities:
Purchases of available-for-sale securities (12,485) (1,000)
Proceeds from sale of available-for-sale securities 8,372
Acquisition of property and equipment (344) (268)
-------- --------
Net cash used in investing activities (4,457) (1,268)
-------- --------
Cash flows from financing activities:
Payment on capital lease obligations (4) (3)
Issuance of common stock, net 26 15,617
-------- --------
Net cash provided by (used in) financing activities 22 15,614
-------- --------
Net (decrease) increase in cash and cash equivalents (4,137) 14,175
Cash and cash equivalents at beginning of period 14,107 1,227
-------- --------
Cash and cash equivalents at end of period $ 9,970 $ 15,402
======== ========
Supplemental schedule of non-cash investing activities:
Unrealized holding gain on non-taxable securities (14) --
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 June 30, 1997 and for the
three months and six month periods then ended are unaudited (except for the
balance sheet information as of December 31, 1996, 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 audited financial statements and notes
thereto, together with management's discussion and analysis of financial
condition and results of operations, contained in the Company's Annual Report on
Form 10-K, which was filed with the Securities and Exchange Commission on March
25, 1997. The results of operations for the three and six month periods ended
June 30, 1997 are not necessarily indicative of the results for the year ending
December 31, 1997, or any future interim period.
2. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the current
year presentation. The reclassification had no impact on previously reported
income from operations or net income.
3. INVENTORIES COMPRISE: (IN THOUSANDS)
JUNE 30, DECEMBER 31,
1997 1996
--------- -----------
(UNAUDITED)
Raw materials and work in progress $1,538 $ 924
Finished goods 1,033 935
------ ------
Total inventories $2,571 $1,859
====== ======
4. AVAILABLE-FOR-SALE SECURITIES
At June 30, 1997, available-for-sale securities consisted of one corporate
security due through July 1997, three municipal securities due through December
1997 and one long term available-for-sale municipal security due through 1998.
5. RECENT ACCOUNTING PRONOUNCEMENTS
During February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share," (SFAS 128) which specifies the computation,
presentation and disclosure requirements for earnings per share. SFAS 128
supersedes Accounting Principles Board Opinion No. 15 and will become effective
for the Company's 1997 fiscal year. SFAS 128 requires restatement of all
prior-period earnings per share data presented after the effective date. SFAS
128 is not expected to have a material impact on the Company's financial
position, results of operations or cash flows.
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In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 (SFAS 130), Reporting Comprehensive
Income. This statement establishes requirements for disclosure of comprehensive
income and becomes effective for the Company's 1998 fiscal year, with
reclassification of earlier financial statements for comparative purposes.
Comprehensive income generally represents all changes in stockholders' equity
except those resulting from investments or contributions by stockholders. The
Company is evaluating alternative formats for presenting this information, but
does not expect this pronouncement to materially impact the Company's results of
operations.
In June 1997, The Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131 (SFAS 131), Disclosures about Segments
of an Enterprise and Related Information. This statement establishes standards
for disclosure about operating segments in annual financial statements and
selected information in interim financial reports. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. This statement supersedes Statement of Financial Accounting Standards
No. 14, Financial Reporting for Segments of a Business Enterprise. The new
standard becomes effective for the Company's 1998 fiscal year and requires that
comparative information from earlier years be restated to conform to the
requirements of this standard. The Company is evaluating the requirements of
SFAS 131 and the effects, if any, on the Company's current reporting and
disclosures.
