UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended October 2, 2004
[ ] 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.)
1212 TERRA BELLA AVENUE
MOUNTAIN VIEW, CALIFORNIA 94043-1824
(Address of principal executive offices, including zip code)
(650) 940-4700
(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. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
APPLICABLE TO CORPORATE ISSUERS:
The number of shares of common stock, $.01 par value, issued and outstanding as
of November 10, 2004 was 7,374,641.
IRIDEX CORPORATION
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Condensed Consolidated Balance Sheets as of
October 2, 2004 and January 3, 2004 3
Condensed Consolidated Statements of Operations for
the three and nine months ended October 2, 2004
and September 27, 2003 4
Condensed Consolidated Statements of Cash Flows for
the nine months ended October 2, 2004 and
September 27, 2003 5
Condensed Consolidated Statements of Comprehensive
Income (Loss) for the three and nine months
ended October 2, 2004 and September 27, 2003 6
Notes to Unaudited Condensed Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 27
ITEM 4. CONTROLS AND PROCEDURES 28
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 29
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 29
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 29
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS 29
ITEM 5. OTHER INFORMATION 29
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 29
SIGNATURE 30
CERTIFICATIONS 31
Exhibit 31.1 Certification of Chief Executive Officer pursuant to
Securities Exchange Act
Rules 13a-14(a) and 15d-14(a)
Exhibit 31.2 Certification of Chief Financial Officer pursuant to
Securities Exchange Act
Rules 13a-14(a) and 15d-14(a)
Exhibit 32.1 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
2
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
- ---------------------------------------------------
IRIDEX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
OCTOBER 2, JANUARY 3,
2004 2004
------------ ------------
ASSETS
------
Current assets:
Cash and cash equivalents . . . . . . . . . . $ 8,612 $ 10,541
Available-for-sale securities . . . . . . . . 9,511 5,751
Accounts receivable, net. . . . . . . . . . . 6,516 6,548
Inventories . . . . . . . . . . . . . . . . . 8,405 8,721
Prepaids and other current assets . . . . . . 738 934
Current deferred income taxes . . . . . . . . 972 972
------------ ------------
Total current assets. . . . . . . . . . . . 34,754 33,467
Property and equipment, net . . . . . . . . . 772 850
Deferred income taxes . . . . . . . . . . . . 2,129 1,522
------------ ------------
Total assets. . . . . . . . . . . . . . . . $ 37,655 $ 35,839
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . $ 950 $ 1,029
Accrued expenses. . . . . . . . . . . . . . . 4,613 3,380
Deferred revenue. . . . . . . . . . . . . . . 789 596
------------ ------------
Total liabilities . . . . . . . . . . . . . 6,352 5,005
------------ ------------
Stockholders' equity:
Common stock. . . . . . . . . . . . . . . . . 74 70
Additional paid-in capital. . . . . . . . . . 24,988 23,900
Accumulated other comprehensive loss. . . . . (20) (1)
Treasury stock. . . . . . . . . . . . . . . . (430) (430)
Retained earnings . . . . . . . . . . . . . . 6,691 7,295
------------ ------------
Total stockholders' equity. . . . . . . . . 31,303 30,834
------------ ------------
Total liabilities and stockholders' equity. $ 37,655 $ 35,839
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
IRIDEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 2, SEPTEMBER 27, OCTOBER 2, SEPTEMBER 27,
2004 2003 2004 2003
--------------- --------------- --------------- ---------------
Sales . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,178 $ 8,267 $ 23,679 $ 22,928
Cost of sales . . . . . . . . . . . . . . . . . . . . . 4,708 4,678 13,187 12,981
--------------- --------------- --------------- ---------------
Gross profit. . . . . . . . . . . . . . . . . . . 3,470 3,589 10,492 9,947
--------------- --------------- --------------- ---------------
Operating expenses:
Research and development. . . . . . . . . . . . . . 1,025 975 3,409 2,972
Sales, general and administrative . . . . . . . . . 3,855 2,402 8,452 7,430
--------------- --------------- --------------- ---------------
Total operating expenses. . . . . . . . . . . . . . . . 4,880 3,377 11,861 10,402
--------------- --------------- --------------- ---------------
Income (loss) from operations . . . . . . . . . . . . . (1,410) 212 (1,369) (455)
Interest and other income, net. . . . . . . . . . . 83 49 212 154
--------------- --------------- --------------- ---------------
Income (loss) before income taxes . . . . . . . . . . . (1,327) 261 (1,157) (301)
Benefit from income taxes . . . . . . . . . . . . . 607 - 553 181
--------------- --------------- --------------- ---------------
Net income (loss) . . . . . . . . . . . . . . . . . . . $ (720) $ 261 $ (604) $ (120)
=============== =============== =============== ===============
Net income (loss) per share - basic . . . . . . . . . . ($0.10) $ 0.04 ($0.08) ($0.02)
=============== =============== =============== ===============
Net income (loss) per share - diluted . . . . . . . . . ($0.10) $ 0.04 ($0.08) ($0.02)
=============== =============== =============== ===============
Shares used in computing net income (loss) per share -
Basic . . . . . . . . . . . . . . . . . . . . . . . 7,244 6,933 7,171 6,922
=============== =============== =============== ===============
Shares used in computing net income (loss) per share -
diluted . . . . . . . . . . . . . . . . . . . . . . 7,244 7,043 7,171 6,922
=============== =============== =============== ===============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
IRIDEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
OCTOBER 2, SEPTEMBER 27,
2004 2003
--------------- ---------------
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (604) $ (120)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . 296 561
Provision for doubtful accounts. . . . . . . . . . . . . . . . . . . . . . . 287 35
Provision for inventories. . . . . . . . . . . . . . . . . . . . . . . . . . 429 348
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . (607) -
Changes in operating assets and liabilities: . . . . . . . . . . . . . . . .
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . (255) 1,777
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (113) 930
Prepaids and other current assets. . . . . . . . . . . . . . . . . . . . . 196 (179)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (79) 219
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,233 (170)
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193 184
--------------- ---------------
Net cash provided by operating activities. . . . . . . . . . . . . . . . . . . 976 3,585
--------------- ---------------
Cash flows from investing activities:
Purchases of available-for-sale securities . . . . . . . . . . . . . . . . . . (8,960) (6,640)
Proceeds from maturity of available-for-sale securities. . . . . . . . . . . . 5,181 1,850
Acquisition of property and equipment. . . . . . . . . . . . . . . . . . . . . (218) (273)
--------------- ---------------
Net cash used in investing activities. . . . . . . . . . . . . . . . . . . . (3,997) (5,063)
--------------- ---------------
Cash flows from financing activities:
Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,092 92
--------------- ---------------
Net cash provided by financing activities. . . . . . . . . . . . . . . . . . 1,092 92
--------------- ---------------
Net decrease in cash and cash equivalents. . . . . . . . . . . . . . . . . . (1,929) (1,386)
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . 10,541 9,186
--------------- ---------------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . $ 8,612 $ 7,800
=============== ===============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
IRIDEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 2, SEPTEMBER 27, OCTOBER 2, SEPTEMBER 27,
2004 2003 2004 2003
--------------- --------------- --------------- ---------------
Net income (loss). . . . . . . . . . . . . . $ (720) $ 261 $ (604) $ (120)
Other comprehensive gain (loss):
Change in unrealized gain (loss) on
available-for-sale securities, net of
tax. . . . . . . . . . . . . . . . . . 9 - (19) (4)
--------------- --------------- --------------- ---------------
Comprehensive income (loss). . . . . . . . . $ (711) $ 261 $ (623) $ (124)
=============== =============== =============== ===============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
IRIDEX CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
IRIDEX Corporation ("the Company") have been prepared in accordance with
generally accepted accounting principles in the United States of America for
interim financial information and pursuant to the instructions to Form 10-Q and
Article 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of management, all adjustments, consisting of normal recurring
adjustments, considered necessary for a fair presentation have been included.
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 our Annual Report on Form 10-K, which was filed with
the Securities and Exchange Commission on April 2, 2004. The results of
operations for the three month period ended October 2, 2004 are not necessarily
indicative of the results for the year ending January 1, 2005 or any future
interim period.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's significant accounting policies are disclosed in our Annual
Report on Form 10-K for the year ended January 3, 2004 which was filed with the
Securities and Exchange Commission on April 2, 2004. The Company's significant
accounting policies have not materially changed as of October 2, 2004.
