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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from to
Commission File Number: 0-27598
IRIDEX CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 77-0210467
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
340 PIONEER WAY
MOUNTAIN VIEW, CALIFORNIA 94041
(Address of principal executive offices, including zip code)
(415) 962-8100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes [X] No [ ]; (2) Yes [X ] No [ ]
The number of shares of Common Stock, $.01 par value, issued and outstanding as
of June 30, 1996 was 6,336,443.
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IRIDEX CORPORATION
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Condensed Consolidated Balance Sheets as of June 30, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Income for the three months and six months
ended June 30, 1996 and June 30, 1995 4
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 1996 and June 30, 1995 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 7
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURE 15
INDEX TO EXHIBITS 16
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IRIDEX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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JUNE 30, DECEMBER 31,
1996 1995*
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ASSETS (unaudited)
Current assets:
Cash and equivalents $ 15,402 $ 1,227
Accounts receivable, net 2,584 2,478
Inventories 1,868 1,256
Prepaids and other current assets 137 285
Deferred income taxes 795 795
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Total current assets 20,786 6,041
Available-for-sale securities 1,000 --
Property and equipment, net 450 254
Deferred income taxes 100 100
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Total assets $ 22,336 $ 6,395
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 619 $ 293
Accrued expenses 995 1,401
Capital lease obligation 13 16
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Total current liabilities 1,627 1,710
Stockholders' equity:
Convertible preferred stock, $.01 par value:
Authorized: Series A through D1: 3,783,330 shares;
Issued and outstanding: none in 1996 and 1,891,663 shares in 1995
(Liquidation value: $ 5,219) 19
Common stock, $.01 par value:
Authorized: 30,000,000 shares;
Issued and outstanding: 6,336,443 shares in 1996 and 1,505,424 shares
in 1995 63 15
Additional paid-in capital 21,077 5,489
Accumulated deficit (431) (838)
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Total stockholders' equity 20,709 4,685
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Total liabilities and stockholders' equity $ 22,336 $ 6,395
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*Derived from the Company's audited financial statements.
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IRIDEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
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THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
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1996 1995 1996 1995
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Sales $ 2,486 $ 2,166 $ 4,903 $ 4,254
Cost of sales 948 745 1,880 1,437
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Gross profit 1,538 1,421 3,023 2,817
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Operating expenses:
Research and development 331 204 601 363
Selling, general and administrative 1,109 905 2,165 1,770
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Total operating expenses 1,440 1,109 2,766 2,133
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Income from operations 98 312 257 684
Other income, net 206 5 298 17
------- ------- ------- -------
Income before provision for income
taxes 304 317 555 701
Provision for income taxes (122) (136) (148) (297)
------- ------- ------- -------
Net income $ 182 $ 181 $ 407 $ 404
------- ------- ------- -------
Net income per share $ 0.03 $ 0.04 $ 0.07 $ 0.09
======= ======= ======= =======
Shares used in per share calculation 6,758 4,549 6,227 4,537
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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IRIDEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
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SIX MONTHS ENDED JUNE 30,
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1996 1995
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Cash flows from operating activities:
Net income $ 407 $ 404
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 72 26
Provision for doubtful accounts (118) --
Changes in operating assets and liabilities:
Accounts receivable 12 (92)
Inventories (612) 68
Prepaids and other current assets 148 (68)
Accounts payable 326 123
Accrued expenses (406) 295
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Net cash provided by operating activities (171) 756
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Cash flows from investing activities:
Acquisition of property and equipment (268) (118)
Purchase of available-for-sale securities (1,000) --
-------- --------
Net cash used in investing activities (1,268) (118)
-------- --------
Cash flows from financing activities:
Payments on bank borrowings -- (125)
Payment on capital lease obligations (3) (4)
Issuance of common stock, net 15,617 13
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Net cash provided by (used in) financing activities 15,614 (116)
Net increase in cash and cash equivalents 14,175 522
Cash and cash equivalents at beginning of period 1,227 684
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Cash and cash equivalents at end of period $ 15,402 $ 1,206
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</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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IRIDEX CORPORATION
CONDENSED CONSOLIDATED
NOTES TO FINANCIAL STATEMENTS
(information for the three months ended and
six months ended June 30, 1996 and 1995 is unaudited)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements at June 30, 1996 and for the
three month and six month periods then ended are unaudited (except for the
balance sheet information as of December 31, 1995, which is derived from the
Company's audited financial statements) and reflect all adjustments (consisting
only of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the financial position and operating
results for the interim periods. The condensed consolidated financial statements
should be read in conjunction with the financial statements and notes thereto,
together with management's discussion and analysis of financial condition and
results of operations, contained in the Company's Registration Statement on Form
SB-2 (Registration Statement No. 333-00320), which was declared effective by the
Securities and Exchange Commission on February 15, 1996. The results of
operations for the three and six month periods ended June 30, 1996 are not
necessarily indicative of the results for the year ending December 31, 1996, or
any future interim period.