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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 Annual
Report on Form 10-K filed with the Securities and Exchange Commission 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 SIX MONTHS ENDED
------------------ ----------------
JUNE 30, JUNE 30,
------------------ ----------------
1997 1996 1997 1996
----- ------ ------ -------
Sales...................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales.............................. 42.3 38.1 42.7 38.3
----- ----- ---- -----
Gross profit.......................... 57.7 61.9 57.3 61.7
Operating expenses:
Research and development................ 10.8 13.3 11.6 12.3
Sales, general and administrative....... 32.2 44.7 35.5 44.2
----- ----- ---- -----
Total operating expenses.............. 43.0 58.0 47.1 56.5
----- ----- ---- ----
Income from operations..................... 14.7 3.9 10.2 5.2
Other income, net.......................... 3.7 8.3 4.1 6.1
----- ----- ---- -----
Income before provision for income taxes... 18.4 12.2 14.3 11.3
Provision for income taxes................. (6.6) (4.9) (5.2) (3.0)
----- ----- ----- -----
Net income................................. 11.8% 7.3% 9.1% 8.3%
===== ===== ===== =====
Sales. Sales increased 75% to $4.4 million for the three months ended
June 30, 1997 from $2.5 million for the three months ended June 30, 1996. Sales
increased 57% to $7.7 million for the six months ended June 30, 1997 from $4.9
million for the six months ended June 30, 1996. 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 $2.4
million accounted for 56% of sales in the three months ended June 30, 1997
compared to $1.1 million or 44% of sales in the comparable 1996 period. The
Company expects revenues from international sales to continue to account for a
substantial portion of its sales. While the OcuLight GL was introduced in the
third quarter of 1996, the Company's ability to ship the OcuLight GL in volume
during the first half of 1997 was negatively affected by delivery problems with
a sole source component. The Company has recently qualified a second source for
that component and began to receive shipments from the second source supplier in
the second quarter of 1997. The Company believes that deliveries from the two
diode sources should meet its requirements for the second half of 1997. The
Company expects future growth in sales to be primarily derived from sales of the
OcuLight GL and the DioLite 532 Dermatology Laser (the "DioLite 532") which the
Company began to ship in limited volumes during the second quarter of 1997.
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Gross Profit. The Company's gross profit increased 63% to $2.5 million
for the three months ended June 30, 1997 from $1.5 million for the three months
ended June 30, 1996. For the six months ended June 30, 1997 gross profit
increased 45% to $4.4 million from $3.0 million for the six months ended June
30, 1996. Gross profit as a percentage of net sales for the three months ended
June 30, 1997 decreased to 58%, as compared to 62% for the three months ended
June 30, 1996, due primarily to increased costs incurred to support expansion of
the Company's business and the introduction of the OcuLight GL. In addition,
increasing competition and a larger than expected percentage of international
sales has resulted in a slight downward trend in average selling prices of the
Company's products. Gross profit as a percentage of net sales for the six months
ended June 30, 1997 was 57% as compared to 62% for the six months ended June 30,
1996. While the Company expects continued competitive pressure on the prices of
its products, it expects the percentage of international sales to stabilize
during the second half of 1997. The Company intends to continue its efforts to
reduce the cost of components and the costs associated with new product
introductions and thereby mitigate the impact of price reductions on its gross
profits. The Company expects its gross profit to continue to fluctuate due to
changes in the relative proportions of domestic and international sales, costs
associated with additional new product introductions, pricing and a variety of
other factors.
Research and Development. Research and development expenses increased
by 42% to $.5 million for the three months ended June 30, 1997 from $.3 million
for the three months ended June 30, 1996, but decreased as a percentage of net
sales to 11% for the three months ended June 30, 1997 from 13% for the
comparable prior year three month period. For the six months ended June 30,
1997, research and development expenses increased 48% to $.9 million from $.6
million for the six months ended June 30, 1996, but remained flat as a
percentage of net sales at 12% for the six months ended June 30, 1997 and 1996.
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 and the DioLite 532. The Company expects these expenses for
research and development to continue to increase in absolute dollars during the
second half of 1997 in connection with new product development activities.
Sales, General and Administrative. Sales, general and administrative
expenses grew by 26% to $1.4 million for the three months ended June 30, 1997
from $1.1 million for the three months ended June 30, 1996, but decreased as a
percentage of net sales to 32% for the three months ended June 30, 1997 from 45%
for the comparable prior year three month period. For the six months ended June
30, 1997, selling, general and administrative expenses increased 26% to $2.7
million from $2.2 million for the six months ended June 30, 1996, but decreased
as a percentage of net sales to 35% for the six months ended June 30, 1997 from
44% for the comparable prior year six 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 OcuLight
GL and the DioLite 532. 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 second half of 1997 to support the
increasing unit shipment volumes and additional employees.
Income Taxes. The Company's effective tax rates for the three and six
months ended June 30, 1997 were 36%. This rate differs from the federal
statutory rate primarily due to state income taxes, partially offset by the
utilization of tax credits, non-taxable available-for-security investments and
tax benefits from the Company's foreign sales corporation.
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RECENT ACCOUNTING PRONOUNCEMENTS
During February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share," (SFAS 128) which specifies the
computation, presentation and disclosure requirements for earnings per share.
