e10vk
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
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Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
for the fiscal year ended December 30, 2006
or
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Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
for the transition period from to
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Commission file number 0-27598
IRIDEX CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware
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77-0210467 |
(State or other jurisdiction
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(I.R.S. Employer |
of incorporation or organization)
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Identification Number) |
1212 Terra Bella Avenue, Mountain View CA 94043-1824
(Address of principal executive offices)
(Zip Code)
(650) 940-4700
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on which Registered |
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Common
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NASDAQ Global Market |
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act of 1933. Yes o No þ
Indicate by check mark if the Registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Securities Exchange Act of 1934 (the
Exchange Act). Yes o
No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act 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 þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the
best of Registrants knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated
filer or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer o Non-accelerated filer þ
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The aggregate market value of the voting common equity held by non-affiliates of the
Registrant was approximately $45,675,676, as of July 1, 2006, the last business day of the
Registrants most recently completed second fiscal quarter, based on the closing price reported for
such date on the NASDAQ Global Market. The registrant did not have any non-voting common equity
outstanding. For purposes of this disclosure, shares of common stock held by each executive officer
and director and by each holder of 5% or more of the outstanding shares of common stock have been
excluded from this calculation, because such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of March 23, 2007,
Registrant had 8,168,624 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain parts of the Proxy Statement for the Registrants 2006 Annual Meeting of Stockholders
(the Proxy Statement) are incorporated by reference into Part III of this Annual Report on Form
10-K.
PART I
This Annual
Report on Form 10-K contains certain 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; impact of the acquisition of the Laserscope aesthetics
business leveraging our core
business and increasing recurring revenues; broadening our product lines through product
innovation; our marketing programs, generally, including the Valued
IRIDEX Partner Program; efforts to decrease costs; higher gross estimate of the size of our
markets; levels of future investment in research and development efforts; our ability to develop
and introduce new products through strategic alliances, OEM
relationships and acquisitions; outcome of our current litigation; results
of clinical studies, risks associated with bringing new products to market, general economic
conditions and levels of international sales, our current liquidity, ability to obtain additional financing and impact of concern regarding our ability to continue as a going concern. 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. The reader is strongly urged to read
the information contained under the captions Part I, Item 1, Business, and Part II,
Item 7,
Managements Discussion and Analysis of Financial Condition and Results of Operations-Factors That
May Affect Future Results in this Annual Report on Form 10-K for a more detailed description of
these significant risks and uncertainties. The reader is cautioned not to place undue reliance on
these forward-looking statements, which reflect managements analysis only as of the date of this
Form 10-K. We undertake no obligation to update such forward-looking statements to reflect events
or circumstances occurring after the date of this report.
Item 1. Business
General
IRIDEX Corporation is a
leading worldwide provider of therapeutic based laser systems and
delivery devices used to treat eye diseases in ophthalmology and skin conditions in dermatology
(also referred to as aesthetics). Our products are sold in the United States predominantly through
a direct sales force and internationally through 77 independent distributors in 107 countries.
Total product sales in 2006, 2005 and 2004 were $35.9 million,
$37.0 million, and $32.8 million
respectively, which generated a net (loss)
income for those corresponding years of ($2.6) million, $1.7
million and ($0.4) million.
The current family of OcuLight laser systems, which accounts for the majority of our revenues,
is used for ophthalmic applications primarily in operating rooms. The OcuLight product family
includes the OcuLight TX, IRIS Medical IQ810 Laser System, the OcuLight Symphony (Laser Delivery
System), OcuLight SL, OcuLight SLx, OcuLight GL and OcuLight GLx laser photocoagulation systems.
Our ophthalmology products contributed $30.8 million, $30.7 million, and $27.8 million to our total
revenues in 2006, 2005 and 2004, respectively. Our ophthalmology products are used in the treatment
of serious eye diseases, including the three leading causes of irreversible blindness, diabetic
retinopathy, glaucoma and age-related macular degeneration (AMD). In addition, our ophthalmology
products are often used in vitrectomy procedures (proliferative diabetic retinopathy, macular
holes, retinal tears and detachments) which are generally performed in the operating room require a
disposable single use laser probe (EndoProbe) to deliver the light to the back of the eye.
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Our dermatology products treat skin conditions, primarily vascular and pigmented lesions. Our
dermatology laser systems include the DioLite XP, and the VariLite Dual Wavelength Laser systems.
Our dermatology products are primarily used in a dermatologist or plastic
surgeons office and contributed $5.1 million, $6.4 million, and $5.1 million to our total
revenues in 2006, 2005 and 2004, respectively.
In January 2007, the Company acquired Laserscopes aesthetics business
including its subsidiaries in France and the United Kingdom (UK) from American Medical Systems Holdings (AMS). Laserscope aesthetic treatments encompass minimally invasive surgical techniques for hair
removal, leg veins, wrinkle removal, acne damage, sun damage and skin rejuvenation. These
procedures are usually not performed in an operating room and are therefore paid for by patients
without the assistance of any insurance or medicare reimbursement. Laserscopes aesthetic products
include the Gemini Laser System, Venus-i Laser Systems, Lyra-i Laser System, Aura-i Laser
System featuring StarPulse and Solis IPL System. Lasersopes delivery devices VersaStat i
SmartScan Plus, SmartScan ,CoolSpot , Dermastats and MicronSpot Dermastats.
The Iridex ophthalmic and dermatology laser system, exclusive of the Laserscope products, consist of small, portable laser consoles and
delivery devices. While dermatologists almost always use our laser systems in their offices,
ophthalmologists and plastic surgeons typically use our laser systems in hospital operating rooms (OR) and ambulatory surgical centers (ASC), as well as their offices. In the OR and ASC, ophthalmologists use
our laser with either an indirect laser ophthalmoscope or a disposable, single use EndoProbe.
Our business includes a recurring revenue component which includes the sales of the disposable,
single use laser probes, EndoProbes, combined with the repair, servicing and extended warranty
protection for our laser systems. Since our first shipment in 1990, more than 8,300 IRIDEX medical
laser systems, both ophthalmic and dermatology, have been sold worldwide.
IRIDEX Corporation was incorporated in California in February 1989 as IRIS Medical
Instruments, Inc. In 1996, we changed our name to IRIDEX Corporation and reincorporated in
Delaware. Our executive offices are located at 1212 Terra Bella Avenue, Mountain View, California
94043-1824, and our telephone number is (650) 940-4700. We can also be reached at our website at
www.iridex.com, however, the information on, or that can be accessed through, our website is not
part of this report. As used in this Annual Report on Form 10-K, the terms Company, IRIDEX,
we, us and our refer to IRIDEX Corporation, a Delaware corporation, and, when the context so
requires, our wholly owned subsidiaries, IRIS Medical Instruments, Inc. and Light Solutions
Corporation, both California corporations.
The IRIDEX Strategy
We are one of the worldwide leaders in developing, manufacturing, marketing, selling and
servicing innovative medical laser systems. We have three key elements in our strategy: 1)
leveraging our core business and increasing recurring revenues in our ophthalmology business, 2)
broadening our product lines
through product innovation, and 3) developing new market opportunities through strategic
alliances, OEM relationships and acquisitions including the successful integration of the
aesthetics business of Laserscope.
1. Leverage our Core Business and Increase Recurring Revenues. We believe that we can continue
to grow our current installed base of more than 8,300 IRIDEX laser systems worldwide. With the
initiatives of our expanded sales and marketing team, we expect to grow our current product
offerings in laser systems, delivery devices and disposables. Despite the fact that the
majority of our sales are in a competitive replacement market, the features of our laser systems
combined with our large installed laser base as well as our new product innovations should allow us
to increase our market share.
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Our recurring revenue includes the sale of our disposable, single use laser probes,
EndoProbes, combined with the repair, servicing and extended warranty protection for our laser
systems. In 2006 recurring revenues were 43% of the overall business up from 36% in 2005 and 33% in 2004. With our
increased sales force and new marketing programs, we believe that there is an opportunity to
significantly increase our recurring revenues over the next several years. Our new sales programs
include an increased number of domestic area sales managers from 10 to 12 focused on the entire
ophthalmic product offering and whose incentive plan is more focused on the recurring revenue
opportunity, particularly laser probe sales. Our new U.S. marketing programs include a VIP (Valued
IRIDEX Partner) program that allows customers to access additional IRIDEX products based upon the
purchase of disposable laser probes. During the past two years, we have introduced many different
types of EndoProbes into the market, including our stepped, intuitive and illuminating probes.
When a customer purchases our laser system, a warranty is included. In addition, we market
extended warranty protection plans which can be purchased at the time of the product acquisition or
after the expiration of the original warranty. We also repair products out of warranty under a
program which allows our customer to obtain a laser overnight while their unit is returned for
repair. The customer is charged a reasonable fee for these services.
2. Broaden Product Lines through Product Innovation. One of our core strengths has been
the introduction at regular intervals of new laser systems, delivery devices including disposable
probes and product upgrades to enhance the benefits of our laser systems. We attempt to leverage
the knowledge and know-how of our existing products and technology when developing new products. In
October 2000, we introduced the EasyFit family of portable slit lamp adapters (or SLAs), which
allow for improved viewing clarity of the retina by the physician. In October 2002, we
introduced the OcuLight Symphony Laser Delivery System which combines the clinical versatility and
convenience of infrared and visible photocoagulation consoles into one delivery device. We also
introduced an expanded EndoProbe product line and a 5 millimeter Large Spot Slit Lamp Adapter. In
December 2002, we commenced shipment of the Millennium Endolase module, which we manufacture to be
included in Bausch & Lombs Millennium Microsurgical System. In 2003, we introduced a 50 micron
spot slit lamp adapter, the smallest spot size diameter available on IRIDEX slit lamp adapters. In
addition, in 2003 and the first quarter of 2004, we introduced four additions to our Endoprobe
product line. In 2004, we launched a new, menu driven infrared platform for ophthalmology, the
IQ810, designed to allow easier physician access to a variety of advanced laser energy delivery
modes used to perform Minimum Intensity Photocoagulation (MIP) procedures. For the dermatology
market, we introduced the VariLite, a dual wavelength laser in the fourth quarter of 2004 that
offers both high power 532 nm and 940 nm wavelengths for added clinical versatility and convenience
for the physician. In 2005, we continued to expand our disposable EndoProbe product line with new
designs in stepped probes, intuitive probes and illuminating probes. In 2005, we also launched the
DioLite XP laser which is a high power 532 nm wavelength laser system and ScanLite XP scanner for
dermatological applications. In 2006 at the American Academy of Ophthalmology (AAO) we introduced
two new laser systems:
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the OcuLight TX, a new green light laser with an optional remote control and wireless
foot switch. This first shipped in late 2006, and |
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the first true yellow 577nm laser system which requires FDA approval and is currently
scheduled to ship in mid 2007. |
We intend to continue our investment in research and product innovation to improve the performance
of our systems and broaden our product offerings. We also intend to develop innovative technologies
which can address the customer needs of the ophthalmic and aesthetic markets.
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3. Develop New Market Opportunities Through Strategic Acquisitions and Alliances. In January
2007, we acquired the aesthetics business of Laserscope from AMS to complement the laser systems
that Iridex has been selling to dermatologists and plastic surgeons since 1994. In addition to
having a strong presence in the offices of dermatologists and plastic surgeons, the Laserscope
products have primarily been sold to general practitioners and ob-gyn doctors. The Iridex
dermatology products treat skin conditions, primarily vascular and pigmented lesions while
Laserscope product treatments encompass minimally invasive surgical techniques for hair removal,
leg veins, wrinkle removal, acne damage, sun damage and skin rejuvenation. The successful
integration of the Laserscope aesthetics business will be one of the major objectives of our
management team in 2007. We have negotiated a supply agreement with AMS to provide us with
Laserscope products for up to a nine month period ending October 2007, however, we plan to
integrate the manufacture of the Laserscope products into our Mountain View facility within a
shorter period of time. In addition we have already transitioned the customer service and support
functions related to the Laserscope products to our existing facility in Mountain View.
In order to achieve the desired level of growth, we must explore opportunities to acquire
technologies or companies which strategically fit our current core competencies. We have an
excellent reputation, within the retinal segment of ophthalmology, as a company with innovative and
reliable technology combined with responsive customer service. Given the level of management
experience within the company and the size of the market opportunity, an acquisition within
ophthalmology would be a good fit strategically. See Managements Discussion and Analysis of
Financial Condition and Results of Operations Factors That May Affect Future Results We Depend
on Collaborative Relationships to Develop, Introduce and Market New Products, Product Enhancements
and New Applications.
Products
We utilize a systems approach to product design. Each system includes a console, which
generates the laser energy, and a number of interchangeable peripheral delivery devices, including
disposable delivery devices, for use in specific clinical applications. This approach allows our
customers to purchase a basic console system and add additional delivery devices as their needs
expand or as new applications develop. We believe that this systems approach is a distinguishing
characteristic and also brings economies-of-scale to our product development and manufacturing
efforts because individual applications do not require the design and manufacture of complete
stand-alone products. Our primary non-disposable products range in price from $2,000 to $60,000,
and consist of laser consoles and specialized delivery devices and our line of disposable products
has list prices of between $150 and $200 to end customers.
Consoles: Our laser consoles incorporate the economic and technical benefits of semiconductor laser
technology.
Infrared Photocoagulator Consoles. These OcuLight and IQ810 photocoagulator consoles used by
ophthalmologists are available in two infrared (810nm) output power ranges: the OcuLight SL at 2
Watts and the IQ810 and OcuLight SLx at 3 Watts. Each console weighs 14 pounds, has dimensions of
4H x 12W x 12D, and requires no external air or water cooling. We believe that the smaller
overall sizes, lower weights and low power requirements to operate represent distinct advantages
over competing products.
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Visible (or Green) Photocoagulator Consoles. Our OcuLight TX, OR, GL and OcuLight GLx
semiconductor-based photocoagulator consoles used in ophthalmology deliver visible (532nm) laser
light. The OcuLight TX was first shipped in late 2006 and offers an optional remote control and
wireless footswitch. The OcuLight GLx has increased power and delivery device capability. Our
visible laser light dermatology products, the DioLite XP and VariLite are also based on
semiconductor-based technology. The OcuLight OR/GL/GLx/DioLite XP/DioLite consoles weigh 15 pounds,
have dimensions of 6H x 12W x 12D, draw a maximum of 300 Watts of wall power and require no
external air or water cooling. In December 2002, we commenced shipment of the Millennium Endolase
module, which is sold exclusively to Bausch & Lomb for use in their Millennium Microsurgical
System. It integrates 532nm photocoagulator capability into Bausch & Lombs array of microsurgical
capabilities for the vitrectomy procedure. The Millennium Endolase module is compatible with the
IRIDEX disposable EndoProbe handpieces and Laser Indirect Ophthalmoscope.
Combination Infrared/Visible Photocoagulator Consoles. The OcuLight Symphony Laser Delivery System,
is used by ophthalmologists and consists of an OcuLight SLx infrared (810nm) laser console,
OcuLight GLx green (532 nm) laser console, multi-fiber slit lamp adapter, slit lamp and a custom
cart. The OcuLight Symphony Laser Delivery System combines the clinical versatility and convenience
of a 532 nm, 810 nm and large spot 810 nm into one delivery device for retinal photocoagulation and
glaucoma procedures. Our VariLite product which is used in dermatology is a dual wavelength
combination of 532nm and infrared 940nm. The VariLite wavelength can be changed with just a simple
flip of a single switch and can be used in conjunction with the ScanLite as well as several
different sized handpieces. We believe that this product offers a unique value-added proposition
and the efficiency of dual laser wavelength delivery in a single product.
Specialized
Delivery Devices. Our versatile family of consoles and delivery devices has been
designed to accommodate the addition of new capabilities with a minimal incremental investment.
Users of this product can add capabilities by simply purchasing new interchangeable delivery
devices and utilizing them with their existing console. We have developed both disposable and
nondisposable delivery devices and expect to continue to develop additional devices.
Ophthalmic Delivery Devices:
TruFocus Laser Indirect Ophthalmoscope (LIO). The indirect ophthalmoscope is designed to be worn on
the physicians head and to be used in procedures to treat peripheral retinal disorders,
particularly in infants or adults requiring treatment in the supine position. This product can be
used in both diagnosis and treatment procedures at the point-of-care.
Slit Lamp Adapter (SLA). These adapters allow the physician to utilize a standard slit lamp in both
diagnosis and treatment procedures. Doctors can install a slit lamp adapter in a few minutes and
convert standard diagnostic slit lamps into a therapeutic photocoagulator delivery system. Slit
lamp adapters are used in treatment procedures for both retinal diseases and glaucoma. These
devices are available in a wide variety of spot diameters. In 2003, we introduced a 50 micron spot
slit lamp adapter, a reduction in the smallest spot size diameter available on IRIDEX slit lamp
adapters.
Operating Microscope Adapter. These adapters allow the physician to utilize a standard operating
microscope in both diagnosis and laser treatment procedures. These devices are similar to slit lamp
adapters, except that they are oriented horizontally and therefore can be used to deliver retinal
photocoagulation to a supine patient.
EndoProbe. The EndoProbe or laser probe is used for endophotocoagulation, a retinal treatment
procedure performed in the hospital operating room or surgery center during a vitrectomy procedure.
These sterile disposable probes are available in tapered, angled, fluted, illuminating, stepped,
endoocular and intuitive styles.
G-Probe. The G-Probe is used in procedures to treat medically and surgically uncontrolled glaucoma,
in many instances replacing cyclocryotherapy, or freezing of the eye. The G-Probes non-invasive
procedure takes approximately ten minutes, is done to an anesthetized eye in the doctors office
and results in less pain and fewer adverse side effects than cyclocryotherapy. The G-Probe is a
sterile disposable product.
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DioPexy Probe. The DioPexy Probe is a hand-held instrument which is used in procedures to treat
retinal tears and breaks, non-invasively through the sclera, as an alternative method of attaching
the retina. Our DioPexy Probe results in increased precision, less pain and less inflammation than
traditional cryotherapy.
Dermatology Delivery Devices:
DioLite Handpiece. The DioLite Handpiece is a hand held instrument that is used in the treatment of
vascular and pigmented skin lesions. These devices are available in 200, 500, 700, 1000 and 1400
micron spot diameters.
VariLite Handpiece. The VariLite Handpiece is a handheld instrument used in the treatment of
vascular, pigmented cutaneous skin lesions and small area hair removal. Ergonomic handpieces can be
used with both the 532 nm and 940 nm wavelengths and are available in 700, 1,000, 1,400, 2,000 and 2,800 micron spot diameter.
ScanLite Scanner. The ScanLite XP and ScanLite are computer pattern generators with integrated
controls designed to enhance the capabilities of the DioLite XP and DioLite 532 laser systems. They
allow rapid and uniform treatment of large-area vascular and pigmented skin lesions including port
wine stains, matted telangiectasia, and cafe au lait stains.
The following chart lists the eye disease procedures that can utilize our photocoagulator
systems, including the console and delivery devices that we offer for use in treating these
diseases. The selection of delivery device is often determined by the severity and location of the
disease. These diseases are treated either within the physicians office, clinic, or the operating
room.
Ophthalmology Treatments:
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Condition |
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Procedure |
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Console |
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Delivery Devices |
Age-related Macular
Degeneration
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Retinal
Photocoagulation
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Infrared & Visible
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Slit Lamp Adapter |
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Diabetic Retinopathy
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Macular Edema
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Grid Retinal
Photocoagulation
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Infrared & Visible
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Slit Lamp Adapter &
Operating Microscope
Adapter, |
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Focal Retinal
Photocoagulation
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Visible
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Slit Lamp Adapter |
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Proliferative
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Pan-Retinal
Photocoagulation
Vitrectomy
Procedure
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Infrared & Visible
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Slit Lamp Adapter,
Operating
Microscope Adapter,
Laser
Indirect
Ophthalmoscope,
EndoProbe* |
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Glaucoma
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Primary Open-Angle
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Trabeculoplasty
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Infrared & Visible
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Slit Lamp Adapter |
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Angle-closure
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Iridotomy
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Infrared & Visible
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Slit Lamp Adapter |
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Condition |
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Procedure |
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Console |
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Delivery Devices |
Uncontrolled Gluacoma
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Transscleral
Cyclophotocoagulation
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Infrared
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G-Probe* |
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Retinal Tears and
Detachments
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Retinopexy Retinal
Photocoagulation
Vitrectomy
Procedure
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Infrared & Visible
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Slit Lamp Adapter,
Laser Indirect
Ophthalmoscope,
Operating Microscope
Adapter, EndoProbe* |
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Transscleral Retinal
Photocoagulation
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Infrared
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DioPexy Probe |
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Retinopathy of Prematurity
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Retinal
Photocoagulation
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Infrared
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Laser Indirect
Ophthalmoscope |
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Ocular Tumors
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Retinal
Photocoagulation
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Infrared
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Slit Lamp Adapter,
Operating
Microscope Adapter,
Laser
Indirect
Ophthalmoscope |
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Macular Holes
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Vitrectomy Procedure
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Visible
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EndoProbe* |
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Disposable single use products |
The following chart lists the procedures for treating skin diseases that can utilize our
dermatology laser systems. These procedures are normally performed in a physicians office and are
elective and private pay.
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Dermatology |
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Treatments: |
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Condition |
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Procedure |
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Console |
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Delivery Devices |
Vascular Lesions
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Selective
Photothermolysis
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Visible
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DioLite Handpiece |
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Pigmented Lesions
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Selective
Photothermolysis
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Visible
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DioLite Handpiece |
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Research and Product Innovation
We have close working relationships with researchers, clinicians and practicing physicians
around the world who provide new ideas, test the feasibility of these new ideas and assist us in
validating new products and new applications before they are introduced.
Our product innovation group (formerly known as product development) activities are performed
by a current team of 19 engineers with an average of 22 years of experience each in medical
products, laser systems and delivery devices. The core competencies of the team include: mechanical
engineering, electrical engineering, optics, software, firmware and delivery devices. The team is
being transitioned with a focus to introduce innovative products which satisfy the unmet and
emerging needs of our customers. Their approach is a rapid product development process which
integrates all the necessary disciplines of the Company from product inception through customer
acceptance. This approach should allow for rapid and reliable new product innovations and a
consistent pipeline of innovative products for our customers.
Our research activities are performed internally by our research staff. From time to time, we
supplement our internal research staff by hiring consultants and/or partnering with universities to
gain specialized expertise. Research efforts are directed toward the development of new products
and new applications for our existing products, as well as the identification of markets which may
include clinical trials and may not be currently addressed by our products.
We believe that it is important to make a substantial contribution to the treatment of serious
eye diseases such as age-related macular degeneration, diabetic retinopathy and glaucoma. The objectives of developing new photocoagluation treatments and applications are to expand
the number of patients who can be treated, to more effectively treat diseases, to treat patients
earlier in the treatment regimen and to reduce the sideeffects of treatment. Examples of such
studies with regard to particular eye afflictions are included in the following paragraphs.
Age-Related Macular Degeneration (AMD) Wet Form. AMD is a progressive disease that damages the
central vision and affects a persons ability to read, see faces, and drive. About 50 million
people worldwide have AMD and, of these, about 5 million have the more severe wet form. Though the
wet form of AMD constitutes about 10% of all AMD, it accounts for about 80% of all severe vision
loss associated with AMD. We are pursuing several approaches to treat wet AMD at different stages.
All of these approaches close new blood vessels in the eyes macula caused by wet AMD with less
damage than conventional laser treatments.
Age-Related Macular Degeneration Dry Form. About 90% of AMD is the dry form. Our approach to the
treatment of dry AMD is to preserve or improve vision by following a MIP protocol that uses the
OcuLight infrared laser to cause resorption of dry AMD deposits (drusen) which have accumulated in
the macula. We have supported a multi-center clinical trial which is testing a treatment of eyes
with dry age-related macular degeneration (PTAMD trial).
Glaucoma. Preliminary studies are underway to evaluate the use of the G-Probe as a primary surgical
treatment modality for glaucoma in various parts of the world.
Diabetic Retinopathy. Other MIP studies are underway to investigate the treatment of diabetic
retinopathy using the MicroPulse operating mode available in our OcuLight SLx product with the
objective of causing regression of the disease with less loss of vision than conventional laser
therapy.
Ocular Tumors. Clinical studies have reported successful treatment of ocular tumors using OcuLight
infrared lasers using the TTT approach.
All of these clinical projects should be considered in the research area and they may or may not
result in additional commercial opportunities. See Managements Discussion and Analysis of
Financial Condition
and Results of Operations Factors That May Affect Future Results We are Dependent on the
Successful Outcome of Clinical Trials of Our Products and New Applications Using Our Products.
10
Customers and Customer Support
Our products are currently sold to ophthalmologists, particularly those specializing in
retina, glaucoma and pediatrics, dermatologists and plastic surgeons. Other customers include
research and teaching hospitals, government installations, surgical centers and hospitals. No
customer or distributor accounted for 10% or more of total sales in any of 2006, 2005 or 2004. See
Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations.
We are continuing our efforts to broaden our customer base through the development of new
products and new applications of our existing products for use by ophthalmologists and
dermatologists. We currently estimate that there are approximately 15,000-20,000 ophthalmologists
in the United States and 40,000-60,000 internationally who are each potential customers.
Additionally, we estimate that there are approximately 4,900 and 18,000 hospitals in the United
States and internationally, respectively, as well as approximately 4,000 ambulatory surgical
centers in the United States which potentially represent multiple unit sales. We believe there are
approximately 10,000 dermatologists and approximately 9,000 plastic surgeons in the United States
who are potential customers. Because independent ophthalmologists and dermatologists frequently
practice at their own offices as well as through affiliation with hospitals or other medical
centers, each independent ophthalmologist, dermatologist, plastic surgeon, office, hospital and
medical center is a potential customer for our products. We are seeking to broaden our customer
base by developing new products directed at addressing the needs of ophthalmologists and
dermatologists.
We seek to provide superior customer support and service and therefore created our Global
Customer Care Group chartered with the responsibility for handling customer requests and product
repairs, which has resulted in a significant improvement in our response times to customer support
and service issues. We believe that our superior customer service and technical support distinguish
our product offerings from those of our competitors. Our customer support representatives assist
customers with orders, warranty returns and other administrative functions. Our technical support
engineers provide customers with answers to technical and product-related questions. We maintain an
around-the-clock telephone service line to service our customers. If a problem with a product
cannot be diagnosed and resolved by telephone, a replacement unit is shipped overnight to any
domestic customer and by the most rapid delivery means available to any international customer, and
the problem unit is returned to us. The small size and rugged design of our products allows for
economical shipment and quick response to customers almost anywhere in the world.
Sales and Marketing
We market our products in
the United States predominantly through our direct sales force. Our
direct sales force is separated into two separate divisions, one for ophthalmology and one for
aesthetics. In total we have a direct sales force of 18 employees who are engaged in sales efforts
within the United States as of December 30, 2006. Our sales and marketing organization is based at our corporate
headquarters in Mountain View, California with area sales managers located throughout the United
States.