2. INVENTORIES COMPRISE: (IN THOUSANDS)
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JUNE 30, 1996 DECEMBER 31, 1995
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(UNAUDITED)
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Raw materials and work in progress $ 985 $ 614
Finished goods 883 642
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Total inventories $1,868 $1,256
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3. AVAILABLE-FOR-SALE SECURITIES
At June 30, 1996, available-for-sale securities consisted of one government bond
due in December 2017 and which was sold in July 1996.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contains trend analysis and other
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Actual results could differ materially from those set forth in such
forward-looking statements as a result of the factors set forth under "Factors
Affecting Operating Results" and other risks detailed in the Company's
Registration Statement on Form SB-2 (Reg. Stmt. No. 333-00320) declared
effective by the Securities and Exchange Commission on February 15, 1996 and
detailed from time to time in the Company's reports filed with the Securities
and Exchange Commission.
OVERVIEW
To date, substantially all of the Company's revenues have been derived
from sales of its OcuLight Diode Laser Photocoagulator system (the "OcuLight IR
System"), an infrared, invisible light, semiconductor-based laser console and
interchangeable delivery devices, into the ophthalmic medical device market. The
Company expects that sales of the OcuLight IR System will continue to account
for a majority of the Company's revenues, at least through 1996. The Company
expects to introduce its visible light semiconductor-based photocoagulator
system (the "Oculight GL") in the third quarter of 1996, subject to FDA review
and clearance. The Company expects revenue in the second half of 1996 to
increase due primarily to the introduction of the OcuLight GL internationally
and domestically. Because sales of the Company's OcuLight IR System represent a
significant portion of the infrared laser market, increased sales of the
Company's infrared system will depend on the rate at which users convert to
infrared photocoagulators. Revenue from product sales is generally recognized at
the time of shipment (net of allowances or discounts), while revenue from
services is recognized upon performance of the applicable services. The
Company's revenue has increased primarily due to growth in unit sales as a
result of greater market penetration and an expanded product offering.
Sales in the United States are derived from direct sales to end users
and internationally are derived from sales to 39 distributors who resell to
hospitals and physicians. Sales to international distributors are made on open
credit terms or letters of credit and generally are not subject to a right of
return unless the Company terminates a distributor. The Company believes its
distributors carry minimal inventory. Although sales of the Company's products
internationally currently are denominated in United States dollars,
international sales are subject to a variety of risks including fluctuations in
foreign currency exchange rates, shipping delays, generally longer receivables
collection periods, changes in applicable regulatory policies, international
monetary conditions, domestic and foreign tax policies, trade restrictions,
duties and tariffs and economic and political instability. These factors are
ameliorated somewhat because the Company has sold its products internationally
in 63 countries. Accordingly, to date the Company has not experienced any
material impact on its results of operations due to fluctuations in currency
exchange rates or the other factors set forth herein.