Deferred Revenue
Deferred revenue related to warranty contracts is recognized on a straight
line basis over the period of the applicable contract. Cost is recognized as
incurred. A reconciliation of changes in the Company's deferred revenue
balances for the nine months ending October 2, 2004 and September 27, 2003
follows (in thousands):
Nine Months Ended
October 2, 2004 September 27, 2003
Balance, beginning of period $ 596 $ 392
Additions to deferral 787 505
Revenue recognized (594) (321)
---------------- ------------------
Balance, end of period $ 789 $ 576
================ ==================
7
Warranty
The Company accrues for an estimated warranty cost upon shipment of
products in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 5, "Accounting for Contingencies." Actual warranty costs incurred have not
materially differed from those accrued. The Company's warranty policy is
effective for shipped products which are considered defective or fail to meet
the product specifications. Warranty costs are reflected in the statement of
operations as a cost of sales. A reconciliation of the changes in the Company's
warranty liability for the nine months ending October 2, 2004 and September 27,
2003 follows (in thousands):
Nine Months Ended
October 2, 2004 September 27, 2003
Balance, beginning of period $ 801 $ 717
Accruals for warranties issued during the period 441 483
Settlements made in kind during the period (393) (513)
--------------- ------------------
Balance, end of period $ 849 $ 687
=============== ==================
Accounting for Stock-Based Compensation
The Company accounts for stock-based compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion ("APB") No.
25, "Accounting for Stock Issued to Employees" and complies with the disclosure
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," as
amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure - an Amendment of FASB Statement No. 123."
Under APB 25, compensation expense for stock option grants to employees is
based on the difference, if any, on the date of the grant, between the fair
value of the Company's stock and the option's exercise price. SFAS 123 defines
a "fair value" based method of accounting for an employee stock option or
similar equity investment. The pro forma disclosure of the difference between
compensation expense included in net income (loss) and the related cost measured
by the fair value method is presented below.
The following table provides a reconciliation of net income (loss) to pro
forma net income (loss) as if the fair value method had been applied to all
employee awards (in thousands, except per share data):
8
Three Months Ended Nine Months Ended
October 2, September 27, October 2, September 27,
2004 2003 2004 2003
--------------- --------------- --------------- ---------------
Net income (loss), as $ (720) $ 261 $ (604) $ (120)
reported
Add: Total stock based (152) (83) (418) (304)
--------------- --------------- --------------- ---------------
compensation expense,
net of tax, determined
under fair value based
method for all awards to
employees
Pro forma net income $ (872) $ 178 $ (1,022) $ (424)
(loss)
Basic net income (loss)
per share:
As reported $ (0.10) $ 0.04 $ (0.08) $ (0.02)
=============== =============== =============== ===============
Pro forma $ (0.12) $ 0.03 $ (0.14) $ (0.06)
=============== =============== =============== ===============
Diluted net income (loss)
per share:
As reported $ (0.10) $ 0.04 $ (0.08) $ (0.02)
=============== =============== =============== ===============
Pro forma $ (0.12) $ 0.03 $ (0.14) $ (0.06)
=============== =============== =============== ===============
The determination of fair value of all options granted by the Company is
computed based on the following assumptions:
Three Months Ended Nine Months Ended
- -------------------------------------------------------------------------------------------------------
October 2, 2004 September 27, 2003 October 2, 2004 September 27, 2003
- -------------------------------------------------------------------------------------------------------
Average risk free 4.25% 4.38% 5.10% 3.92%
interest rate
- -------------------------------------------------------------------------------------------------------
Expected life (in 2 yrs 2 yrs. 2 yrs. 2 yrs.
years)
- -------------------------------------------------------------------------------------------------------
Dividend yield -- -- -- --
- -------------------------------------------------------------------------------------------------------
Average volatility 87.0% 84.0% 87.0% 88.0%
- -------------------------------------------------------------------------------------------------------
9
3. INVENTORIES
Inventories are stated at the lower of cost or market. Cost is based on
actual sales computed on a first in, first out basis. The components of
inventories consist of the following (in thousands):
OCTOBER 2 JANUARY 3,
2004 2004
---------- -----------
Raw materials and work in progress. $ 4,902 $ 4,426
Finished goods. . . . . . . . . . . 3,503 4,295
---------- -----------
Total inventories . . . . . . . . . $ 8,405 $ 8,721
========== ===========
In the first nine months of 2004 and 2003, there were no significant sales
of inventory previously written off. As a result, there has been no significant
impact on gross margin associated with the sale of inventory previously written
off.
4. COMPUTATIONS OF NET LOSS PER COMMON SHARE
Basic and diluted net income (loss) per share are computed by dividing net
income (loss) for the period by the weighted average number of shares of common
stock outstanding during the period. The calculation of diluted net income
(loss) per share includes the dilutive effect of potentially dilutive common
stock provided the inclusion of such potential common stock is not antidilutive.
Potentially dilutive common stock consists of incremental common shares issuable
upon the exercise of stock options.
During the three months ended September 27, 2003, options to purchase
1,238,594 shares of common stock at weighted average exercise prices of $5.89
per share were outstanding, but were not included in the computations of diluted
net income per common share because the exercise price of the related options
exceeded the average market price of the common shares. During the three months
ended October 2, 2004, options to purchase 1,861,275 shares at a weighted
average exercise price of $5.40 were outstanding, but were not included in the
computations of diluted net loss per share because their effect was
antidilutive. During the nine months ended October 2, 2004 and September 27,
2003 options to purchase 1,861,275 and 2,000,040 shares of common stock at
weighted average exercise prices of $5.40 and $5.25, respectively, were
outstanding, but were not included in the computation of diluted net loss per
share because their effect was antidilutive. These options could dilute
earnings per share in future periods.
5. BUSINESS SEGMENTS
We operate in two reportable segments: the ophthalmology medical device
segment and the dermatology medical device segment. In both segments, we
develop, manufacture and market medical devices. Our revenues arise from the
sale of consoles, delivery devices, disposables and service and support
activities.
Information on reportable segments for the three and nine months ended
October 2, 2004 and September 27, 2003 is as follows (in thousands):
10
Three Months Ended October 2, 2004 Three Months Ended September 27,2003
Ophthalmology Dermatology Total Ophthalmology Dermatology Total
Medical Medical Medical Medica
Devices Devices Devices Devices
Sales $ 7,193 $ 985 $ 8,178 $ 6,897 $ 1,370 $ 8,267
Direct Cost of Goods
Sold 2,641 717 3,358 2,493 835 3,328
--------------- --------------- --------------- --------------- --------------- ---------------
Direct Gross Margin 4,552 268 4,820 4,404 535 4,939
Total Unallocated
Costs (6,147) (4,678)
--------------- ---------------
Pre-tax income (loss) $ (1,327) $ 261
=============== ===============
Nine Months Ended October 2, 2004 Nine Months Ended September 27, 2003
Ophthalmology Dermatology Total Ophthalmology Dermatology Total
Medical Medical Medical Medical
Devices Devices Devices Devices
Sales $ 20,122 $ 3,557 $ 23,679 $ 18,640 $ 4,288 $ 22,928
Direct Cost of Goods
Sold 7,096 2,141 9,237 6,506 2,222 8,728
--------------- --------------- --------------- --------------- --------------- ---------------
Direct Gross Margin 13,026 1,416 14,442 12,134 2,066 14,200
Total Unallocated
Costs (15,599) (14,501)
--------------- ---------------
Pre-tax loss $ (1,157) $ (301)
=============== ===============
Indirect costs of manufacturing, research and development, and selling,
general and administrative costs are not allocated to the segments.
The Company's assets and liabilities are not evaluated on a segment basis.
Accordingly, no disclosure on segment assets and liabilities is provided.
11
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q 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, such as statements relating to levels of future sales and operating
results, actual order rate and market acceptance of our products; expectations
for future sales growth, generally, including expectations of additional sales
from our new products and new applications of our existing products; the
potential for production cost decreases and higher gross margins; our ability to
develop and introduce new products through strategic alliances; favorable Center
for Medicare and Medicaid coverage decisions regarding AMD procedures that use
our products; results of clinical studies and risks associated with bringing new
products to market; general economic conditions; and levels of international
sales. In some cases, forward-looking statements can be identified by
terminology, such as "may," "will," "should," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "intends," "potential," "continue," or the
negative of such terms or other comparable terminology. These statements
involve known and unknown risks, uncertainties and other factors which may cause
our actual results, performance or achievements to differ materially from those
expressed or implied by such forward-looking statements, including as a result
of the factors set forth under "Factors That May Affect Future Operating
Results" and other risks detailed in our Annual Report on Form 10-K filed with
the Securities and Exchange Commission on April 2, 2004 and detailed from time
to time in our reports filed with the Securities and Exchange Commission. The
reader is cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis only as of the date of this Form
10-Q. We undertake no obligation to update such forward-looking statements to
reflect events or circumstances occurring after the date of this report.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
sales for the periods indicated.