International product sales represented 39.2%, 38.6% and 39.4% of our sales in 2006, 2005 and
2004, respectively. We believe that our international sales will continue to represent a
significant portion of our revenues for the foreseeable future. Our international sales are made
principally to customers in Europe, Asia, Pacific Rim, Middle East and Latin America. Our products
are sold internationally through our 77 independent distributors into 107 countries. International
sales are administered through our corporate headquarters in Mountain View, California. Our
distribution agreements with our international distributors are generally exclusive and typically
can be terminated by either party without cause with 90 days notice. International sales may be
adversely affected by the imposition of governmental controls, currency fluctuations, restrictions
on export technology, political instability, trade restrictions, changes in tariffs and the
economic condition in each country in which we sell our products. See Item 7, Managements
Discussion and Analysis of Financial Condition and Results of Operations Factors That May Affect
Future Results We Depend on International Sales.
11
To support our sales process we conduct marketing programs which include direct mail, trade
shows, public relations, market research, and advertising in trade and academic journals and
newsletters. We annually participate in over 100 trade shows internationally. These meetings allow
us to present our products to existing and prospective buyers. One of our new marketing programs
designed to help us reach our goal of increasing our recurring revenues, includes a VIP (Valued
IRIDEX Partner) program which allows customers to access additional IRIDEX products through a
contractual agreement on the purchase of disposable laser probes. In 2006, recurring revenues
(including sales of EndoProbes and service revenue) were 40% of the overall business up from 36% in
2005. During the past two years, we have introduced many specialty types of EndoProbes into the
market, including our new stepped, intuitive and illuminating probes.
We believe that educating patients and physicians at an early stage about the long-term health
benefits and cost-effectiveness of diagnosis and treatment of diseases that cause blindness is
critical to market acceptance of our ophthalmic products. The trend toward management of health
care costs in the United States should lead to increased awareness of and early intervention of
disease management with cost-effective treatments and, as a result, will increase demand for our
ophthalmic products. Our marketing efforts are made to promote the education of our customers on
these topics.
Through marketing, we collaborate with our customers to enhance our ability to identify new
applications for our products, validate new procedures using our products and identify new product
applications which help meet their unmet needs. Customers include key opinion leaders who are often
the heads of the departments in which they work or professors at universities. We believe that
these luminaries in the field of ophthalmology and dermatology are key to the successful
introduction of new products and the subsequent acceptance of these new products by the general
market. Acceptance of our products by these early adopters is key to our strategy in the validation
and commercialization of our new products.
Operations
The manufacture of our infrared and visible light photocoagulators and the related delivery
devices is a highly complex and precise process. Completed systems must pass quality control and
reliability tests before shipment. Our manufacturing activities consist of specifying, sourcing,
assembling and testing of components and certain subassemblies for assembly into our final product.
As of December 30, 2006, we had a total of 52 employees engaged in manufacturing activities.
The medical devices manufactured by us are subject to extensive regulation by numerous
governmental authorities, including federal, state, and foreign governmental agencies. The
principal regulator in the United States is the Food and Drug Administration (the FDA). In April
1998, we received certification for ISO 9001/EN 46001. ISO 9001/EN 46001 is a documented
international quality system standard that documents compliance to the European Medical Device
Directive. In February 2004, we were certified to ISO 13485:2003 which replaced ISO 9001/EN46001 as
the international standard for quality systems as applied to medical devices.
We rely on third parties to manufacture substantially all of the components used in our
products, although we assemble critical subassemblies and the final product at our facility in
Mountain View, California. Some of these suppliers and manufacturers are sole source. We have some
long-term or volume purchase agreements with our suppliers and currently purchase most components
on a purchase order basis. These components may not be available in the quantities required, on
reasonable terms, or at all. Financial or other difficulties faced by our suppliers or significant
changes in demand for these components or materials could limit their availability. Any failures by
such third parties to adequately perform may delay the submission of products for regulatory
approval, impair our ability to deliver products on a timely basis or otherwise impair our
competitive position. See Item 7, Managements Discussion and Analysis of Financial Condition and
Results of Operations Factors That May Affect Future Results We Face Risks of Manufacturing
and We Depend on Key Manufacturers and Suppliers.
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International regulatory bodies often establish 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 to the European Medical Device Directive and all
applicable standards. In July 1998, we received CE mark under Annex II guidelines, the most
stringent path to CE certification. With Annex II CE certification, we have demonstrated our
ability to both understand and comply with all applicable European standards. This allows us to CE
mark any product upon our internal verification of compliance to all applicable European standards.
Currently, all released products are CE marked. Continued certification is based on successful
review of the process by our European Registrar during its annual audit. Any loss of certification
would have a material adverse effect on our business, results of operations and financial
condition. See Item 7, Managements Discussion and Analysis of Financial Condition and Results of
Operations Factors That May Affect Future Results-We Are Subject to Government Regulation.
Competition
Competition in the market for laser systems and delivery devices used for ophthalmic and
dermatology treatment procedures is intense and is expected to increase. This market is also
characterized by rapid technological innovation and change, and our products could become obsolete
as a result of future innovations. Our competitive position depends on a number of factors
including product performance, characteristics and functionality, ease of use, scalability,
durability and cost. In addition to other companies that manufacture photocoagulators and
dermatological devices, we compete with pharmaceutical solutions, other technologies and other
surgical techniques available in both the dermatologic and ophthalmic markets. Our principal
competitors in ophthalmology are Lumenis Ltd., Nidek, Inc., Carl Zeiss Meditec AG, Alcon Inc. and
Synergetics. All of these companies currently offer a competitive, semiconductor-based laser system
for ophthalmology. Also within ophthalmology pharmaceutical alternative treatments for AMD such as
Lucentis (Genentech), and to a lesser extent Visudyne (Novartis) and Macugen (Eyetech) compete
rigorously with traditional laser procedures. Our principal competitors in dermatology are Palomar
Technologies, Candela Corporation,
Syneron, and Lumenis Ltd. 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 us and long-standing customer relationships. In addition,
other medical companies, academic and research institutions, or others, may develop new
technologies or therapies, including medical devices, surgical procedures or pharmacological
treatments and obtain regulatory approval for products utilizing such techniques that are more
effective in treating the conditions targeted by us, or are less expensive than our current or
future products. Our technologies and products could be rendered obsolete by such developments. Any
such developments could have a material adverse effect on our business, financial condition and
results of operations. See Item 7, Managements Discussion and Analysis of Financial Condition and
Results of Operations Factors That May Affect Future Results Our Market is Competitive.
Patents and Proprietary Rights
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 15 United States patents and five foreign
patents on the technologies related to our products and processes, which have expiration dates
ranging from 2009 to 2023. We have approximately five pending patent applications in the United
States and five foreign pending patent applications that have been filed. Our patent applications
may not be approved.
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
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 See Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations Factors
That May Affect Future Results We Rely on Patents and Proprietary Rights.
13
Government Regulation
The medical devices to be marketed and manufactured by us are subject to extensive regulation
by numerous governmental authorities, including federal, state, and foreign governmental agencies.
Pursuant to the Federal Food, Drug, and Cosmetic Act, as amended, and the regulations promulgated
thereunder (the FDA Act), the FDA serves as the principal federal agency within the United States
with authority over medical devices and regulates the research, clinical testing, manufacture,
labeling, distribution, sale, marketing and promotion of such devices. Noncompliance with
applicable requirements can result in, among other things, warning letters, fines, injunctions,
civil penalties, recall or seizures of products, total or partial suspension of production, failure
of the government to grant premarket clearance or approval for devices, withdrawal of marketing
approvals, and criminal prosecution. The FDA also has the authority to request repair, replacement
or refund of the cost of any device manufactured or distributed by us.
In the United States, medical devices are classified into one of three classes (Class I, II or
III), on the basis of the controls deemed necessary by the FDA to reasonably assure the safety and
effectiveness of such products. Under FDA regulations, Class I devices are subject to general
controls (for example, labeling, premarket notification and adherence to Quality System Regulations
(QSRs) requirements). Class II devices receive marketing clearance through either a 510(k)
premarket notification or a PMA. A 510(k) clearance will be granted if the submitted information
establishes that the proposed device is substantially equivalent to a legally marketed Class I or
II medical device, or to a Class III medical device for which the FDA has not called for a PMA. The
FDA may determine that a proposed device is not substantially equivalent to a legally marketed
device, or that additional information or data are needed before a substantial equivalence
determination can be made. A request for additional data may require that clinical studies of the
devices safety and efficacy be performed.
Commercial distribution of a device for which a 510(k) notification is required can begin only
after the FDA issues an order finding the device to be substantially equivalent to a previously
cleared device. The FDA has recently been requiring a more rigorous demonstration of substantial
equivalence than in the past. Even in cases where the FDA grants a 510(k) clearance, it can take
the FDA from three to six months from the date of submission to grant a 510(k) clearance, but it
may take longer.
A not substantially equivalent determination, or a request for additional information, could
delay the market introduction of new products that fall into this category and could have a
materially adverse effect on our business, financial condition and results of operations. For any
of our products that are cleared through the 510(k) process, such as our IQ810 system,
modifications or enhancements that could significantly affect the safety or efficacy of the device
or that constitute a major change to the intended use of the device will require new 510(k)
submissions.
A PMA application must be submitted if a proposed device is not substantially equivalent to a
legally marketed Class I or Class II device, or if it is a Class III device for which the FDA has
called for PMAs. A PMA application must be supported by valid scientific evidence which typically
includes extensive data, including human clinical trial data, to demonstrate the safety and
effectiveness of the device. The PMA application must also contain the results of all relevant
bench tests, laboratory and animal studies, a complete description of the device and its
components, and a detailed description of the methods, facilities and controls used to manufacture
the device. In addition, the submission must also contain the proposed labeling, advertising
literature and training methods.
Upon receipt of a PMA application, the FDA makes a threshold determination as to whether the
application is sufficiently complete to permit a substantive review. If the FDA determines that the
PMA application is sufficiently complete to permit a substantive review, the FDA will accept the
application for filing. Once the submission is accepted for filing, the FDA begins an in-depth
review of the PMA. An FDA review of a PMA application generally takes one to two years from the
date the PMA application is accepted for filing, but may take significantly longer. The review time is often significantly
extended as a result of the FDA asking for more information or clarification of information already
provided in the submission. During the review period, an advisory committee, typically a panel of
clinicians, will likely be convened to review and evaluate the application and provide
recommendations to the FDA as to whether the device should be approved. The FDA is not bound by the
recommendations of the advisory panel. Toward the end of the PMA review process, the FDA generally
will conduct an inspection of the manufacturers facilities to ensure that the facilities are in
compliance with applicable QSR requirements.
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If the FDAs evaluations of both the PMA application and the manufacturing facilities are
favorable, the FDA will either issue an approval letter or an approvable letter, which may contain
a number of
conditions that must be met in order to secure final approval of the PMA. When, and if, those
conditions have been fulfilled to the satisfaction of the FDA, the agency will issue a PMA approval
letter, authorizing commercial marketing of the device for certain indications. The FDA may also
determine that additional clinical trials are necessary or other deficiencies exist in the PMA, in
which case PMA approval may be delayed. The PMA process can be expensive, uncertain and lengthy,
and a number of devices for which the FDA approval has been sought by other companies have never
been approved for marketing.
If human clinical trials of a device are required in connection with either a 510(k)
notification or a PMA, and the device presents a significant risk, the sponsor of the trial
(usually the manufacturer or the distributor of the device) is required to file an investigational
device exemption (IDE) application prior to commencing human clinical trials. The IDE application
must be supported by data, typically including the results of animal and laboratory testing. If the
IDE application is reviewed and approved by the FDA and one or more appropriate institutional
review boards (IRBs), human clinical trials may begin at a specific number of investigational
sites with a specific number of patients, as approved by the FDA. If the device presents a non
significant risk to the patient, a sponsor may begin the clinical trial after obtaining approval
for the study by one or more appropriate IRBs.
We have obtained 510(k) clearance for all of our marketed products. We have also modified
aspects of our products since receiving regulatory clearance, but we believe that new 510(k)
clearances are not required for these modifications. After a device receives 510(k) clearance or a
PMA, any modification that could significantly affect its safety or effectiveness, or that would
constitute a major change in its intended use, will require a new clearance or approval. The FDA
requires each manufacturer to make this determination initially, but the FDA can review any such
decision and can disagree with a manufacturers determination. If the FDA disagrees with our
determination not to seek a new 510(k) clearance or PMA, the FDA may retroactively require us to
seek 510(k) clearance or premarket approval. The FDA could also require us to cease marketing and
distribution and/or recall the modified device until 510(k) clearance or PMA approval is obtained.
Also, in these circumstances, we may be subject to significant regulating fines or penalties.
Any products manufactured or distributed by us pursuant to FDA clearances or approvals are
subject to pervasive and continuing regulation by the FDA, including record keeping requirements
and reporting of adverse experiences with the use of the device. Device manufacturers are required
to register their establishments and list their devices with the FDA and certain state agencies,
and are subject to periodic inspections by the FDA and certain state agencies. The FDA Act requires
devices to be manufactured to comply with applicable QSR regulations which impose certain
procedural and documentation requirements upon us with respect to design, development,
manufacturing and quality assurance activities. We are subject to unannounced inspections by the
FDA and the Food and Drug Branch of the California Department of Health Services, or CDHS, to
determine our compliance with the QSR and other regulations, and these inspections may include the
manufacturing facilities of our subcontractors.
Labeling and promotion activities are subject to scrutiny by the FDA and, in certain
instances, by the Federal Trade Commission. The FDA actively enforces regulations prohibiting
marketing of products for unapproved uses. We and our products are also subject to a variety of
state laws and regulations in those states or localities where our products are or will be
marketed. Any applicable state or local regulations may hinder our ability to market our products
in those states or localities. Manufacturers are also subject to numerous federal, state and local
laws relating to such matters as safe working conditions,
manufacturing practices, environmental protection, fire hazard control and disposal of hazardous or potentially
hazardous substances. We may be required to incur significant costs to comply with such laws and
regulations now or in the future. Such laws or regulations may have a material adverse effect upon
our ability to do business.
15
Exports of our products are regulated by the FDA and are covered by the Export Amendment of
1996, which greatly expanded the export of approved and unapproved United States medical devices.
However, some foreign countries require manufacturers to provide an FDA certificate for products
for export (CPE) which requires the device manufacturer to certify to the FDA that the product
has been granted premarket clearance in the United States and that the manufacturing facilities
appeared to be in compliance with QSR at the time of the last QSR inspection. The FDA will refuse
to issue a CPE if significant outstanding QSR violations exist.
We are also regulated under the Radiation Control for Health and Safety Act, which requires
laser products to comply with performance standards, including design and operation requirements,
and manufacturers to certify in product labeling and in reports to the FDA that their products
comply with all such standards. The law also requires laser manufacturers to file new product and
annual reports, maintain manufacturing, testing and sales records and report product defects.
Various warning labels must be affixed and certain protective devices installed, depending on the
class of the product.
The introduction of our products in foreign markets will also subject us to foreign regulatory
clearances which may impose substantial additional costs and burdens. International sales of
medical devices are subject to the regulatory requirements of each country. The regulatory review
process varies from country to country. Many countries also impose product standards, packaging
requirements, labeling requirements and import restrictions on devices. In addition, each country
has its own tariff regulations, duties and tax requirements. The approval by the FDA and foreign
government authorities is unpredictable and uncertain. The necessary approvals or clearances may
not be granted on a timely basis, if at all. Delays in receipt of, or a failure to receive, such
approvals or clearances, or the loss of any previously received approvals or clearances, could have
a material adverse effect on our business, financial condition and results of operations.
Changes in existing requirements or adoption of new requirements or policies by the FDA or
other foreign and domestic regulatory authorities could adversely affect our ability to comply with
regulatory requirements. Failure to comply with regulatory requirements could have a material
adverse effect on our business, financial condition and results of operations. We may be required
to incur significant costs to comply with laws and regulations in the future. These laws or
regulations may have a material adverse effect upon our business, financial condition or results of
operations.
Reimbursement
The cost of a significant portion of medical care in the United States is funded by government
programs, health maintenance organizations and private insurance plans. Our ophthalmology products
are typically purchased by doctors, clinics, hospitals and other users, which bill various
third-party payers, such as government programs and private insurance plans, for the health care
services provided to their patients. Government imposed limits on reimbursement of hospitals and
other health care providers have significantly impacted the spending budgets of doctors, clinics
and hospitals to acquire new equipment, including our products. Under certain government insurance
programs, a health care provider is reimbursed for a fixed sum for services rendered in treating a
patient, regardless of the actual charge for such treatment. The Center for Medicare and Medicaid
Services (CMS) reimburses hospitals on a prospectively-determined fixed amount for the costs
associated with an in-patient hospitalization based on the patients discharge diagnosis. CMS
reimburses physicians a prospectively-determined fixed amount based on the procedure performed,
regardless of the actual costs incurred by the hospital or physician in furnishing the care and
regardless of the specific devices used in that procedure. Reimbursement issues have affected sales
of our ophthalmic products to a greater extent than sales of our dermatologic products because
dermatology procedures, in general, are not covered under most insurance programs and the cost of
these procedures are paid for by the patient.
16
Private third-party reimbursement plans are also developing increasingly sophisticated methods
of controlling health-care costs by imposing limitations on reimbursable procedures and the
exploration of more cost-effective methods of delivering health care. In general, these government
and private measures have caused health care providers, including our customers, to be more
selective in the purchase of medical products. In addition, changes in government regulation or in
private third-party payers policies may limit or eliminate reimbursement for procedures employing
our products, which could have a material adverse effect on our business, results of operations and
financial condition. See Item 7, Managements Discussion and Analysis of Financial Condition and
Results of Operations Factors That May Affect Future Results We Depend on Third Party Coverage
and Reimbursement Policies.
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.
Product Liability and Insurance
We may be subject to product liability claims in the future. Our products are highly complex
and are used to treat extremely delicate eye tissue and skin conditions on and near a patients
face. Our products are often used in situations where there is a high risk of serious injury or
adverse side effects. We recommend that our disposable products only be used
once and prominently label these disposables. If a disposable product is not adequately sterilized by the
customer between such uses, a patient could suffer serious consequences, possibly resulting in a
suit against us for damages. Accordingly, the manufacture and sale of medical products entails
significant risk of product liability claims. Although we currently maintain and intend to continue
the Companys product liability insurance, adequate insurance may not be available on acceptable
terms, if at all and may not provide adequate coverage against potential liabilities. Such
insurance is expensive and in the future may not be available on acceptable terms, 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. To date, we have not
experienced any product liability claims which would result in payments in excess of our policy
limits.
Backlog
We generally do not maintain a high level of backlog. As a result, we do not believe that our
backlog at any particular time is indicative of future sales levels.
Employees
At December 30, 2006, we had a total of 121 full-time employees, including 52 in operations,
37 in sales and marketing, 19 in research and product innovation and 13 in finance and
administration. We also employ, from time to time, a number of temporary and part-time employees as
well as consultants on a contract basis. At December 30, 2006, we employed 19 such persons. We
intend to hire additional personnel during the next twelve months primarily in the product
innovation, direct sales, production and finance areas. We hired 62 additional employees in
January 2007 in connection with our acquisition of the assets of Laserscopes aesthetics business.
Our future success will depend in part on our ability to attract, train, retain and motivate highly
qualified employees, who are in great demand. We may not be successful in attracting and retaining
such personnel. Our employees are not represented by a collective bargaining organization, and we
have never experienced a work stoppage or strike. We consider our employee relations to be good.
Available Information
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K
and amendments to reports pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as
amended, are available, free of charge, on our website at www.iridex.com, as soon as
reasonably practicable after such reports are electronically filed with the Securities and Exchange
Commission, however, the information on, or that can be accessed through, our website is not part
of this report.
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Item 1A. Risk Factors
Factors That May Affect Future Results
In addition to the other information contained in this Annual Report Form 10-K, we have
identified the following risks and uncertainties that may have a material adverse effect on our
business, financial condition or results of operation. You should carefully consider the risks
described below before making an investment decision.
We do not believe that our current liquidity and capital resources will be sufficient to meet
our currently planned operating requirements for the next 12 months.
We do not believe that our current liquidity and capital resources, cash expected to be
generated from operations and our ability to draw-down on our credit facilities, if at all, will be
sufficient to meet our currently planned operating requirements for the next 12 months. Our
concerns about our ability to satisfy our liquidity requirements over the next 12 months are
primarily a result of our current operating performance relative to plan, as well as our continuing
losses, negative cash flows and current liquidity in relation to future obligations, including our
obligation to make a payment in October 2007 to Laserscope for the purchase of certain inventory
under our Supply Agreement we entered into with American Medical Systems Holdings in connection
with the acquisition of the aesthetics business of Laserscope and our expected inability to satisfy
certain covenants under our loan agreement with Mid-Peninsula Bank, part of Greater Bay Bank N.A.,
and the Export-Import Bank as of March 31, 2007. Our independent registered public accounting
firm, PricewaterhouseCoopers LLP, issued an opinion in connection with their audit of our financial
statements for the fiscal year ended December 30, 2006 which stated, that there was substantial
doubt as to our ability to continue as a going concern.
Our recent and current operating performance has not met our expectations, primarily as a
result of our inability to realize the full benefits of the acquisition of the aesthetics business
of Laserscope in our previously anticipated time frame, as well as recent negative cash flows from
operations. In particular, revenues from the aesthetics business have been below our expectations.
Our ability to realize the potential benefits of the acquisition will depend, in part, on our
ability to integrate the aesthetics business. As expected, our efforts towards integrating the
aesthetics business of Laserscope has and will continue to take a significant amount of time and
place a significant strain on our managerial, operational and financial resources, and may
continue to be more difficult and expensive than originally anticipated. This continued diversion
of our managements attention and any additional delays or difficulties encountered in connection
with the integration of the aesthetics business will harm our operating results and increase the
difficulty of our being able to satisfy our liquidity requirements.
In addition, we currently expect that our operating performance for our first fiscal quarter
ending March 31, 2007 will result in our not being able to satisfy certain current restrictive
covenants contained in our credit facilities with Mid-Peninsula Bank and the Export-Import Bank,
and if we default on these credit facilities and the lenders exercise their remedies, this will
further contribute to the difficulties we expect to face in meeting our liquidity requirements over
the next 12 months. Our obligations under these credit facilities are secured by a lien on
substantially all of the Companys assets. Each of these credit facilities contain certain
customary covenants which require the Company to maintain profitability beginning in our second
fiscal quarter of 2007 and to meet certain tangible net worth and debt service requirements. In
addition, we must maintain $3.0 million in restricted cash at all times when borrowings are
outstanding. We currently have drawn down $11.4 million under this credit facility which is the
full amount currently available, and, given our current financial status, we currently do not
expect to be able to satisfy the restrictive covenants relating to these facilities as of March 31,
2007. In the event of default by the Company with the covenants under these facilities,
Mid-Peninsula Bank and the Export-Import Bank, would be entitled to exercise their remedies, under
these facilities, which include declaring all obligations immediately due and payable and disposing
of the collateral if obligations were not paid. We have initiated discussions with a view toward
restructuring these credit facilities to enable us to come into compliance with applicable
covenants; however, we cannot assure you that these discussions will be successful. See Note 11 of
Notes to Consolidated Financial Statements in Part II of this report for more information regarding
these credit facilities.
In order to address our liquidity issues, we plan to, among other things: (i) work towards
integrating the aesthetics business as quickly and efficiently as possible and maximizing the
potential benefits that may be realized from the acquisition, (ii) modify our planned operations in
order to increase our cash flows from operations, (iii) seek to restructure our credit facilities, and (iv) raise additional capital
through equity or debt financing in order to enhance our liquidity.
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We cannot assure you that we will be successful in these efforts or that any additional
capital raised through debt or equity financings will be available on favorable terms or at all.
If we are unsuccessful in these efforts, we may have to suspend or cease operations or
significantly dilute our stockholders equity holdings.
We Have More Indebtedness and Fewer Liquid Resources After the Acquisition of the Aesthetics
Business of Laserscope, Which Could Adversely Affect Our Cash Flows and Business.
In order to complete
the acquisition, we entered into financing arrangements that provide for
a $6 million term loan and a revolving credit line of up to $6 million. We had no debt outstanding
at December 30, 2006. We had $12 million outstanding on January 17, 2007 when the acquisition of
the aesthetics business of Laserscope was consummated. We also used the majority of our liquid
resources to finance the acquisition of the aesthetics business of
Laserscope. Upon the transfer of the manufacturing of the Laserscope
products from Laserscope to us, we are required to purchase up to
$9 million of raw materials inventory from Laserscope. As a result of the
increase in debt, demands on our cash resources may increase after the completion of the
acquisition. The increased levels of debt could, among other things:
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require us to dedicate a substantial portion of our cash flow from operations to
payments on our debt, thereby reducing funds available for working capital, capital
expenditures, acquisitions and other purposes; |
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making it more difficult for us to meet our payment and other obligations under our
outstanding debt; |
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increase our vulnerability to, and limit our flexibility in planning for, adverse
economic and industry conditions; |
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increase our sensitivity to interest rate increases on our indebtedness with
variable interest rates; |
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result in an event of default if we fail to comply with the financial and other
restrictive covenants contained in our debt agreements, which event of default could
result in all of our debt becoming immediately due and payable; |
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affect our credit
rating; |
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limit our ability to obtain additional financing to fund future working capital,
capital expenditures, additional acquisitions and other general corporate
requirements; |
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create competitive disadvantages compared to other companies with less
indebtedness; and |
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limit our ability to apply proceeds from an offering or asset sale to purposes
other than the repayment of debt. |
Our Loan Agreements Contain Covenant Restrictions that May Limit Our Ability to Operate Our
Business and To Service Our Indebtedness, We Will Require a Significant Amount of Cash. Our Ability
to Generate Cash Flow Depends on Many Factors Beyond Our Control.
Our ability to meet our payment and other obligations under our debt depends on our ability to
generate significant cash flow in the future. This, to some extent, is subject to general economic,
financial, competitive, legislative and regulatory factors as well as other factors that are beyond
our control. We cannot assure holders that our business will generate cash flow from operations, or
that future borrowings will be available to us under our senior credit facility or otherwise, in an
amount sufficient to enable us to meet our payment obligations under our debt and to fund other
liquidity needs. Our loan agreements contain covenant restrictions that may limit our ability to
operate our business.
19
Although We Expect that Our Acquisition of the Aesthetics Business of Laserscope Will Result
in Benefits to the Company, the Company May Not Realize Those Benefits Because of Integration and
Other Challenges.
On January 16, 2007, we completed our acquisition of the aesthetics business of Laserscope
(the Aesthetics Business), a wholly-owned subsidiary of American Medical Systems Holdings, Inc.
Our ability to realize the anticipated benefits of the acquisition will depend, in part, on our
ability to integrate the Aesthetics Business with our business. Integrating the Aesthetics Business
may be expensive and time-consuming and we may not be able to successfully do so. Integration
efforts often take a significant amount of time, place a significant strain on managerial,
operational and financial resources and can prove to be more difficult or expensive than predicted.