Although the Company has been profitable on an annual and quarterly
basis since the quarter ended December 31, 1993, the Company's sales and
operating results have varied on a quarterly basis and such fluctuations are
expected to continue in future periods. The Company believes that its gross
margins in 1996 will be somewhat lower than gross margins in the second half of
1995, primarily because of increases in fixed costs incurred to support
expansion of the Company's business and decreases in average selling price. In
addition, the Company has been incurring and expects to continue to incur
increased operating expenses in 1996 associated with the planned introduction of
its visible light photocoagulator system, the OcuLight GL. These increases are
expected to result in significantly lower operating margins in at least the
first three quarters of 1996. Increases in operating margins will
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depend significantly on the successful introduction and market acceptance of
this visible light photocoagulator as well as increased sales of existing
OcuLight Systems.
RESULTS OF OPERATIONS
The following table sets forth the percentage of net sales of
certain items in the Company's income statement for the periods indicated.
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THREE MONTHS ENDED SIX MONTHS ENDED
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JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1996 1995 1995 1996
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Sales ........................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales ................................... 38.1 34.4 38.3 33.8
----- ----- ----- -----
Gross profit ........................... 61.9 65.6 61.7 66.2
Operating expenses:
Research and development ................... 13.3 9.4 12.3 8.5
Sales, general and administrative .......... 44.7 41.8 44.2 41.6
----- ----- ----- -----
Total operating expenses ............... 58.0 51.2 56.5 50.1
Income from operations .......................... 3.9 14.4 5.2 16.1
Other income (expense), net ..................... 8.3 0.2 6.1 0.4
----- ----- ----- -----
Income before benefit from (provision for) income
taxes ........................................... 12.2 14.6 11.3 16.5
Benefit from (provision for) income taxes ....... (4.9) (6.2) (3.0) (7.0)
----- ----- ----- -----
Net income ...................................... 7.3% 8.4% 8.3% 9.5%
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Sales. Sales increased 14.8% to $2.5 million for the three months
ended June 30, 1996 from $2.2 million for the three months ended June 30, 1995.
For the six months ended June 30, 1996, net sales increased 15.3% to $4.9
million from $4.3 million for the six months ended June 30, 1995. The growth in
sales over these periods was primarily attributable to increased unit volume as
the Company expanded its product offerings and broadened its customer base,
offset somewhat by slight decreases in average selling prices. International
sales of $1.1 million accounted for 43.8% of sales in the three months ended
June 30, 1996 compared to $1.2 million or 53.7% of sales in the comparable 1995
period. For the six months ended June 30, 1996, international sales accounted
for $2.3 million, or 49.4% of sales compared to $2.1 million, or 48.4% of sales
for the six months ended June 30, 1995. The Company expects revenues from
international sales to continue to account for a substantial portion of its
sales. The decrease in revenue from international sales of approximately $.2
million is primarily due to the international introduction of the OcuLight GL
that resulted in bookings, but no shipments in the quarter ended June 30, 1996.
The Company expects to begin shipment of the OcuLight GL in the third quarter of
1996, pending FDA clearance.
Gross Profit. The Company's gross profit increased 8.2% to $1.5 million
for the three months ended June 30, 1996 from $1.4 million for the three months
ended June 30, 1995. For the six months ended June 30, 1996, gross profit
increased 7.3% to $3.0 million from $2.8 million for the six months ended June
30, 1995. Gross profit as a percentage of net sales for the three and six months
ended June 30, 1996 were 61.9% and 61.7%, respectively, as compared to 65.6% and
66.2%, respectively, for the three and six months ended June 30, 1995.
Increasing competition has resulted in a downward trend in average selling
prices of the Company's products. The Company expects continued competitive
pressure on the prices of its products and therefore a somewhat lower gross
profit in
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future periods. The Company intends to continue its efforts to reduce the cost
of components and thereby mitigate the impact of price reductions on its gross
profits. The Company also expects its gross profit to continue to fluctuate due
to changes in the relative proportions of domestic and international sales,
costs associated with new product introductions and a variety of other factors.
The Company believes that its gross profit in 1996 will be somewhat lower than
gross profit in the second half of 1995, primarily because of increases in fixed
costs incurred to support expansion of the Company's business and decreases in
average selling prices.