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 2, SEPTEMBER 27, OCTOBER 2, SEPTEMBER 27,
2004 2003 2004 2003
-------------- -------------- -------------- --------------
Sales . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0%
Cost of sales . . . . . . . . . . . . . . 57.6 56.6 55.7 56.6
-------------- -------------- -------------- --------------
Gross profit. . . . . . . . . . . . . 42.4 43.4 44.3 43.4
-------------- -------------- -------------- --------------
Operating expenses:
Research and development. . . . . . . 12.5 11.8 14.4 13.0
Sales, general and administrative . . 47.2 29.0 35.7 32.4
-------------- -------------- -------------- --------------
Total operating expenses. . . . . . 59.7 40.8 50.1 45.4
-------------- -------------- -------------- --------------
Income (loss) from operations . . . . . . (17.2) 2.6 (5.8) (2.0)
Interest and other income, net. . . . . . 1.0 0.6 0.9 0.7
-------------- -------------- -------------- --------------
Income (loss) before income taxes . . . . (16.2) 3.2 (4.9) (1.3)
Benefit from (provision for) income taxes 7.4 0.0 2.3 0.8
-------------- -------------- -------------- --------------
Net income (loss) . . . . . . . . . . . . (8.8)% 3.2% (2.6)% (0.5)%
============== ============== ============== ==============
The following table sets forth for the periods indicated the amount of
sales for our operating segments and sales as a percentage of total sales.
12
Three Months Ended Nine Months Ended
October 2, 2004 September 27, 2003 October 2, 2004 September 27, 2003
Amount Percentage Amount Percentage Amount Percentage Amount Percentage
of total of total of total of total
sales sales sales sales
Domestic $ 5,161 63.1% $ 5,222 63.2% $ 14,162 59.8% $ 14,442 63.0%
International 3,017 36.9% 3,045 36.8% 9,517 40.2% 8,486 37.0%
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Total $ 8,178 100.0% $ 8,267 100.0% $ 23,679 100.0% $ 22,928 100.0%
============ ============ ============ ============ ============ ============ ============ ============
Ophthalmology:
Domestic $ 4,541 55.5% $ 4,061 49.1% $ 11,964 50.5% $ 11,111 48.5%
International 2,652 32.4% 2,836 34.3% 8,157 34.5% 7,529 32.8%
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Total $ 7,193 87.9% $ 6,897 83.4% $ 20,121 85.0% $ 18,640 81.3%
============ ============ ============ ============ ============ ============ ============ ============
Dermatology:
Domestic $ 620 7.6% $ 1,161 14.1% $ 2,198 9.3% $ 3,331 14.5%
International 365 4.5% 209 2.5% 1,360 5.7% 957 4.2%
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Total $ 985 12.1% $ 1,370 16.6% $ 3,558 15.0% $ 4,288 18.7%
============ ============ ============ ============ ============ ============ ============ ============
Ophthalmology Sales
Ophthalmology sales increased 4.3% to $7.2 million for the three months
ended October 2, 2004 from $6.9 million for the three months ended September 27,
2003. For the nine months ended October 2, 2004, ophthalmology sales increased
7.9% to $20.1 million from $18.6 million. For the three month period ended
October 2, 2004, domestic ophthalmology sales increased 11.8% to $4.5 million
from $4.1 million for the three months ended September 27, 2003 due primarily to
a $0.4 million increase in unit sales of laser consoles and service revenue.
Domestic ophthalmology sales increased 7.7% for the nine months ended October 2,
2004 to $12.0 million from $11.1 million due to a $1.2 million increase in unit
sales of delivery devices and service revenue, offset by a $0.3 million decrease
in sales of laser consoles. International ophthalmology sales decreased 6.5% to
$2.7 million for the three months ended October 2, 2004 from $2.8 million for
the three months ended September 27, 2003. The decrease in international
ophthalmology sales during this period was due to a $0.1 million decrease in
unit sales of delivery devices. Sales of laser consoles remained constant for
this period. For the nine months ended October 2, 2004, international
ophthalmology sales increased 8.3% to $8.2 million from $7.5 million due to a
$0.7 million increase in unit sales of laser consoles and service revenue.
Dermatology Sales
Dermatology sales decreased 28.1% to $1.0 million for the three months
ended October 2, 2004 from $1.4 million for the three months ended September 27,
2003. For the nine months ended October 2, 2004 dermatology sales decreased
17.0% to $3.6 million from $ 4.3 million. Domestic dermatology sales
13
decreased 46.6% to $0.6 million for the three month period ended October 2, 2004
from $1.2 million for the comparable prior year three month period due primarily
to a $0.6 million decrease in unit sales of laser consoles. For the nine months
ended October 2, 2004 domestic dermatology sales decreased 34.0% to $2.2 million
from $3.3 million due to a $1.2 million decrease in unit sales of laser consoles
offset by a $0.1 million increase in domestic dermatology service revenue.
International dermatology sales increased 75.0% to $0.4 million for the three
months ended October 2, 2004 from $0.2 million for the three months ended
September 27, 2003 due to a $0.2 million increase in sales of laser consoles and
service revenue. For the nine months ended October 2, 2004, international
dermatology sales increased 42.0% to $1.4 million from $1.0 million due to a
$0.4 million increase in unit sales of laser consoles and international
dermatology service revenue. Our dermatology product sales, both domestically
and internationally, continue to be affected by economic conditions.
Additionally dermatology procedures are typically elective procedures that are
deferred by patients in difficult economic times. See "-Factors that May Affect
Future Results - Our Business Has Been Adversely Impacted by the Worldwide
Economic Slowdown and Related Uncertainties."
Gross Profit. Our gross profit decreased by $0.1 million to $3.5 million
for the three month period ended October 2, 2004 compared to $3.6 million for
the three months ended September 27, 2003. Gross profit as a percentage of
sales for the three months ended October 2, 2004 decreased to 42.4% from 43.4%
for the comparable prior year three month period. The total 1.0% decrease in
gross profit as a percentage of sales during this period included a decrease of
2.8% related to an inventory reserve for saleable, but aging and potentially
excess inventory partially associated with the Company's recent introduction of
new products, a decrease of 0.5% for average selling prices and a decrease of
0.2% related to higher overhead costs offset by an increase of 2.2% related to
the impact of product mix and an increase of 0.3% related to lower product costs
including other inventory reserve and warranty charges. For the nine months
ended October 2, 2004, gross profit increased by $0.6 million to $10.5 million
from $9.9 million for the nine months ended September 27, 2003. Gross profit as
a percentage of sales for the nine months ended October 2, 2004 increased to
44.3% from 43.4%. The total 0.9% increase in gross profit as a percentage of
sales related to an increase of 1.2% for the impact of product mix, an increase
of 1% due to decreased overhead costs, an increase of 0.2% related to improved
average selling prices, offset by a decrease of 1.0% for an inventory reserve
associated with the Company's recent introduction of new products and a decrease
of 0.5% for higher product costs including other inventory reserve and warranty
charges. Although increasing competition has continued to result in a downward
trend in average selling prices for some products, we intend to continue our
efforts to reduce the cost of components and manufacturing and thereby mitigate
the impact of price reductions on our gross profit. In addition, as we evaluate
gross margins on each of our product lines, we may choose to place greater focus
on product lines with better margins. See "-Factors That May Affect Future
Results - If We Cannot Increase Our Sales Volumes, Reduce Our Costs or Introduce
Higher Margin Products to Offset Anticipated Reductions in the Average Unit
Selling Price of our Products, Our Operating Results May Suffer." We expect our
gross profit margins to continue to fluctuate due to changes in the relative
proportions of domestic and international sales, mix of sales of existing
products, pricing, product costs and a variety of other factors. See "-Factors
That May Affect Future Results - Our Operating Results May Fluctuate from
Quarter to Quarter and Year to Year."
Research and Development. Our research and development expenses increased
by 5.1% to $1.03 million for the three months ended October 2, 2004 from $0.98
million for the three months ended September 27, 2003. Research and development
expenses increased as a percentage of sales to 12.5% for the three months ended
October 2, 2004 from 11.8% for the comparable prior year three month period.
The increase in research and development expense in absolute dollars and as a
percentage of sales for the three month period ended October 2, 2004 was due
primarily to $0.05 million in increased research and development project
spending. For the nine months ended October 2, 2004 research and development
expenses increased 14.7% to $3.4 million from $3.0 million for the nine months
ended September 27, 2003. As a percentage of sales, research and development
expense increased to 14.4% for the nine months ended
14
October 2, 2004 from 13.0% for the nine months ended September 27, 2003. The
increase in research and development expense in absolute dollars and as a
percentage of sales for the nine month period ended October 2, 2004 was due
primarily to $0.4 million in increased research and development project
materials spending.
Sales, General and Administrative. Our sales, general and administrative
expenses increased by 60.5% to $3.9 million for the three months ended October
2, 2004 from $2.4 million for the three months ended September 27, 2003. As a
percentage of sales, sales, general and administrative expenses increased to
47.2% for the three months ended October 2, 2004 from 29.0% for the comparable
prior year three month period. The increase in sales, general and administrative
expense in absolute dollars and as a percentage of sales for the three month
period ended October 2, 2004 was due primarily to a $1.2 million reserve for
sales tax and a $0.3 million increase in the allowance for doubtful accounts.