The diversion of our managements attention and any delay or difficulties encountered in connection
with the pending acquisition of the Aesthetics Business could result in the disruption of our
on-going business or inconsistencies in standards, controls, procedures and policies that could
negatively affect our ability to maintain relationships with customers, suppliers, collaborators,
employees and others with whom we have business dealings. These disruptions could harm our
operating results. Further, the following specific factors may adversely affect our ability to
integrate the Aesthetics Business:
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coordinating marketing functions; |
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transferring of the manufacturing of the Laserscope products
to the Company; |
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unanticipated issues in integrating information, communications and other systems; |
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unanticipated incompatibility of purchasing, logistics, marketing and
administration methods; |
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greater than anticipated liabilities; |
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retaining key employees; |
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consolidating corporate and administrative infrastructures; |
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the diversion of managements attention from ongoing business concerns; |
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coordinating our current product and process development efforts with those of the
Aesthetics Business in a way which permits us to bring future new products to the
market in a timely and cost-effective manner; and |
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coordinating geographically separate organizations. |
We cannot assure you that the combination of the Aesthetics Business with us will result in the
realization of the full benefits anticipated from the acquisition.
In addition, as part of our acquisition, we entered into agreements with Laserscope to obtain
certain manufacturing support, administrative services and future intellectual property rights. In
the event that Laserscope fails to provide this support and service, or provides such support and
service at a level of quality and timeliness inconsistent with the historical delivery of such
support and service, or fails to grant us the intellectual property rights we expected, our ability
to integrate the Aesthetics Business will be hampered and our operating results may be harmed.
Failure to Remediate the Material Weaknesses in Our Disclosure Controls and Procedures in a
Timely Manner, or at All, Could Harm Our Operating Results or Cause Us to Fail to Meet Our
Regulatory or Reporting Obligations.
We evaluated the effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report and, based on this evaluation, management concluded that our
disclosure controls and procedures were not effective because of the material weaknesses detailed
in Item 9A of Part II of this Annual Report on Form 10-K.
In particular,
the material weaknesses identified related to the Companys period-end review
procedures. We are taking a number of remedial actions designed
to remedy the material weaknesses summarized above. However, if despite our remediation efforts,
we fail to remediate our material weaknesses, we could be subject to regulatory scrutiny and a loss
of public confidence in our disclosure controls and procedures. These remediation efforts will
likely increase our general and administrative expenses and could, therefore, have an adverse
effect on our reported net income.
Even if we are to successfully remediate such material weaknesses, because of inherent
limitations, our disclosure controls and procedures may not prevent or detect misstatements or
material omissions. Projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
20
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 visible and infrared light therapeutic-based photocoagulator medical laser
systems and delivery devices to the ophthalmology and aesthetics markets. We believe that
continued and increased sales, if any, of these medical laser systems is dependent upon a number of
factors including the following:
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acceptance of product performance, features, ease of use, scalability and durability; |
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acceptance of the companys new marketing programs; |
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recommendations and opinions by ophthalmologists, dermatologists, other
clinicians, plastic surgeons and their associated opinion leaders, including study
outcomes; |
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price of our products and prices of competing products and technologies; |
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availability of competing products, technologies and alternative treatments; and |
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level of reimbursement for treatments administered with our products. |
In addition, we derive a meaningful portion of our sales from recurring revenues including
disposable laser probes, EndoProbes and service. Our ability to increase recurring revenues from
the sale of EndoProbes will depend primarily upon the features of our current products and product
innovation, 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 may have a
material adverse effect on our business, results of operations and financial condition.
If There is Not Sufficient Demand for the Procedures Performed with Our Products, Practitioner
Demand for Our Products Could be Inhibited, Resulting in Unfavorable Operating Results and Reduced
Growth Potential.
Continued expansion of the global market for laser- and other light-based aesthetic procedures
is a material assumption of our growth strategy. Most procedures performed using our products are
elective procedures not reimbursable through government or private health insurance, with the costs
borne by the patient. The decision to utilize our products may therefore be influenced by a number
of factors, including:
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evolving customer needs; |
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the introduction of new products and technologies; |
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evolving surgical practices; |
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evolving industry standards; |
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the cost of procedures performed using our products; |
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the cost, safety and effectiveness of alternative treatments, including
treatments which are not based upon laser- or other light-based technologies and
treatments which use pharmaceutical products; |
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the success of our sales and marketing efforts; and |
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consumer confidence, which may be impacted by economic and political conditions. |
If, as a result of these factors, there is not sufficient demand for the procedures performed
with our products, practitioner demand for our products could be reduced, resulting in unfavorable
operating results and lower growth potential.
21
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. Successful
commercialization of 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.
While We Devote Significant Resources to Research and Development, Our Research and
Development May Not Lead to New Products that Achieve Commercial Success.
Our research and development process is expensive, prolonged, and entails considerable
uncertainty. Because of the complexities and uncertainties associated with ophthalmic and aesthetic
research and development, products we are currently developing may not complete the development
process or obtain the regulatory approvals required to market such products successfully. The
products currently in our development pipeline may not be approved by regulatory entities and may
not be commercially successful, and our current and planned products could be surpassed by more
effective or advanced products of current or future competitors. Therefore, even if we are able to
successfully develop enhancements or new generations of our products, these enhancements or new
generations of products may not produce revenue in excess of the costs of development and they may
be quickly rendered obsolete by changing customer preferences or the introduction by our
competitors of products embodying new technologies or features.
The Clinical Trial Process Required to Obtain Regulatory Approvals is Costly and Uncertain,
and Could Result in Delays in New Product Introductions or Even an Inability to Release a Product.
The clinical trials required to obtain regulatory approvals for our products are complex and
expensive and their outcomes are uncertain. We incur substantial expense for, and devote
significant time to, clinical trials but cannot be certain that the trials will ever result in the
commercial sale of a product. We may suffer significant setbacks in clinical trials, even after
earlier clinical trials showed promising results. Any of our products may produce undesirable side
effects that could cause us or regulatory authorities to interrupt, delay or halt clinical trials
of a product candidate. We, the FDA, or another regulatory authority may suspend or terminate
clinical trials at any time if they or we believe the trial participants face unacceptable health
risks.
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., Nidek, Carl
Zeiss, Inc., Alcon, and Synergetics, Inc. Most of these companies currently offer a competitive
semiconductor-based laser system in ophthalmology. Also within ophthalmology pharmaceutical
alternative treatments for AMD such as Visudyne (Novartis), Macugen (OSI Pharmaceuticals) and
Lucentis (Genentech) compete rigorously with traditional laser procedures. Our principal
competitors in dermatology are Palomar Technologies, Candela Corporation, Syneron, and Lumenis Ltd.
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.
22
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 some 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 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 fiscal year ended December 30, 2006, our
ophthalmology sales were $30.8 million or 86% 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.
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 year ended December 30, 2006, our international sales were $14.0 million. We
anticipate that international sales will continue to account for a significant portion of our
revenues, particularly ophthalmology, 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 and potential costs, including:
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differing local product preferences and product requirements; |
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cultural differences; |
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changes in foreign medical reimbursement and coverage policies and programs; |
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political and economic instability; |
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impact of recessions in economies outside of the United States; |
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difficulty in staffing and managing foreign operations; |
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performance of our international channel of distributors; |
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foreign certification requirements, including continued ability to use the CE
mark in Europe; |
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reduced or limited protections of intellectual property rights in jurisdictions
outside the United States; |
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longer accounts receivable collection periods; |
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fluctuations in foreign currency exchange rates; |
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potentially adverse tax consequences; and |
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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.
As we expand our existing international operations, especially following our acquisition of
the aesthetics business of Laserscope, we may encounter new risks. For example, as we focus on
building our international sales and distribution networks in new geographic regions, we must
continue to develop relationships with qualified local distributors and trading companies. If we
are not successful in developing these relationships, we may not be able to grow sales in these
geographic regions. These or other similar risks could adversely affect our revenue and
profitability.
We Are Exposed to Risks Associated With Worldwide Economic Slowdowns and Related
Uncertainties.
Concerns about consumer and investor confidence, volatile corporate profits and reduced
capital spending, international conflicts, terrorist and military activity, civil unrest and
pandemic illness could cause a slowdown in customer orders or cause customer order cancellations.
In addition, political and social turmoil related to international conflicts and terrorist acts may
put further pressure on economic conditions in the United States and abroad. Unstable political,
social and economic conditions make it difficult for our customers, our suppliers and us to
accurately forecast and plan future business activities. In particular, it is difficult to develop
and implement strategy, sustainable business models and efficient operations, as well as
effectively manage supply chain relationships. If such conditions persist, our business, financial
condition and results of operations could suffer.
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.
Currently our direct sales force consists of 21 employees and we maintain relationships with 77
independent distributors internationally selling our products into 107 countries through four
direct Area Sales Managers. 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 terms of its
distribution agreement 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 distributor 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.
24
If We Lose Key Personnel or Fail to Integrate Replacement Personnel Successfully, Our Ability
to Manage Our Business Could Be Impaired.
Our future success depends upon the continued service of our key management, technical, sales,
and other critical personnel. Our officers and other key personnel are employees-at-will, and we
cannot assure you that we will be able to retain them. Key personnel have left our company in the
past and there likely will be additional departures of key personnel from time to time in the
future. The loss of any key employee could result in significant disruptions to our operations,
including adversely affecting the timeliness of product releases, the successful implementation and
completion of company initiatives, and the results of our operations. Competition for these
individuals is intense, and we may not be able to attract, assimilate or retain highly qualified
personnel. Competition for qualified personnel in our industry and the San Francisco Bay Area, as
well as other geographic markets in which we recruit, is intense and characterized by increasing
salaries, which may increase our operating expenses or hinder our ability to recruit qualified
candidates. In addition, the integration of replacement personnel could be time consuming, may
cause additional disruptions to our operations, and may be unsuccessful.
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.
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:
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unavailability of, shortages or limitations on the ability to obtain supplies of
components in the quantities that we require; |
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delays in delivery or failure of suppliers to deliver critical components on the
dates we require; |
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failure of suppliers to manufacture components to our specifications, and
potentially reduced quality; and |
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inability to obtain components at acceptable prices. |
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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. 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 Face Risks Associated with our Collaborative and OEM 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. For example, in 2005 we developed and sold a laser system on an OEM basis
for a third party which positively impacted the revenues and gross margins during the second half
of 2005. We cannot provide assurance that these types of relationships will continue over a longer
period. 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 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 operations and, as a result, product shipments to our customers could be delayed,
which would negatively impact our net revenues.
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 innovation and clinical testing of our products. Commercially, we currently
collaborate with Bausch & Lomb to design and manufacture a solid-state green wavelength (532nm)
laser photocoagulator module, called the Millennium Endolase module. The Millennium Endolase
module is designed to be a component of Bausch & Lombs 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. The failure to
obtain any additional future clinical or commercial collaborations and the resulting failure or
success of such arrangements 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.
26
If We Fail to Maintain Our Relationships With Health Care Providers, Customers May Not Buy Our
Products and Our Revenue and Profitability May Decline.
We market our products to numerous health care providers, including eye care professionals,
hospitals, ambulatory surgical centers, corporate optometry chains and group purchasing
organizations. We have developed and strive to maintain close relationships with members of each of
these groups who assist in product research and development and advise us on how to satisfy the
full range of surgeon and patient needs. We rely on these groups to recommend our products to their
patients and to other members of their organizations. The failure of our existing products and any
new products we may introduce to retain the support of these various groups could have a material
adverse effect on our business, financial condition and results of operations.
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:
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general economic uncertainties and political concerns; |
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the timing of the introduction and market acceptance of new products, product
enhancements and new applications; |
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changes in demand for our existing line of dermatology and ophthalmic products; |
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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; |
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our ability to maintain sales volumes at a level sufficient to cover fixed
manufacturing and operating costs; |
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fluctuations in our product mix between dermatology and ophthalmic products and foreign
and domestic sales; |
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the effect of regulatory approvals and changes in domestic and foreign regulatory
requirements; |
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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; |
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our long and highly variable sales cycle; |
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changes in the prices at which we can sell our products; |
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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 |
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increased product innovation costs. |
In addition to these factors, our quarterly results have been, and are expected to continue to
be, affected by seasonal factors.
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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 quarters 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.
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. From time to time, we meet with investors and potential investors. In
addition, we receive attention by securities analysts and present at analyst meetings when invited.
Our common stock may experience an imbalance between supply and demand resulting from low trading
volumes. These broad market fluctuations could have a significant impact on the market price of
our common stock regardless of our performance.
Material Increases in Interest Rates May Harm Our Sales.
We currently sell our products primarily to health care providers in general practice. These
health care providers often purchase our products with funds they secure through various financing
arrangements with third party financial institutions, including credit facilities and short-term
loans. If interest rates continue to increase, these financing arrangements will be more expensive
to our customers, which would effectively increase the overall cost of owning our products for our
customers and, thereby, may decrease demand for our products. Any reduction in the sales of our
products would cause our business to suffer.
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.
28
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.
If We Fail to Comply With the FDAs Quality System Regulation and Laser Performance Standards,
Our Manufacturing Operations Could Be Halted, and Our Business Would Suffer.
We are currently required to demonstrate and maintain compliance with the FDAs Quality System
Regulation, or QSR. The QSR is a complex regulatory scheme that covers the methods and
documentation of the design, testing, control, manufacturing, labeling, quality assurance,
packaging, storage and shipping of our products. Because our products involve the use of lasers,
our products also are covered by a performance standard for lasers set forth in FDA regulations.
The laser performance standard imposes specific record-keeping, reporting, product testing and
product labeling requirements. These requirements include affixing warning labels to laser
products, as well as incorporating certain safety features in the design of laser products. The FDA
enforces the QSR and laser performance standards through periodic unannounced inspections. We have
been, and anticipate in the future being, subject to such inspections. Our failure to take
satisfactory corrective action in response to an adverse QSR inspection or our failure to comply
with applicable laser performance standards could result in enforcement actions, including a public
warning letter, a shutdown of our manufacturing operations, a recall of our products, civil or
criminal penalties, or other sanctions, such as those described in the preceding paragraph, which
would cause our sales and business to suffer.
If We Modify One of Our FDA Approved Devices, We May Need to Seek Reapproval, Which, if Not
Granted, Would Prevent Us from Selling Our Modified Products or Cause Us to Redesign Our Products.
Any modifications to an FDA-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 pre-market approval. We may not be able to obtain additional 510(k)
clearance or pre-market approvals for new products or for modifications to, or additional
indications for, our existing products in a timely fashion, or at all. Delays in obtaining future
clearance 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 in the past and may make additional modifications in the future that we believe do
not or will not require additional clearance or approvals. If the FDA disagrees, and requires new
clearances or approvals for the modifications, we may be required to recall and to stop marketing
the modified devices, which could harm our operating results and require us to redesign our
products.
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
five pending patent applications in the United States and six 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.
29
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 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. Management believes that liabilities
resulting from the Synergetics Litigation Matters described in Part I, Item 3 , or other claims
which are pending or known to be threatened, will not have a material adverse effect on the
Companys financial position or results of operations. However, it is possible that cash flows or
results or operations could be materially affected in any particular period by the unfavorable
resolution of one or more of these contingencies or because of the diversion of managements
attention and the incurrence of significant expenses.
The Requirements of Complying with the Sarbanes-Oxley Act of 2002 Might Strain Our Resources,
Which May Adversely Affect Our Business and Financial Condition.
We are subject to
a number of requirements, including the reporting requirements of the
Securities Exchange Act of 1934, as amended, and the Sarbanes-Oxley
Act of 2002. Beginning in 2007 we will be required to comply with the
requirements of Section 404 of the Sarbanes-Oxley Act which
will require management to perform an assessment of internal control
over financial reporting. These requirements
might place a strain on our systems and resources. The Sarbanes-Oxley Act requires, among other
things, that we maintain effective disclosure controls and procedures and internal control over
financial reporting. In order to maintain and improve the effectiveness of our disclosure controls
and procedures and internal control over financial reporting, significant resources and management
oversight will be required. As a result, our managements attention might be diverted from other
business concerns, which could have a material adverse effect on our business, financial condition,
and operating results. In addition, we might need to hire additional accounting and financial staff
with appropriate public company experience and technical accounting knowledge, and we might not be
able to do so in a timely fashion.
30
Because We Do Not Require Training for Users of Our Products, and Sell Our Products to
Non-physicians, There Exists an Increased Potential for Misuse of Our Products, Which Could Harm
Our Reputation and Our Business.
Federal regulations allow us to sell our products to or on the order of licensed
practitioners. The definition of licensed practitioners varies from state to state. As a result,
our products may be purchased or operated by physicians with varying levels of training, and in
many states by non-physicians, including nurse practitioners, chiropractors and technicians.
Outside the United States, many jurisdictions do not require specific qualifications or training
for purchasers or operators of our products. We do not supervise the procedures performed with our
products, nor do we require that direct medical supervision occur. We, and our distributors,
generally offer but do not require purchasers or operators of our products to attend training
sessions. In addition, we sometimes sell our systems to companies that rent our systems to third
parties and that provide a technician to perform the procedure. The lack of training and the
purchase and use of our products by non-physicians may result in product misuse and adverse
treatment outcomes, which could harm our reputation and expose us to costly product liability
litigation.
Some of Our Laser Systems Are Complex in Design and May Contain Defects That Are Not Detected
Until Deployed By Our Customers, Which Could Increase Our Costs and Reduce Our Revenues.
Laser systems are inherently complex in design and require ongoing regular maintenance. The
manufacture of our lasers, laser products and systems involves a highly complex and precise
process. As a result of the technical complexity of our products, changes in our or our suppliers
manufacturing processes or the inadvertent use of defective materials by us or our suppliers could
result in a material adverse effect on our ability to achieve acceptable manufacturing yields and
product reliability. To the extent that we do not achieve such yields or product reliability, our
business, operating results, financial condition and customer relationships would be adversely
affected. We provide warranties on certain of our product sales, and allowances for estimated
warranty costs are recorded during the period of sale. The determination of such allowances
requires us to make estimates of failure rates and expected costs to repair or replace the products
under warranty. We currently establish warranty reserves based on historical warranty costs for
each product line. If actual return rates and/or repair and replacement costs differ significantly
from our estimates, adjustments to recognize additional cost of sales may be required in future
periods.
Our customers may discover defects in our products after the products have been fully deployed
and operated under peak stress conditions. In addition, some of our products are combined with
products from other vendors, which may contain defects. As a result, should problems occur, it may
be difficult to identify the source of the problem. If we are unable to identify and fix defects or
other problems, we could experience, among other things:
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loss of customers; |
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increased costs of product returns and warranty expenses; |
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damage to our brand reputation; |
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failure to attract new customers or achieve market acceptance; |
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diversion of development and engineering resources; and |
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legal actions by our customers. |
The occurrence of any one or more of the foregoing factors could seriously harm our business,
financial condition and results of operations.
31
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 managements attention, cause us to
incur significant expenses, harm our reputation with customers and negatively affect our future
sales.
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 other
things, new product innovation 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.
Our Manufacturing Capacity May Not Be Adequate to Meet the Demands of Our Business.
If our sales increase substantially, we may need to increase our production capacity. Any
prolonged disruption in the operation of our manufacturing facilities could materially harm our
business. We cannot assure you that if we choose to scale-up our manufacturing operations, we will
have the resources necessary to do so, or that we will be able to obtain regulatory approvals in a
timely fashion, which could affect our ability to meet product demand or result in additional
costs.
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
patients face. Although we maintain product liability insurance with coverage limits of $10.0
million per occurrence and an annual aggregate maximum of $10.0 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.
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,
32
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 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. In
November 2005, we filed a CPT (Current Procedural Terminology) Change Request Form seeking the
extension of Category III (Emerging Technology) codes 0016T and 0017T for wet and dry forms of AMD.
We learned in early May that the panel had voted to retain the Category III codes 0016T and 0017T
on reporting Transpupillary Thermotherapy/Ablation of macular drusen for an extension of five years
or until codes have been accepted for placement in the Category I section of CPT.
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.
The Successful Outcome of Clinical Trials and the Development of New Applications Using
Certain of Our Products will Accelerate Future Revenue Growth Rates.
The Companys ability to generate incremental revenue growth will depend, in part, on the
successful outcome of clinical trials that lead to the development of new applications using our
products. Clinical trials are long, expensive and uncertain processes. If the future results of
any of our clinical trials fail to demonstrate improved patient outcomes and/or the development of
new product applications, our ability to generate incremental revenue growth would be adversely
affected. We have supported several clinical trials, including, for example, the TTT4CNV and the
PTAMD clinical trials.
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 product innovation 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.
33
Our Business is Subject to Environmental Regulations.
Our facilities and operations are subject to federal, state and local environmental and
occupational health and safety requirements of the United States and foreign countries, including
those relating to discharges of substances to the air, water and land, the handling, storage and
disposal of hazardous materials and wastes and the cleanup of properties affected by pollutants.
Failure to maintain compliance with these regulations could have a material adverse effect on our
business or financial condition.
In the future, federal, state or local governments in the United States or foreign countries
could enact new or more stringent laws or issue new or more stringent regulations concerning
environmental and worker health and safety matters that could affect our operations. Also, in the
future, contamination may be found to exist at our current or former facilities or off-site
locations where we have sent wastes. We could be held liable for such newly discovered
contamination which could have a material adverse effect on our business or financial condition. In
addition, changes in environmental and worker health and safety requirements could have a material
adverse effect on our business or financial condition.
Our Export Controls May Not be Adequate to Ensure Compliance With United States Export Laws,
Especially When We Sell Our Products to Distributors Over Which We Have Limited Control.
The United States government has declared an embargo that restricts the export of products and
services to a number of countries, including Iran, Syria, Sudan and Cuba, for a variety of reasons,
including the support by these countries of terrorism. We sell our products through distributors in
Europe, Asia and the Middle East, and in such circumstances, the distributor is responsible for
interacting with the end user of our products, including assisting in the set up of any products
purchased by such end user. In order to comply with United States export laws, we have instituted
export controls including training for our personnel in export restrictions and requirements,
appointing an export control officer to oversee our export procedures, executing agreements with
our distributors that include defining their territory for sale and requirements pertaining to
United States export laws, obtaining end user information from our distributors and screening it to
restricted party lists maintained by the United States government. While we believe that these
procedures are adequate to prevent the export or re-export of our products into countries under
embargo by the United States government, we cannot assure you that our products will not be
exported or re-exported by our distributors into such restricted countries. In particular, our
control over what our distributors do with our products is necessarily limited, and we cannot
assure you that they will not sell our products to an end user in a country in violation of United
States export laws. Any violation of United States export regulations could result in substantial
legal, consulting and accounting costs, and significant fines and/or criminal penalties. In the
event that our products are exported to countries under a United States trade embargo in violation
of applicable United States export laws and regulations, such violations, costs and penalties or
other actions that could be taken against us could adversely affect our reputation and/or have an
adverse effect on our business, financial condition, prospects or results of operations.
We have sold and may continue to sell, with a license, our products into countries that are
under embargo by the United States and as a result have incurred and may continue to incur
significant legal, consulting and accounting fees and may place our Companys reputation at risk.
United States export laws permit the sale of medical products to certain countries under
embargo by the United States government if the seller of such products obtains a license to do so,
which requirements are in place because the United States has designated such countries as state
sponsors of terrorism. Certain of our products have been sold in Syria under license through a
distribution agreement with an independent distributor. In addition, certain of our products were
distributed in Iran without United States governmental authorization. The aggregate revenue
generated by sales of our products into Sudan and Syria have been immaterial to our business and
results of operations.
We may continue to supply medical devices to Sudan and Syria and other countries that are
under embargo by the United States government upon obtaining all necessary licenses. We do not
believe, however, that our sales into such countries will be material to our business or results of
operations. There are risks we face in selling to countries under United States embargo, including,
but not limited to, possible
34
damage to our reputation for sales to countries that are deemed to support terrorism, and
failure of our export controls to limit sales strictly to the terms of the relevant license, which
failure may result in civil and criminal penalties. In addition, we may incur significant legal,
consulting and accounting costs in ensuring compliance with our export licenses to countries under
embargo. Any damage to our reputation from such sales, failure to comply with the terms of our
export licenses or the additional costs we incur in making such sales could have a material adverse
impact on our business, financial condition, prospects or results of operations.
Item 2. Properties
We lease 37,000 square feet of space in Mountain View, California. This facility is being
substantially utilized for all of our manufacturing and research and development efforts and also
serves as our corporate headquarters. This facility is utilized for both our ophthalmology medical
device segment and our dermatology medical device segment. In September 2003, we entered into a
lease amendment for our facility in Mountain View. The original lease term of this facility, which
ended in February 2004, was amended and extended until February 2009. The lease was also amended to
grant us an option to renew this lease for an additional five year period beginning 2009 and
continuing until 2014 at a base monthly rental amount to be negotiated at the time of the renewal.
Management believes that our facility has capacity adequate for our current needs including
the requirements for the acquisition of Laserscope products and that suitable additional space or
an alternative space would be available as needed in the future on commercially reasonable terms.
Item 3. Legal Proceedings
On October 19, 2005, the Company filed a suit in the United States District Court for the
Eastern District of Missouri against Synergetics, USA, Inc. for infringement of a patent. The
Company later amended its complaint to assert infringement claims against Synergetics, Inc.;
Synergetics USA, Inc. was dismissed from the suit. The Company alleges that Synergetics infringes
the Companys patent by making and selling infringing products, including its Quick Disconnect
laser probes and its Quick Disconnect Laser Probe Adapter, and seeks injunctive relief, monetary
damages, treble damages, costs and attorneys fees.
On July 7, 2006, the Court issued a Claim Construction Ruling, interpreting 14 disputed
phrases within the Companys patent. The Court adopted the Companys position with respect to 13
of the 14 patent terms, and adopted a position between the Companys and Synergetics positions
with respect to the 14th term.
Discovery closed on February 15, 2007. Near the close of discovery, the Company filed five
summary judgment motions and Synergetics filed four. After the Courts rulings on these motions,
only four issues remain for trial. Those issues are: (1) the jury will decide the amount of
damages caused by Synergetics infringement with their Quick Disconnect products, (2) the jury will
decide whether Synergetics infringement was willful, (3) the jury will decide the validity of the
IRIDEX patent on the issue of obviousness, and (4) the Court will decide if IRIDEXs right to
recover damages for Synergetics infringement is limited by the equitable doctrines of laches and
estoppel.
35
Trial is scheduled to begin on April 16, 2007. The Company is confident that its patent
claims have merit, and if the parties do not reach a settlement, the Company intends to vigorously
pursue its claims to judgment.
The company is involved in two other pending suits with Synergetics. The first suit, entitled
Synergetics, Inc. v. Peregrine Surgical, Ltd., Innovatech Surgical, Inc., and IRIDEX Corporation,
is Case No. 06-CV-107 in the United States District Court for the Eastern District of Pennsylvania.