Research and Development. Research and development expenses increased
by 62.3% to $.3 million for the three months ended June 30, 1996 from $.2
million for the three months ended June 30, 1995. For the six months ended June
30, 1996, research and development expenses increased 65.6% to $.6 million from
$.4 million for the six months ended June 30, 1995, increasing as a percentage
of net sales to 12.3% for the six months ended June 30, 1996 from 8.5% for the
comparable prior year six month period. The increase in research and development
expenses during this period was primarily attributable to an increase in
personnel as the Company increased its product development efforts, particularly
those directed at the introduction of the new visible light photocoagulator
system, the OcuLight GL, expected to be released in the third quarter of 1996,
pending FDA clearance. The Company expects these expenses for research and
development to continue to increase in absolute dollars during the second half
of 1996 in connection with the completion of the development of its visible
light photocoagulator system and thereafter in connection with other development
activities.
Sales, General and Administrative. Sales, general and administrative
expenses grew by 22.5% to $1.1 million for the three months ended June 30, 1996
from $.9 million for the three months ended June 30, 1995. For the six months
ended June 30, 1996, sales, general and administrative expenses increased 22.3%
to $2.2 million from $1.8 million for the six months ended June 30, 1995,
increasing as a percentage of net sales to 44.2% for the six months ended June
30, 1996 from 41.6% for the comparable prior year six month period. The
increases in sales, general and administrative expenses were primarily due to
the hiring of additional marketing employees to address new opportunities, to
support expanding unit volumes and growth of sales of products, particularly for
the OcuLight GL, scheduled to be introduced in the second half of 1996 and the
expenses associated with the marketing launch of the OcuLight GL. During 1995,
the Company began implementing a new management information system in
manufacturing and expects to expand this system throughout the Company during
1996 and 1997. The Company expects these expenses to continue to increase during
the second half of 1996 to support the introduction of the OcuLight GL.
Income Taxes. The Company's effective tax rate decreased to 40.1% for
the three months ended June 30, 1996 from 42.9% for the three months ended June
30, 1995. For the six months ended June 30, 1996, the effective tax rate
decreased to 26.7% from 42.4% for the six months ended June 30, 1995. These
rates differ from the federal statutory rate primarily due to the utilization of
tax credits.
LIQUIDITY AND CAPITAL RESOURCES
Since January 1994, the Company has funded its operations primarily
from cash generated from operations. At June 30, 1996, the Company's primary
sources of liquidity included cash and cash equivalents of $15.4 million and
available bank borrowings of $1.0 million under its unsecured line of credit
which bears interest at the bank's prime rate plus 0.75% and expires on October
1, 1996. No borrowings were outstanding under this line of credit at June 30,
1996.
During the six-month period ended June 30, 1996, the Company used $.2
million in operating activities. Sources of cash included net income of $.4
million offset by increases in inventories of $.6 million. The increase in
inventories is due to the purchase of components for the Company's new visible
light laser photocoagulator, the
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OcuLight GL, which the Company expects to ship in the third quarter of 1996,
pending FDA clearance, and to purchases of components for the Company's other
products.
The Company used $1.3 million in investing activities during the six
months ended June 30, 1996. Investing activities consisted of the acquisition of
$.3 million of property and equipment used in the development and production of
the new OcuLight GL product and $1.0 million for the purchase of
available-for-sale securities with maturities of greater than one year.
In February 1996, the Company sold 1,982,500 shares of its Common Stock
in connection with its initial public offering ("IPO"). The net proceeds of this
offering were approximately $15.6 million after deducting underwriting discounts
and commissions and expenses of the offering. The Company has used a portion of
the net proceeds from the IPO for purchases of inventory, leasehold improvements
and payment of certain accrued liabilities. The Company believes that, based on
current estimates, current cash balances, its credit facility and net cash
provided by operating activities, will be sufficient to meet its working capital
and capital expenditure requirements through 1997.