The reserve for sales tax resulted from the completion of a comprehensive review
of our sales tax practices. Historically we had been collecting and remitting
sales tax in only those states where we believed we had nexus. Based on the
independent review, we will now begin to collect and remit sales taxes from
customers in additional states and will attempt to enter into voluntary
settlement agreements with certain states for the payment of prior period sales
taxes and associated interest. As a result, we recorded a one time charge of
$1.2 million to establish a reserve for upaid sales taxes and interest. The $1.2
million, which represents the current estimate of the amounts to be remitted to
these states, could differ materially from the actual amount recorded. For the
nine months ended October 2, 2004 sales, general and administrative expense
increased 13.8% to $8.5 million from $7.4 million for the nine months ended
September 27, 2003. As a percentage of sales, sales, general and administrative
expenses increased to 35.7% for the nine months ended October 2, 2004 from 32.4%
for the nine months ended September 27, 2003. The increase in sales, general and
administrative expense in absolute dollars and as a percentage of sales for the
nine month period ended October 2, 2004 was due primarily to a $1.2 million
reserve for sales tax and a $0.3 million increase in the allowance for doubtful
accounts offset by $0.4 million in decreased spending on marketing programs and
domestic sales.
Interest and Other Income, net. For the three months ended October 2, 2004
we had net other income of $83,000 as compared with net other income of $49,000
for the three months ended September 27, 2003. For the nine months ended October
2, 2004, net other income was $212,000 as compared with $154,000 for the nine
months ended September 27, 2003. The change in net other income for both the
three and six month periods was due primarily to an increase in interest income
associated with increased cash, cash equivalents and available for sale
securities.
Income Taxes. The effective income tax rates for the three and nine month
periods ended October 2, 2004 and September 27, 2003 were lower for periods
where we had pre-tax income and higher for periods where we had pre-tax losses
than the Federal and State combined statutory rate of 40% primarily because of
certain tax benefits associated with tax credits for research and development
activities. Based on our tax liability through October 2, 2004 a tax benefit of
$607,000 was recorded in the third fiscal quarter of 2004.
In addition to estimating our quarterly income tax provision (benefit) we
assess temporary differences resulting from differing treatment of items for tax
and accounting purposes which result in deferred tax assets and liabilities,
which are included in our balance sheet. Currently, we have determined that no
valuation allowance is required against our deferred tax assets as it is more
likely than not that the deferred tax assets can be realized based on
determination of our future taxable income. A valuation allowance is required to
reduce our deferred tax assets to the amount that is more likely than not to be
realized. However, if at any point in time, we determine that we will not
realize all or a portion of our remaining deferred tax assets, we will increase
our valuation allowance with a charge to income tax expense. Significant
management judgment is required in determining our provision for income taxes,
our deferred tax assets and liabilities and any valuation allowance recorded
against our net deferred tax assets. In the event that actual results differ
from these estimates or we adjust these estimates in future periods, we may
15
need to establish a valuation allowance which could materially impact our
financial position and results of operations. Our ability to utilize our
deferred tax assets and the continuing need for a related valuation allowance
are monitored on an ongoing basis.
LIQUIDITY AND CAPITAL RESOURCES
At October 2, 2004, our primary sources of liquidity included cash and cash
equivalents and available-for-sale securities in the aggregate amount of $18.1
million. In addition, we have available $4 million under our unsecured line of
credit which bears interest at the bank's prime rate and expires in October
2005. As of October 2, 2004, no borrowings were outstanding under this credit
facility.
During the nine months ended October 2, 2004, operating activities provided
$1.0 million of cash. The primary sources of cash from operating activities
included an increase in accrued expenses of $1.2 million, a decrease in net
inventory of $0.3 million, depreciation of $0.3 million, an increase of $0.2
million in deferred revenue and a decrease in prepaid expenses of $0.2 million
offset by uses of cash which included a $0.6 million net loss and $0.6 million
increase in deferred income taxes. The increase in accrued expenses resulted
primarily from an accrual for a sales tax liability. The decrease in inventory
related primarily to increased inventory reserves, in particular a reserve of
$0.3 million for saleable, but aging and potentially excess inventory partially
associated with the Company's recent introduction of new products.
Investing activities used $4.0 million in cash and cash equivalents during
the three months ended October 2, 2004, primarily due to net purchases of
available for sale securities of $3.8 million and purchases of fixed assets of
$0.2 million.
Net cash provided by financing activities during the nine months ended
October 2, 2004 was $1.1 million which consisted of the issuance of common stock
under employee option plans and the employee stock purchase plan.
We believe that, based on current estimates, our cash, cash equivalents and
available-for-sale securities together with cash generated from operations and
our credit facility will be sufficient to meet our anticipated cash requirements
for the next 12 months. Our liquidity could be negatively affected by a decline
in demand for our products, the need to invest in new product development or
reductions in spending by our customers as a result of the continuing economic
downturn or other factors. There can be no assurance that additional debt or
equity financing will be available when required or, if available, can be
secured on terms satisfactory to us. See "-Factors That May Affect Future
Results - We May Need Additional Capital, which May Not Be Available, and Our
Ability to Grow May Be Limited as a Result."
In December 1998, we instituted a stock repurchase program whereby up to
150,000 shares of our common stock may be repurchased in the open market. We
plan to utilize all of the reacquired shares for reissuance in connection with
employee stock programs. No shares were repurchased during the three months
ended October 2, 2004. To date, we have purchased 103,000 shares of our common
stock under this program.
CRITICAL ACCOUNTING POLICIES
The Company's significant accounting policies are disclosed in our Annual
Report on Form 10-K for the year ended January 3, 2004 which was filed with the
Securities and Exchange Commission on April 2, 2004.
FACTORS THAT MAY AFFECT FUTURE RESULTS
We Rely on Continued Market Acceptance of Our Existing Products and Any
Decline in Sales of Our Existing Products Would Adversely Affect Our Business
and Results of Operations. We currently market
16
visible and infrared light semiconductor-based photocoagulator medical laser
systems to the ophthalmic market. We also market visible and infrared light
semiconductor-based photocoagulator medical laser systems to the dermatology
market. We believe that continued and increased sales, if any, of these medical
laser systems is dependent upon a number of factors including the following:
- Product performance, features, ease of use, scalability and
durability;
- Recommendations and opinions by ophthalmologists, dermatologists,
other clinicians, plastic surgeons and their associated opinion
leaders, including study outcomes;
- Price of our products and prices of competing products and
technologies;
- Availability of competing products, technologies and alternative
treatments;
- Willingness of ophthalmologists and dermatologists to convert to
semiconductor-based or infrared laser systems from alternative
technologies; and
- Level of reimbursement for treatments administered with our products.
In addition, we derive a meaningful portion of our revenues from the sale of
delivery devices. Our ability to increase revenues from the sale of delivery
devices will depend primarily upon the features, ease of use and prices of our
products, including the relationship to prices of competing delivery devices.
The level of service revenues will depend on our quality of care, responsiveness
and the willingness of our customers to request our services rather than
purchase competing products or services. Any significant decline in market
acceptance of our products or our revenues derived from the sales of laser
consoles, delivery devices or services would have a material adverse effect on
our business, results of operations and financial condition.
We Face Strong Competition in Our Markets and Expect the Level of
Competition to Grow in the Foreseeable Future. Competition in the market for
devices used for ophthalmic and dermatology treatment procedures is intense and
is expected to increase. Our competitive position depends on a number of factors
including product performance, characteristics and functionality, ease of use,
scalability, durability and cost. Our principal competitors in ophthalmology are
Lumenis Ltd., Carl Zeiss, Inc., Alcon, Quantel and Nidek, Inc. All of these
companies currently offer a competitive semiconductor-based laser system in
ophthalmology. Our principal competitors in dermatology are Laserscope, Candela
Corporation, Palomar Technologies, Lumenis Ltd. and Cutera, Inc. Some
competitors have substantially greater financial, engineering, product
development, manufacturing, marketing and technical resources than we do. Some
companies also have greater name recognition than we do and long-standing
customer relationships. In addition to other companies that manufacture
photocoagulators, we compete with pharmaceuticals, other technologies and other
surgical techniques. Some medical companies, academic and research institutions,
or others, may develop new technologies or therapies that are more effective in
treating conditions targeted by us or are less expensive than our current or
future products. Any such developments could have a material adverse effect on
our business, financial condition and results of operations.