Synergetics filed suit against the Company on April 25, 2006, by adding the Company as a defendant
to a then-existing lawsuit against the other two defendants. Synergetics alleges that the Company
infringes its patent and seeks injunctive relief, monetary damages, treble damages, costs and
attorneys fees. On June 29, the Company filed its response to Synergetics pleading, denying
Synergetics claims and asserting counterclaims seeking a declaratory judgment that it does not
infringe Synergetics patent. Synergetics responded to the Companys counterclaims on July 24,
2006, denying them. On August 10, 2006, the case was reassigned to District Judge Thomas Golden.
Judge Golden has set a status conference for May 4, 2007. There have not yet been any significant
proceedings in this case.
The second suit, entitled Synergetics, Inc. v. IRIDEX Corporation, is pending in the United
States District Court for the Eastern District of Missouri. Synergetics filed suit against the
Company on February 21, 2007, alleging that the Companys assertion of patent infringement against
Synergetics constitutes a violation of the federal antitrust laws and also abuse of process in
Missouri. The Company has not yet been served with a copy of the summons and complaint, which was
filed under seal. The Company believes that Synergetics suit lacks merit (in part because the
Court granted the Company judgment of infringement and denied Synergetics motion for judgment on
laches) and intends to vigorously defend against Synergetics claims should Synergetics choose to
proceed with the suit.
Management believes that liabilities resulting from such proceedings, or claims which are
pending or known to be threatened will not have a material adverse effect on the Companys
financial position or results of operations. The company may incur significant dedication of
management resources and legal costs in connection with this lawsuit.
36
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrants Common Equity and Related Stockholder Matters, and Issuer Purchases
of Equity Securities
Market Information for Common Equity
Our common stock is quoted on the NASDAQ Global Market under the symbol IRIX since our
initial public offering on February 15, 1996. The following table sets forth for the periods
indicated the high and low sales prices for our common stock, as reported on the NASDAQ Global
Market.
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High |
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Low |
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Fiscal 2006 |
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Fourth Quarter |
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$ |
11.65 |
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$ |
8.03 |
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Third Quarter |
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10.69 |
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7.20 |
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Second Quarter |
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13.40 |
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|
9.75 |
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First Quarter |
|
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13.34 |
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7.50 |
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Fiscal 2005 |
|
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Fourth Quarter |
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$ |
8.93 |
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$ |
6.29 |
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Third Quarter |
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8.80 |
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6.16 |
|
Second Quarter |
|
|
6.53 |
|
|
|
5.07 |
|
First Quarter |
|
|
6.19 |
|
|
|
4.21 |
|
On March 15, 2007 the closing price on the NASDAQ Global Market for our common stock was
$10.25 per share. As of March 15, 2007, there were approximately 72 holders of record (not in
street name) of our common stock. Because many of our shares of common stock are held by brokers
and other institutions on behalf of our stockholders, we are unable to estimate the total number of
stockholders represented by these record holders.
Dividend Policy
We have never paid cash dividends on our common stock. We currently intend to retain any
earnings for use in our business and do not anticipate paying cash dividends in the foreseeable
future. In addition, the payment of cash dividends to our stockholders is currently prohibited by
our credit facility. See Note 4 of Notes to Consolidated Financial Statements.
37
Securities Authorized for Issuance Under Equity Compensation Plans
As of December 30, 2006, we had three equity compensation plans. These plans are the 2005
Employee Stock Purchase Plan, 1995 Director Option Plan and 1998 Stock Option Plan, all of which
have been approved by our stockholders. The following table summarizes our equity compensation
plans as of December 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
|
(b) |
|
|
(c) |
|
|
|
|
|
|
|
|
|
|
|
Number of securities |
|
|
|
|
|
|
|
|
|
|
|
remaining available for future |
|
|
|
Number of securities to |
|
|
Weighted-average exercise |
|
|
issuance under equity |
|
|
|
be issued upon exercise |
|
|
price of outstanding |
|
|
compensation plans |
|
|
|
of outstanding options, |
|
|
options, warrants and |
|
|
(excluding securities |
|
Plan category |
|
warrants and rights |
|
|
rights |
|
|
reflected in column (a)) |
|
Equity compensation plans
approved by security holders |
|
|
1,822,466 |
(1) |
|
$ |
5.93 |
|
|
|
471,621 |
(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans not
approved by security holders |
|
|
309,104 |
(3) |
|
|
6.42 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,131,570 |
|
|
$ |
6.00 |
|
|
|
471,621 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes 1,462,791 options to purchase shares outstanding under the 1998 Stock Plan, 97,500 options to purchase
shares outstanding under the 1995 Director Option Plan and 262,175, options to purchase shares outstanding
under the Amended and Restated 1989 Incentive Stock Plan. |
|
(2) |
|
Includes 458,673 options available for future issuance under the 1998 Stock Plan and 12,948 shares issuable
under the 2005 Employee Stock Purchase Plan. |
|
(3) |
|
Consists of three items. The first is a Stand-Alone Option granted to Barry G. Caldwell on July 5, 2005, entitling Mr.
Caldwell to purchase up to 234,104 shares of the Companys common stock at an exercise price of $6.07 per share, issued as a
stand-alone option, outside of the Companys existing stock plans and as a material inducement to Mr. Caldwell accepting
employment with the Company. The shares covered by the Stand-Alone Option vest over a four (4) year period, with
1/4th of the total number of shares subject to the Stand-Alone Option vesting on July 5, 2006 and 1/48th
of the total number of shares subject to the Stand-Alone Option vesting each full month thereafter, provided that Mr.
Caldwell continues to be a service provider to the Company on each such date. |
The second item is a warrant, issued in conjunction with the employment of the Companys Chief Executive Officer, in
consideration of services performed under a recruiting contract, to purchase 25,000 shares of the Companys common stock at
an exercise price of $6.07 per share. The warrant is exercisable at any time and expires on July 5, 2008.
The third item is a stand-alone option granted outside of the Companys existing stock plans to Deborah Tomasco, the
Companys Vice President of Product Innovation. The option entitles Ms. Tomasco to purchase up to 50,000 shares of the
Companys common stock at an exercise price of $8.26 per share.
38
Item 6. Selected Financial Data
The following selected consolidated financial data as of December 30, 2006 and December 31,
2005, and for the years ended December 30, 2006, December 31, 2005 and January 1, 2005, has been
derived from, and are qualified by reference to, our audited consolidated financial statements
included herein. The selected consolidated statement of operations data for the years ended January 3, 2004 and December 28, 2002, and the consolidated balance sheet data as of January 1,
2005, January 3, 2004 and December 28, 2002 has been derived from our audited financial statements
not included herein. These historical results are not necessarily indicative of the results of
operations to be expected for any future period.
The data set forth below (in thousands, except per share data) are qualified by reference to,
and should be read in conjunction with Item 7, Managements Discussion and Analysis of Financial
Condition and Results of Operations, and our consolidated financial statements, related financial
statement notes and other financial information included in Item 8, Financial Statements and
Supplementary Data.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal |
|
|
Fiscal |
|
|
Fiscal |
|
|
Fiscal |
|
|
Fiscal |
|
|
|
Year |
|
|
Year |
|
|
Year |
|
|
Year |
|
|
Year |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
Consolidated Statement of Operations
Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
$ |
35,904 |
|
|
$ |
37,029 |
|
|
$ |
32,810 |
|
|
$ |
31,699 |
|
|
$ |
30,634 |
|
Cost of sales |
|
|
17,099 |
|
|
|
18,854 |
|
|
|
17,922 |
|
|
|
17,628 |
|
|
|
17,046 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
18,805 |
|
|
|
18,175 |
|
|
|
14,888 |
|
|
|
14,071 |
|
|
|
13,588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
5,511 |
|
|
|
4,195 |
|
|
|
4,509 |
|
|
|
4,032 |
|
|
|
4,315 |
|
Selling, general and administrative |
|
|
18,059 |
|
|
|
12,171 |
|
|
|
11,455 |
|
|
|
10,087 |
|
|
|
9,454 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
23,570 |
|
|
|
16,366 |
|
|
|
15,964 |
|
|
|
14,119 |
|
|
|
13,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations |
|
|
(4,765 |
) |
|
|
1,809 |
|
|
|
(1,076 |
) |
|
|
(48 |
) |
|
|
(181 |
) |
Interest and other income, net |
|
|
733 |
|
|
|
528 |
|
|
|
319 |
|
|
|
212 |
|
|
|
122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes |
|
|
(4,032 |
) |
|
|
2,337 |
|
|
|
(757 |
) |
|
|
164 |
|
|
|
(59 |
) |
(Provision) benefit from income
taxes |
|
|
(1,721 |
) |
|
|
(666 |
) |
|
|
355 |
|
|
|
207 |
|
|
|
209 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) |
|
$ |
(5,753 |
) |
|
$ |
1,671 |
|
|
$ |
(402 |
) |
|
$ |
371 |
|
|
$ |
150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Data (basic and diluted): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per common share |
|
$ |
(0.75 |
) |
|
$ |
0.23 |
|
|
$ |
(0.06 |
) |
|
$ |
0.05 |
|
|
$ |
0.02 |
|
Diluted net income (loss) per common
share |
|
$ |
(0.75 |
) |
|
$ |
0.21 |
|
|
$ |
(0.06 |
) |
|
$ |
0.05 |
|
|
$ |
0.02 |
|
Shares used in net income (loss) per
common share calculation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
7,713 |
|
|
|
7,405 |
|
|
|
7,200 |
|
|
|
6,933 |
|
|
|
6,870 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
7,713 |
|
|
|
7,880 |
|
|
|
7,200 |
|
|
|
7,072 |
|
|
|
6,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December |
|
December |
|
January |
|
January |
|
|
|
|
30, |
|
31, |
|
1, |
|
3, |
|
December 28, |
|
|
2006 |
|
2005 |
|
2005 |
|
2004 |
|
2002 |
|
Consolidated Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and
available-for-sale securities |
|
$ |
21,051 |
|
|
$ |
21,434 |
|
|
$ |
18,028 |
|
|
$ |
16,292 |
|
|
$ |
11,542 |
|
Working capital |
|
|
29,846 |
|
|
|
32,330 |
|
|
|
25,342 |
|
|
|
28,462 |
|
|
|
28,072 |
|
Total assets |
|
|
40,177 |
|
|
|
41,104 |
|
|
|
39,093 |
|
|
|
35,839 |
|
|
|
34,272 |
|
Total stockholders equity |
|
|
32,157 |
|
|
|
34,517 |
|
|
|
31,783 |
|
|
|
30,834 |
|
|
|
30,198 |
|
39
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
Overview
IRIDEX Corporation is a leading worldwide provider of therapeutic based laser systems and
delivery devices used to treat eye diseases in ophthalmology and skin conditions in dermatology
(aesthetics). Our products are sold in the United States predominantly through a direct sales force
and internationally through 77 independent distributors into 107 countries. Total product sales in
2006, 2005, and 2004 were $35.9 million, $37.0 million, and $32.8 million respectively.
Our revenues arise primarily from the sale of our IRIS Medical OcuLight Systems, IQ810 lasers,
VariLite, DioLite 532 systems, delivery devices, disposables and revenues from service and support
activities. Our current family of OcuLight systems includes the IRIS Medical OcuLight Symphony,
OcuLight SL, OcuLight SLx, OcuLight TX, OcuLight GL and OcuLight GLx laser photocoagulation systems
as well as the IQ810 laser. In 2006 at the American Academy of Ophthalmology (AAO) we introduced
two new ophthalmic products; the OcuLight TX, a new green light laser with an optional remote
control and wireless footswitch which first shipped in late 2006 and the first true yellow 577 nm
laser system which is currently scheduled to ship in the second half of 2007 once FDA approval has
been obtained. We also produce the Millennium Endolase module which is sold exclusively to Bausch
& Lomb and incorporated into their Millennium Microsurgical System. We believe that our future
growth in revenue will be based upon the successful implementation of our strategy in these areas:
1) leveraging our core business and increasing recurring revenues, 2) broadening our product lines
through product innovation, and 3) developing new market opportunities through strategic
acquisitions and alliances.
Our business includes a recurring revenue component which includes the sale of our disposable
single use laser probes, EndoProbes, combined with the repair, servicing and extended warranty
protection for our laser systems. In 2006, recurring revenues were 43% of the overall business up
from 36% in 2005 and 33% in 2004. With our new sales and marketing programs, combined with having sold more than
8,300 IRIDEX laser systems worldwide, we believe that there is an opportunity to significantly
increase our recurring revenues over the next several years. Our new sales programs include an
increase in the number of our domestic area sales managers from 10 to 12 focused on the entire
ophthalmic product offering with emphasis in their incentive plan on the recurring revenue
opportunity. Our new marketing programs include a VIP (Valued IRIDEX Partner) program which allows
customers to access additional IRIDEX products through a contractual agreement on the purchase of
disposable laser probes. During the past two years, we have introduced many different types of
EndoProbes into the market, including our new stepped, intuitive and illuminating probes.
Sales to international distributors are made on open credit terms or letters of credit. Sales
of our products internationally are currently denominated in United States dollars and,
accordingly, are not subject to risks associated with international monetary conditions and
currency fluctuations.
Cost of sales consists primarily of the cost of purchasing components and sub-systems,
assembling, packaging, shipping and testing components at our facility, and direct labor and
associated overhead. Research and development expenses consist primarily of personnel costs,
materials and research support provided to clinicians at medical institutions developing new
applications which utilize our products.
Research and development costs have been expensed as incurred. Sales, general and administrative
expenses consist primarily of costs of personnel, sales commissions, travel expenses, advertising
and promotional expenses, facilities cost, legal and accounting fees, insurance and other expenses
not allocated to other departments.
Results of Operations 2006, 2005 and 2004
Revenue: Revenue by source for 2006, 2005 and 2004 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Opthalmology Domestic |
|
$ |
18,184 |
|
|
$ |
17,762 |
|
|
$ |
16,443 |
|
Opthalmology International |
|
|
12,641 |
|
|
|
12,900 |
|
|
|
11,310 |
|
|
|
|
|
|
|
|
|
|
|
Total Opthalmology |
|
|
30,826 |
|
|
|
30,663 |
|
|
|
27,753 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dermatology Domestic |
|
|
3,641 |
|
|
|
4,951 |
|
|
|
3,451 |
|
Dermatology International |
|
|
1,437 |
|
|
|
1,415 |
|
|
|
1,606 |
|
|
|
|
|
|
|
|
|
|
|
Total Dermatology |
|
|
5,078 |
|
|
|
6,366 |
|
|
|
5,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue |
|
$ |
35,904 |
|
|
$ |
37,029 |
|
|
$ |
32,810 |
|
|
|
|
|
|
|
|
|
|
|
40
Ophthalmology and Dermatology Revenue.
We manage and evaluate our business in two major segments Ophthalmology and Dermatology. We
then further break down these major segments by geography Domestic (United States) and
International (the rest of the world). Total revenue in 2006 declined to $35.9 million from $37
million in 2005, a $1.1 million or 3.0% decrease. The decrease resulted from Dermatology sales in
the domestic segment which declined $1.3 million or 26.5%. Changes in the composition of the
selling force in the first half of the year significantly contributed to this decrease
Dermatology international sales were essentially flat from 2005 levels. Overall, Dermatology sales
in both segments declined by $1.3 million, a 20.2% decrease. Ophthalmology sales in the domestic
segment increased $0.4 million or 2.4% in 2006 from 2005. This increase in domestic ophthalmology
revenue was offset by a decrease in OEM revenue from 2005 levels which reflected a large one time
OEM order. Ophthalmology international sales declined $0.2 million in 2006, a 2% decrease
due to a decline of approximately $1.0 million in sales to end customers in China and Hong Kong
offset by strength in international sales in Europe and other parts of the world. Overall
Ophthalmology sales growth was $0.2 million or 0.5% in 2006 compared to 2005.
Total Revenue in 2005 increased by $4.2 million over 2004, a 13% increase. In 2005,
ophthalmology sales increased 10.5% to $30.7 million from $27.8 million in 2004. Domestic
ophthalmology sales increased 8% to $17.8 million in 2005 from $16.4 million in 2004. Domestic
ophthalmology sales increased during this period mainly as a result of $1.2 million in increased
unit sales of visible lasers, $0.5 million in increased service revenue, $0.1 million in increased
unit sales of delivery devices offset by $0.4 million in decreased unit sales of infrared lasers
and $0.2 million in decreased average selling prices. International ophthalmology sales increased
14.1% to $12.9 million from $11.3 million in 2004. The increase in international sales was due
primarily to a $1.2 million increase in unit sales of visible laser consoles, $0.4 million in
increased delivery device sales, $0.2 million in increased average selling prices and $0.1 million
in increased international ophthalmology service revenue offset by a $0.5 million decrease in unit
sales of infrared lasers. Dermatology sales increased 25.9% in 2005 to $6.4 million from $5.1
million in 2004. Domestic dermatology sales increased 43.5% to $5.0 million in 2005 from $3.5
million in 2004. The increase in domestic dermatology sales was due primarily to $2.4 million in
increased unit sales of the VariLite laser, $0.1 million in unit sales of the new DioLite XP laser
and $0.2 million in increased domestic dermatology service revenue offset by $0.7 million in
decreased unit sales of the DioLite laser and $0.5 million in sales of the Apex hair removal laser
which was discontinued in 2005. International dermatology sales decreased 11.9% to $1.4 million in
2005 from $1.6 million in 2004. The decrease in international dermatology sales was due to a $0.9
million decrease in unit sales of the Apex hair removal laser which was discontinued in 2005 offset
by a $0.7 million increase in unit sales of the VariLite laser. We expect revenues to increase
primarily due to the acquisition of the assets of the aesthetics business of Laserscope.
Gross Margin:
Gross profit was $18.8 million in 2006, $18.2 million in 2005 and $14.9 million in 2004. Gross
margin represented 52.4% of sales in 2006, 49.1% of sales in 2005 and 45.4% of sales in 2004. The
3.3% increase in gross profit in 2006 was primarily due to a decrease in warranty reserves due to a
change in the duration of our standard warranty, which was reduced from three years to one year and a benefit due
to the sale of previously reserved inventory. In addition gross margin was positively impacted by
a slight improvement in overall average selling prices.
The 3.7% increase in gross profit in 2005 from 2004 resulted from a 1.9% decrease in direct
costs combined with a 1.8% decrease in overhead spending. Additional factors having a positive
impact on gross margin include the mix impact of the increase in disposable laser probe revenue and
some OEM revenues which may not be repeatable.
We believe gross
profit in dollars will likely increase as unit volumes increase and unit
production costs decrease by improved design and production efficiencies. Overall, however, gross
margins as a percentage of sales will continue to fluctuate due to changes in the relative
proportions of domestic and international sales, the product mix of sales, costs associated with
future product introductions and the manufacturing transition of the
Laserscope products 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.
Research and development includes the cost of research and product innovation efforts.
Research and product innovation expenses increased by 31.4% to $5.5 million in 2006 from $4.2
million in 2005. The increase in spending in 2006 related to increased project spending of $0.5
million associated with increased development efforts, $0.4 million of increased salary and
benefit expense associated with increased headcount including expenses for consulting and
temporary help and stock compensation expense of $0.3 million recorded in 2006.
Research and product innovation expenses decreased by 7.0% in 2005 to $4.2 million from $4.5
million in 2004. The decrease in 2005, consisted of a $0.2 million decrease in project spending and
$0.1 million in decreased clinical spending. The decrease in project spending in 2005 was primarily
driven by completion of development of the VariLite and IQ810 lasers in 2004. Total research and
development expenses were 15.3% of net sales in 2006, 11.3% of net sales in 2005 and 13.7% of net
sales in 2004. The decrease in research and product innovation expense, as a percentage of net sales in 2005 was attributable to
the decrease in research and product innovation spending in that year due to completion of certain
products. We expect to target our level of research and development spend at approximately 10% of
our revenues in future periods to maintain a consistent level of new product introductions.
41
Sales, General and Administrative.
Sales, general and
administrative expense increased in 2006 by 48.4% to $18.1 million from
$12.2 million in 2005. General and administrative expenses increased $4.0 million in 2006 due to
$2.4 million in increased legal spending related to litigation, $1.0 million in stock compensation
expense, $0.2 million in increased business development spending
and $0.5 million in professional and legal fees associated with an internal investigation of our revenue recognition policy and resulting
financial restatement. Selling expenses increased 21.4% or $1.1
million in 2006. This increase was largely related to increased salary and benefit expense and
recruiting expense of $0.8 million related to increased sales headcount. In addition, selling
expense was increased for charges related to demonstration units used in the sales process of $0.1
million and increased bad debt expense of $0.1 million. Marketing expense increased $0.8 million
in 2006. This increase was due to increased salary and benefit expense of $0.3 million associated
with increased headcount, $0.2 million of stock compensation expense, and $0.3 million in increased
advertising and trade show expenses. We expect sales, general and
administrative expense to increase in the first half of 2007 due to
ongoing legal spending related to litigation and increased consulting
fees associated with the Laserscope integration.
Sales, general and administrative expense increased by 6.3% in 2005 to $12.2 million from
$11.5 million in 2004. The increase in 2005 was driven by an increase of $0.3 million in marketing
spending, $0.2 million in increased selling expenses and $0.2 million in increased general and
administrative costs. The increase in marketing spending was primarily related to spending on trade
shows, advertising and consulting. The increase in selling expense was due mainly to increased
sales headcount and related expenses. General and administrative expense increased primarily due to
spending related to the hiring of a new Chief Executive Officer as well as increased consulting,
legal expenses and public company expenses offset by a one-time $1.0 million charge to establish a
reserve for unpaid sales tax in 2004. These expenses were 32.9% of sales in 2005 and 34.9% of sales
in 2004. The decrease, as a percentage of net sales, from 2004 to 2005, was attributable to the
level of increase in sales, general and administrative expense relative to the increase in the
level of sales.
Interest and Other income, net.
Other income, net consists primarily of interest income earned on available-for-sales
securities. Interest income was $736,000, $534,000 and $249,000 in 2006, 2005 and 2004
respectively. Interest income increased in 2006 over 2005 and 2005 over 2004 based on higher
average cash balances and increased interest rates in 2006 and 2005. We do not expect to earn interest income in the future and instead
expect to incur interest expense related to our new credit facilities.
Income Taxes
Significant components
affecting the effective tax rate include pre-tax net income or loss,
changes in valuation allowance,
federal and state R&D tax credits, income from tax-exempt securities, the state composite tax rate
and recognition of certain deferred tax assets subject to valuation allowance. We recorded a tax
provision of $1.7 million in 2006 resulting from the
establishment of a valuation allowance with respect of our deferred
tax assets based on our past losses and uncertainty regarding our
ability to project taxable income. Our tax provision for 2005 was $0.7 million based upon a 28% annual effective
tax rate. This rate was calculated based on a statutory tax rate benefited by R&D tax credits and
state tax benefits. We recorded a tax benefit in 2004 of $0.4 million. The 2004 tax rate resulted
primarily from a small pre-tax loss benefited by R&D tax
credits. In 2007 we do not anticipate recording a tax provision until
we determine it is appropriate to revise the valuation allowance.
Liquidity and Capital Resources
Our recent and current operating performance has not met our expectations, primarily as a
result of our inability to realize the full benefits of the acquisition of the aesthetics business
of Laserscope in our previously anticipated time frame, as well as recent negative cash flows from
operations. In particular, revenues from the aesthetics business have been below our expectations.
Our ability to realize the potential benefits of the acquisition will depend, in part, on our
ability to integrate the aesthetics business. As expected, our efforts towards integrating the
aesthetics business of Laserscope has and will continue to take a significant amount of time and
place a significant strain on our managerial, operational and financial resources, and may
continue to be more difficult and expensive than originally anticipated. This continued diversion
of our managements attention and any additional delays or difficulties encountered in connection
with the integration of the aesthetics business will harm our operating results and increase the
difficulty of our being able to satisfy our liquidity requirements.
We do not believe that our current liquidity and capital resources, cash expected to be
generated from operations and our ability to draw-down on our credit facilities, if at all, will be
sufficient to meet our currently planned operating requirements for the next 12 months. Our
concerns about our ability to satisfy our liquidity requirements over the next 12 months are
primarily a result of our current operating performance relative to plan, as well as our continuing
losses, negative cash flows and current liquidity in relation to future obligations, including our
obligation to make a payment in October 2007 to Laserscope for the purchase of certain inventory
under our Supply Agreement we entered into with American Medical Systems Holdings in connection
with the acquisition of the aesthetics business of Laserscope and our expected inability to satisfy
certain covenants under our loan agreement with Mid-Peninsula Bank, part of Greater Bay Bank N.A.,
and the Export-Import Bank as of March 31, 2007. Our independent registered public accounting
firm, PricewaterhouseCoopers LLP, issued an opinion in connection with their audit of our financial
statements for the fiscal year ended December 30, 2006 which stated, that there was substantial
doubt as to our ability to continue as a going concern.
42
In addition, we currently expect that our operating performance for our first fiscal quarter
ending March 31, 2007 will result in our not being able to satisfy certain current restrictive
covenants contained in our credit facilities with Mid-Peninsula Bank and the Export-Import Bank,
and if we default on these credit facilities and the lenders exercise their remedies, this will
further contribute to the difficulties we expect to face in meeting our liquidity requirements over
the next 12 months. Our obligations under these credit facilities are secured by a lien on
substantially all of the Companys assets. Each of these credit facilities contain certain
customary covenants which require the Company to maintain profitability beginning in our second
fiscal quarter of 2007 and to meet certain tangible net worth and debt service requirements. In
addition, we must maintain $3.0 million in restricted cash at all times when borrowings are
outstanding. We currently have drawn down $11.4 million under this credit facility which is the
full amount currently available, and, given our current financial status, we currently do not
expect to be able to satisfy the restrictive covenants relating to these facilities as of March 31,
2007. In the event of default by the Company with the covenants under these facilities,
Mid-Peninsula Bank and the Export-Import Bank, would be entitled to exercise their remedies, under
these facilities, which include declaring all obligations immediately due and payable and disposing
of the collateral if obligations were not paid. We have initiated discussions with a view toward
restructuring these credit facilities to enable us to come into compliance with applicable
covenants; however, we cannot assure you that these discussions will be successful. See Note 11 of
Notes to Consolidated Financial Statements in Part II of this report for more information regarding
these credit facilities.
In order to address our liquidity issues, we plan to, among other things: (i) work towards
integrating the aesthetics business as quickly and efficiently as possible and maximizing the
potential benefits that may be realized from the acquisition, (ii) modify our planned operations in
order to increase our cash flows from operations, (iii) seek to restructure our credit facilities,
and (iv) raise additional capital through equity or debt financing in order to enhance our
liquidity.
We cannot assure you that we will be successful in these efforts or that any additional
capital raised through debt or equity financings will be available on favorable terms or at all.
If we are unsuccessful in these efforts, we may have to suspend or cease operations or
significantly dilute our stockholders equity holdings.