FACTORS AFFECTING OPERATING RESULTS
Dependence on Existing Products and on Market Acceptance of Infrared
Photocoagulators. To date, substantially all of the Company's revenues have been
derived from sales of its OcuLight Diode Laser Photocoagulator system (the
"OcuLight IR System"), an infrared, invisible light, semiconductor-based laser
console and interchangeable delivery devices, into the ophthalmic medical device
market. The Company expects that sales of the OcuLight IR System will continue
to account for a majority of the Company's revenues at least through 1996. The
Company expects to introduce its visible light semiconductor-based
photocoagulator system in the third quarter of 1996, subject to FDA review and
clearance. The ophthalmic community historically has used argon-gas
photocoagulators which produce visible light and the substantial majority of
photocoagulators sold for ophthalmic purposes are argon-gas. Because sales of
the Company's OcuLight IR System represent a significant portion of the infrared
laser market, increased sales of the Company's infrared system will depend on
the rate at which users convert to infrared photocoagulators. Equipment
purchasing decisions may be based on a number of factors, in addition to price
and performance. For example, many ophthalmologists have been trained in medical
school to use visible lasers and may be reticent to change to infrared lasers.
There can be no assurance that the OcuLight IR System will continue to be
accepted by the market or that other competitive treatments will not be
developed, and therefore that sales derived from the OcuLight IR System will
continue to grow at historical rates or be sustainable at current sales levels.
Any decline in the demand for the OcuLight IR System or any failure of sales
derived from such products to meet the Company's expectations would have a
material adverse effect on the business, results of operations and financial
condition of the Company.
Dependence on Successful Development and Introduction of Visible
Photocoagulator. The Company is currently developing a new semiconductor-based
photocoagulator system, the OcuLight GL, that emits visible light similar to the
argon-gas lasers currently used. The Company is devoting significant resources
to the development and commercial introduction of the OcuLight GL which it
expects to introduce during the third quarter of 1996, subject to FDA review and
approval. The Company filed a 510(k) covering the OcuLight GL with the FDA in
March 1996 and in May 1996 responded to FDA inquiries relating to this 510(k)
submission. The Company believes that the growth of its sales will be
substantially dependent upon the success of this visible light laser system.
This system is currently being released for manufacturing. The process of
successfully developing and introducing a new product involves a significant
amount of risk. Once developed, a market clearance must be obtained from the FDA
before the product can be sold domestically. This process can be lengthy.
Unexpected difficulties may occur in the manufacturing process. For example,
the Company is currently experiencing delays in its manufacturing of the
OcuLight GL
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due to the inability of a supplier of a sole-source component to deliver
components in volume. The Company is working with this supplier to resolve these
difficulties and expects to ship the OcuLight GL in the third quarter of 1996,
pending FDA clearance. Additionally, once introduced, despite testing by the
Company, quality and reliability problems may arise which may result in reduced
bookings, manufacturing rework costs, delays in collecting accounts receivable,
additional service and warranty costs and a decline in the Company's competitive
position. Moreover, the Company believes that recommendations by
ophthalmologists and clinicians for use of this laser will be essential for its
market acceptance. Ophthalmologists and clinicians will not recommend this laser
or related treatments unless they conclude, based upon clinical data and other
factors, that it is a beneficial alternative to other technologies and
treatments, including more established argon gas lasers. There can be no
assurance that this visible laser system will receive FDA clearance, be
manufactured on a cost-effective and timely basis, and be successfully
introduced or achieve market acceptance. Additionally, even if this visible
light photocoagulator system achieves initial market acceptance, it will compete
directly with established argon-based photocoagulator systems currently sold by
the Company's competitors and the Company expects to experience significant
competitive pressures. Failure of the OcuLight GL system to achieve market
acceptance for any reason would have a material adverse effect on the Company's
business, results of operations and financial condition.