Our Future Success Depends on Our Ability to Develop and Successfully
Introduce New Products and New Applications. Our future success is dependent
upon, among other factors, our ability to develop, obtain regulatory approval or
clearance of, manufacture and market new products. In October 2004, we announced
17
FDA approval for two new laser products, the IQ810 in ophthalmology and the
VariLite in dermatology. In May 2004, we introduced a new type of illuminating
Endoprobe. In June 2003 we began shipment of two new products; a 50 micron slit
lamp adaptor and a 25 gauge single-use Endoprobe. In October 2002, we announced
the introduction of a number of new products, specifically the OcuLight Symphony
multi-wavelength laser delivery system, an expanded EndoProbe product line and a
5 mm Large Spot Slit Lamp Adapter. We also announced the Millennium Endolase
module in 2002, which we manufacture to be included in Bausch & Lomb's
Millennium Microsurgical System. Successful commercialization of these and other
new products and new applications will require that we effectively transfer
production processes from research and development to manufacturing and
effectively coordinate with our suppliers. In addition, we must 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, which include, among other things, price, safety, efficacy,
reliability, marketing and sales efforts, the development of new applications
for these products, the availability of third-party reimbursement of procedures
using our new products, the existence of competing products and general economic
conditions affecting purchasing patterns. Our ability to market and sell new
products may also be subject to government regulation, including approval or
clearance by the United States Food and Drug Administration, or FDA, and foreign
government agencies. Any failure in our ability to successfully develop and
introduce new products or enhanced versions of existing products and achieve
market acceptance of new products and new applications could have a material
adverse effect on our operating results and would cause our net revenues to
decline.
Our Business Has Been Adversely Impacted By the Worldwide Economic Slowdown
and Related Uncertainties. The overall weak economic conditions worldwide have
resulted in reduced demand for some of our products, particularly demand for our
dermatology products. Political and social turmoil in various parts of the world
or terrorist acts may adversely impact global economic conditions. These
political, social and economic conditions and related economic uncertainties
make it difficult for us, our customers and our distributors to forecast orders
and sales of our products and, accordingly, plan future business activities.
This level of uncertainty strongly challenges our ability to operate profitably
or grow our business. If economic or market conditions do not improve, this may
have a material adverse impact on our financial position, results of operation
and cash flows.
If We Cannot Increase Our Sales Volumes, Reduce Our Costs or Introduce
Higher Margin Products to Offset Anticipated Reductions in the Average Unit
Price of Our Products, Our Operating Results May Suffer. We have experienced
declines in the average unit price of our products and expect to continue to
suffer from declines in the future. The average unit price of our products may
decrease in the future in response to changes in product mix, competitive
pricing pressures, new product introductions by our competitors or other
factors. If we are unable to offset the anticipated decrease in our average
selling prices by increasing our sales volumes or through new product
introductions, our net revenues will decline. In addition, to maintain our gross
margins, we must continue to reduce the manufacturing cost of our products. If
we cannot maintain our gross margins, our business could be seriously harmed,
particularly if the average selling price of our products decreases
significantly without a corresponding increase in sales.
We Face Manufacturing Risks. The manufacture of our infrared and visible
light photocoagulators and the related delivery devices is a highly complex and
precise process. We assemble critical subassemblies and all of our final
products at our facility in Mountain View, California. We may experience
manufacturing difficulties, quality control issues or assembly constraints,
particularly with regard to new products that we may introduce. We may not be
able to manufacture sufficient quantities of our products, which may require
that we qualify other manufacturers for our products. Furthermore, we may
experience delays, disruptions, capacity constraints or quality control problems
in our manufacturing
18
operations and, as a result, product shipments to our customers could be
delayed, which would negatively impact our net revenues.
We Depend on Sole Source or Limited Source Suppliers. We rely on third
parties to manufacture substantially all of the components used in our products,
including optics, laser diodes and crystals. We have some long term or volume
purchase agreements with our suppliers and currently purchase components on a
purchase order basis. Some of our suppliers and manufacturers are sole or
limited sources. In addition, some of these suppliers are relatively small
private companies that may discontinue their operations at any time. There are
risks associated with the use of independent manufacturers, including the
following:
- Unavailability of, shortages or limitations on the ability to obtain
supplies of components in the quantities that we require;
- Delays in delivery or failure of suppliers to deliver critical
components on the dates we require;
- Failure of suppliers to manufacture components to our specifications,
and potentially reduced quality; and
- Inability to obtain components at acceptable prices.
Our business and operating results may suffer from the lack of alternative
sources of supply for critical sole and limited source components. The process
of qualifying suppliers is complex, requires extensive testing with our
products, and may be lengthy, particularly as new products are introduced. New
suppliers would have to be educated in our production processes. In addition,
the use of alternate components may require design alterations to our products
and additional product testing under FDA and relevant foreign regulatory agency
guidelines, which may delay sales and increase product costs. Any failures by
our vendors to adequately supply limited and sole source components may impair
our ability to offer our existing products, delay the submission of new products
for regulatory approval and market introduction, materially harm our business
and financial condition and cause our stock price to decline. Establishing our
own capabilities to manufacture these components would be expensive and could
significantly decrease our profit margins. We do not currently intend to
manufacture any of these components. Our business, results of operations and
financial condition would be adversely affected if we are unable to continue to
obtain components in the quantity and quality desired and at the prices we have
budgeted.
We Depend on International Sales for a Significant Portion of Our Operating
Results. We derive, and expect to continue to derive, a large portion of our
revenue from international sales. For the three months ended October 2, 2004,
our international sales were $3.0 million or 36.9% of total sales. We anticipate
that international sales will continue to account for a significant portion of
our revenues in the foreseeable future. None of our international revenues and
costs has been denominated in foreign currencies. As a result, an increase in
the value of the U.S. dollar relative to foreign currencies makes our products
more expensive and thus less competitive in foreign markets. The factors stated
above could have a material adverse effect on our business, financial condition
or results of operations. Our international operations and sales are subject to
a number of other risks including:
- Longer accounts receivable collection periods;
19
- Impact of recessions in economies outside of the United States;
- Foreign certification requirements, including continued ability to use
the "CE" mark in Europe;
- Reduced or limited protections of intellectual property rights in
jurisdictions outside the United States;
- Potentially adverse tax consequences; and
- Multiple protectionist, adverse and changing foreign governmental laws
and regulations.
Any one or more of these factors stated above could have a material adverse
effect on our business, financial condition or results of operations. For
additional discussion about our foreign currency risks, see Item 3,
"Quantitative and Qualitative Disclosures about Market Risk."
We Depend on Sales of Our Ophthalmology Products for a Significant Portion
of Our Operating Results. We derive, and expect to continue to derive, a large
portion of our revenue and profits from sales of our ophthalmology products. For
the three months ended October 2, 2004 our ophthalmology sales were $7.2 million
or 88.0% of total sales. We anticipate that sales of our ophthalmology products
will continue to account for a significant portion of our revenues in the
foreseeable future as we continue to introduce new ophthalmology products, such
as the 50 micron slit lamp adapter and our expanded EndoProbe product line, and
support clinical trials in the field of ophthalmology, including the TTT4CNV
clinical trial for the treatment of wet AMD.
Our Operating Results May be Adversely Affected by Changes in Third Party
Coverage and Reimbursement Policies and any Uncertainty Regarding Healthcare
Reform Measures. Our ophthalmology products are typically purchased by doctors,
clinics, hospitals and other users, which bill various third-party payers, such
as governmental programs and private insurance plans, for the health care
services provided to their patients. Third-party payers are increasingly
scrutinizing and challenging the coverage of new products and the level of
reimbursement for covered products. Doctors, clinics, hospitals and other users
of our products may not obtain adequate reimbursement for use of our products
from third-party payers. While we believe that the laser procedures using our
products have generally been reimbursed, payers may deny coverage and
reimbursement for our products if they determine that the device was not
reasonable and necessary for the purpose used, was investigational or was not
cost-effective. In addition, third party payers may not initiate coverage of new
procedures using our products for a significant period. In September 2000, the
Center for Medicare and Medicaid Services, or CMS, advised that claims for
reimbursement for certain age related macular degeneration, or AMD, procedures
which use our OcuLight SLx laser system, could be submitted for reimbursement,
with coverage and payment to be determined by the local medical carriers at
their discretion. To date five carriers representing 17 states have written
reimbursement coverage policies on Transpupillary Thermotherapy, or TTT. The
states reimbursing for TTT are Alaska, Arizona, California, Colorado, Hawaii,
Iowa, Idaho, Mississippi, North Carolina, North Dakota, Nevada, Oregon,
Pennsylvania, South Dakota, Tennessee, Washington and Wyoming. Domestic sales of
the OcuLight SLx laser system may continue to be limited until more local
medical carriers reimburse for performing such AMD procedures or until CMS
advises that claims for these procedures may be submitted directly to CMS at the
20
national level. The clinical results of the TTT4CNV trial and other clinical
trials may influence the individual state or CMS decision to reimburse for
certain laser procedures.
Changes in government legislation or regulation or in private third-party
payers' policies toward reimbursement for procedures employing our products may
prohibit adequate reimbursement. There have been a number of legislative and
regulatory proposals to change the healthcare system, reduce the costs of
healthcare and change medical reimbursement policies. Doctors, clinics,
hospitals and other users of our products may decline to purchase our products
to the extent there is uncertainty regarding reimbursement of medical procedures
using our products and any healthcare reform measures. Further proposed
legislation, regulation and policy changes affecting third party reimbursement
are likely. We are unable to predict what legislation or regulation, if any,
relating to the health care industry or third-party coverage and reimbursement
may be enacted in the future, or what effect such legislation or regulation may
have on us. However, denial of coverage and reimbursement of our products would
have a material adverse effect on our business, results of operations and
financial condition.