Net cash used by operations
in 2006 totaled $1.5 million. This resulted largely from a net
loss of $5.7 million an increase in net inventories of $0.9 million, offset by $3.2 million associated with the recording of a valuation
allowance on the deferred tax asset and non-cash stock
compensation expense recorded during the year of $1.8 million. Cash provided by investing
activities was $8.3 million due to the conversion of available-for-sale securities into cash and
cash equivalents in anticipation of closing the
acquisition of the aesthetics business of Laserscope in January 2007. Net cash provided by
financing activities was $1.6 million related to the issuance of stock in connection with our
employee stock purchase programs.
Net cash generated by operations in 2005 totaled $2.8 million. The primary sources of cash in
2005 included net income of $1.7 million, a decrease in net accounts receivable of $0.8 million due
to a decrease in days sales outstanding and an increase in deferred income taxes of $0.6 million.
Uses of cash in 2005 consisted mainly of a decrease in accrued expenses of $0.7 million due to
payments in 2005 against a sales tax reserve offset by increased bonus accruals for 2005. We used
$1.5 million for investing activities in 2005 primarily due to the purchase of available-for-sale
securities and the acquisition of capital assets. Net cash provided by financing activities was
$1.0 million from the issuance of stock in connection with our employee stock purchase programs.
Net cash generated by operations in 2004 totaled $0.8 million and consisted mainly of an
increase in net accrued expenses and accounts payable of $2.0 million due primarily to a reserve
for sales tax and associated consulting as well as payroll accruals related to the timing of
payroll, depreciation of $0.4 million, an increase in deferred revenue of $0.3 million based on
increased sales of extended warranty contracts offset by an increase in net accounts receivable of
$0.8 million related mainly to the timing of sales in the fourth quarter of 2004, an increase in
the deferred tax asset of $0.6 million, a net loss of $0.4 million and an increase in inventory of
$0.2 million associated with inventory purchased in connection with new product introductions. We
used $2.3 million for investing activities in 2004 primarily due to the purchase of
available-for-sale securities and the acquisition of capital assets. Net cash provided by
financing activities was $1.4 million from the issuance of stock in connection with our employee
stock purchase programs.
Our contractual payment obligations that were fixed and determinable as of December 30, 2006 were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 and |
|
|
|
Total |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
thereafter |
|
Contractual Obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases |
|
$ |
983 |
|
|
$ |
438 |
|
|
$ |
451 |
|
|
$ |
94 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unconditional Purchase
Obligations* |
|
$ |
1,472 |
|
|
$ |
1,472 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Cash
Obligations |
|
$ |
2,455 |
|
|
$ |
1,910 |
|
|
$ |
451 |
|
|
$ |
94 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Related to the acquisition of the aesthetics business
of AMS in January 2007, we have agreed to purchase up to $9.0 million worth of certain inventory
from AMS book value, following the termination of our
Product Supply Agreement with AMS no
later than October 2007. Principal payments under the term loans entered into in conjunction with the acquisition are
$98,000 per month over a term of 5 years.
43
The
following annual operating lease commitments as of January 17, 2007 were acquired as part of the
acquisition of the French and UK subsidiaries of Laserscope.
|
|
|
|
|
2007 |
|
$ |
328 |
|
2008 |
|
|
224 |
|
2009 |
|
|
145 |
|
2010 |
|
|
33 |
|
|
|
|
|
|
|
$ |
730 |
|
|
|
|
|
Critical Accounting Policies
The preparation of our condensed consolidated financial statements in conformity with United
States Generally Accepted Accounting Principles (GAAP) requires us to make estimates and judgments
that affect the reported amounts of assets and liabilities, net sales and expenses, and the related
disclosures. We base our estimates on historical experience, our knowledge of economic and market
factors and various other assumptions we believe to be reasonable under the circumstances. Actual
results may differ from these estimates under different assumptions or conditions. We believe the
following critical accounting policies are affected by significant estimates, assumptions, and
judgments used in the preparation of our condensed consolidated financial statements.
Our revenues arise from the sale of laser consoles, delivery devices, disposables and service
and support activities. Revenue from product sales is recognized upon receipt of a purchase order
and product shipment provided that no significant obligations remain and collection of the
receivables is reasonably assured. Shipments are generally made with Free-On-Board (FOB) shipping
point terms, whereby title passes upon shipment from our dock. Any shipments with FOB receiving
point terms are recorded as revenue when the shipment arrives at the receiving point. Up-front
fees received in connection with product sales are deferred and recognized over the associated
product shipments. Revenue relating to extended warrant contracts is recognized on a straight line
basis over the period of the applicable warranty contract. We recognize repair service revenue
upon completion of the work. Cost is recognized as product sales revenue is recognized. The
Companys sales may include post-sales obligations for training or other deliverables. When these
obligations are fulfilled after product shipment, the Company recognizes revenue in accordance with
the multiple element accounting guidance set forth in Emerging Issues Task Force No. 00-21,
Revenue Arrangements with Multiple Deliverables. When the Company has objective and reliable
evidence of fair value of the undelivered elements, it defers revenue attributable to the post-sale
obligations and recognizes such revenue when the obligation is fulfilled. Otherwise, the Company
defers all revenue related to the transaction until all elements are delivered.
Inventories are stated at the lower of cost or market and include on-hand inventory, sales
demo inventory and service loaner inventory. Cost is determined on a standard cost basis which
approximates actual cost on a first-in, first-out (FIFO) method. Lower of cost or market is
evaluated by considering obsolescence, excessive levels of inventory, deterioration and other
factors. Adjustments to reduce the cost of inventory to its net realizable value, if required, are
made for estimated excess, obsolescence or impaired inventory and are charged to cost of goods
sold. Factors influencing these adjustments include changes in demand, product life cycle and
development plans, component cost trends, product pricing, physical deterioration and quality
issues. Revisions to these adjustments would be required if these factors differ from our
estimates.
|
|
|
Sales Returns Allowance and Allowance for Doubtful Accounts |
In the process of preparing financial statements we make estimates and assumptions that affect
the reported amount of assets and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses during the reported
period. Specifically, we estimate future product returns related to current period product revenue.
We analyze historical returns, and changes in customer demand and acceptance of our products when
evaluating the adequacy of the sales returns allowance and other allowances. Significant management
judgments and estimates must be made and used in connection with establishing the sales returns and other allowances in any accounting
period. Material differences may result in the amount and timing of our revenue for any period if
management made different judgments or utilized different estimates. The provision for sales
returns amounted to $0.2 million in fiscal years 2006, 2005 and 2004.
Similarly our management must make estimates regarding the uncollectability of our accounts
receivable. We are exposed to credit risk in the event of non-payment by customers to the extent
of amounts recorded on the balance sheet. As of December 30, 2006, we had accounts receivable
totaling $6.1 million, net of an allowance for doubtful accounts of $0.4 million. As sales levels
increase the level of accounts receivable would likely also increase. In the event that customers
were to delay their payments to us, the levels of accounts receivable would likely also increase.
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of
our customers to make required payments. The allowance for doubtful accounts is based on past
payment history with the customer, analysis of the customers current financial condition, the
aging of the accounts receivable balance, customer concentration and other known factors.
44
The Company accrues for estimated warranty costs upon shipment of products. Actual warranty
costs incurred have not materially differed from those accrued. The Companys warranty policy is
applicable to products which are considered defective in their performance or fail to meet the
product specifications. Warranty costs are reflected in the statement of operations as a cost of
sales.
We account for income taxes in accordance with
SFAS No. 109, Accounting for Income Taxes, which requires that
deferred tax assets and liabilities be recognized using enacted tax rates for
the effect of temporary differences between the book and tax bases of recorded assets and
liabilities. Under SFAS No. 109, the liability method is used in accounting for income taxes.
Deferred tax assets and liabilities are determined based on the differences between financial
reporting and the tax basis of assets and liabilities, and are measured using the enacted tax rates
and laws that will be in effect when the differences are expected to reverse. SFAS No. 109 also
requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not
that some or all of the deferred tax asset will not be realized. We evaluate annually the
realizability of our deferred tax assets by assessing our valuation allowance and by adjusting the
amount of such allowance, if necessary. The factors used to assess the likelihood of realization
include our forecast of future taxable income and available tax planning strategies that could be
implemented to realize the net deferred tax assets. In the quarter
ended December 30, 2006 we recorded a full valuation allowance
for our deferred tax assets based on our past losses and uncertainty
regarding our ability to project future taxable income. In future
periods if we are able to generate income we may reduce or eliminate
the valuation allowance.
|
|
|
Accounting for Stock-Based Compensation |
On January 1, 2006 we adopted Statement of Financial Accounting Standards No. 123 (revised
2004), Share-Based Payment (SFAS 123(R)), which requires the measurement and recognition of
compensation expense for all share-based awards made to employees and directors, including employee
non-qualified and incentive stock options, restricted stock units and employee purchase rights
under our Employee Stock Purchase Plan (ESPP Shares) based on estimated fair values. SFAS 123(R)
supersedes previous accounting under Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees (APB 25) for periods beginning in fiscal year 2006. In March 2005, the
Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 107 (SAB 107)
providing supplemental implementation guidance for SFAS 123(R). We have applied the provisions of
SAB 107 in our adoption of SFAS 123(R).
SFAS 123(R) requires companies to estimate the fair value of share-based awards on the date of
grant using an option pricing model. The value of the portion of the award that is ultimately
expected to vest is recognized as expense over the requisite service periods in our consolidated
statements of income. We adopted SFAS 123(R) using the modified prospective transition method which
requires the application of the accounting standard starting from January 1, 2006, the first day of our fiscal year 2006.
Our consolidated financial statements, as of and for the year ended December 30, 2006, reflect the
impact of SFAS 123(R). In accordance with the modified prospective transition method we used in
adopting SFAS 123(R), our results of operations prior to fiscal year 2006 have not been restated to
reflect, and do not include, the impact of SFAS 123(R).
Prior to the adoption of SFAS 123(R), we accounted for share-based awards to employees and
directors using the intrinsic value method in accordance with APB 25 and FASB Interpretation (FIN)
No. 44, Accounting for Certain Transactions Involving Stock Compensation an Interpretation of
APB Opinion No. 25. Accordingly, no compensation cost has been recognized for our fixed cost stock
option plans because stock-based awards were issued at fair market value on the date of grant
Stock-based compensation expense recognized in the year ended December 30, 2006, included
stock-based compensation expense for share-based awards granted prior to, but not yet vested as of
December 31, 2005, based on the fair value on the grant date estimated in accordance with the pro
forma provisions of SFAS 123, and stock-based compensation expense for the share-based awards
granted subsequent to December 31, 2005, based on the fair value on the grant date estimated in
accordance with the provisions of SFAS 123(R). In conjunction with the adoption of SFAS 123(R), we
changed our method of attributing the value of stock-based compensation expense from the
accelerated multiple-option method (for the purposes of non-GAAP information under SFAS 123) to the
straight-line single option method. Stock-based compensation expense for all share-based awards
granted on or prior to December 31, 2005 will continue to be recognized using the accelerated
multiple-option approach, while stock-based compensation expense for all share-based awards granted
subsequent to December 30, 2005 will be recognized using the straight-line single option method.
SFAS 123(R) requires that we recognize expense for awards ultimately expected to vest; therefore we
are required to develop an estimate of the number of awards expected to cancel prior to vesting
(forfeiture rate). The forfeiture rate is estimated based on historical pre-vest cancellation
experience and is applied to all share-based awards. SFAS 123(R) requires the forfeiture rate to be
estimated at the time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. Prior to fiscal year 2006, we accounted for forfeitures as
they actually occurred.
Upon adoption of SFAS 123(R), we selected the Black-Scholes option pricing model as the most
appropriate method for determining the estimated fair value for stock options and ESPP Shares. The
Black-Scholes model requires the use of highly subjective and complex assumptions which determine
the fair value of share-based awards, including the options expected term and the price volatility
of the underlying stock. For restricted stock or restricted stock units, stock-based compensation
expense is calculated based on the fair market value of our stock on the date of grant.
45
Recent Accounting Pronouncements
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes an interpretation of SFAS 109 (FIN 48). FIN 48 prescribes a comprehensive model
for recognizing, measuring, presenting and disclosing in the financial statements tax positions
taken or expected to be taken on a tax return, including a decision whether to file or not to file
in a particular jurisdiction. FIN 48 is effective for fiscal years beginning after December 15, 2006. We
will adopt FIN 48 in our year ended December 29, 2007. We do not believe that the adoption of the
provisions of FIN 48 will materially impact our consolidated financial position and results of
operations.
On September 13, 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements (SAB 108), which provides interpretive
guidance on how the effects of the carryover or reversal of prior year misstatements should be
considered in quantifying a current year misstatement. The guidance became effective for our fiscal
year 2006. Our adoption of SAB 108 did not have an impact on our consolidated financial position
and results of operations.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair
Value Measurements (SFAS 157). SFAS 157 establishes a framework for measuring fair value and
expands disclosures about fair value measurements under GAAP. The changes to current practice
resulting from the application of SFAS 157 relate to the definition of fair value, the methods used
to measure fair value, and the expanded disclosures about fair value measurements. SFAS 157 is
effective for fiscal years beginning after November 15, 2007 and interim periods within those
fiscal years. We do not believe that the adoption of the provisions of SFAS 157 will materially
impact our consolidated financial position and results of operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Market risk represents the risk of loss that may impact the financial position, results of
operations or cash flows due to adverse changes in financial and commodity market prices and rates.
Although limited, our exposure to market risk in the areas of changes in United States and foreign
interest rates and changes in foreign currency exchange rates are measured against the United
States dollar. These exposures are directly related to our normal operating and funding activities.
We are exposed to fluctuations in interest rates on cash and cash equivalents,
available-for-sale marketable securities and any future financing requirements. At December 30,
2006, we had no available-for-sale securities. Our primary interest rate exposure relates to the
impact of interest rate movements on our ability to obtain adequate financing to fund future
operations. We have no debt outstanding at December 30, 2006.
Currently, the majority of our revenue is denominated in United States dollars. Increases in
the value of the United States dollar against any local currencies could cause our products to
become relatively more expensive to customers in a particular country or region, leading to reduced
revenue or profitability in that country or region. As we continue to expand our international
sales, we expect our non-United States dollar denominated revenue and our exposure to gains and
losses on international currency transactions to increase due to our acquisition of two European
subsidiaries as part of our acquisition of the assets of the aesthetics business of Laserscope. We
currently do not engage in transactions to hedge against the risk of the currency fluctuation, but
we may do so in the future.
Item 8. Financial Statements and Supplementary Data.
Our consolidated balance sheets as of December 30, 2006 and December 31, 2005 and the
consolidated statements of operations, comprehensive income (loss), stockholders equity and cash
flows for each of the three years ending in the period December 30, 2006, together with the related
notes and the report of our independent auditors, are on the following pages. Additional required
financial information is described in Item 15.
46
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of IRIDEX Corporation:
In our opinion, the consolidated financial statements listed in the index appearing under Item
15(a)(1) present fairly, in all material respects, the financial position of IRIDEX Corporation and
its subsidiaries at December 30, 2006 and December 31, 2005, and the results of their operations
and their cash flows for each of the three years in the period ended December 30, 2006 in
conformity with accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the index appearing under Item
15(a)(2) presents fairly in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Companys management. Our responsibility
is to express an opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1, the Company will not be
in compliance with certain debt covenants as
of the quarter ended March 31, 2007 and does not have available resources to repay the debt if
required to do so by the lender which raise substantial doubt about its ability to continue as a going
concern. Managements plans in regard to these matters are also described in Note 1. The
consolidated financial statements do not include any adjustments that might result from the outcome
of this uncertainty.
As discussed in Note 6 to the consolidated financial statements, the Company changed the
manner in which it accounts for stock-based compensation in 2006.
/s/ PricewaterhouseCoopers LLP
San Jose, California
March 30, 2007
47
IRIDEX Corporation
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
December |
|
|
December |
|
|
|
30, |
|
|
31, |
|
|
|
2006 |
|
|
2005 |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
21,051 |
|
|
$ |
12,655 |
|
Available-for-sale securities |
|
|
|
|
|
|
8,779 |
|
Accounts receivable, net of allowance for
doubtful accounts of $439 in 2006 and $559
in 2005 |
|
|
6,052 |
|
|
|
6,589 |
|
Inventories, net |
|
|
9,499 |
|
|
|
8,594 |
|
Prepaids and other current assets |
|
|
1,264 |
|
|
|
885 |
|
Short term deferred income taxes |
|
|
|
|
|
|
1,415 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
37,866 |
|
|
|
38,917 |
|
Property and equipment, net |
|
|
1,087 |
|
|
|
1,114 |
|
Other long term assets |
|
|
1,224 |
|
|
|
|
|
Deferred income taxes |
|
|
|
|
|
|
1,073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
40,177 |
|
|
$ |
41,104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
1,830 |
|
|
$ |
1,094 |
|
Accrued expenses |
|
|
4,775 |
|
|
|
4,421 |
|
Deferred revenue |
|
|
1,415 |
|
|
|
1,072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
8,020 |
|
|
|
6,587 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 5). |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity |
|
|
|
|
|
|
|
|
Convertible Preferred Stock, $.01 par value: |
|
|
|
|
|
|
|
|
Authorized: 2,000,000 shares; |
|
|
|
|
|
|
|
|
Issued and outstanding: none |
|
|
|
|
|
|
|
|
Common Stock, $.01 par value: |
|
|
|
|
|
|
|
|
Authorized: 30,000,000 shares; |
|
|
|
|
|
|
|
|
Issued and outstanding: 7,841,781 shares in
2006 and 7,520,358 shares in 2005 |
|
|
79 |
|
|
|
76 |
|
Additional paid-in capital |
|
|
29,697 |
|
|
|
26,334 |
|
Accumulated other comprehensive loss |
|
|
|
|
|
|
(27 |
) |
Treasury stock, at cost |
|
|
(430 |
) |
|
|
(430 |
) |
Retained earnings |
|
|
2,811 |
|
|
|
8,564 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
32,157 |
|
|
|
34,517 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
40,177 |
|
|
$ |
41,104 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
48
IRIDEX Corporation
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
December 30, |
|
|
December 31, |
|
|
January 1, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Sales |
|
$ |
35,904 |
|
|
|
37,029 |
|
|
$ |
32,810 |
|
Cost of sales |
|
|
17,099 |
|
|
|
18,854 |
|
|
|
17,922 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
18,805 |
|
|
|
18,175 |
|
|
|
14,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
5,511 |
|
|
|
4,195 |
|
|
|
4,509 |
|
Sales, general and administrative |
|
|
18,059 |
|
|
|
12,171 |
|
|
|
11,455 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
23,570 |
|
|
|
16,366 |
|
|
|
15,964 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations |
|
|
(4,765 |
) |
|
|
1,809 |
|
|
|
(1,076 |
) |
Interest and other income, net |
|
|
733 |
|
|
|
528 |
|
|
|
319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income before income taxes |
|
|
(4,032 |
) |
|
|
2,337 |
|
|
|
(757 |
) |
(Provision for) Benefit from income taxes |
|
|
(1,721 |
) |
|
|
(666 |
) |
|
|
355 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(5,753 |
) |
|
|
1,671 |
|
|
$ |
(402 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) net income per common share |
|
$ |
(0.75 |
) |
|
$ |
0.23 |
|
|
$ |
(0.06 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) net income per common share |
|
$ |
(0.75 |
) |
|
$ |
0.21 |
|
|
$ |
(0.06 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing net (loss) income per share basic |
|
|
7,713 |
|
|
|
7,405 |
|
|
|
7,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing net (loss) income per common
share diluted |
|
|
7,713 |
|
|
|
7,880 |
|
|
|
7,200 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
49
IRIDEX Corporation
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Paid-in |
|
|
Treasury |
|
|
Comprehensive |
|
|
Retained |
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Stock |
|
|
Income (Loss) |
|
|
Earnings |
|
|
Total |
|
Balances, January
3, 2004 |
|
|
6,987,033 |
|
|
$ |
70 |
|
|
$ |
23,900 |
|
|
$ |
(430 |
) |
|
$ |
(1 |
) |
|
$ |
7,295 |
|
|
$ |
30,834 |
|
Issuance of Common
Stock under Stock
Option Plan |
|
|
294,852 |
|
|
|
4 |
|
|
|
1,081 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,085 |
|
Issuance of Common
Stock under
Employee Stock
Purchase Plan |
|
|
26,972 |
|
|
|
|
|
|
|
122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122 |
|
Tax Benefit of
Employee Stock
Option Plan |
|
|
|
|
|
|
|
|
|
|
178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
178 |
|
Change in
unrealized gains on
available-for-sale
securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(34 |
) |
|
|
|
|
|
|
(34) |
) |
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(402 |
) |
|
|
(402) |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, January
1, 2005 |
|
|
7,308,857 |
|
|
|
74 |
|
|
|
25,281 |
|
|
|
(430 |
) |
|
|
(35 |
) |
|
|
6,893 |
|
|
|
31,783 |
|
Issuance of Common
Stock under Stock
Option Plan |
|
|
183,873 |
|
|
|
2 |
|
|
|
661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
663 |
|
Issuance of Common
Stock under
Employee Stock
Purchase Plan |
|
|
27,628 |
|
|
|
|
|
|
|
134 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
134 |
|
Tax Benefit of
Employee Stock
Option Plan |
|
|
|
|
|
|
|
|
|
|
171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
171 |
|
Change in
unrealized gains on
available-for-sale
securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
8 |
|
Warrants issued for
services |
|
|
|
|
|
|
|
|
|
|
87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,671 |
|
|
|
1,671 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December
31, 2005 |
|
|
7,520,358 |
|
|
|
76 |
|
|
$ |
26,334 |
|
|
|
(430 |
) |
|
|
(27 |
) |
|
|
8,564 |
|
|
|
34,517 |
|
Issuance of Common
Stock under Stock
Option Plan |
|
|
276,578 |
|
|
|
3 |
|
|
|
1,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,292 |
|
Issuance of Common
Stock under
Employee Stock
Purchase Plan |
|
|
44,845 |
|
|
|
|
|
|
|
295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
295 |
|
Employee
Stock-Based
Compensation
Expense |
|
|
|
|
|
|
|
|
|
|
1,779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,779 |
|
Change in
unrealized gains on
available-for-sale
securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27 |
|
|
|
|
|
|
|
27 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,753 |
) |
|
|
(5,753 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December
30, 2006 |
|
|
7,841,781 |
|
|
$ |
79 |
|
|
$ |
29,697 |
|
|
$ |
(430 |
) |
|
$ |
|
|
|
$ |
2,811 |
|
|
$ |
32,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
50
IRIDEX Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
December 30, |
|
|
December 31, |
|
|
January 1, |
|
|
|
2006 |
|
|
2005 |
|
|
2005 |
|
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(5,753 |
) |
|
$ |
1,671 |
|
|
$ |
(402 |
) |
Adjustments to reconcile net (loss) income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
542 |
|
|
|
435 |
|
|
|
384 |
|
Stock compensation cost recognized |
|
|
1,816 |
|
|
|
|
|
|
|
|
|
Issuance of warrant |
|
|
|
|
|
|
87 |
|
|
|
|
|
Provision for doubtful accounts |
|
|
141 |
|
|
|
132 |
|
|
|
376 |
|
Provision for inventories |
|
|
(296 |
) |
|
|
407 |
|
|
|
694 |
|
Deferred income taxes |
|
|
2,488 |
|
|
|
585 |
|
|
|
(579 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
396 |
|
|
|
683 |
|
|
|
(1,232 |
) |
Inventories |
|
|
(609 |
) |
|
|
(436 |
) |
|
|
(895 |
) |
Prepaids and other current assets |
|
|
(379 |
) |
|
|
(71 |
) |
|
|
120 |
|
Other long term assets |
|
|
(154 |
) |
|
|
|
|
|
|
|
|
Accounts payable |
|
|
(274 |
) |
|
|
(139 |
) |
|
|
204 |
|
Accrued expenses |
|
|
354 |
|
|
|
(746 |
) |
|
|
1,787 |
|
Deferred revenue |
|
|
343 |
|
|
|
162 |
|
|
|
314 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash/(used) provided by operating activities |
|
|
(1,385 |
) |
|
|
2,770 |
|
|
|
771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of available-for-sale securities |
|
|
(18,250 |
) |
|
|
(8,770 |
) |
|
|
(7,681 |
) |
Proceeds from maturity of available-for-sale securities |
|
|
27,056 |
|
|
|
7,646 |
|
|
|
5,751 |
|
Business acquisition cost |
|
|
(60 |
) |
|
|
|
|
|
|
|
|
Acquisition of property and equipment |
|
|
(515 |
) |
|
|
(340 |
) |
|
|
(386 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
8,231 |
|
|
|
(1,464 |
) |
|
|
(2,316 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock under employee stock plans |
|
|
1,550 |
|
|
|
968 |
|
|
|
1,385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
1,550 |
|
|
|
968 |
|
|
|
1,385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
8,396 |
|
|
|
2,274 |
|
|
|
(160 |
) |
Cash and cash equivalents, beginning of year |
|
|
12,655 |
|
|
|
10,381 |
|
|
|
10,541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
21,051 |
|
|
$ |
12,655 |
|
|
$ |
10,381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for: |
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
243 |
|
|
$ |
209 |
|
|
$ |
25 |
|
The accompanying notes are an integral part of these consolidated financial statements.
51
IRIDEX Corporation
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
December 30, |
|
|
December 31, |
|
|
January 1, |
|
|
|
2006 |
|
|
2005 |
|
|
2005 |
|
Net (loss) income |
|
$ |
(5,753 |
) |
|
$ |
1,671 |
|
|
$ |
(402 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in unrealized
losses on
available-for-sale
securities, net of tax |
|
|
27 |
|
|
|
6 |
|
|
|
(34 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income |
|
$ |
(5,726 |
) |
|
$ |
1,677 |
|
|
$ |
(436 |
) |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
IRIDEX Corporation
Notes to Consolidated Financial Statements
1. Business of the Company
Description of Business
IRIDEX Corporation is a worldwide provider of therapeutic based laser systems and delivery
devices used to treat eye diseases in ophthalmology and skin conditions in dermatology. Our
products are sold in the United States predominately through a direct sales force and
internationally through 77 independent distributors into 107 countries.
The Companys financial statements have been prepared on a going concern basis which
contemplates the realization of assets and the settlement of liabilities and commitments in the
normal course of business.