Dependence on Development of New Products and New Applications. The
Company's future success will depend upon, among other factors, its ability to
develop, obtain regulatory approval, manufacture and introduce on a timely and
cost-effective basis as well as successfully sell and achieve market acceptance
of new products and applications and enhanced versions of existing products. The
extent of, and rate at which, market acceptance and penetration are achieved by
future products, including the new visible light photocoagulator system, is a
function of many variables, including price, safety, efficacy, reliability,
marketing and sales efforts, the development of new applications for these
products and general economic conditions affecting purchasing patterns. Even if
the Company's products achieve clinical acceptance, there can be no assurance
that the Company can successfully manage the introduction of such products into
the ophthalmic market. The failure of the Company to successfully develop and
introduce new products or enhanced versions of existing products would have a
material adverse effect on the Company's business, operating results and
financial condition. The Company is seeking to expand the market for its
existing and new products by working with clinicians and third parties to
identify new applications for its products, validating new procedures which
utilize its products and responding more effectively to new procedures. There
can be no assurance that the Company's efforts to develop new applications for
its products will be successful, that it can obtain regulatory approvals to use
its products in new clinical applications in a timely manner, or at all, or gain
satisfactory market acceptance for such new applications. Failure to develop and
achieve market acceptance of new applications would have a material adverse
effect on the Company's business, results of operations and financial condition.
Dependence on Key Manufacturers and Suppliers. The Company relies on
third parties to manufacture substantially all of the components used in its
products, although the Company assembles critical subassemblies as well as the
final product at its facility in Mountain View, California. There are risks
associated with the use of independent manufacturers, including unavailability
of or delays in obtaining adequate supplies of components and potentially
reduced control of quality, production costs and the timing of delivery. The
Company has qualified two or more sources for most of the components used in
its products. Certain semiconductor laser components purchased from SDL, Inc.
("SDL") are not readily available from other suppliers. The Company is
currently experiencing delays in its manufacturing of the OcuLight GL due to
the inability of a supplier of a sole-source component to deliver components in
volume. The Company is working with this supplier to resolve these difficulties
and expects to ship the OcuLight GL in the third quarter of 1996, pending FDA
clearance. While the Company is currently seeking to qualify additional
suppliers for this component and other components, it will require time to
complete qualification of a second supplier and to obtain components from such
a second source. To the extent the Company successfully introduces any new
products, the Company will have to qualify new suppliers for components. The
process of qualifying suppliers may be lengthy. The Company does not
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have long-term or volume purchase agreements with any of its suppliers and
currently purchases components on a purchase order basis. No assurance can be
given that these components will be available timely in the quantities required
by the Company, on reasonable terms, or at all. Establishing its own
capabilities to manufacture these components would require significant scale-up
expenses and additions to facilities and personnel and could significantly
decrease the Company's profit margins. The Company's business, results of
operations and financial condition would be adversely affected if it did not
obtain components as required at a reasonable cost or if it could not expand
manufacturing capacity to meet demand or if its single facility were disrupted.
Quarterly Fluctuations in Operating Results. Although the Company has
been profitable on an annual and quarterly basis for the last three years, the
Company's sales and operating results have varied substantially on a quarterly
basis and such fluctuations are expected to continue in future periods. The
Company believes that its gross margins in 1996 will be somewhat lower than
gross margins in the second half of 1995, primarily because of increases in
fixed costs incurred to support expansion of the Company's business and the
downward trend in average selling prices primarily due to increased competition.
In addition, the Company expects to incur increased operating expenses in the
second half of 1996 associated with the planned introduction of the OcuLight GL.
Increases may result in lower operating margins in the second half of 1996.