We are Dependent on the Successful Outcome of Clinical Trials of Our
Products and New Applications Using Our Products. Our success will depend in
part on the successful outcome of clinical trials of our products and new
applications using our products. Clinical trials are long, expensive and
uncertain processes. We are currently supporting several ongoing clinical
trials, including, for example, the TTT4CNV clinical trial. The TTT4CNV clinical
trial is a multi-center, prospective, double-masked, placebo-controlled,
randomized trial conducted at 22 centers in the United States. This clinical
trial is a post marketing study performed within the FDA cleared indications of
the OcuLight SLx and is being conducted to determine whether TTT laser treatment
using our OcuLight SLx infrared laser system and Large Spot Slit Lamp Adapter
can reduce the risk of vision loss for patients with wet AMD compared to a
randomized control, which should reflect the natural history of the disease. In
March 2003, we announced that the Executive Committee for the TTT4CNV clinical
trial accepted the recommendations of the independent Data and Safety Monitoring
Committee that an adequate number of patients were enrolled to detect a
clinically relevant difference between outcomes in TTT-treated eyes and patients
not being treated. In June 2003, we announced the publication of two additional
clinical studies, which also support the effectiveness of TTT for the treatment
of wet age-related macular degeneration. Both studies were prospective,
non-randomized, non-masked case series that were performed using our OcuLight
SLx laser and Large Spot Size Slit Lamp Adapter. On October 22, 2004, Dr. Elias
Reichel, Study Chairman of the TTT4CNV Clinical Trial and Associate Professor of
Ophthalmology at the New England Eye Center, Tufts School of Medicine, presented
preliminary results from the TTT4CNV Clinical Trial for occult neovascular (wet)
AMD at the annual meeting of the American Academy of Ophthalmology. A total of
303 patients were enrolled in the study. Patients who were treated in the study
with the Transpupillary Thermotherapy (TTT) laser protocol were compared to sham
treatment. The results for the intent-to-treat population, while trending
favorably, showed that the primary visual outcome using TTT, as applied in this
trial, did not result in a significant beneficial effect relative to sham.
Additionally, it was reported that 11% of patients who were treated with TTT
compared to 3% of patients who received sham showed improvement (greater or
equal to 2 lines increase) from baseline when evaluated at one year. This
secondary outcome was statistically significant. The Executive Committee for the
TTT4CNV trial intends to conduct further analysis of this subgroup of patients
whose vision improved as it may yield information regarding those patients who
respond to TTT. Specifically this subgroup of patients may have certain
characteristics that result in a high likelihood of improvement or stabilization
over time. Safety results were also presented. Some patients, both in the
treatment and sham groups, showed severe loss of vision at the one month
follow-up visit. This occurred in 5% of TTT treated eyes compared to 1% of sham
eyes. This finding was not statistically significant. There are a number of
questions for which analysis remains to be done. The Executive Committee had
little time to review the outcome data prior to Dr. Reichel's presentation and,
as a result, careful inspection of baseline characteristics between groups and a
per protocol analysis that evaluates the subset of enrolled patients who met all
key eligibility criteria needs to be done. Data analysis will continue through
the end of 2004 and
21
into the first half of 2005. We cannot assure you that further analysis of the
TTT4CNV clinical trial data will yield any additional statistically significant
identifiable group that improved from the TTT treatment. Even if further
analysis yields favorable results, an increase in laser sales may take a number
of years. If the future results of the TTT4CNV clinical trial or any other
clinical trial regarding our products fails to demonstrate improved outcomes of
treatments using our products, our ability to generate revenues from new
products or new applications using our products would be adversely affected.
Our Operating Results May Fluctuate from Quarter to Quarter and Year to
Year. Our sales and operating results may vary significantly from quarter to
quarter and from year to year in the future. Our operating results are affected
by a number of factors, many of which are beyond our control. Factors
contributing to these fluctuations include the following:
- General economic uncertainties and political concerns;
- The timing of the introduction and market acceptance of new products,
product enhancements and new applications;
- Changes in demand for our existing line of dermatology and ophthalmic
products;
- The cost and availability of components and subassemblies, including
the ability of our sole or limited source suppliers to deliver
components at the times and prices that we have planned;
- Our ability to maintain sales volumes at a level sufficient to cover
fixed manufacturing and operating costs;
- Fluctuations in our product mix between dermatology and ophthalmic
products and foreign and domestic sales;
- The effect of regulatory approvals and changes in domestic and foreign
regulatory requirements;
- Introduction of new products, product enhancements and new
applications by our competitors, entry of new competitors into our
markets, pricing pressures and other competitive factors;
- Our long and highly variable sales cycle;
- Changes in the prices at which we can sell our products;
- Changes in customers' or potential customers' budgets as a result of,
among other things, reimbursement policies of government programs and
private insurers for treatments that use our products; and
- Increased product development costs.
22
In addition to these factors, our quarterly results have been, and are expected
to continue to be, affected by seasonal factors.
Our expense levels are based, in part, on expected future sales. If sales
levels in a particular quarter do not meet expectations, we may be unable to
adjust operating expenses quickly enough to compensate for the shortfall of
sales, and our results of operations may be adversely affected. In addition, we
have historically made a significant portion of each quarter's product shipments
near the end of the quarter. If that pattern continues, any delays in shipment
of products could have a material adverse effect on results of operations for
such quarter. Due to these and other factors, we believe that quarter to
quarter and year to year comparisons of our past operating results may not be
meaningful. You should not rely on our results for any quarter or year as an
indication of our future performance. Our operating results in future quarters
and years may be below expectations, which would likely cause the price of our
common stock to fall.
We Rely on Our Direct Sales Force and Network of International Distributors
to Sell Our Products and any Failure to Maintain Our Direct Sales Force and
Distributor Relationships Could Harm Our Business. Our ability to sell our
products and generate revenue depends upon our direct sales force within the
United States and relationships with independent distributors outside the United
States. As of October 2, 2004 our direct sales force consisted of 10 employees
with 6 additional open positions and we maintained relationships with 66
independent distributors internationally selling our products into 107
countries. We generally grant our distributors exclusive territories for the
sale of our products in specified countries. The amount and timing of resources
dedicated by our distributors to the sales of our products is not within our
control. Our international sales are entirely dependent on the efforts of these
third parties. If any distributor breaches or fails to generate sales of our
products, we may be forced to replace the distributor and our ability to sell
our products into that exclusive sales territory would be adversely affected.
We do not have any long-term employment contracts with the members of our direct
sales force. We may be unable to replace our direct sales force personnel with
individuals of equivalent technical expertise and qualifications, which may
limit our revenues and our ability to maintain market share. The loss of the
services of these key personnel would harm our business. Similarly, our
distributorship agreements are generally terminable at will by either party and
distributors may terminate their relationships with us, which would affect our
international sales and results of operations.
We Depend on Collaborative Relationships to Develop, Introduce and Market
New Products, Product Enhancements and New Applications. We depend on both
clinical and commercial collaborative relationships. We have entered into
collaborative relationships with academic medical centers and physicians in
connection with the research and development and clinical testing of our
products. Commercially, we currently collaborate with Bausch & Lomb to design
and manufacture a solid-state green wavelength (532 nm) laser photocoagulator
module, called the Millennium Endolase module. The Millennium Endolase module is
designed to be a component of Bausch & Lomb's ophthalmic surgical suite product
offering and is not expected to be sold as a stand-alone product. Sales of the
Millennium Endolase module are dependent upon the actual order rate from and
shipment rate to Bausch & Lomb, which depends on the efforts of our partner and
is beyond our control. We cannot assure you that our relationship with Bausch &
Lomb will result in further sales of our Millennium Endolase module. We also
collaborate with Miravant Medical Technologies, a maker of photodynamic drugs,
on a device that emits a laser beam to activate a photodynamic drug developed by
Miravant for the treatment of wet AMD. In January 2002, Miravant announced that
the top line results of their Phase III clinical trial indicated that SnET2, the
photodynamic drug developed, did not meet the primary efficacy endpoint in the
study population. As we could not be assured that SnET2 would be timely or
successfully pursued through clinical trials by Miravant, we charged to expense
in the fourth quarter of 2001, $0.3 million of inventory related to the OcuLight
664, the laser used by Miravant in the Phase III clinical trials. Miravant has
since received an
23
approvable letter from the FDA for SnET2 with conditions for final marketing
approval which includes a request for an additional confirmatory clinical trial.
We are the exclusive provider of the OcuLight 664 activation laser used in this
application. Successful commercialization of this product will depend, among
other things, on the results of the confirmatory clinical trial, acceptance of
this product and Miravant's ability to successfully market and sell this
therapy. The failure of any current or future clinical or commercial
collaboration relationships could have a material adverse effect on our ability
to introduce new products or applications and therefore could have a material
adverse effect on our business, results of operations and financial condition.