The Company does
not expect that current cash and cash equivalents, short-term investments, revenue
expected to be generated from operations and available credit facilities, if any, will be
sufficient to meet the Companys planned operating requirements for the next 12 months. The
Company expects that for our first fiscal quarter ending March 31, 2007 the Company will not be
able to satisfy certain restrictive covenants contained in credit facilities with Mid-Peninsula
Bank and the Export-Import Bank (see Note 11.). As of March 30,
2007 we have drawn down $11.4 million under
this credit facility which is the full amount currently available. The obligations under these
credit facilities are collateralized by a lien on substantially all of the Companys assets. Each of
these credit facilities contain certain customary covenants which require the Company to maintain
profitability beginning in the second fiscal quarter of 2007 and to meet certain tangible net
worth and debt service requirements. In addition, the Company must maintain $3.0 million in
unrestricted cash at all times when borrowings are outstanding. In the event of default by the
Company with the covenants under these facilities, Mid-Peninsula Bank and the Export-Import Bank,
would be entitled to exercise their remedies, under these facilities, which include declaring all
obligations immediately due and payable and disposing of the collateral if obligations are not
paid. The Company has initiated discussions with the lenders with a view toward restructuring
these credit facilities to enable the Company to come into compliance with applicable covenants;
however, there can be no assurance that the Company will be able to satisfactory restructure the
credit facilities. The Company also intends to modify planned operations in order to increase
cash flows from operations, and raise additional capital through equity or debt financing in order
to enhance liquidity. However, there can be no assurances that the Company will be successful in
these efforts or that any additional capital raised through debt or equity financings will be
available on favorable terms or at all. If unsuccessful in these efforts, the Company may have
to suspend or cease operations. These matters raise substantial doubt about the Companys ability
to continue as a going concern. The accompanying financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
52
2. Summary of Significant Accounting Policies
|
|
|
Financial Statement Presentation |
The consolidated financial statements include the accounts of Iridex Corporation and our
wholly owned subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Our fiscal year always ends on the Saturday closest to December 31. Fiscal 2006 ended on
December 30, 2006; fiscal 2005 ended on December 31, 2005 and fiscal 2004 ended on January 1, 2005.
|
|
|
Cash and Cash Equivalents |
For financial statement purposes, we consider all highly liquid debt instruments with
insignificant interest rate risk and an original maturity of three months or less when purchased
to be cash equivalents. Cash equivalents consist primarily of cash deposits in money market funds
that are available for withdrawal without restriction.
|
|
|
Available-for-Sale Securities |
All marketable securities as December 31, 2005 are considered to be available-for-sale and
therefore are carried at fair value. Available-for-sale securities are classified as current assets
when they have original maturities of less than one year. Available-for-sale securities are
classified as non current assets when they have original maturities of more than one year.
Marketable securities include auction rate and floating rate securities. These securities are
structured as short-term, highly liquid investments that can be readily converted into cash every
30, 60 or 90 days. However, since the stated or contractual maturities of these securities is
greater than 90 days, these securities are classified as marketable securities and not cash
equivalents and included with current assets. Unrealized holding gains and losses on such
securities net of related taxes are reported as a component of comprehensive income in
shareholders equity until realized. Realized gains and losses on sales of all such securities are
reported in interest and other income and are computed using the specific identification cost
method.
|
|
|
Sales Returns Allowance and Allowance for Doubtful Accounts |
In the process of preparing financial statements we make estimates and assumptions that affect
the reported amount of assets and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses during the reported
period. Specifically, we estimate future product returns related to current period product revenue.
We analyze historical returns, and changes in customer demand and acceptance of our products when
evaluating the adequacy of the sales returns allowance and other allowances. Significant management
judgments and estimates must be made and used in connection with establishing the sales returns and
other allowances in any accounting period. Material differences may result in the amount and timing
of our revenue for any period if management made different judgments or utilized different
estimates. The provision for sales returns amounted to $0.2 million in fiscal years 2006, 2005 and
2004.
Similarly our management must make estimates regarding the uncollectability of our accounts
receivable. We are exposed to credit risk in the event of non-payment by customers to the extent
of amounts recorded on the balance sheet. As of December 30, 2006, we had accounts receivable
totaling $6.1million, net of an allowance for doubtful accounts of $0.4 million as compared with
total accounts receivable of $6.6 million and $7.4 million, net of allowance for doubtful accounts
of $0.6 million and $0.5 million, respectively, as of
December 31, 2005 and January 1, 2005. As
sales levels increase the level of accounts receivable would likely also increase. In the event
that customers were to delay their payments to us, the levels of accounts receivable would likely
also increase. We maintain allowances for doubtful accounts for estimated losses resulting from
the inability of our customers to make required payments. The allowance for doubtful accounts is
based on past payment history with the customer, analysis of the customers current financial
condition, the aging of the accounts receivable balance, customer concentration and other known
factors.
Inventories are stated at the lower of cost or market and include on-hand inventory, sales
demo inventory and service loaner inventory. Cost is determined on a standard cost basis which
approximates actual cost on a first-in, first-out (FIFO) method. Lower of cost or market is
evaluated by considering obsolescence, excessive levels of inventory, deterioration and other
factors. Adjustments to reduce the cost of inventory to its net realizable value, if required, are
made for estimated excess, obsolescence or impaired inventory and are charged to cost of goods
sold. Factors influencing these adjustments include changes in demand, product life cycle and
development plans, component cost trends, product pricing, physical deterioration and quality
issues. Revisions to these adjustments would be required if these factors differ from our
estimates.
53
Property and equipment are stated at cost less accumulated depreciation and amortization.
Depreciation is provided on a straight line basis over the estimated useful lives of the assets,
which is generally three years. Amortization of leasehold improvements and property and equipment
is computed using the straight line method over the estimated useful life of the related assets,
typically three years. Our net property and equipment was $1.1 million at the end of fiscal 2006
and at the end of fiscal 2005. We invested $0.5 million in property and equipment in 2006 compared
with $0.3 million in 2005. Capital expenditures in the last two years have been primarily for
engineering, manufacturing and office equipment.
Our revenues arise from the sale of laser consoles, delivery devices, disposables and service
and support activities. Revenue from product sales in recognized upon receipt of a purchase order
and product shipment provided that no significant obligations remain and collection of the
receivables is reasonably assured. Shipments are generally made with Free-On-Board (FOB) shipping
point terms, whereby title passes upon shipment from our dock. Any shipments with FOB receiving
point terms are recorded as revenue when the shipment arrives at the receiving point. Up-front
fees received in connection with product sales are deferred and recognized over the associated
product shipments. Revenue relating to extended warrant contracts is recognized on a straight line
basis over the period of the applicable warranty contract. We recognize repair service revenue
upon completion of the work. Cost is recognized as product sales revenue is recognized. The
Companys sales may include post-sales obligations for training or other deliverables. When these
obligations are fulfilled after product shipment, the Company recognizes revenue in accordance with
the multiple element accounting guidance set forth in Emerging Issues Task Force No. 00-21,
Revenue Arrangements with Multiple Deliverables. When the Company has objective and reliable
evidence of fair value of the undelivered elements, it defers revenue attributable to the post-sale
obligations and recognizes such revenue when the obligation is fulfilled. Otherwise, the Company
defers all revenue related to the transaction until all elements are delivered.
Revenue related to extended service contracts is deferred and recognized on a straight line
basis over the period of the applicable service period. Costs associated with these service
arrangements are recognized as incurred. A reconciliation of the changes in the Companys deferred
revenue balances for the years ended December 30, 2006 and December 31, 2005 is provided as follows
(in thousands):
|
|
|
|
|
Balance, January 1, 2005 |
|
$ |
910 |
|
|
|
|
|
|
Additions to deferral |
|
|
1,451 |
|
|
|
|
|
|
Revenue recognized |
|
|
(1,289 |
) |
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005 |
|
$ |
1,072 |
|
|
|
|
|
|
Additions to deferral |
|
|
1,688 |
|
|
|
|
|
|
Revenue recognized |
|
|
(1,345 |
) |
|
|
|
|
|
|
|
|
|
Balance, December 30, 2006 |
|
$ |
1,415 |
|
|
|
|
|
54
The Company accrues for estimated warranty costs upon shipment of products. Actual warranty
costs incurred have not materially differed from those accrued. The Companys warranty policy is
applicable to products which are considered defective in their performance or fail to meet the
product specifications. Warranty costs are reflected in the statement of operations as a cost of
sales. A reconciliation of the changes in the Companys warranty liability for the years ended
December 30, 2006 and December 31, 2005 is provided as follows (in thousands):
|
|
|
|
|
Balance, January 1, 2005 |
|
$ |
933 |
|
|
|
|
|
|
Accruals for warranties issued during the year |
|
|
1,163 |
|
|
|
|
|
|
Settlements made in kind during the year |
|
|
(968 |
) |
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005 |
|
$ |
1,128 |
|
|
|
|
|
|
Accruals for warranties issued during the year |
|
|
741 |
|
|
|
|
|
|
Settlements made in kind during the year |
|
|
(1,003 |
) |
|
|
|
|
|
|
|
|
|
Balance, December 30, 2006 |
|
$ |
866 |
|
|
|
|
|
|
|
|
Research and Development |
Research and development expenditures are charged to operations as incurred.
Our policy is to expense advertising and promotion costs as they are incurred. Our
advertising and promotion expenses were approximately $424,000 in 2006, $288,000 in 2005 and
$218,000 in 2004 and are included in selling, general and administrative expenses in the
accompanying consolidated statements of operations.
|
|
|
Fair Value of Financial Instruments |
Carrying amounts of our financial instruments including cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities approximate fair value due to their short
maturities. The fair value for marketable debt and equity securities are based on quoted market
prices.
We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes,
which requires that deferred tax assets and liabilities be recognized using enacted tax rates for
the effect of temporary differences between the book and tax bases of recorded assets and
liabilities. Under SFAS No. 109, the liability method is used in accounting for income taxes.
Deferred tax assets and liabilities are determined based on the differences between financial
reporting and the tax basis of assets and liabilities, and are measured using the enacted tax rates
and laws that will be in effect when the differences are expected to reverse. SFAS No. 109 also
requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not
that some or all of the deferred tax asset will not be realized. We evaluate annually the
realizability of our deferred tax assets by assessing our valuation allowance and by adjusting the
amount of such allowance, if necessary. The factors used to assess the likelihood of realization
include our forecast of future taxable income and available tax planning strategies that could be
implemented to realize the net deferred tax assets.
|
|
|
Accounting for Stock-Based Compensation |
On January 1, 2006 we adopted Statement of Financial Accounting Standards No. 123 (revised
2004), Share-Based Payment (SFAS 123(R)), which requires the measurement and recognition of
compensation expense for all share-based awards made to employees and directors, including employee
non-qualified and incentive stock options, restricted stock units and employee purchase rights
under our Employee Stock Purchase Plan (ESPP Shares) based on estimated fair values. SFAS 123(R)
supersedes previous accounting under Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees (APB 25) for periods beginning in fiscal year 2006. In March 2005, the
Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 107 (SAB 107)
providing supplemental implementation guidance for SFAS 123(R). We have applied the provisions of
SAB 107 in our adoption of SFAS 123(R).
55
SFAS 123(R) requires companies to estimate the fair value of share-based awards on the date of
grant using an option pricing model. The value of the portion of the award that is ultimately
expected to vest is recognized as expense over the requisite service periods in our consolidated
statements of income. We adopted SFAS 123(R) using the modified prospective transition method which
requires the application of the accounting standard starting from January 1, 2006, the first day of
our fiscal year 2006. Our consolidated financial statements, as of and for the year ended December
30, 2006, reflect the impact of SFAS 123(R). In accordance with the modified prospective transition
method we used in adopting SFAS 123(R), our results of operations prior to fiscal year 2006 have
not been restated to reflect, and do not include, the impact of SFAS 123(R).
Prior to the adoption of SFAS 123(R), we accounted for share-based awards to employees and
directors using the intrinsic value method in accordance with APB 25 and FASB Interpretation (FIN)
No. 44, Accounting for Certain Transactions Involving Stock Compensation an Interpretation of
APB Opinion No. 25. Accordingly, no compensation cost has been recognized for our fixed cost stock
option plans because stock-based awards were issued at fair market value on the date of grant
Stock-based compensation expense recognized in the year ended December 30, 2006, included
stock-based compensation expense for share-based awards granted prior to, but not yet vested as of
December 31, 2005, based on the fair value on the grant date estimated in accordance with the pro
forma provisions of SFAS 123, and stock-based compensation expense for the share-based awards
granted subsequent to December 31, 2005, based on the fair value on the grant date estimated in
accordance with the provisions of SFAS 123(R). In conjunction with the adoption of SFAS 123(R), we
changed our method of attributing the value of stock-based compensation expense from the
accelerated multiple-option method (for the purposes of non-GAAP information under SFAS 123) to the
straight-line single option method. Stock-based compensation expense for all share-based awards
granted on or prior to December 31, 2005 will continue to be recognized using the accelerated
multiple-option approach, while stock-based compensation expense for all share-based awards granted
subsequent to December 30, 2005 will be recognized using the straight-line single option method.
SFAS 123(R) requires that we recognize expense for awards ultimately expected to vest; therefore we
are required to develop an estimate of the number of awards expected to cancel prior to vesting
(forfeiture rate). The forfeiture rate is estimated based on historical pre-vest cancellation
experience and is applied to all share-based awards. SFAS 123(R) requires the forfeiture rate to be
estimated at the time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. Prior to fiscal year 2006, we accounted for forfeitures as
they actually occurred.
Upon adoption of SFAS 123(R), we selected the Black-Scholes option pricing model as the most
appropriate method for determining the estimated fair value for stock options and ESPP Shares. The
Black-Scholes model requires the use of certain subjective and complex assumptions which determine
the fair value of share-based awards, including the options expected term and the price volatility
of the underlying stock. For restricted stock or restricted stock units, stock-based compensation
expense is calculated based on the fair market value of our stock on the date of grant.
|
|
|
Concentration of Credit Risk and Other Risks and Uncertainties |
The Companys cash and cash equivalents are deposited in demand and money market accounts of
three financial institutions. Deposits held with banks may exceed the amount of insurance provided
on such deposits. Generally these deposits may be redeemed upon demand and therefore, bear minimal
risk.
The Company markets its products to distributors and end-users throughout the world. Sales to
international distributors are generally made on open credit terms and letters of credit.
Management performs ongoing credit evaluations of our customers and maintains an allowance for
potential credit losses. Historically, the Company has not experienced any significant losses
related to individual customers or group of customers in any particular geographic area. For the
years ended December 30, 2006, December 31, 2005 and January 1, 2005 no customer accounted for
greater than 10% of total sales. As of December 30, 2006, December 31, 2005, January 1, 2005 no
customer accounted for more than 10% of our accounts receivable, net balance.
The Companys products require approvals from the Food and Drug Administration and
international regulatory agencies prior to commercialized sales. The Companys future products may
not receive required approvals. If the Company were denied such approvals, or if such approvals
were delayed, it would have a materially adverse impact on the Companys business, results of
operations and financial condition.
56
|
|
|
Reliance on Certain Suppliers |
Certain components and services used by the Company to manufacture and develop its products
are presently available from only one or a limited number of suppliers or vendors. The loss of any
of these suppliers or vendors would potentially require a significant level of hardware and/or
software development efforts to incorporate the products or services into the Companys products.
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States require us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues, and expenses and the related disclosure of contingent
assets and liabilities. We base our estimates on historical experience and on various other
assumptions that we believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities that are not readily
apparent form other sources. Actual results may differ from these estimates. In addition, any
change in these estimates or their related assumptions could have an adverse effect on our
operating results.
|
|
|
Net Income (loss) per Share |
Basic and diluted net income (loss) per share are computed by dividing net income (loss) for
the year by the weighted average number of shares of common stock outstanding during the period.
The calculation of diluted net income (loss) per share excludes potential common stock if their
effect is anti-dilutive. Potential common stock consists of incremental common shares issuable upon
the exercise of stock options. See Note 10.
|
|
|
Recent Accounting Pronouncements |
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes an interpretation of SFAS 109 (FIN 48). FIN 48 prescribes a comprehensive model
for recognizing, measuring, presenting and disclosing in the financial statements tax positions
taken or expected to be taken on a tax return, including a decision whether to file or not to file
in a particular jurisdiction. FIN 48 is effective for fiscal years beginning after December 15,
2006. We will adopt FIN 48 in our year ended December 29, 2007. We do not believe that the
adoption of the provisions of FIN 48 will materially impact our consolidated financial position and
results of operations.
On September 13, 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements (SAB 108), which provides interpretive
guidance on how the effects of the carryover or reversal of prior year misstatements should be
considered in quantifying a current year misstatement. The guidance became effective for our fiscal
year 2006. Our adoption of SAB 108 did not have an impact on our consolidated financial position
and results of operations.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair
Value Measurements (SFAS 157). SFAS 157 establishes a framework for measuring fair value under
GAAP and expands disclosures about fair value measurements. The changes to current practice
resulting from the application of SFAS 157 relate to the definition of fair value, the methods used
to measure fair value, and the expanded disclosures about fair value measurements. SFAS 157 is
effective for fiscal years beginning after November 15, 2007 and interim periods within those
fiscal years. We do not believe that the adoption of the provisions of SFAS 157 will materially
impact our consolidated financial position and results of operations.
57
3. Balance Sheet Detail
Available-for-sale securities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Estimated |
|
|
Maturity |
|
|
|
Cost |
|
|
Gain (Loss) |
|
|
Fair Value |
|
|
Dates |
|
As of December 31,
2005,
available-for-sale
securities
consisted of the
following: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate notes |
|
$ |
5,442 |
|
|
$ |
(19 |
) |
|
$ |
5,423 |
|
|
|
2/066/06 |
|
Government agencies |
|
|
3,364 |
|
|
|
(8 |
) |
|
|
3,356 |
|
|
|
1/063/06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
8,806 |
|
|
$ |
(27 |
) |
|
$ |
8,779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 30, 2006 there were no available-for-sales securities.
There were no realized capital gains or losses recognized in 2006, 2005 and 2004.
|
|
|
|
|
|
|
|
|
|
|
December 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Inventories: |
|
|
|
|
|
|
|
|
Raw materials and work in process |
|
$ |
4,000 |
|
|
$ |
5,191 |
|
Finished goods |
|
|
5,499 |
|
|
|
3,403 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total inventories |
|
$ |
9,499 |
|
|
$ |
8,594 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment: |
|
|
|
|
|
|
|
|
Equipment |
|
$ |
5,344 |
|
|
$ |
4,937 |
|
Leasehold improvements |
|
|
2,029 |
|
|
|
1,921 |
|
Less: accumulated depreciation and amortization |
|
|
(6,286 |
) |
|
|
(5,744 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
1,087 |
|
|
$ |
1,114 |
|
|
|
|
|
|
|
|
Depreciation expense related to property and equipment was $544,000, $435,000 and $384,000 for the
years ended December 30, 2006, December 31, 2005 and January 1, 2005.
|
|
|
|
|
|
|
|
|
Accrued Expenses: |
|
|
|
|
|
|
|
|
Accrued payroll, vacation and related expenses |
|
$ |
1,517 |
|
|
$ |
1,671 |
|
Accrued warranty |
|
|
866 |
|
|
|
1,129 |
|
Income taxes payable |
|
|
|
|
|
|
552 |
|
Sales and use tax payable |
|
|
150 |
|
|
|
220 |
|
Other accrued expenses |
|
|
2,242 |
|
|
|
849 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accrued expenses |
|
$ |
4,775 |
|
|
$ |
4,421 |
|
|
|
|
|
|
|
|
4. Bank Borrowings
At December 31, 2005, the Company had a revolving line of credit agreement with a bank which provided for borrowings
of up to $4.0 million at the banks prime rate (7.25% at December 31, 2005). There were no
borrowings outstanding against this credit agreement at December 31, 2005. This credit agreement
expired on October 5, 2006. See footnote 11 regarding subsequent events.
58
5. Commitments and Contingencies
Lease Agreements
The Company leases its operating facilities under a noncancelable operating lease. In
September 2003, the Company entered into a lease amendment for our facility in Mountain View,
California. The original lease term of this facility, which ended in February 2004, was amended and
extended until February 2009. The lease was also amended to grant the Company an option to renew
this lease for an additional five year period beginning 2009 until 2014 at a base monthly rental
amount to be negotiated at the time of the renewal. Rent expense totaled $403,000 for each of the
fiscal years ended December 30, 2006, December 31, 2005 and January 1, 2005.
Future minimum lease payments under current operating leases at December 30, 2006 are
summarized as follows (in thousands):
|
|
|
|
|
Fiscal Year |
|
Operating Lease Payments |
|
2007 |
|
|
438 |
|
2008 |
|
|
451 |
|
2009 |
|
|
94 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
983 |
|
|
|
|
|
* Related to the acquisition of the aesthetics business
of AMS in January 2007, we have agreed to purchase up to $9.0 million worth of certain inventory
from AMS book value, following the termination of our
Product Supply Agreement with AMS no
later than October 2007. Principal payments under the term loans entered into in conjunction with the acquisition are
$98,000 per month over a term of 5 years.
The following annual operating lease commitments as of January 17, 2007 were acquired as part of the acquisition of the French and UK subsidiaries of Laserscope.
|
|
|
|
|
2007 |
|
$ |
328 |
|
2008 |
|
|
224 |
|
2009 |
|
|
145 |
|
2010 |
|
|
33 |
|
|
|
|
|
|
|
$ |
730 |
|
|
|
|
|
License Agreements
The Company is obligated to pay royalties equivalent to 5% and 7.5% of sales on certain
products under certain license agreements. Royalty expense was $93,000, $71,000 and $80,000 for the
years ended December 30, 2006, December 31, 2005 and January 1, 2005, respectively.
Contingencies
Patent Litigation On October 19, 2005, the Company filed a suit in the United States District Court for the
Eastern District of Missouri against Synergetics, USA, Inc. for infringement of a patent. The
Company later amended its complaint to assert infringement claims against Synergetics, Inc.;
Synergetics USA, Inc. was dismissed from the suit. The Company alleges that Synergetics infringes
the Companys patent by making and selling infringing products, including its Quick Disconnect
laser probes and its Quick Disconnect Laser Probe Adapter, and seeks injunctive relief, monetary
damages, treble damages, costs and attorneys fees.
On July 7, 2006, the Court issued a Claim Construction Ruling, interpreting 14 disputed
phrases within the Companys patent. The Court adopted the Companys position with respect to 13
of the 14 patent terms, and adopted a position between the Companys and Synergetics positions
with respect to the 14th term.
Discovery closed on February 15, 2007. Near the close of discovery, the Company filed five
summary judgment motions and Synergetics filed four. After the Courts rulings on these motions,
only four issues remain for trial. Those issues are: (1) the jury will decide the amount of
damages caused by Synergetics infringement with their Quick Disconnect products, (2) the jury will
decide whether Synergetics infringement was willful, (3) the jury will decide the validity of the
IRIDEX patent on the issue of obviousness, and (4) the Court will decide if IRIDEXs right to
recover damages for Synergetics infringement is limited by the equitable doctrines of laches and
estoppel.
Trial is scheduled to begin on April 16, 2007. The Company is confident that its patent
claims have merit, and if the parties do not reach a settlement, the Company intends to vigorously
pursue its claims to judgment.
59
The company is involved in two other pending suits with Synergetics. The first suit, entitled
Synergetics, Inc. v. Peregrine Surgical, Ltd., Innovatech Surgical, Inc., and IRIDEX Corporation,
is Case No. 06-CV-107 in the United States District Court for the Eastern District of Pennsylvania.
Synergetics filed suit against the Company on April 25, 2006, by adding the Company as a defendant
to a then-existing lawsuit against the other two defendants. Synergetics alleges that the Company
infringes its patent and seeks injunctive relief, monetary damages, treble damages, costs and
attorneys fees. On June 29, the Company filed its response to Synergetics pleading, denying
Synergetics claims and asserting counterclaims seeking a declaratory judgment that it does not
infringe Synergetics patent. Synergetics responded to the Companys counterclaims on July 24,
2006, denying them. On August 10, 2006, the case was reassigned to District Judge Thomas Golden.
Judge Golden has set a status conference for May 4, 2007. There have not yet been any significant
proceedings in this case.
The second suit, entitled Synergetics, Inc. v. IRIDEX Corporation, is pending in the United
States District Court for the Eastern District of Missouri. Synergetics filed suit against the
Company on February 21, 2007, alleging that the Companys assertion of patent infringement against
Synergetics constitutes a violation of the federal antitrust laws and also abuse of process in
Missouri. The Company has not yet been served with a copy of the summons and complaint, which was
filed under seal. The Company believes that Synergetics suit lacks merit (in part because the
Court granted the Company judgment of infringement and denied Synergetics motion for judgment on
laches) and intends to vigorously defend against Synergetics claims should Synergetics choose to
proceed with the suit.
Management believes that liabilities resulting from such proceedings, or claims which are pending
or known to be threatened will not have a material adverse effect on the Companys financial
position or results of operations. The company may incur significant dedication of management
resources and legal costs in connection with this lawsuit.
The Company enters into standard indemnification arrangements in our ordinary course of
business. Pursuant to these arrangements, the Company indemnifies, holds harmless, and agrees to
reimburse the indemnified parties for losses suffered or incurred by the indemnified party,
generally our business partners or customers, in connection with any trade secret, copyright,
patent or other intellectual property infringement claim by any third party with respect to our
products. The term of these indemnification agreements is generally perpetual anytime after the
execution of the agreement. The maximum potential amount of future payments the Company could be
required to make under these agreements is not determinable. The Company has never incurred costs
to defend lawsuits or settle claims related to these indemnification agreements. As a result, the
Company believes the estimated fair value of these agreements is minimal.
The Company has entered into indemnification agreements with its directors and officers that
may require the Company: to indemnify its directors and officers against liabilities that may arise
by reason of their status or service as directors or officers, other than liabilities arising from
willful misconduct of a culpable nature; to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified; and to make good faith determination
whether or not it is practicable for the Company to obtain directors and officers insurance. The
Company currently has directors and officers liability insurance.
6. Stockholders Equity
Convertible Preferred Stock
Our Articles of Incorporation authorize 2,000,000 shares of undesignated preferred stock.
Preferred Stock may be issued from time to time in one or more series. As of December 30, 2006, we
had no preferred stock issued and outstanding.
Treasury Stock
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 our employee stock programs. In 2003, 2004 and 2005, no shares of
Common Stock were repurchased. A total of 103,000 shares of common stock had been repurchased as of
December 31, 2005. The stock repurchase program was discontinued in 2005.
60
Stock Option Plans
Amended and Restated 1989 Incentive Stock Plan
The Amended and Restated 1989 Plan (the 1989 Plan) provided for the grant of options and
stock purchase rights to purchase shares of our Common Stock to employees and consultants. The
terms of the 1989 Plan, which expired in August 1999, are substantially the same as the 1998 Plan
described below.
1998 Stock Plan
The 1998 Stock Plan (the 1998 Plan), as amended, provides for the granting to employees
(including officers and employee directors) of incentive stock options and for the granting to
employees (including officers and employee directors) and consultants of nonstatutory stock
options, stock purchase rights (SPRs), restricted stock, restricted stock units, performance
shares, performance units and stock appreciation rights. The exercise price of incentive stock
options and stock appreciation rights granted under the 1998 Plan must be at least equal to the
fair market value of the shares at the time of grant. With respect to any recipient who owns stock
possessing more than 10% of the voting power of our outstanding capital stock, the exercise price
of any option or SPR granted must be at least equal to 110% of the fair market value at the time of
grant. Options granted under the 1998 Plan are exercisable at such times and under such conditions
as determined by the Administrator; generally over a four year period. The maximum term of
incentive stock options granted to any recipient must not exceed ten years; provided, however, that
the maximum term of an incentive stock option granted to any recipient possessing more than 10% of
the voting power of our outstanding capital stock must not exceed five years. In the case of SPRs,
unless the Administrator determines otherwise, we have a repurchase option exercisable upon the
voluntary or involuntary termination of the purchasers employment with us for any reason
(including death or disability). Such repurchase option lapses at a rate determined by the
Administrator. The purchase price for shares repurchased by us is the original price paid by the
purchaser. As of December 30, 2006 and December 31, 2005, no shares were subject to repurchase. The
form of consideration for exercising an option or stock purchase right, including the method of
payment, is determined by the Administrator. The 1998 Plan expires in June 2008. In June of 2006,
this plan was amended to shorten the contractual life of all option grants made after June 2006 to
a seven year term.