SFAS 128 supersedes Accounting Principles Board Opinion No. 15 and will become
effective for the Company's 1997 fiscal year. SFAS 128 requires restatement of
all prior-period earnings per share data presented after the effective date.
SFAS 128 is not expected to have a material impact on the Company's financial
position, results of operations or cash flows.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 (SFAS 130), Reporting Comprehensive
Income. This statement establishes requirements for disclosure of comprehensive
income and becomes effective for the Company for fiscal years beginning after
December 15, 1997, with reclassification of earlier financial statements for
comparative purposes. Comprehensive income generally represents all changes in
stockholders' equity except those resulting from investments or contributions by
stockholders. The Company is evaluating alternative formats for presenting this
information, but does not expect this pronouncement to materially impact the
Company's results of operations.
In June 1997, The Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131 (SFAS 131), Disclosures about Segments
of an Enterprise and Related Information. This statement establishes standards
for disclosure about operating segments in annual financial statements and
selected information in interim financial reports. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. This statement supersedes Statement of Financial Accounting Standards
No. 14, Financial Reporting for Segments of a Business Enterprise. The new
standard becomes effective for fiscal years beginning after December 15, 1997,
and requires that comparative information from earlier years be restated to
conform to the requirements of this standard. The Company is evaluating the
requirements of SFAS 131 and the effects, if any, on the Company's current
reporting and disclosures.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Company's primary sources of liquidity included
cash and cash equivalents and available-for-sale securities of $15.1 million.
During the six months ended June 30, 1997, the Company used $.3 million
in operating activities. Sources of cash included net income of $.7 million,
decreases in accounts receivable of $.3 million and increases of depreciation,
accounts payable and accrued expenses of $.4 million, offset by increases in
inventories of $.7 million and prepaids expenses of $.4 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
delayed in the first quarter due to the unavailability of a sole source
component. The Company recently qualified a second source for that component and
received deliveries from that second source during the second quarter. The
Company expects that deliveries from the two sources should meet the Company's
requirements for such diode components.
The Company used $4.4 million in investing activities during the six
months ended June 30, 1997. Investing activities consisted of the acquisition of
$.3 million of property and equipment used in the development and production of
the OcuLight GL product and net acquisition of $4.1 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 $15.7 million after deducting
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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 THAT MAY AFFECT FUTURE RESULTS
Dependence on Visible Photocoagulator. The Company introduced a new
semiconductor-based photocoagulator system, the OcuLight GL, in the second half
of 1996. The Company devoted significant resources to the development and
commercial introduction of the OcuLight GL. The Company believes that the
continued growth of its sales, if any, will be substantially dependent upon
sales of this visible light laser system. While the OcuLight GL has been
successfully introduced, the Company has continued to face risks associated with
developing and manufacturing a new product. For example, the Company experienced
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 has worked with this supplier to resolve these
difficulties and has qualified a second source for that component. The Company
began to ship products incorporating components from this second source during
the second quarter of 1997. Other difficulties may occur, for example, 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 continued market acceptance. While the Company believes that
the OcuLight GL has been generally accepted by the market, ophthalmologists and
clinicians may 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 the Company will be able to
manufacture this visible laser system on a cost-effective, timely basis or that
it will achieve widespread market acceptance. Additionally, the OcuLight GL
competes directly with established ion-based and other photocoagulator systems
currently sold by the Company's competitors and new systems being introduced by
competitors and the Company expects to continue to experience significant
competitive pressures. Failure of the OcuLight GL system to achieve widespread
market acceptance for any reason would have a material adverse effect on the
Company's business, results of operations and financial condition.
Dependence on Continued Market Acceptance of Infrared Photocoagulators.