We Face Risks Associated with our Collaborative Relationships. Our
collaborators may not pursue further development and commercialization of
products resulting from collaborations with us or may not devote sufficient
resources to the marketing and sale of such products. Our reliance on others for
clinical development, manufacturing and distribution of our products may result
in unforeseen problems. Further, our collaborative partners may develop or
pursue alternative technologies either on their own or in collaboration with
others. If a collaborator elects to terminate its agreement with us, our ability
to develop, introduce, market and sell the product may be significantly impaired
and we may be forced to discontinue altogether the product resulting from the
collaboration. We may not be able to negotiate alternative collaboration
agreements on acceptable terms, if at all. The failure of any current or future
collaboration efforts could have a material adverse effect on our ability to
introduce new products or applications and therefore could have a material
adverse effect on our business, results of operations and financial condition.
We Rely on Patents and Proprietary Rights to Protect our Intellectual
Property and Business. Our success and ability to compete is dependent in part
upon our proprietary information. We rely on a combination of patents, trade
secrets, copyright and trademark laws, nondisclosure and other contractual
agreements and technical measures to protect our intellectual property rights.
We file patent applications to protect technology, inventions and improvements
that are significant to the development of our business. We have been issued
fifteen United States patents and five foreign patents on the technologies
related to our products and processes. We have approximately four pending patent
applications in the United States and five foreign pending patent applications
that have been filed. Our patent applications may not be approved. Any patents
granted now or in the future may offer only limited protection against potential
infringement and development by our competitors of competing products. Moreover,
our competitors, many of which have substantial resources and have made
substantial investments in competing technologies, may seek to apply for and
obtain patents that will prevent, limit or interfere with our ability to make,
use or sell our products either in the United States or in international
markets.
In addition to patents, we rely on trade secrets and proprietary know-how
which we seek to protect, in part, through proprietary information agreements
with employees, consultants and other parties. Our proprietary information
agreements with our employees and consultants contain industry standard
provisions requiring such individuals to assign to us without additional
consideration any inventions conceived or reduced to practice by them while
employed or retained by us, subject to customary exceptions. Proprietary
information agreements with employees, consultants and others may be breached,
and we may not have adequate remedies for any breach. Also, our trade secrets
may 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. 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 our competitors. Until recently patent applications
were maintained in secrecy in the United States until the patents issued. Patent
applications filed in the United States after November 2000 generally will be
published eighteen months after the filing date. However, since patent
applications continue to be maintained in secrecy for at least some period of
time, both within the United States and with regards to
24
international patent applications, we cannot assure you that our technology does
not infringe any patents or patent applications held by third parties. We have,
from time to time, been notified of, or have otherwise been made aware of,
claims that we may be infringing upon patents or other proprietary intellectual
property owned by others. If it appears necessary or desirable, we may seek
licenses under such patents or proprietary intellectual property. Although
patent holders commonly offer such licenses, licenses under such patents or
intellectual property may not be offered or the terms of any offered licenses
may not be reasonable.
Any claims, with or without merit, and regardless of whether we are
successful on the merits, would be time-consuming, result in costly litigation
and diversion of technical and management personnel, cause shipment delays or
require us to develop noninfringing technology or to enter into royalty or
licensing agreements. An adverse determination in a judicial or administrative
proceeding and failure to obtain necessary licenses or develop alternate
technologies could prevent us from manufacturing and selling our products, which
would have a material adverse effect on our business, results of operations and
financial condition.
We Are Subject To Government Regulation Which May Cause Us to Delay or
Withdraw the Introduction of New Products or New Applications for Our Products.
The medical devices that we market and manufacture are subject to extensive
regulation by the FDA and by foreign and state governments. Under the Federal
Food, Drug and Cosmetic Act and the related regulations, the FDA regulates the
design, development, clinical testing, manufacture, labeling, sale, distribution
and promotion of medical devices. Before a new device can be introduced into the
market, the product must undergo rigorous testing and an extensive regulatory
review process implemented by the FDA under federal law. Unless otherwise
exempt, a device manufacturer must obtain market clearance through either the
510(k) premarket notification process or the lengthier premarket approval
application (PMA) process. Depending upon the type, complexity and novelty of
the device and the nature of the disease or disorder to be treated, the FDA
process can take several years, require extensive clinical testing and result in
significant expenditures. Even if regulatory approval is obtained, later
discovery of previously unknown safety issues may result in restrictions on the
product, including withdrawal of the product from the market. Other countries
also have extensive regulations regarding clinical trials and testing prior to
new product introductions. Our failure to obtain government approvals or any
delays in receipt of such approvals would have a material adverse effect on our
business, results of operations and financial condition.
The FDA imposes additional regulations on manufacturers of approved medical
devices. We are required to comply with the applicable Quality System
regulations and our manufacturing facilities are subject to ongoing periodic
inspections by the FDA and corresponding state agencies, including unannounced
inspections, and must be licensed as part of the product approval process before
being utilized for commercial manufacturing. Noncompliance with the applicable
requirements can result in, among other things, fines, injunctions, civil
penalties, recall or seizure of products, total or partial suspension of
production, 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 we manufacture or distribute. Any of these actions by the FDA would
materially and adversely affect our ability to continue operating our business
and the results of our operations.
In addition, we are also subject to varying product standards, packaging
requirements, labeling requirements, tariff regulations, duties and tax
requirements. As a result of our sales in Europe, we are required to have all
products "CE" marked, an international symbol affixed to all products
demonstrating compliance with the European Medical Device Directive and all
applicable standards. While currently all of our released products are CE
marked, continued certification is based on the successful review of our quality
system by our European Registrar during their annual audit. Any loss of
certification would have a material adverse effect on our business, results of
operations and financial condition.
25
Our products could be subject to recalls even after receiving FDA approval
or clearance. A recall would harm our reputation and adversely affect our
operating results. The FDA and similar governmental authorities in other
countries in which we market and sell our products have the authority to require
the recall of our products in the event of material deficiencies or defects in
design or manufacture. A government mandated recall, or a voluntary recall by
us, could occur as a result of component failures, manufacturing errors or
design defects, including defects in labeling. A recall could divert
management's attention, cause us to incur significant expenses, harm our
reputation with customers and negatively affect our future sales.
If we modify one of our FDA approved or cleared devices, we may need to
seek new approvals or clearances which, if not granted, would prevent us from
selling our modified products.
Any modifications to an FDA-approved or cleared device that would
significantly affect its safety or effectiveness or that would constitute a
major change in its intended use would require a new 510(k) clearance or
possibly a PMA approval. We may not be able to obtain additional 510(k)
clearances or PMA approvals for new products or for modifications to, or
additional intended uses or indications for, our existing products in a timely
fashion, or at all. Delays in obtaining future clearances would adversely affect
our ability to introduce new or enhanced products in a timely manner, which in
turn would harm our revenue and future profitability. We have made modifications
to our devices and the labeling of our devices in the past and may make
additional modifications in the future that we believe do not or will not
require additional clearances or approvals. If the FDA disagrees and requires
new clearances or approvals for the modifications, we may be required to recall
and stop marketing the modified devices, which could harm our operating results
and require us to redesign or relabel our products.
If Product Liability Claims are Successfully Asserted Against Us, We may
Incur Substantial Liabilities That May Adversely Affect Our Business or Results
of Operations. We may be subject to product liability claims from time to time.
Our products are highly complex and some are used to treat extremely delicate
eye tissue and skin conditions on and near a patient's face. Although we
maintain product liability insurance with coverage limits of $11.0 million per
occurrence and an annual aggregate maximum of $12.0 million, our coverage from
our insurance policies may not be adequate. Product liability insurance is
expensive. We might not be able to obtain product liability insurance in the
future on acceptable terms or in sufficient amounts to protect us, if at all. A
successful claim brought against us in excess of our insurance coverage could
have a material adverse effect on our business, results of operations and
financial condition.
If We Fail to Accurately Forecast Demand For Our Product and Component
Requirements For the Manufacture of Our Product, We Could Incur Additional Costs
or Experience Manufacturing Delays and May Experience Lost Sales or Significant
Inventory Carrying Costs. We use quarterly and annual forecasts based primarily
on our anticipated product orders to plan our manufacturing efforts and
determine our requirements for components and materials. It is very important
that we accurately predict both the demand for our product and the lead times
required to obtain the necessary components and materials. Lead times for
components vary significantly and depend on numerous factors, including the
specific supplier, the size of the order, contract terms and current market
demand for such components. If we overestimate the demand for our product, we
may have excess inventory, which would increase our costs. Over the past several
quarters, we have placed a high priority on our asset management efforts to,
among other things, reduce overall inventory levels and increase our cash
position. If we underestimate demand for our product and, consequently, our
component and materials requirements, we may have inadequate inventory, which
could interrupt our manufacturing, delay delivery of our product to our
customers and result in the loss of customer sales. Any of these occurrences
would negatively impact our business and operating results.