1995 Director Option Plan
In October 1995, we adopted the 1995 Director Option Plan (the Director Plan), under which
members of the Board of Directors are granted options to purchase 11,250 shares upon the first to
occur of their appointment or the adoption of the Director Plan (First Option) and an option to
purchase 3,750 shares (Subsequent Option) on July 1 of each year thereafter provided that he or
she has served on the Board for at least the preceding six months. The options granted are at fair
market value on the date of grant. The First Option becomes exercisable as to one-twelfth (1/12) of
the shares subject to the First Option for each quarter over a three-year period. Each Subsequent
Option becomes exercisable as to one-fourth (1/4) of the shares subject to the Subsequent Option
for each quarter, commencing one quarter after the First Option and any previously granted
Subsequent Options have become fully exercisable. Options granted under the Director Plan had a
contractual term of ten years. In the event of our merger with or into another corporation,
resulting in a change of control, or the sale of substantially all of our assets, each Director
Plan options become exercisable in full and shall be exercisable for 30 days after written notice
to the holder of the event causing the change in control. The Director Plan terminated in 2005.
Stand-Alone Options
In July 2005, in connection with the employment of the Companys Chief Executive Officer, the
Companys Board of Directors granted a stand alone option, outside of the Companys existing stock
plans, to Barry Caldwell, its Chief Executive Officer. The option entitles Mr. Caldwell to purchase
up to 234,104
61
shares of the Companys common stock at an exercise price of $6.07 per share. In
conjunction with the employment of the Companys Chief Executive Officer, in consideration of
services performed under a recruiting contract, the Company issued a warrant to purchase 25,000
shares of the Companys common stock at an exercise price of $6.07 per share. The warrant is
exercisable at any time and expires on July 5, 2008. The fair value of the warrants of $87,000 was
recorded as an expense for the twelve month period ended December 31, 2005. The fair value of the
warrant was calculated using the Black-Scholes pricing model with the following assumptions:
dividend yield 0 percent, contractual life of 3 years, risk free rates of 4.04 percent and
volatility of 83 percent. At December 30, 2006, this option remains outstanding.
In March 2006, in connection with the employment of the Companys Vice President of Product
Innovation, the Companys Board of Directors granted a stand alone option, outside of the Companys
existing stock plans, to Deborah Tomasco, the Companys Vice President of Product Innovation. The
option entitles Ms. Tomasco to purchase up to 50,000 shares of the Companys common stock at
an exercise price of $8.26 per share.
2005 Employee Stock Purchase Plan
Our 2005 Employee Stock Purchase Plan (the Purchase Plan) was adopted by the Board of
Directors in June 2005. The total number of shares of common stock reserved for issuance under the
Purchase Plan at December 30, 2006 was 12,948. The Purchase Plan permits eligible employees
(including officers) to purchase Common Stock through payroll deductions, which may not exceed 10%
of an employees compensation. No employee may purchase more than $25,000 worth of stock in any
calendar year or more than 2,000 shares of Common Stock in any twelve-month period. The price of
shares purchased under the Purchase Plan is 85% of the lower of the fair market value of the Common
Stock at the beginning of the offering period or the end of the offering period.
Information with respect to activity under these option plans are set forth below (in
thousands except share and per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options |
|
|
Shares |
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Available |
|
Number |
|
Aggregate |
|
Average |
|
|
for Grant |
|
of Shares |
|
Price |
|
Exercise Price |
Balances, January 3, 2004 |
|
|
313,212 |
|
|
|
2,004,283 |
|
|
|
9,835 |
|
|
|
4.91 |
|
Additional shares reserved |
|
|
270,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted |
|
|
(214,750 |
) |
|
|
214,750 |
|
|
|
1,379 |
|
|
|
6.42 |
|
Options exercised |
|
|
|
|
|
|
(294,852 |
) |
|
|
(1,085 |
) |
|
|
3.68 |
|
Options cancelled |
|
|
(15,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Options terminated |
|
|
100,789 |
|
|
|
(100,789 |
) |
|
|
(701 |
) |
|
|
6.95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, January 1, 2005 |
|
|
454,251 |
|
|
|
1,823,392 |
|
|
|
9,428 |
|
|
|
5.18 |
|
Additional shares reserved |
|
|
434,104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted |
|
|
(622,050 |
) |
|
|
622,050 |
|
|
|
3,791 |
|
|
|
6.09 |
|
Warrants issued |
|
|
(25,000 |
) |
|
|
25,000 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
|
|
|
|
(183,873 |
) |
|
|
(663 |
) |
|
|
3.60 |
|
Options cancelled |
|
|
(78,355 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Options terminated |
|
|
132,566 |
|
|
|
(132,566 |
) |
|
|
(866 |
) |
|
|
6.53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2005 |
|
|
295,516 |
|
|
|
2,154,003 |
|
|
|
11,690 |
|
|
|
5.50 |
|
Additional shares reserved |
|
|
435,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted |
|
|
(300,650 |
) |
|
|
300,650 |
|
|
|
2,551 |
|
|
|
8.48 |
|
Options exercised |
|
|
|
|
|
|
(276,578 |
) |
|
|
(1,291 |
) |
|
|
4.67 |
|
Options cancelled |
|
|
(4,750 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Options terminated |
|
|
46,505 |
|
|
|
(46,505 |
) |
|
|
(311 |
) |
|
|
6.69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 30, 2006 |
|
|
471,621 |
|
|
|
2,131,570 |
|
|
$ |
12,639 |
|
|
$ |
6.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62
The following table summarizes information with respect to stock options outstanding at
December 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
Options Vested and Exercisable |
|
|
Number of |
|
Weighted |
|
|
|
|
|
Number of |
|
|
|
|
|
Weighted |
|
|
Shares |
|
Average |
|
Weighted |
|
Shares |
|
Weighted |
|
Average |
|
|
Outstanding |
|
Remaining |
|
Average |
|
Exercisable at |
|
Average |
|
Remaining |
Range of Exercise |
|
at December |
|
Contractual |
|
Exercise |
|
December 30, |
|
Exercise |
|
Contractual |
Prices |
|
30, 2006 |
|
Life (Years) |
|
Price |
|
2006 |
|
Price |
|
Life (Years) |
$2.94- $3.50 |
|
|
232,427 |
|
|
|
6.12 |
|
|
|
3.36 |
|
|
|
211,551 |
|
|
$ |
3.36 |
|
|
|
6.17 |
|
$3.52 - $4.00 |
|
|
287,758 |
|
|
|
2.80 |
|
|
|
3.87 |
|
|
|
279,782 |
|
|
$ |
3.88 |
|
|
|
2.72 |
|
$4.01 - $5.08 |
|
|
287,557 |
|
|
|
5.51 |
|
|
|
4.61 |
|
|
|
212,117 |
|
|
$ |
4.51 |
|
|
|
4.81 |
|
$5.13 - $5.66 |
|
|
217,865 |
|
|
|
5.64 |
|
|
|
5.46 |
|
|
|
123,667 |
|
|
$ |
5.47 |
|
|
|
4.30 |
|
$5.69 - $6.00 |
|
|
17,891 |
|
|
|
7.31 |
|
|
|
5.82 |
|
|
|
5,905 |
|
|
$ |
5.76 |
|
|
|
8.26 |
|
$6.07 - $6.07 |
|
|
325,000 |
|
|
|
8.51 |
|
|
|
6.07 |
|
|
|
131,251 |
|
|
$ |
6.07 |
|
|
|
7.18 |
|
$6.19 - $7.84 |
|
|
287,378 |
|
|
|
6.71 |
|
|
|
7.15 |
|
|
|
110,494 |
|
|
$ |
6.96 |
|
|
|
6.04 |
|
$7.98 - $8.75 |
|
|
243,894 |
|
|
|
6.85 |
|
|
|
8.34 |
|
|
|
59,148 |
|
|
$ |
8.09 |
|
|
|
6.90 |
|
$8.88 - $10.86 |
|
|
213,300 |
|
|
|
3.30 |
|
|
|
9.36 |
|
|
|
175,970 |
|
|
$ |
9.08 |
|
|
|
2.93 |
|
$11.38 - $12.75 |
|
|
18,500 |
|
|
|
4.05 |
|
|
|
12.28 |
|
|
|
15,500 |
|
|
$ |
12.46 |
|
|
|
3.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$2.94 - $12.75 |
|
|
2,131,570 |
|
|
|
6.01 |
|
|
|
6.00 |
|
|
|
1,325,385 |
|
|
$ |
5.52 |
|
|
|
5.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2005 and January 1, 2005 options to purchase 2,154,003 and 1,823,392 shares of
common stock were exercisable at a weighted average exercise price of $6.31 and $5.36,
respectively.
As of December 30, 2006, the aggregate intrinsic value of fully vested and exercisable options
was $4.4 million.
Adoption of SFAS 123(R)
The Company adopted SFAS 123(R) using the modified prospective method, which requires the
application of the accounting standard as of January 1, 2006, the first day of the Companys fiscal
year. The Companys financial statements for the year ended December 30, 2006 reflect the impact
of SFAS 123(R). In accordance with the modified prospective method, the Companys financial
statements for prior periods have not been restated to reflect, and do not include the impact of
SFAS 123(R). Stock-based compensation expense recognized under SFAS 123(R) for the twelve months
ended December 30, 2006 was $1.8 million, which consisted of stock-based compensation expense
related to stock options and employee stock purchases.
63
We estimate the fair value of stock options granted using the Black-Scholes option-pricing
formula. In conjunction with the adoption of SFAS 123(R) on January 1, 2006, the Company changed
its method of attributing the value of stock-based compensation from the accelerated
multiple-option approach to the straight-line single option method for options granted following
the adoption of SFAS 123(R).
The determination of fair value of all options granted by the Company is computed based on the
Black-Scholes option-pricing model with the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Option Plan |
|
Employee Stock Purchase Plan |
|
|
2006 |
|
2005 |
|
2004 |
|
2006 |
|
2005 |
|
2004 |
Average risk free
interest rate |
|
|
4.80 |
% |
|
|
4.40 |
% |
|
|
3.50 |
% |
|
|
4.43 |
% |
|
|
4.20 |
% |
|
|
2.56 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected life (in
years) |
|
|
3.8 |
|
|
5-7 years |
|
|
4.0 |
|
|
|
0.5 |
|
|
|
0.5 |
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend yield |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average volatility |
|
|
50.0 - 60.0 |
% |
|
|
77.0 -83.0 |
% |
|
|
88.0 |
% |
|
|
34.0-60.0 |
% |
|
|
46.0 |
% |
|
|
84.0 |
% |
Option-pricing models require the input of various subjective assumptions, including the
options expected life and the price volatility of the underlying stock. The expected stock price
volatility is based on analysis of the Companys stock price history over a period commensurate
with the expected term of the options, trading volume of the Companys stock, look-back
volatilities and Company specific events that affected volatility in a prior period. The expected
term of options granted is based on an analysis of historical exercise and post-vesting employment
termination behavior. The risk-free interest rate is based on the U.S. Treasury yield curve in
effect at the time of grant. No dividend yield is included as the Company has not issued any
dividends and does not anticipate issuing any dividends in the future.
The following table shows stock-based compensation expense included in the Consolidated
Statements of Operations for 2006 (in thousands):
|
|
|
|
|
|
|
Year Ended |
|
|
|
December 30, 2006 |
|
Cost of sales |
|
$ |
122 |
|
Research and development |
|
|
251 |
|
Sales, general and administrative |
|
|
1,443 |
|
|
|
|
|
|
|
$ |
1,816 |
|
|
|
|
|
The modified prospective transition method of SFAS 123(R) requires the presentation of
pro-forma information for periods presented prior to the adoption of SFAS 123(R) regarding net
income (loss) and net income (loss) per share as if the Company had accounted for the Companys
stock options under the fair value method of SFAS 123. If compensation expense had been determined
based upon the fair value at grant date for employee compensation arrangements, consistent with the
methodology prescribed under SFAS 123, the Companys pro forma net income and net income per common
share under SFAS 123 for the twelve months ended December 31, 2005 and January 1, 2005 would have
been as follows (in thousands except per share data).
64
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
|
December 31, 2005 |
|
|
January 1, 2005 |
|
Net income (loss), as reported for prior periods |
|
$ |
1,671 |
|
|
$ |
(402 |
) |
Stock-based compensation expense related to
employee stock options and employee stock
purchases |
|
|
(966 |
) |
|
|
(560 |
) |
|
|
|
|
|
|
|
Pro forma net income |
|
$ |
705 |
|
|
$ |
(962 |
) |
|
|
|
|
|
|
|
Basic net income per share: |
|
|
|
|
|
|
|
|
As reported |
|
$ |
0.23 |
|
|
|
($0.06 |
) |
|
|
|
|
|
|
|
Pro forma |
|
$ |
0.10 |
|
|
|
($0.13 |
) |
|
|
|
|
|
|
|
Diluted net income per share: |
|
|
|
|
|
|
|
|
As reported |
|
$ |
0.21 |
|
|
|
($0.06 |
) |
|
|
|
|
|
|
|
Pro forma |
|
$ |
0.09 |
|
|
|
($0.13 |
) |
|
|
|
|
|
|
|
Information with respect to activity under these option plans are set forth below (in
thousands except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
Aggregate |
|
|
|
Shares |
|
|
Exercise Price |
|
|
Intrinsic Value |
|
Outstanding at December 31, 2005 |
|
|
2,154,003 |
|
|
$ |
5.50 |
|
|
$ |
14,518 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted |
|
|
300,650 |
|
|
|
8.48 |
|
|
|
117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
(276,578 |
) |
|
|
4.67 |
|
|
|
(1,162 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Options forfeited/cancelled/expired |
|
|
(46,505 |
) |
|
|
6.69 |
|
|
|
(101 |
) |
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 30, 2006 |
|
|
2,131,570 |
|
|
$ |
5.53 |
|
|
$ |
13,372 |
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant date fair value of options granted during 2006 was $4.38 per share.
The aggregate intrinsic value in the table above represents the total pretax intrinsic value
(the difference between the Companys closing stock price on the last trading day of fiscal 2006
and the exercise price, multiplied by the number of in-the-money options) that would have been
received by the option holders had all option holders exercised their options on December 30, 2006.
This amount changes based on the fair market value of the Companys stock. Total intrinsic value
of options exercised in 2006 was $1.2 million. Total fair value of options vested and expensed
was $1.1 million, net of tax, for 2006.
As a result of adopting the fair value recognition provisions of SFAS 123(R), the impact to
the consolidated financial statements for 2006 from stock-based compensation is as follows (in
thousands, except per share data):
|
|
|
|
|
|
|
Year Ended December |
|
|
|
30, 2006 |
|
Stock-based compensation expense by award type: |
|
|
|
|
Employee stock options granted |
|
$ |
1,708 |
|
Employee stock purchase plan |
|
|
108 |
|
|
|
|
|
Total stock-based compensation |
|
|
1,816 |
|
|
|
|
|
Total effect on stock-based compensation at the
Companys marginal tax rate |
|
|
(690 |
) |
|
|
|
|
Effect on net income (loss) |
|
$ |
1,126 |
|
Effect on net income (loss) per share: |
|
|
|
|
Basic and diluted earnings per share |
|
|
($0.15 |
) |
65
A summary of the status of the Companys non-vested shares as of December 30, 2006 and changes
during the period ended December 30, 2006 is presented below (in thousands, except per share
amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average Grant |
|
|
Number of Shares |
|
Dated Fair Value |
Non-vested at December 31, 2005 |
|
|
893,119 |
|
|
$ |
5.72 |
|
Granted |
|
|
300,650 |
|
|
$ |
4.38 |
|
Vested |
|
|
(341,075 |
) |
|
$ |
3.98 |
|
Cancelled/forfeited |
|
|
(46,505 |
) |
|
$ |
4.47 |
|
Non-vested at December 30, 2006 |
|
|
806,189 |
|
|
$ |
4.42 |
|
As of December 30, 2006, there were $2.2 million of total unrecognized compensation cost
related to non-vested share-based compensation arrangements under both of the plans. The cost is
expected to be recognized over a weighted average period of three years.
7. Employee Benefit Plan
The Company has a plan known as the IRIS Medical Instruments 401(k) trust to provide
retirement benefits through the deferred salary deductions for substantially all employees.
Employees may contribute up to 15% of their annual compensation to the plan, limited to a maximum
amount set by the Internal Revenue Service. The plan also provides for Company contributions at the
discretion of the Board of Directors. On April 1, 2000 the Company commenced a Company match for
the 401(k) in the amount of 50% of employee contributions up to an annual maximum of $1,000 per
year. The Company contributions totaled $106,000 in 2006, $94,000 in 2005 and $88,000 in 2004.
8. Income Taxes
The provision for income taxes includes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
December 30, |
|
|
December 31, |
|
|
January 1, |
|
|
|
2006 |
|
|
2005 |
|
|
2005 |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
(371 |
) |
|
$ |
59 |
|
|
$ |
212 |
|
State |
|
|
|
|
|
|
31 |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(371 |
) |
|
|
90 |
|
|
|
226 |
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
1,756 |
|
|
|
451 |
|
|
|
(519 |
) |
State |
|
|
337 |
|
|
|
125 |
|
|
|
(62 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
2,093 |
|
|
|
576 |
|
|
|
(581 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision (benefit) |
|
$ |
1,721 |
|
|
$ |
666 |
|
|
$ |
(355 |
) |
|
|
|
|
|
|
|
|
|
|
66
The Companys effective tax rate differs from the statutory federal income tax rate as shown
in the following schedule:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
December 30, |
|
|
December 31, |
|
|
January 1, |
|
|
|
2006 |
|
|
2005 |
|
|
2005 |
|
Income tax provision at statutory rate |
|
|
34 |
% |
|
|
34 |
% |
|
|
34 |
% |
State income taxes, net of federal benefit |
|
|
1 |
% |
|
|
6 |
% |
|
|
8 |
% |
Tax exempt interest |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
Nondeductible permanent differences |
|
|
(10 |
%) |
|
|
1 |
% |
|
|
(5 |
%) |
Research and development credits |
|
|
2 |
% |
|
|
(13 |
%) |
|
|
12 |
% |
Change in valuation allowance |
|
|
(73 |
%) |
|
|
0 |
% |
|
|
0 |
% |
Other |
|
|
0 |
% |
|
|
0 |
% |
|
|
(2 |
%) |
|
|
|
|
|
|
|
|
|
|
Effective tax rate |
|
|
(45 |
%) |
|
|
28 |
% |
|
|
47 |
% |
|
|
|
|
|
|
|
|
|
|
The tax effect of temporary differences and carry-forwards that give rise to
significant portions of the net deferred tax assets are presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Fixed assets |
|
$ |
568 |
|
|
$ |
558 |
|
Accrued liabilities |
|
|
530 |
|
|
|
595 |
|
Allowance for excess and obsolete inventories |
|
|
467 |
|
|
|
599 |
|
Research credit |
|
|
695 |
|
|
|
514 |
|
State tax |
|
|
2 |
|
|
|
1 |
|
Allowance for doubtful accounts |
|
|
167 |
|
|
|
215 |
|
Other |
|
|
299 |
|
|
|
5 |
|
Net operating loss |
|
|
160 |
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset |
|
$ |
2,888 |
|
|
$ |
2,487 |
|
Valuation Allowance |
|
|
(2,888 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net Deferred Tax Assets (Liability) |
|
$ |
0 |
|
|
$ |
2,487 |
|
|
|
|
|
|
|
|
During the quarter ending
December 30, 2006, as a result of the losses incurred in 2006 and uncertainty regarding the ability
to project future profitable results, management determined it was no longer more likely than
not that the company would realize the deferred tax assets recorded. As such, the company recorded
a valuation allowance against its deferred tax assets. The amount of this valuation allowance was
$2,888,000. The company will continue to evaluate its ability to utilize the deferred tax assets
on a quarterly basis.
As of December 30, 2006, the company had Federal and State net operating loss carryforwards of
approximately $1,838,000 and $1,950,00 respectively. The federal losses will expire in 2027 and the
state losses will begin to expire in 2017. Of the above NOLs, $1,451,000 and $1,095,000
respectively, relate to windfall stock option deductions which when realized will be credited to
equity.
As of December 30, 2006, the Company had Federal and State research credit carryforwards of
approximately $704,000 and $731,000 available to offset future liabilities. The Federal credits
will begin expiring in 2020 if not used. The state research credits do not expire.
The above net operating losses and R&D credits are subject to IRC sections 382 & 383. In the event
of a change in ownership as defined by these code sections, the usage of the above mentioned NOLs
and credits may be limited.
9. Major Customers and Business Segments
The Company operates in two reportable segments: the ophthalmology medical device segment and
the dermatology medical device segment. In both segments, the Company develops, manufactures and
markets medical devices. Our revenues arise from the sale of consoles, delivery devices,
disposables and service and support activities.
In the years ended December 30, 2006, December 31, 2005 and January 1, 2005, no customer
individually accounted for more than 10% of our revenue.
67
Revenue information shown (in thousands) by geographic region is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
December 30, |
|
|
December 30, , |
|
|
January 1, |
|
|
|
2006 |
|
|
2005 |
|
|
2005 |
|
United States |
|
$ |
21,826 |
|
|
$ |
22,713 |
|
|
$ |
19,894 |
|
Europe |
|
$ |
7,787 |
|
|
|
7,138 |
|
|
|
6,498 |
|
Rest of Americas |
|
$ |
1,836 |
|
|
|
1,703 |
|
|
|
631 |
|
Asia/Pacific Rim |
|
$ |
4,455 |
|
|
|
5,475 |
|
|
|
5,787 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
35,904 |
|
|
$ |
37,029 |
|
|
$ |
32,810 |
|
|
|
|
|
|
|
|
|
|
|
Revenues are attributed to countries based on location of end customers. In the years ended
December 30, 2006, December 31, 2005 and January 1, 2005, no individual country accounted for more
than 10% of the Companys sales, except for the United States, which accounted for 60.8% of sales
in 2006, 61.4% in 2005 and 60.6% in 2004.
Information on reportable segments for the three years ended December 30, 2006, December 31,
2005 and January 1, 2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 30, 2006 |
|
|
|
Ophthalmology |
|
|
Dermatology |
|
|
|
|
|
|
Medical Devices |
|
|
Medical Devices |
|
|
Total |
|
Sales |
|
$ |
30,826 |
|
|
$ |
5,078 |
|
|
$ |
35,904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct cost of goods sold |
|
$ |
9,312 |
|
|
$ |
2,125 |
|
|
$ |
11,437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct gross margin |
|
$ |
21,514 |
|
|
$ |
2,953 |
|
|
$ |
24,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unallocated indirect costs |
|
|
|
|
|
|
|
|
|
$ |
29,232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
|
|
|
|
|
|
|
$ |
(4,765 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,2005 |
|
|
|
Ophthalmology |
|
|
Dermatology |
|
|
|
|
|
|
Medical Devices |
|
|
Medical Devices |
|
|
Total |
|
Sales |
|
$ |
30,663 |
|
|
$ |
6,366 |
|
|
$ |
37,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct cost of goods sold |
|
$ |
10,374 |
|
|
$ |
3,138 |
|
|
$ |
13,512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct gross margin |
|
$ |
20,289 |
|
|
$ |
3,228 |
|
|
$ |
23,517 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unallocated indirect costs |
|
|
|
|
|
|
|
|
|
$ |
21,708 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
|
|
|
|
|
|
|
$ |
1,809 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 1, 2005 |
|
|
|
Ophthalmology |
|
|
Dermatology |
|
|
|
|
|
|
Medical Devices |
|
|
Medical Devices |
|
|
Total |
|
Sales |
|
$ |
27,753 |
|
|
$ |
5,057 |
|
|
$ |
32,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct cost of goods sold |
|
$ |
9,876 |
|
|
$ |
2,898 |
|
|
$ |
12,774 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct gross margin |
|
$ |
17,877 |
|
|
$ |
2,159 |
|
|
$ |
20,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unallocated indirect costs |
|
|
|
|
|
|
|
|
|
$ |
21,112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
|
|
|
|
|
|
|
$ |
(1,076 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
68
Indirect costs of manufacturing, research and development and selling, general and
administrative costs are not allocated to the segments.
The Companys assets and liabilities are not evaluated on a segment basis. Accordingly, no
disclosure on segment assets and liabilities is provided.
10. Computation of Net Income Per Common Share and Per Diluted Common Share
A reconciliation of the numerator and denominator of net income (loss) per common share and
diluted net income (loss) per common share is provided as follows (in thousands, except per share
amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
December 30, |
|
|
December 31, |
|
|
January 1, |
|
|
|
2006 |
|
|
2005 |
|
|
2005 |
|
Net (loss) income |
|
$ |
(5,753 |
) |
|
$ |
1,671 |
|
|
$ |
(402 |
) |
Denominator Net income (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common stock outstanding |
|
|
7,713 |
|
|
|
7,405 |
|
|
|
7,200 |
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common stock options |
|
|
|
|
|
|
475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted average stock and options outstanding |
|
|
7,713 |
|
|
|
7,880 |
|
|
|
7,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per common share |
|
$ |
(0.75 |
) |
|
$ |
0.23 |
|
|
$ |
(0.06 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net (loss) income per common share |
|
$ |
(0.75 |
) |
|
$ |
0.21 |
|
|
$ |
(0.06 |
) |
|
|
|
|
|
|
|
|
|
|
In 2006 and 2004 there were 2,131,570 and 463,588 outstanding options to purchase shares at a
weighted average exercise price of $5.53 and $8.65 per share, respectively, that were not included
in the computation of diluted net loss per common share because their effect was antidilutive.
These options could dilute earnings per share in future periods. In 2005, there were 454,918
options outstanding at a weighted average exercise price of $8.48 that were not included in the
computation of diluted net income (loss) per common share since the exercise price of the options
exceeded the market price of the common stock.
