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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 September 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from _______________ to ________________
Commission File Number: 0-27598
IRIDEX CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 77-0210467
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
1212 TERRA BELLA AVENUE
MOUNTAIN VIEW, CALIFORNIA 94043-1824
(Address of principal executive offices, including zip code)
(650) 940-4700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes [X] No [ ]; (2) Yes [X] No [ ]
The number of shares of Common Stock, $.01 par value, issued and outstanding as
of November 1, 1997 was 6,455,128.
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IRIDEX CORPORATION
TABLE OF CONTENTS
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Page
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Condensed Consolidated Balance Sheets as of September 30, 1997
and December 31, 1996 3
Condensed Consolidated Statements of Income for the three months and nine months
ended September 30, 1997 and September 30, 1996 4
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 1997 and September 30, 1996 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 8
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURE 19
INDEX TO EXHIBITS 20
</TABLE>
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IRIDEX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
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ASSETS (unaudited) *
Current assets:
Cash and cash equivalents $ 9,405 $ 14,107
Available-for-sale securities 4,152 1,007
Accounts receivable, net 5,488 5,390
Inventories 3,261 1,859
Prepaids and other current assets 483 122
Deferred income taxes 519 519
-------- --------
Total current assets 23,308 23,004
Property and equipment, net 2,073 655
Deferred income taxes 48 48
-------- --------
Total assets $ 25,429 $ 23,707
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,026 $ 535
Accrued expenses 1,412 1,684
Current portion of capital lease obligations 5 8
-------- --------
Total current liabilities 2,443 2,227
Capital lease obligations, net of current portion -- 2
-------- --------
Total liabilities 2,443 2,229
-------- --------
Stockholders' equity:
Common Stock, $.01 par value:
Authorized: 30,000,000 shares;
Issued and outstanding: 6,455,128 shares as of 9/30/97
and 6,350,180 shares as of 12/31/96 64 63
Additional paid-in capital 21,484 21,248
Unrealized holding losses on available-for-sale securities (24) --
Retained earnings 1,462 167
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Total stockholders' equity 22,986 21,478
-------- --------
Total liabilities and stockholders' equity $ 25,429 $ 23,707
======== ========
</TABLE>
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*Derived from the 1996 audited financial statements.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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IRIDEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
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THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1997 1996 1997 1996
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Sales $ 4,641 $ 2,635 $ 12,317 $ 7,538
Cost of sales 1,987 968 5,267 2,848
-------- -------- -------- --------
Gross profit 2,654 1,667 7,050 4,690
-------- -------- -------- --------
Operating expenses:
Research and development 422 313 1,314 914
Selling, general and administrative 1,458 1,177 4,182 3,342
-------- -------- -------- --------
Total operating expenses 1,880 1,490 5,496 4,256
-------- -------- -------- --------
Income from operations 774 177 1,554 434
Other income, net 157 226 472 524
-------- -------- -------- --------
Income before provision for income
taxes 931 403 2,026 958
Provision for income taxes (335) (161) (731) (309)
-------- -------- -------- --------
Net income $ 596 $ 242 $ 1,295 $ 649
======== ======== ======== ========
Net income per share $ 0.09 $ 0.04 $ 0.19 $ 0.10
======== ======== ======== ========
Shares used in per share calculation 6,849 6,750 6,719 6,402
======== ======== ======== ========
</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)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1997 1996
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Cash flows from operating activities:
Net income $ 1,295 $ 649
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation 261 142
Provision for doubtful accounts 10 (118)
Changes in operating assets and liabilities:
Accounts receivable (108) (563)
Inventories (1,402) (1,040)
Prepaids and other current assets (361) 140
Accounts payable 491 72
Accrued expenses (272) (196)
-------- --------
Net cash used in operating activities (86) (914)
-------- --------
Cash flows from investing activities:
Purchases of available-for-sale securities (35,882) (2,044)
Proceeds from sale of available-for-sale securities 32,713 1,000
Acquisition of property and equipment (1,679) (369)
-------- --------
Net cash used in investing activities (4,848) (1,413)
-------- --------
Cash flows from financing activities:
Payment on capital lease obligations (5) (5)
Issuance of common stock, net 237 15,609
-------- --------
Net cash provided by financing activities 232 15,604
-------- --------
Net (decrease) increase in cash and cash equivalents (4,702) 13,277
Cash and cash equivalents at beginning of period 14,107 1,227
-------- --------
Cash and cash equivalents at end of period $ 9,405 $ 14,504
======== ========
Supplemental schedule of non-cash investing activities: (24) --
Change in unrealized holding losses on available-for-sale on securities
</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
1. BASIS OF PRESENTATION
The condensed consolidated financial statements at September 30, 1997 and for
the three months and nine month periods then ended are unaudited (except for the
balance sheet information as of December 31, 1996, which is derived from the
Company's audited financial statements) and reflect all adjustments (consisting
only of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the financial position and operating
results for the interim periods. The condensed consolidated financial statements
should be read in conjunction with the audited financial statements and notes
thereto, together with management's discussion and analysis of financial
condition and results of operations, contained in the Company's Annual Report on
Form 10-K, which was filed with the Securities and Exchange Commission on March
25, 1997. The results of operations for the three and nine month periods ended
September 30, 1997 are not necessarily indicative of the results for the year
ending December 31, 1997, or any future interim period.
2. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the current
year presentation. The reclassification had no impact on previously reported
income from operations or net income.
3. INVENTORIES COMPRISE: (IN THOUSANDS)
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<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
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(UNAUDITED)
Raw materials and work in progress $2,331 $ 924
Finished goods 930 935
------ ------
Total inventories $3,261 $1,859
====== ======
</TABLE>
4. AVAILABLE - FOR- SALE SECURITIES
At September 30, 1997, available-for-sale securities consisted of five municipal
securities due through March 1998.
5. RECENT ACCOUNTING PRONOUNCEMENTS
During February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share," (SFAS 128) which specifies the computation,
presentation and disclosure requirements for earnings per share. SFAS 128
supersedes Accounting Principles Board Opinion No. 15 and will become effective
for the Company's 1997 fiscal year. SFAS 128 requires restatement of all
prior-period earnings per share data presented after the effective date. SFAS
128 is not expected to have a material impact on the Company's financial
position, results of operations or cash flows.
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In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 (SFAS 130), Reporting Comprehensive
Income. This statement establishes requirements for disclosure of comprehensive
income and becomes effective for the Company's 1998 fiscal year, with
reclassification of earlier financial statements for comparative purposes.
Comprehensive income generally represents all changes in stockholders' equity
except those resulting from investments or contributions by stockholders. The
Company is evaluating alternative formats for presenting this information, but
does not expect this pronouncement to materially impact the Company's results of
operations.
In June 1997, The Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131 (SFAS 131), Disclosures about Segments
of an Enterprise and Related Information. This statement establishes standards
for disclosure about operating segments in annual financial statements and
selected information in interim financial reports. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. This statement supersedes Statement of Financial Accounting Standards
No. 14, Financial Reporting for Segments of a Business Enterprise. The new
standard becomes effective for the Company's 1998 fiscal year and requires that
comparative information from earlier years be restated to conform to the
requirements of this standard. The Company is evaluating the requirements of
SFAS 131 and the effects, if any, on the Company's current reporting and
disclosures.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion in Management's Discussion and Analysis of Financial
Condition and Results of Operations contains trend analysis and other
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Actual results could differ materially from those set forth in such
forward-looking statements as a result of the factors set forth under "Factors
Affecting Operating Results" and other risks detailed in the Company's Annual
Report on Form 10-K filed with the Securities and Exchange Commission and
detailed from time to time in the Company's reports filed with the Securities
and Exchange Commission.
RESULTS OF OPERATIONS
The following table sets forth the percentage of net sales of certain
items in the Company's income statement for the periods indicated.