Increases in operating margins during the second half of 1996 will depend
significantly on the successful introduction and market acceptance of the
OcuLight GL as well as increased sales of the other existing OcuLight IR
Systems. The Company's operating results are affected by a number of factors,
many of which are beyond the Company's control. Factors contributing to these
fluctuations include the timing of the introduction and market acceptance of new
products or product enhancements by the Company and its competitors, the timing
of the development and market acceptance of new applications for the Company's
products, changes in pricing by the Company and its competitors, the relatively
long and highly variable sales cycle for the Company's products to hospitals and
other health care institutions, the cost and availability of components and
subassemblies, increased product development costs, and fluctuations in economic
and financial market conditions and resulting changes in customers' or potential
customers' budgets. The Company expects the inability to obtain a sole-sourced
component for its OcuLight GL will impact shipment of the OcuLight GL in the
third quarter of 1996. In addition to these factors, the Company's quarterly
results have been and are expected to continue to be affected by seasonal
factors. The Company manufactures its products to forecast rather than to
outstanding purchase orders, and products are typically shipped shortly after
receipt of a purchase order. As a result, the Company does not have substantial
backlog, and the amount of backlog at any particular date is generally not
indicative of its future level of sales. Although the Company's manufacturing
procedures are designed to assure rapid response to customer orders, they may in
certain instances create a risk of excess or inadequate inventory levels if
orders do not match forecasts. The Company has increased its inventory of the
OcuLight system during the first half of 1996 in anticipation of allocating
substantial manufacturing resources to produce the OcuLight GL in the second
half of 1996. The Company's expense levels are based, in part, on expected
future sales. If sales levels in a particular quarter do not meet expectations,
the Company may be unable to adjust operating expenses quickly enough to
compensate for the shortfall, and the Company's results of operations may be
adversely affected. In addition, the Company has historically made a significant
portion of each quarter's product shipments near the end of the quarter. If that
pattern continues, even short delays in shipment of products at the end of a
quarter could have a material adverse effect on results of operations for such
quarter. As a result of the above factors, sales for any future quarter are not
predictable with any significant degree of accuracy and operating results in any
period should not be considered indicative of the results to be expected for any
future period and there can be no assurance that the Company will remain
profitable in the future or that operating results will not vary significantly.
Dependence on Collaborative Relationships. The Company has entered into
collaborative relationships with academic medical centers and physicians in
connection with the research and development and clinical testing of its
products. The Company plans to collaborate with third parties to develop and
commercialize existing and new products. In May 1996, the Company executed an
agreement with PDT, Inc. ("PDT"), a maker of photodynamic
-12-
<PAGE> 13
drugs, under which the Company and PDT will collaborate to develop a device
which will emit a laser beam to activate a photodynamic drug being developed by
PDT to achieve a desired therapeutic result. The development of this new
photodynamic system will require at least three years and significant financial
and other resources. There can be no assurance that this collaborative
development effort will continue or that it will result in the successful
development and introduction of a photodynamic system. The Company believes that
these current and future relationships are important because they would allow
the Company greater access to funds, to research, development and testing
resources and to manufacturing, sales and distribution resources. However, the
amount and timing of resources to be devoted to these activities are not within
the Company's control. There can be no assurance that such parties will perform
their obligations as expected or that the Company's reliance on others for
clinical development, manufacturing and distribution of its products will not
result in unforeseen problems. Further, there can be no assurance that the
Company's collaborative partners will not develop or pursue alternative
technologies either on their own or in collaboration with others, including the
Company's competitors, as a means of developing or marketing products for the
diseases targeted by the collaborative programs and by the Company's products.
The failure of any current or future collaboration efforts could have a material
adverse effect on the Company's ability to introduce new products or
applications and therefore could have a material adverse effect on the Company's
business, results of operations and financial condition.
Dependence on International Sales. The Company derives, and expects to
continue to derive, a large portion of its revenue from international sales. In
1994, 1995 and for the first six months of fiscal 1996, the Company's
international sales were $3.4 million, $4.2 million, and $2.3 million, or 47.8%,
47.7% and 47.4%, respectively, of total sales. Therefore, a large portion of the
Company's revenues will continue to be subject to the risks associated with
international sales, including fluctuations in foreign currency exchange rates,
shipping delays, generally longer receivables collection periods, changes in
applicable regulatory policies, international monetary conditions, domestic and
foreign tax policies, trade restrictions, duties and tariffs, and economic and
political instability. Each of these factors could have a significant impact on
the Company's ability to deliver products on a competitive and timely basis.