Prior to the third quarter of 1996, substantially all of the Company's revenues
had been derived from sales of its OcuLight Diode Laser Photocoagulator system
(the "OcuLight SL"), an infrared, invisible light, semiconductor-based laser
console and interchangeable delivery devices, into the ophthalmic medical device
market. 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 SL continued to 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 SL 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 SL will continue
to grow at historical rates or be sustainable at current sales levels. Any
decline in the demand for the OcuLight SL 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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Introduction and Market Acceptance of DioLite 532. In 1996, the Company
developed a new laser product which is intended to be used in the dermatology
market to treat vascular and pigmented skin lesions. The new product, the
DioLite 532, delivers pulsed laser power through a variety of fiber optic
delivery device hand pieces. While the Company received 510(k) clearance for the
DioLite 532 and introduced the DioLite 532 in limited quantities during the
second quarter of 1997, there can be no assurance that such products will
achieve clinical or market acceptance or that the Company can successfully
manage the successful introduction of such product into the dermatology market,
a market that the Company's products do not currently address and in which the
Company has limited experience. Additionally, there can be no assurance that the
Company will be able to manufacture this laser product on a cost-effective,
timely basis or that it will achieve widespread market acceptance. The failure
of the Company to successfully develop and introduce new products for new
markets could have a material adverse effect on the Company's business,
operating results and financial condition.
Management of Growth. With the introduction of the OcuLight GL and the
DioLite 532, the Company has recently experienced, and may continue to
experience growth in production, the number of employees, the scope of its
business, 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 has been required to continue to implement
and improve operational, financial and management information systems,
procedures and controls 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. Additionally, the Company is in
the process of relocating to a larger facility. There can be no assurance that
the Company's business or operations will not be disrupted during such move,
possibly causing 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 is dependent 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, 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. In 1996, the
Company developed a new product which is intended to be used in the dermatology
market to treat vascular and pigmented skin lesions. The new product, the
DioLite 532, delivers pulsed laser power through a variety of fiber optic
delivery device hand pieces. While the Company received 510(k) clearance for the
DioLite 532 and introduced the DioLite 532 in limited quantities during the
second quarter of 1997, there can be no assurance that such products will
achieve clinical or market acceptance or that the Company can successfully
manage the successful introduction of such product into the dermatology market,
a market that the Company's products do not currently address and in which the
Company has limited experience. The failure of the Company to successfully
develop and introduce new products or enhanced versions of existing products
could have a material adverse effect on the Company's business, operating
results and financial condition. The Company is seeking to expand the market
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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 or new products 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 such as optics and
laser diodes 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 diodes purchased from SDL, Inc.
("SDL") were not readily available from other suppliers until the second quarter
of 1997. During the last half 1996 and first quarter 1997, the Company
experienced delays in its manufacturing of the OcuLight GL due to the inability
of SDL to deliver components in volume and on a timely basis. The Company
continues to work with this supplier to ensure such difficulties do not reoccur.
Additionally, during the first quarter of 1997, the Company qualified Opto-Power
as a second source in this diode component. This component is also required for
the DioLite 532, which the Company began shipping in limited volumes in the
second quarter of 1997. Deliveries from SDL and Opto-Power should meet the
Company's future requirements for such diode components. The process of
qualifying suppliers is ongoing and may be lengthy, particularly as new products
are introduced. 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. 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.
Quarterly Fluctuations in Operating Results. Although the Company has
been profitable on an annual and quarterly basis for the last four 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 1997 will continue to be lower than
gross margins in 1996, primarily because of increases in costs incurred to
support expansion of the Company's business, capital expenditures associated
with the Company's move to its new facility, the higher cost of certain
components associated with the OcuLight GL, the introduction of the DioLite 532
and the slight downward trend in average selling prices, primarily due to
increased competition. In addition, the Company expects international sales of
the OcuLight GL to exceed domestic sales of this product during the second half
of 1997. 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 distributor discounts. Additionally, the Company expects to
continue to incur increased operating expenses in the second half of 1997
associated with the introduction of the OcuLight GL and DioLite 532. Such
increases may result in lower operating margins in the second half of 1997. The
ability of the Company to increase its operating margins during the second half
of 1997 and thereafter will depend primarily on timely receipt of components
from its two diode sources and other critical components, successful and timely
manufacturing of the OcuLight SL, OcuLight GL and DioLite 532 and continued
market acceptance of the OcuLight GL and DioLite 532, as well as increased sales
of the OcuLight SL. 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
-13-
14
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. Any
inability to obtain adequate quantities of the critical components used in the
system products would adversely impact the Company's ability to ship the
OcuLight SL, OcuLight GL and the DioLite 532. 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 1996 and
during the first half of 1997, because of manufacturing difficulties associated
with the Company's new product, 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 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 increased its inventory of the
OcuLight SL system during 1996 in anticipation of allocating substantial
manufacturing resources to producing the OcuLight GL. The Company expects to
reduce inventory of the OcuLight SL through the second half of 1997. 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.