If We Fail to Manage Growth Effectively, Our Business Could Be Disrupted
Which Could Harm Our Operating Results. We have experienced, and may continue to
experience growth in our business. We have made and expect to continue to make
significant investments to enable our future growth through, among
26
other things, new product development and clinical trials for new applications
and products. We must also be prepared to expand our work force and to train,
motivate and manage additional employees as the need for additional personnel
arises. Our personnel, systems, procedures and controls may not be adequate to
support our future operations. Any failure to effectively manage future growth
could have a material adverse effect on our business, results of operations and
financial condition.
If Our Facilities Were To Experience Catastrophic Loss, Our Operations
Would Be Seriously Harmed. Our facilities could be subject to catastrophic loss
such as fire, flood or earthquake. All of our research and development
activities, manufacturing, our corporate headquarters and other critical
business operations are located near major earthquake faults in Mountain View,
California. Any such loss at any of our facilities could disrupt our operations,
delay production, shipments and revenue and result in large expense to repair
and replace our facilities.
We May Need Additional Capital, which May Not Be Available, and Our Ability
to Grow May be Limited as a Result. We believe that our existing cash balances,
available-for-sale securities, credit facilities and cash flow expected to be
generated from future operations will be sufficient to meet our capital
requirements at least through the next 12 months. However, we may be required,
or could elect, to seek additional funding prior to that time. The development
and marketing of new products and associated support personnel requires a
significant commitment of resources. If cash from available sources is
insufficient, we may need additional capital, which may not be available on
favorable terms, if at all. If we cannot raise funds on acceptable terms, we may
not be able to develop or enhance our products, take advantage of future
opportunities, fund potential acquisitions or respond to competitive pressures
or unanticipated requirements. Any inability to raise additional capital when we
require it would seriously harm our business.
Our Stock Price Has Been and May Continue to be Volatile and an Investment
in Our Common Stock Could Suffer a Decline in Value. The trading price of our
common stock has been subject to wide fluctuations in response to a variety of
factors, some of which are beyond our control, including quarterly variations in
our operating results, announcements by us or our competitors of new products or
of significant clinical achievements, changes in market valuations of other
similar companies in our industry and general market conditions. We receive only
limited attention by securities analysts and may experience an imbalance between
supply and demand for our common stock resulting from low trading volumes. In
addition, the stock market has experienced extreme volatility in the last few
years that has often been unrelated to the performance of particular companies.
These broad market fluctuations could have a significant impact on the market
price of our common stock regardless of our performance.
Changes in Accounting Rules. We prepare our financial statements in conformity
with accounting principles generally accepted in the United States of America.
These principles are subject to interpretation by the Securities and Exchange
Commission, or the SEC, and various bodies formed to interpret and create
appropriate accounting policies. A change in these policies can have a
significant effect on our reported results and may even retroactively affect
previously reported transactions. In particular, changes to FASB guidelines
relating to accounting for stock-based compensation, if enacted, will likely
increase our compensation expense, could make our net income less predictable in
any given reporting period and could change the way we compensate our employees
or cause other changes in the way we conduct our business.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
QUANTITATIVE DISCLOSURES
We are exposed to market risks inherent in our operations, primarily
related to interest rate risk and currency risk. These risks arise from
transactions and operations entered into in the normal course of
27
business. We do not use derivatives to alter the interest characteristics of our
marketable securities or our debt instruments. We have no holdings of derivative
or commodity instruments.
Interest Rate Risk. We are subject to interest rate risks on cash and cash
equivalents, available-for-sale marketable securities and any future financing
requirements. Interest rate risks related to marketable securities are managed
by managing maturities in our marketable securities portfolio. We have no
long-term debt as of October 2, 2004.
The fair value of our investment portfolio or related income would not be
significantly impacted by changes in interest rates since the marketable
securities maturities do not exceed a term of 12 - 14 months and the interest
rates are primarily fixed.
QUALITATIVE DISCLOSURES
Interest Rate Risk. Our primary interest rate risk exposures relate to:
- The risk that available-for-sale securities will fall in value if
market interest rates increase.
- The impact of interest rate movements on our ability to obtain
adequate financing to fund future operations.
We have the ability to hold at least a portion of the fixed income
investments until maturity and therefore would not expect our operating results
or cash flows to be affected to any significant degree by a sudden change in
market interest rates on our short- and long-term marketable securities
portfolio.
Management evaluates our financial position on an ongoing basis.
Currency Rate Risk.
As all of our sales transactions are denominated in U.S. currency, we do
not hedge any balance sheet exposures against future movements in foreign
exchange rates. The exposure related to currency rate movements would not have a
material impact on future net income or cash flows.
ITEM 4. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer and
our Chief Financial Officer, evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange
Act of 1934), as of the end of the period covered by this Quarterly Report on
Form 10-Q. Based on that evaluation, our Chief Executive Officer and our Chief
Financial Officer concluded that our disclosure controls and procedures are
effective to ensure that information we are required to disclose in reports that
we file or submit under the Securities Exchange Act of 1934 (i) is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission rules and forms and (ii) is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
(b) CHANGES IN INTERNAL CONTROLS
28
There was no change in our internal control over financial reporting that
occurred during the period covered by this Quarterly Report on Form 10-Q that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not subject to any material legal proceedings as of
the date of this report.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
On July 27, 2004 the registrant furnished a Current Report on Form 8-K
reporting under Item 12 of Form 8-K that on July 27, 2004, the Company issued a
press release regarding the Company's financial results for the fiscal quarter
ended July 3, 2004.
On September 22, 2004 the registrant filed a Current Report on Form 8-K
reporting under Item 5.02 of Form 8-K that effective September 22, 2004, the
registrant's Board of Electors elected Garret A. Garrettson as a new member of
the registrant's Board of Directors.
On October 19, 2004 the registrant furnished a Current Report on Form 8-K
reporting under Item 12 of From 8-K that on October 19, 2004, the Company issued
a press release regarding the Company's financial results for the fiscal quarter
ended October 2, 2004.
29
TRADEMARK ACKNOWLEDGMENTS
IRIDEX, the IRIDEX logo, IRIS Medical, OcuLight, SmartKey, EndoProbe and Apex
are our registered trademarks. IRIDERM, G-Probe, DioPexy, DioVet, TruFocus,
TrueCW, UltraView, DioLite 532, Long Pulse, MicroPulse, ScanLite, ColdTip
(Handpiece), VariSpot (Handpiece), TruView and EasyFit product names are our
trademarks. All other trademarks or trade names appearing in the Form 10-Q are
the property of their respective owners.
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 16, 2004 By: /s/ Larry Tannenbaum
------------------------
Larry Tannenbaum
Chief Financial Officer and Vice
President, Administration
(Principal Financial,
Principal Accounting Officer and
Authorized Signatory)
30
EXHIBIT INDEX
--------------
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
-----------------------------------------------------------------------
Sarbanes-Oxley Act of 2002.
------------------------------
31.2 Certification of Chief Financial pursuant to Section 302 of the
-----------------------------------------------------------------------
Sarbanes-Oxley Act of 2002.
------------------------------
32.1 Certification of Chief Executive Officer and Chief Financial Officer
-----------------------------------------------------------------------
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
-----------------------------------------------------------------------
of the Sarbanes-Oxley Act of 2002.
-------------------------------------
31
EXHIBIT 31.1
-------------
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO
SECTION 13(A) OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 AS
ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF
I, Theodore A. Boutacoff, certify that:
1. I have reviewed this quarterly report on Form 10-Q of IRIDEX Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any changes in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter
(the registrant's fourth fiscal quarter in the case of the annual
report) that has materially affected, or is reasonably likely to
materially affect the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: November 16, 2004
By: /s/ THEODORE A. BOUTACOFF
----------------------------------------
Name: Theodore A. Boutacoff
Title: President and Chief Executive Officer
(Principal Executive Officer)
EXHIBIT 31.2
--------------
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
SECTION 13(A) OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 AS
ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Larry Tannenbaum certify that:
1. I have reviewed this quarterly report on Form 10-Q of IRIDEX Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c. Disclosed in this report any changes in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of the annual report) that has materially affected, or is
reasonably likely to materially affect the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: November 16, 2004
By: /s/ LARRY TANNENBAUM
--------------------------------------------
Name: Larry Tannenbaum
Title: Chief Financial Officer and Vice
President,Administration
(Principal Financial and Accounting Officer)
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of IRIDEX Corporation (the "Company") on
Form 10-Q for the quarter ending Octrober 2, 2004, as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), Theodore A.
Boutacoff, Chief Executive Officer, and Larry Tannenbaum, Chief Financial
Officer, of the Company, each certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Date: November 16, 2004
By: /s/ THEODORE A. BOUTACOFF
--------------------------------------------
Name: Theodore A. Boutacoff
Title: President and Chief Executive Officer
(Principal Executive Officer)
Date: November 16, 2004
By: /s/ LARRY TANNENBAUM
--------------------------------------------
Name: Larry Tannenbaum
Title: Chief Financial Officer and Vice
President, Administration
(Principal Financial and Accounting Officer)