11. Subsequent Events
Credit Facility
On January 16, 2007, the Company entered into (i) a Business Loan and Security Agreement (the
Business Loan Agreement) with Mid-Peninsula Bank, part of Greater Bay Bank N.A. (Lender), (ii)
an Export-Import Bank Loan and Security Agreement (the Exim Agreement) with Lender, and (iii) a
Borrower Agreement (the Borrower Agreement and together with the Business Loan Agreement and the
Exim Agreement, the Credit Agreement) in favor of Lender and Export-Import Bank of the United
States
69
(Exim
Bank). The Credit Agreement provides for an asset-based revolving line of credit of up to $6 million
(the Revolving Loans) and a $6 million term loan (the Term Loan). Of the Revolving Loans,
up to $3 million principal amount (the Exim Sublimit) will be
guaranteed by Exim Bank. The Companys obligations under the Term Loans and the Revolving Loans (including the Exim
Sublimit) are secured by a lien on substantially all of the Companys assets. Interest on the Term Loan and the
Revolving Loans (including the Exim Sublimit)
is the prime rate as published in the Wall Street Journal, minus 0.5%, subject to adjustment under certain circumstances
including adjustments to the prime rate, late payment or the
occurrence of an event of default. Payments of principal outstanding
under the Term Loan are due in sixty monthly installments beginning
February 28, 2007 and ending February 28, 2012. All
outstanding amounts under the Revolving Loans are payable in full on
January 31, 2009. If at any the amount outstanding under the
Revolving Loans exceeds the Borrowing Base, the Company will be
required to pay the difference between the outstanding amount and the
Borrowing Base. The Company may prepay all amounts outstanding under
the Term Loan and Revolving Loans without penalty. These facilities contain
certain financial and other
covenants, including the requirement for Iridex to maintain profitability on a quarterly basis. Tangible net worth
of $15.5 million, maintain unrestricted cash/marketable securities of $3 million and maintain a debt service
ratio of 1.75 to 1.00 on an annual basis. In
addition, the Company must maintain $3 million in unrestricted cash in an account with Lender. Other covenants
include, but are not limited to, covenants limiting or restricting the Companys ability to incur indebtedness,
incur liens, enter into mergers or consolidations,
dispose of assets, make investments, pay dividends, enter into transactions with affiliates, or prepay certain
indebtedness. In the event of noncompliance by the Company with the covenants under these facilities, the
Mid-Peninsula Bank and Export-Import Bank, would be
entitled to exercise their remedies, under these facilities, which include declaring all obligations immediately
due and payable and disposing of the collateral if obligations were not paid. The Company anticipates being in
non-compliance with the covenants as of March 30, 2007.
Completion of Acquisition
On January 16, 2007, the Company completed its acquisition of the aesthetics business of Laserscope, a California corporation (Laserscope), a wholly owned subsidiary of American Medical Systems, Inc., a Delaware corporation (AMS), pursuant to that certain Asset
Purchase Agree, dated as of November 30, 2006, by and among the Company, AMS and Laserscope. Pursuant to the terms of the Asset Purchase Agreement, IRIDEX purchased certain equipment, finished goods inventory, contracts relating to the Aesthetics Business, accounts
receivable and prepaid expenses, intellectual property, customer lists and other assets and liabilities related to the Aesthetics Business. In addition, the Company acquired all of the outstanding equity interests in Laserscopes subsidiaries, Laserscope (UK) Ltd., a British
private limited company, and Laserscope France, S.A., a French société anonyme (together, the Subsidiaries), after segregation of the assets and the liabilities of each entity which were not part of the Aesthetics Business. In exchange for such net assets and equity
interests in the Subsidiaries, the Company assumed certain liabilities specified in the Asset Purchase Agreement and paid Laserscope $28 million at closing, subject to certain post-closing adjustments, consisting of $26 million in immediately available funds and 213,435
shares of the Companys common stock, based upon the average closing price of the Companys common stock for a 20-day period immediately preceding the closing date of the transaction, which was calculated to be $9.37. The Company will also pay Laserscope up to an additional $9.0 million as
determined by the book value of certain inventory following termination of a manufacturing transition period of approximately six to nine months.
70
Stand-Alone Options
On February 13, 2007, in connection with the employment of the Companys Chief Financial
Officer, the Companys Board of Directors granted a stand alone option, outside of the Companys
existing stock plans, to Meryl Rains, its Chief Financial Officer. The option entitles Ms. Rains to
purchase up to 50,000 shares of the Companys common stock at an exercise price of $9.42 per share.
In February 2007, the Compensation Committee of the Companys Board of Directors approved the
grant of 235,000 non-qualified stock options, outside of the Companys existing stock plans, to a
total of 54 new employees, both domestic and international, hired in connection with the Companys
recently completed acquisition of the assets of the aesthetics business of Laserscope. The option
is granted as of February 28, 2007 at an exercise price of $10.06 per share.
12. Selected Quarterly Financial Data, (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter |
|
|
First |
|
Second |
|
Third |
|
Fourth |
|
|
(In thousands, except per share amounts) |
Year Ended December 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
$ |
8,843 |
|
|
$ |
8,804 |
|
|
$ |
9,222 |
|
|
$ |
9,035 |
|
Gross profit |
|
$ |
4,262 |
|
|
$ |
4,659 |
|
|
$ |
4,872 |
|
|
$ |
5,012 |
|
Net income (loss) |
|
$ |
(303 |
) |
|
$ |
(534 |
) |
|
$ |
(1,143 |
) |
|
$ |
(3,773 |
) |
Net income (loss) per common share |
|
$ |
(0.04 |
) |
|
$ |
(0.07 |
) |
|
$ |
(0.15 |
) |
|
$ |
(0.48 |
) |
Diluted net income (loss) per common share |
|
$ |
(0.04 |
) |
|
$ |
(0.07 |
) |
|
$ |
(0.15 |
) |
|
$ |
(0.48 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
$ |
8,145 |
|
|
$ |
9,387 |
|
|
$ |
9,081 |
|
|
$ |
10,416 |
|
Gross profit |
|
$ |
3,678 |
|
|
$ |
4,545 |
|
|
$ |
4,879 |
|
|
$ |
5,073 |
|
Net income (loss) |
|
$ |
(20 |
) |
|
$ |
430 |
|
|
$ |
879 |
) |
|
$ |
381 |
|
Net income (loss) per common share |
|
$ |
(0.00 |
) |
|
$ |
0.06 |
) |
|
$ |
0.12 |
) |
|
$ |
0.05 |
|
Diluted net income (loss) per common share |
|
$ |
(0.00 |
) |
|
$ |
0.05 |
) |
|
$ |
0.11 |
) |
|
$ |
0.05 |
|
71
Item 9. Changes in And Disagreements with Accountants On Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Evaluation of disclosure controls and procedures
a) Evaluation of disclosure controls and procedures.
Our management evaluated, with the participation of its Chief Executive Officer (CEO) and its
Chief Financial Officer (CFO), the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13A-15(e) and Rule 15d-15(e) of the Securities Exchange
Act of 1934 (the 34 Act), as of the end of the period covered by this report.
Disclosure controls and procedures are designed with the objective of ensuring that (i)
information required to be disclosed in our reports filed under the 34 Act is recorded, processed,
summarized and reported within the time periods specified in the SECs rules and forms and (ii)
information is accumulated and communicated to management, including the CEO and CFO, as
appropriate to allow timely decisions regarding required disclosure. Internal control procedures,
which are designed with the objective of providing reasonable assurance that our transactions are
properly authorized, our assets are safeguarded against unauthorized or improper use and its
transactions are properly recorded and reported, are intended to permit the preparation of our
financial statements in conformity with generally accepted accounting principles. To the extent
that elements of our internal controls over financial reporting are included within our disclosure
controls and procedures, they are included in the scope of our quarterly controls evaluation.
Based on that evaluation, and as a result of the material weakness in our internal controls
over financial reporting discussed below, the CEO and CFO concluded that as of the end of the
period covered by this report, the Companys disclosure controls and procedures were not effective.
A material weakness
is a control deficiency, or a combination of control deficiencies, that
results in more than a remote likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. Management determined that the following
control deficiencies constitute a material weakness in our internal control over financial
reporting at December 30, 2006.
In connection with the annual audit of our financial statements as of December 30, 2006 and
December 31, 2005, our independent registered public accounting firm communicated to our management
and the Audit Committee of the Board of Directors that they had identified a control deficiency
that existed in the design or operation of our internal controls over financial reporting that they
considered to be a material weakness, because the control deficiency resulted in more than a remote
likelihood that a material misstatement could occur in our annual financial statements and not be
prevented or detected. Specifically, the material weakness identified by our independent
accountants relates to a failure to maintain adequate period-end review procedures to ensure the
completeness and accuracy of certain journal entries impacting general ledger accounts. As a
result, incorrect entries were recorded to the financial statements which were not identified and
corrected by management in a timely manner.
Plan for remediation of material weaknesses
To address the material weaknesses in our internal control over financial reporting identified
above, management has designed a remediation plan which will supplement the existing controls of
the Company. The remediation plan addresses the following corrective actions:
72
|
|
|
implementation of additional controls over the preparation and review of key spreadsheets; |
|
|
|
|
implementation of automated general ledger reports to replace existing key spreadsheets where possible; |
|
|
|
|
implementation of additional review procedures; and |
|
|
|
|
enhancement of the current capabilities of the finance function. |
Even if we are to successfully remediate each of the material weaknesses described above,
because of inherent limitations, our disclosure controls and procedures may not prevent or detect
misstatements or material omissions. Projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
(b) Changes in internal control over financial reporting
As disclosed in our Quarterly Report on Form 10-Q for the period ended September 30, 2006, in
August 2006, the Audit Committee of the Board of Directors engaged outside counsel and initiated an
independent review of our revenue recognition practices. This review was initiated in response to
an allegation made by a former employee. In the course of this review, errors in revenue
recognition were identified and
management, with the participation of the CEO and CFO, determined the Company did not maintain
effective controls over the accounting for revenue.
In the quarter ended December 30, 2006 the Company implemented the following changes to internal
control related to our revenue recognition practices:
|
|
|
reassignment of responsibilities for oversight of the sales function and
responsibilities for internal control over sales transactions; |
|
|
|
|
provision of additional training on a recurring basis for all domestic sales personnel
on revenue recognition policies and procedures; |
|
|
|
|
establishment of annual formal training for our customer service group on revenue
recognition policies and procedures; |
|
|
|
|
establishment of a checklist for use by our customer service group in processing revenue
transactions to verify proper recognition and establishment of a policy by which this
checklist is signed off by the preparer and at least one reviewer; |
|
|
|
|
establishment of internal audit procedures over all domestic laser sale transactions; and |
|
|
|
|
formalization over our sales returns process to include more thorough documentation,
review and approval for all returns. |
We believe that the implementation of these corrective actions have mitigated the material
weaknesses that were identified as of September 30, 2006 related to our revenue recognition
practices.
Subsequent to December 30, 2006 the Company enhanced the current capabilities of the Companys
finance function by adding a new Chief Financial Officer.
73
No other change has occurred in our internal controls over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) of the 34 Act) during the quarter ended December 30, 2006, that has
materially affected, or is reasonably likely to materially affect, our internal controls over
financial reporting. As discussed in (a) above, management has designed a plan for remediation and
is implementing changes in our internal control over financial reporting to remediate the material
weaknesses identified above.
Item 9B. Other Information
Not applicable.
PART III
Certain information required by Part III has been omitted from this Form 10-K. This
information is instead incorporated herein by reference to our definitive Proxy Statement for our
2007 Annual Meeting of Stockholders (the Proxy Statement), which we will file within 120 days
after the end of our fiscal year pursuant to Regulation 14A in time for our Annual Meeting of
Stockholders to be held June 7, 2007.
Item 10. Directors and Executive Officers of the Registrant
Information regarding our directors is incorporated herein by reference to Proposal One -
Election of DirectorsNominees in our Proxy Statement. The information concerning our current
executive officers is incorporated herein by reference to Executive Officers in our Proxy
Statement. Information regarding delinquent filers is incorporated by reference to Section 16(a)
Beneficial Ownership Reporting Compliance in our Proxy Statement. Information regarding our code
of business conduct and ethics is incorporated herein by reference to Proposal One Election of
Directors Corporate Governance Matters Code of Business Conduct and Ethics in our Proxy
Statement.
Item 11. Executive Compensation
The information required by this item is incorporated herein by reference to Executive
Compensation in our Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information required by this Item is incorporated herein by reference to Security
Ownership of Certain Beneficial Owners and Management in our Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is incorporated herein by reference to Certain
Relationships and Related Transactions in our Proxy Statement.
Item 14. Principal Accountant Fees and Services.
The information required by this item is incorporated herein by reference to Proposal Five
Ratification of Appointment of Independent Accountants in our Proxy Statement.
74
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
The following documents are filed in Part II of this Annual Report on Form 10-K:
|
|
|
|
|
|
|
Page in |
|
|
Form 10-K |
|
|
Report |
1. Financial Statements |
|
|
|
|
|
|
|
47 |
|
|
|
|
48 |
|
|
|
|
49 |
|
|
|
|
50 |
|
|
|
|
51 |
|
|
|
|
52 |
|
|
|
|
52 |
|
|
|
|
|
|
2. Financial Statement Schedule |
|
|
|
|
The following financial statement schedule of IRIDEX Corporation for the years
ended December 30, 2006, December 31, 2005, and
January 1, 2005 is filed as part
of this Annual Report and should be read in conjunction with the Consolidated
Financial Statements of IRIDEX Corporation |
|
|
|
|
|
|
|
77 |
|
Other schedules have been omitted because they are either not required, not applicable, or the
required information is included in the consolidated financial statements or notes thereto.
3. Exhibits
|
|
|
Exhibits |
|
Exhibit Title |
2.1(9)
|
|
Asset Purchase Agreement dated November 30, 2006 by and among American Medical Systems,
Inc., a Delaware corporation, Laserscope, a California corporation and a wholly owned
subsidiary of American Medical Systems, Inc. and IRIDEX Corporation. |
|
|
|
3.1(1)
|
|
Amended and Restated Certificate of Incorporation of Registrant. |
|
|
|
3.2(2)
|
|
Amended and Restated Bylaws of Registrant. |
|
|
|
10.1(1)
|
|
Form of Indemnification Agreement with directors and officers. |
|
|
|
10.2(7)
|
|
2005 Employee Stock Purchase Plan. |
|
|
|
10.3(5)
|
|
Employment Agreement with Barry G. Caldwell dated July 5, 2005. |
|
|
|
10.4(6)
|
|
Executive Transition Agreement entered into by and between the
Company and Theodore A. Boutacoff dated April 28, 2005. |
|
|
|
10.5(6)
|
|
Amended and Restated Severance and Change of Control Agreement
entered into by and between the Company and Larry Tannenbaum on
April 29, 2005. |
|
|
|
10.6(4)
|
|
Lease Agreement dated December 6, 1996 by and between Zappettini
Investment Co. and the Registrant, as amended. |
75
|
|
|
Exhibits |
|
Exhibit Title |
10.7(3)
|
|
1998 Stock Option Plan, as amended. |
|
|
|
10.8(8)
|
|
2006 Incentive Program. |
|
|
|
21.1(1)
|
|
Subsidiaries of Registrant. |
|
|
|
23.1
|
|
Consent of Independent Registered Public Accounting Firm. |
|
|
|
24.1
|
|
Power of Attorney (See page 78). |
|
|
|
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 pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
|
|
|
(1) |
|
Incorporated by reference to the Exhibits filed with the Registration
Statement on Form SB-2 (No. 333-00320-LA) which was declared effective
on February 15, 1996. |
|
(2) |
|
Incorporated by reference to the Exhibits in Registrants Report on
Form 10-Q for the quarter ended October 3, 1998. |
|
(3) |
|
Incorporated by reference to the Exhibits in Registrants Proxy
Statement for the Companys 2006 Annual Meeting of Stockholders which
was filed May 5, 2006. |
|
(4) |
|
Incorporated by reference to the Exhibits in Registrants Report on
Form 10-Q for the quarter ended September 27, 2003. |
|
(5) |
|
Incorporated by reference to the Exhibits filed with the Registrants Report on Form 8-K
dated July 5, 2005. |
|
(6) |
|
Incorporated by reference to the Exhibits filed with the Registrants Report on Form 8-K
dated May 4, 2005. |
|
(7) |
|
Incorporated by reference to the Exhibits filed with the Registrants Proxy Statement for the
Companys 2004 Annual Meeting of Stockholders which was filed on April 30, 2004. |
|
(8) |
|
Incorporated by reference to the Exhibits filed with the Registrants Report on Form 8-K
dated March 14, 2006. |
|
(9) |
|
Incorporated by reference to the Exhibits filed with the Registrants Report on Form 8-K
dated December 6, 2006. |
Trademark Acknowledgments
IRIDEX, the IRIDEX logo, IRIS Medical, OcuLight, IQ810, VariLite, DioLite XP, SmartKey,
EndoProbe and Apex are our registered trademarks. IRIDERM, G-Probe, DioPexy, DioVet, TruFocus,
TrueCW, UltraView, DioLite 532, Long Pulse, MicroPulse Scanlite Scanner, ColdTip Handpiece,
Varispot Handpiece and EasyFit product names are our trademarks. All other trademarks or trade
names appearing in this Annual Report on Form 10-K are the property of their respective owners.
76
Schedule II
IRIDEX CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
Charged to |
|
|
|
|
|
Balance |
|
|
Beginning of |
|
Costs and |
|
|
|
|
|
at End of |
Description |
|
The Period |
|
Expenses |
|
Deductions |
|
The Period |
Balance for the year ended January 1, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts receivable |
|
$ |
120 |
|
|
$ |
376 |
|
|
$ |
(30 |
) |
|
$ |
466 |
|
Provision for inventory |
|
$ |
1,043 |
|
|
$ |
694 |
|
|
$ |
|
|
|
$ |
1,737 |
|
Balance for the year ended December 31, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts receivable |
|
$ |
466 |
|
|
$ |
132 |
|
|
$ |
(39 |
) |
|
$ |
559 |
|
Provision for inventory |
|
$ |
1,737 |
|
|
$ |
407 |
|
|
$ |
(89 |
|
|
$ |
2,055 |
|
Balance for the year ended December 30, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts receivable |
|
$ |
559 |
|
|
$ |
141 |
|
|
$ |
(261 |
) |
|
$ |
439 |
|
Provision for inventory |
|
$ |
2,055 |
|
|
$ |
(296 |
) |
|
$ |
1 |
|
|
$ |
1,760 |
|
77
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Mountain View, State of California, on the 30th day of
March, 2007.
|
|
|
|
|
|
IRIDEX CORPORATION
|
|
|
By: |
/s/ Barry G. Caldwell
|
|
|
|
Barry G. Caldwell |
|
|
|
President, Chief Executive Officer, and Director |
|
|
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes
and appoints Barry G. Caldwell and Meryl Rains, jointly and severally, their attorney-in-fact, each
with full power of substitution, for him in any and all capacities, to sign on behalf of the
undersigned any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and Exchange Commission,
and each of the undersigned does hereby ratifying and confirming all that each of said
attorneys-in-fact, or his substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, this report has been signed by the
following persons in the capacities and on the dates indicated.
|
|
|
|
|
/s/ Barry G. Caldwell
|
|
President, Chief Executive Officer, and Director
|
|
March 30, 2007 |
(Barry G. Caldwell)
|
|
(Principal Executive Officer) |
|
|
|
|
|
|
|
/s/ Meryl Rains
|
|
Chief Financial Officer and Vice President
|
|
March 30, 2007 |
(Meryl Rains)
|
|
(Principal Financial and Accounting Officer) |
|
|
|
|
|
|
|
|
|
Vice President, Corporate Business
|
|
|
(James L. Donovan)
|
|
Development and Director |
|
|
|
|
|
|
|
/s/ Robert K. Anderson
|
|
Director
|
|
March 30, 2007 |
(Robert K. Anderson) |
|
|
|
|
|
|
|
|
|
/s/ Donald L. Hammond
|
|
Director
|
|
March 30, 2007 |
(Donald L. Hammond) |
|
|
|
|
|
|
|
|
|
/s/ Sanford Fitch
|
|
Director
|
|
March 30, 2007 |
(Sanford Fitch) |
|
|
|
|
|
|
|
|
|
/s/ Garrett A. Garrettson
|
|
Director
|
|
March 30, 2007 |
(Garett A. Garrettson) |
|
|
|
|
|
|
|
|
|
/s/ Theodore A. Boutacoff
|
|
Chairman of the Board
|
|
March 30, 2007 |
(Theodore A. Boutacoff) |
|
|
|
|
78
Exhibit Index
|
|
|
Exhibits |
|
Exhibit Title |
2.1(9)
|
|
Asset Purchase Agreement dated November 30, 2006 by and among American Medical Systems,
Inc., a Delaware corporation, Laserscope, a California corporation and a wholly owned
subsidiary of American Medical Systems, Inc. and IRIDEX Corporation. |
|
|
|
3.1(1)
|
|
Amended and Restated Certificate of Incorporation of Registrant. |
|
|
|
3.2(2)
|
|
Amended and Restated Bylaws of Registrant. |
|
|
|
10.1(1)
|
|
Form of Indemnification Agreement with directors and officers. |
|
|
|
10.2(7)
|
|
2005 Employee Stock Purchase Plan. |
|
|
|
10.3(5)
|
|
Employment Agreement with Barry G. Caldwell dated July 5, 2005. |
|
|
|
10.4(6)
|
|
Executive Transition Agreement entered into by and between the
Company and Theodore A. Boutacoff dated April 28, 2005. |
|
|
|
10.5(6)
|
|
Amended and Restated Severance and Change of Control Agreement
entered into by and between the Company and Larry Tannenbaum on
April 29, 2005. |
|
|
|
10.6(4)
|
|
Lease Agreement dated December 6, 1996 by and between Zappettini
Investment Co. and the Registrant, as amended. |
|
|
|
10.7(3)
|
|
1998 Stock Option Plan, as amended. |
|
|
|
10.8(8)
|
|
2006 Incentive Program. |
|
|
|
21.1(1)
|
|
Subsidiaries of Registrant. |
|
|
|
23.1
|
|
Consent of Independent Registered Public Accounting Firm. |
|
|
|
24.1
|
|
Power of Attorney (See page 78). |
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1
|
|
Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
|
|
|
(1) |
|
Incorporated by reference to the Exhibits filed with the Registration
Statement on Form SB-2 (No. 333-00320-LA) which was declared effective
on February 15, 1996. |
|
(2) |
|
Incorporated by reference to the Exhibits in Registrants Report on
Form 10-Q for the quarter ended October 3, 1998. |
|
(3) |
|
Incorporated by reference to the Exhibits in Registrants Proxy
Statement for the Companys 2006 Annual Meeting of Stockholders which
was filed May 5, 2006. |
|
(4) |
|
Incorporated by reference to the Exhibits in Registrants Report on
Form 10-Q for the quarter ended September 27, 2003. |
|
(5) |
|
Incorporated by reference to the Exhibits filed with the Registrants
Report on Form 8-K dated July 5, 2005. |
|
(6) |
|
Incorporated by reference to the Exhibits filed with the Registrants
Report on Form 8-K dated May 4, 2005. |
|
(7) |
|
Incorporated by reference to the Exhibits filed with the Registrants Proxy Statement for
the Companys 2004 Annual Meeting of Stockholders which was filed on April 30, 2004. |
|
(8) |
|
Incorporated by reference to the Exhibits filed with the Registrants Report on Form 8-K
dated March 14, 2006. |
|
(9) |
|
Incorporated by reference to the Exhibits filed with the Registrants Report on Form 8-K
dated December 6, 2006. |
exv23w1
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statement on Forms S-8
(No. 333-135822, No. 333-117885, 333-127716, 333-32161, 333-57573, 333-86091, 333-45736, 333-67480,
333-97541 and 333-107700) of Iridex Corporation of our report dated March 30, 2007 relating to the
financial statements and financial statement schedules which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
San Jose, California
March 30, 2007
exv31w1
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 2002
I, Barry G. Caldwell, certify that:
|
1. |
|
I have reviewed this report on Form 10-K of IRIDEX Corporation; |
|
|
2. |
|
Based on my knowledge, this 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 report; |
|
|
3. |
|
Based on my knowledge, the financial statements, and other financial information
included in this 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 report; |
|
|
4. |
|
The registrants other certifying officers 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 annual report is being prepared; |
|
|
b) |
|
Evaluated the effectiveness of the registrants disclosure control 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 registrants internal control
over financial reporting that occurred during the registrants most recent fiscal
quarter (the registrants fourth fiscal quarter in the case of the annual report)
that has materially affected, or is reasonably likely to materially affect the
registrants internal control over financial reporting; |
|
5. |
|
The registrants other certifying officers and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrants
auditors and the audit committee of the registrants 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 registrants 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 registrants internal control over
financial reporting. |
Date: March 30, 2007
|
|
|
|
|
By: /s/ BARRY G. CALDWELL |
|
|
|
|
|
|
|
|
Name: Barry G. Caldwell |
|
|
Title: President and Chief Executive Officer |
|
|
(Principal Executive Officer) |
exv31w2
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, Meryl Rains, certify that:
|
1. |
|
I have reviewed this report on Form 10-K of IRIDEX Corporation; |
|
|
2. |
|
Based on my knowledge, this 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 report; |
|
|
3. |
|
Based on my knowledge, the financial statements, and other financial information
included in this 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 report; |
|
|
4. |
|
The registrants other certifying officers 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 annual report is being prepared; |
|
|
b) |
|
Evaluated the effectiveness of the registrants disclosure control 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 registrants internal control
over financial reporting that occurred during the registrants most recent fiscal
quarter (the registrants fourth fiscal quarter in the case of the annual report)
that has materially affected, or is reasonably likely to materially affect the
registrants internal control over financial reporting; |
|
5. |
|
The registrants other certifying officers and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrants
auditors and the audit committee of the registrants 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 registrants 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 registrants internal control over
financial reporting. |
Date: March 30, 2007
|
|
|
|
|
By: /s/ MERYL RAINS |
|
|
|
|
|
|
|
|
Name: Meryl Rains |
|
|
Title: Chief Financial Officer and Vice President |
|
|
(Principal Financial and Accounting Officer) |
exv32w1
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Barry G. Caldwell, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that the Annual Report of IRIDEX Corporation on Form 10-K for
the fiscal year ended December 30, 2006 (i) fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934 and (ii) that information contained in such Annual
Report on Form 10-K fairly presents, in all material respects, the financial condition and results
of operations of IRIDEX Corporation.
Date: March 30, 2007
|
|
|
|
|
By: /s/ BARRY G. CALDWELL |
|
|
|
|
|
|
|
|
Name: Barry G. Caldwell |
|
|
Title: President and Chief Executive Officer |
|
|
(Principal Executive Officer) |
exv32w2
EXHIBIT 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Meryl Rains, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that the Annual Report of IRIDEX Corporation on Form 10-K for the
fiscal year ended December 30, 2006 (i) fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934 and (ii) that information contained in such Annual
Report on Form 10-K fairly presents, in all material respects, the financial condition and results
of operations of IRIDEX Corporation.
Date: March 30, 2007
|
|
|
|
|
By: /s/ MERYL RAINS |
|
|
|
|
|
|
|
|
Name: Meryl Rains |
|
|
Title: Chief Financial Officer and Vice President, |
|
|
(Principal Financial and Accounting Officer) |