Government Regulation. The medical devices marketed and manufactured by
the Company are subject to extensive regulation by the FDA and, in some
instances, by foreign and state governments. Pursuant to the Federal Food, Drug
and Cosmetic Act of 1976, as amended, and the regulations promulgated
thereunder, the FDA regulates the clinical testing, manufacture, labeling, sale,
distribution and promotion of medical devices. Before a new device can be
introduced into the market, the manufacturer must obtain market clearance
through either the 510(k) premarket notification process or the lengthier
premarket approval ("PMA") application process. Noncompliance with applicable
requirements, including good manufacturing practices ("GMP"), can result in,
among other things, fines, injunctions, civil penalties, recall or seizure of
products, total or partial suspension of production, failure of the government
to grant premarket clearance or premarket approval for devices, withdrawal of
marketing approvals, and criminal prosecution. The FDA also has the authority to
request repair, replacement or refund of the cost of any device manufactured or
distributed by the Company.
The Company filed a 510(k) covering the OcuLight GL with the FDA in
early March 1996 and responded to FDA inquiries concerning this submission in
May 1996. The introduction of the OcuLight GL in the second half of 1996 is
dependent on receiving 510(k) notification from the FDA. There can be no
assurance that the Company will receive such notification or that such
notifications will be received on a timely basis. The failure of the Company to
obtain government approvals or any delays in such approvals would have a
material adverse effect on the Company's business, results of operations and
financial condition.
-13-
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.10* Development and Distribution Agreement dated as of
May 28, 1996 between PDT, Inc. and the Company.
11.1 Statement Regarding Computation of Net Income Per
Share
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the period for
which this report is filed.
- ----------------------
* Confidential Treatment requested.
-14-
<PAGE> 15
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IRIDEX CORPORATION
(Registrant)
Date: August 12, 1996 By: /s/ Timothy A. Marcotte
-------------------------
Timothy A. Marcotte
Chief Financial Officer
(Principal Financial and
Principal Accounting Officer)
-15-
<PAGE> 16
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
<S> <C>
*10.10 Redevelopment and Distribution Agreement dated as of May 28, 1996
between PDT, Inc. and the Company
11.1 Statement Regarding Computation of Net Income Per Share
27.1 Financial Data Schedule
</TABLE>
- ------------
* Confidential Treatment requested.
-16-
<PAGE> 1
EXHIBIT 11.1
IRIDEX CORPORATION
COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Weighted average shares outstanding
Common stock .............................................. 6,336 1,263 4,256 1,217
Conversion of preferred stock ............................. -- 2,837 1,419 2,837
Common equivalent shares pursuant to Staff Accounting ------ ------ ------ ------
Bulletin No. 83(2) ........................................... -- 273 273 273
Conversion of stock options under the treasury stock method 422 176 279 210
------ ------ ------ ------
Weighted average common shares and equivalents ............... 6,758 4,549 6,227 4,537
====== ====== ====== ======
Net income ................................................... $ 182 $ 181 $ 407 $ 404
Net income per share ......................................... $ 0.03 $ 0.04 $ 0.07 $ 0.09
====== ====== ====== ======
</TABLE>
- -------------------
(1) There is no difference between primary and fully diluted net income per
share.
(2) Pursuant to Securities & Exchange Commission's Staff Accounting
Bulletin No. 83, all securities issued during the period from January
17, 1995 through the filing date of the initial public offering
(January 16,1996), are included in the calculation of Common Stock
equivalents as if outstanding for all periods prior to the effective
date of the initial public offering (February 15, 1996), even if
anti-dilutive. The Common Stock warrants of stock options are computed
using the Treasury Stock Method, using the estimated initial public
offering price and applicable exercise prices.
-49-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 15,402
<SECURITIES> 0
<RECEIVABLES> 2,849
<ALLOWANCES> 265
<INVENTORY> 1,868
<CURRENT-ASSETS> 20,786
<PP&E> 855
<DEPRECIATION> 405
<TOTAL-ASSETS> 22,336
<CURRENT-LIABILITIES> 1,627
<BONDS> 0
0
0
<COMMON> 63
<OTHER-SE> 20,646
<TOTAL-LIABILITY-AND-EQUITY> 22,336
<SALES> 4,903
<TOTAL-REVENUES> 4,903
<CGS> 1,880
<TOTAL-COSTS> 1,880
<OTHER-EXPENSES> 2,766
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6
<INCOME-PRETAX> 555
<INCOME-TAX> 148
<INCOME-CONTINUING> 407
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 407
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