Competition. Competition in the market for devices used for ophthalmic
treatments is intense and is expected to increase. This market is also
characterized by rapid technological innovation and change and the Company's
products could be rendered obsolete as a result of future innovations. The
Company's competitive position depends on a number of factors including product
performance, characteristics and functionality, ease of use, scalability,
durability and cost. In addition to photocoagulators, the Company competes with
pharmaceuticals, other technologies and other surgical techniques. Although many
of the Company's current competitors do not currently sell semiconductor lasers
such as those used in the Company's products, the Company believes that
competitors will be introducing competitive products and may compete directly
with the Company. The Company's principal competitors are Coherent, Inc., Nidek,
Zeiss, Keeler and HGM Medical Laser Systems, Inc. Of these companies, only
Nidek, Zeiss and Keeler currently offer a semiconductor-based laser system.
Other competitors have substantially greater financial, engineering, product
development, manufacturing, marketing and technical resources than the Company.
Such companies also have greater name recognition than the Company and
long-standing customer relationships. In addition, there can be no assurance
that other medical companies, academic and research institutions or others will
not develop new technologies or therapies, including medical devices, surgical
procedures or pharmacological treatments and obtain regulatory approval for
products utilizing such techniques that are more effective in treating the
ophthalmic conditions targeted by the Company or are less expensive than the
Company's current or future products, and that the Company's technologies and
products would not be rendered obsolete by such developments. Any such
developments could have a material adverse effect on the business, financial
condition and results of operations of the Company.
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
-14-
15
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, a maker of photodynamic drugs, under which the Company
and PDT have collaborated 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
1995, 1996 and six months ended June 30, 1997, the Company's international sales
were $4.3 million, $6.1 million, and $2.4 million, or 49%, 50% and 56%,
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.
Patents and Proprietary Rights. The Company's success and ability to
compete is dependent in part upon its proprietary information. The Company
relies on a combination of patents, trade secrets, copyright and trademark laws,
nondisclosure and other contractual agreements and technical measures to protect
its intellectual property rights. The Company files patent applications to
protect technology, inventions and improvements that are significant to the
development of its business. The Company has been issued six United States
patents on the technologies related to its products and processes. The Company
has applied for two additional patents related to its solid state laser
products. There can be no assurance that any of the Company's patent
applications will issue as patents, that any patents now or hereafter held by
the Company will offer any degree of protection, or that the Company's patents
or patent applications will not be challenged, invalidated or circumvented in
the future. Moreover, there can be no assurance that the Company's competitors,
many of which have substantial resources and have made substantial investments
in competing technologies, will not seek to apply for and obtain patents that
will prevent, limit or interfere with the Company's ability to make, use or sell
its products either in the United States or in international markets.
In addition to patents, the Company relies on trade secrets and
proprietary know-how which it seeks to protect, in part, through proprietary
information agreements with employees, consultants and other parties. The
Company's proprietary information agreements with its employees and consultants
contain industry standard provisions requiring such individuals to assign to the
Company without additional consideration any inventions conceived or reduced to
practice by them while employed or retained by the Company, subject to customary
exceptions. There can be no assurance that proprietary information agreements
with employees, consultant and others
-15-
16
will not be breached, that the Company would have adequate remedies for any
breach, or that the Company's trade secrets will not otherwise become known to
or independently developed by competitors.
The laser and medical device industry is characterized by frequent
litigation regarding patent and other intellectual property rights and companies
in the medical device industry have employed intellectual property litigation to
gain a competitive advantage. Numerous patents are held by others, including
academic institutions and competitors of the Company. Because patent
applications are maintained in secrecy in the United States until patents are
issued and are maintained in secrecy for a period of time outside the United
States, the Company has not conducted any searches to determine whether the
Company's technology infringes any patents or patent applications. The Company
has from time to time been notified of, or has otherwise been made aware of
claims that it may be infringing upon patents or other proprietary intellectual
property owned by others. If it appears necessary or desirable, the Company may
seek licenses under such patents or proprietary intellectual property. Although
patent holders commonly offer such licenses, no assurance can be given that
licenses under such patents or intellectual property will be offered or that the
terms of any offered licenses will be reasonable or will not adversely impact
the Company's operating results. Any claims, with or without merit, could be
time-consuming, result in costly litigation and diversion of technical and
management personnel, cause shipment delays or require the Company to develop
noninfringing technology or to enter into royalty or licensing agreements.
Although patent and intellectual property disputes in the medical device area
have often been settled through licensing or similar arrangements, costs
associated with such arrangements may be substantial and could include ongoing
royalties. An adverse determination in a judicial or administrative proceeding
or failure to obtain necessary licenses could prevent the Company from
manufacturing and selling its products, which would have a material adverse
effect on the Company's business, results of operations and financial condition.
Conversely, litigation may be necessary to enforce patents issued to the
Company, to protect trade secrets or know-how owned by the Company or to
determine the enforceability, scope and validity of the proprietary rights of
others. Both the defense and prosecution of intellectual property suits or
interference proceedings are costly and time consuming.
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 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 premarket clearance. 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.
Product Liability and Insurance. The Company may be subject to product
liability claims in the future. The Company's products are highly complex, used
to treat extremely delicate eye tissue and are often used in situations where
there is a high risk of serious injury or adverse side effects. In addition,
although the Company recommends that its disposable products only be used once
and so prominently labels these disposables, the Company believes that certain
customers may reuse these disposables. Were such a disposable not adequately
sterilized by the customer
-16-
17
between such uses, a patient could suffer serious consequences, possibly
resulting in a suit against the Company for damages. Accordingly, the
manufacture and sale of medical products entails significant risk of product
liability claims. Although the Company maintains product liability insurance
with coverage limits of $5.0 million per occurrence and an annual aggregate
maximum of $6.0 million, there can be no assurance that the coverage of the
Company's insurance policies will be adequate. Such insurance is expensive and
in the future may not be available on acceptable terms, if at all. A successful
claim brought against the Company in excess of its insurance coverage could have
a material adverse effect on the Company's business, results of operations and
financial condition. To date, the Company has not experienced any product
liability claims.
Volatility of Stock Price. The trading price of the Company's Common
Stock has been subject to wide fluctuations in response to a variety of factors
since the Company's initial public offering in February 1996, including
quarterly variations in operating results, announcements of technological
innovations or new products by the Company or its competitors, developments in
patents or other intellectual property rights, general conditions in the
ophthalmic laser industry, revised earning estimates, comments or
recommendations issued by analysts who follow the Company, its competitors or
the ophthalmic laser industry and general economic and market conditions.
Additionally, the stock market in general, and the market for technology stocks
in particular, have experienced extreme price volatility in recent years.
Volatility in price and volume has had a substantial effect on the market prices
of many technology companies for reasons unrelated or disproportionate to the
operating performance of such companies. These broad market fluctuations could
have a significant impact on the market price of the Common Stock.
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
No reports on Form 8-K have been filed during the period for
which this report is filed.
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18
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: August 13, 1997 By: /s/ JAMES DONOVAN
---------------------
James Donovan
Chief Financial Officer
(Principal Financial and
Principal Accounting Officer)
-18-
19
INDEX TO EXHIBITS
EXHIBIT PAGE
11.1 Statement Regarding Computation of Net Income Per Share 20
27.1 Financial Data Schedule 21
-19-
1
EXHIBIT 11.1
IRIDEX CORPORATION AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------- ---------------
1997 1996 1997 1996
------ ------ ------ ------
Weighted average shares outstanding
Common stock............................................... 6,385 6,336 6,370 4,256
Conversion of preferred stock.............................. -- -- -- 1,419
Common equivalent shares pursuant to Staff Accounting
Bulletin No. 83(2)....................................... -- -- -- 273
Conversion of stock options under the treasury stock method 283 422 284 279
------ ------ ------ ------
Weighted average common shares and equivalents............... 6,668 6,758 6,654 6,227
====== ====== ====== ======
Net income................................................... $ 514 $ 182 $ 699 $ 407
====== ====== ====== ======
Net income per share......................................... $ 0.08 $ 0.03 $ 0.11 $ 0.07
====== ====== ====== ======
- ------------
(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.
-20-
5
1,000
6-MOS
DEC-31-1997
JAN-01-1997
JUN-30-1997
9,970
4,110
5,481
(350)
2,571
22,817
1,570
(732)
24,699
2,510
0
0
0
21,337
852
24,699
7,676
7,676
3,280
3,616
0
0
0
1,095
396
0
0
0
0
699
0.11
0.11