<TABLE>
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THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
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1997 1996 1997 1996
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Sales .................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales .......................... 42.8 36.7 42.8 37.8
----- ----- ----- -----
Gross profit ...................... 57.2 63.3 57.2 62.2
Operating expenses:
Research and development ............ 9.1 11.9 10.7 12.1
Sales, general and administrative ... 31.4 44.7 33.9 44.4
----- ----- ----- -----
Total operating expenses .......... 40.5 56.6 44.6 56.5
----- ----- ----- -----
Income from operations ................. 16.7 6.7 12.6 5.7
Other income, net ...................... 3.4 8.6 3.8 7.0
----- ----- ----- -----
Income before provision for income taxes 20.1 15.3 16.4 12.7
Provision for income taxes ............. (7.3) (6.1) (5.9) (4.1)
----- ----- ----- -----
Net income ............................. 12.8% 9.2% 10.5% 8.6%
===== ===== ===== =====
</TABLE>
Sales. Sales increased 76% to $4.6 million for the three months ended
September 30, 1997 from $2.6 million for the three months ended September 30,
1996. Sales increased 63% to $12.3 million for the nine months ended September
30, 1997 from $7.5 million for the nine months ended September 30, 1996. The
growth in sales over these periods was primarily attributable to increased unit
volume as the Company expanded its product offerings and broadened its customer
base, offset somewhat by slight decreases in average selling prices.
International sales of $2.8 million accounted for 60% of sales in the three
months ended September 30, 1997 compared to $1.3 million or 48% of sales in the
comparable 1996 period. The Company expects revenues from international sales to
continue to account for a substantial portion of its sales. While the OcuLight
GL was introduced in the third quarter of 1996, the Company's ability to ship
the OcuLight GL in volume during the first half of 1997 was negatively affected
by delivery problems with a sole source component. The Company qualified a
second source for that component and began to receive shipments from the second
source supplier in the second quarter of 1997. The Company believes that
deliveries from the two diode sources should meet its requirements for the
balance of 1997. The Company expects future growth in sales to be primarily
derived
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from sales of the OcuLight GL and the DioLite 532 Dermatology Laser (the
"DioLite 532") which the Company shipped in greater volumes during the third
quarter of 1997.
Gross Profit. The Company's gross profit increased 59% to $2.7 million
for the three months ended September 30, 1997 from $1.7 million for the three
months ended September 30, 1996. For the nine months ended September 30, 1997
gross profit increased 50% to $7.1 million from $4.7 million for the three
months ended September 30, 1996. Gross profit as a percentage of net sales for
the three months ended September 30, 1997 decreased to 57%, as compared to 63%
for the three months ended September 30, 1996, due primarily to increased costs
incurred to support expansion of the Company's business and the introduction of
the OcuLight GL. In addition, increasing competition and a larger than expected
percentage of international sales has resulted in a slight downward trend in
average selling prices of the Company's products. Gross profit as a percentage
of net sales for the nine months ended September 30, 1997 was 57% as compared to
62% for the nine months ended September 30, 1996. While the Company expects
continued competitive pressure on the prices of its products, it expects the
percentage of international sales to stabilize during the remainder of 1997. The
Company intends to continue its efforts to reduce the cost of components and the
costs associated with new product introductions and thereby mitigate the impact
of price reductions on its gross profits. The Company expects its gross profit
to continue to fluctuate due to changes in the relative proportions of domestic
and international sales, costs associated with additional new product
introductions, pricing and a variety of other factors.
Research and Development. Research and development expenses increased by
35% to $0.4 million for the three months ended September 30, 1997 from $0.3
million for the three months ended September 30, 1996, but decreased as a
percentage of net sales to 9% for the three months ended September 30, 1997 from
12% for the comparable prior year three month period. For the nine months ended
September 30, 1997, research and development expenses increased 44% to $1.3
million from $0.9 million for the nine months ended September 30, 1996, but
decreased as a percentage of net sales to 11% for the nine months ended
September 30, 1997 from 12% for the comparable prior year nine month period. The
increase in research and development expenses during this period was primarily
attributable to an increase in personnel as the Company strengthened its product
development efforts, particularly those directed at the introduction of the
OcuLight GL and the DioLite 532. The Company expects these expenses for research
and development to continue to increase in absolute dollars during the remainder
of 1997 in connection with new product development activities.
Sales, General and Administrative. Sales, general and administrative
expenses grew by 24% to $1.5 million for the three months ended September 30,
1997 from $1.2 million for the three months ended September 30, 1996, decreased
as a percentage of net sales to 31% for the three months ended September 30,
1997 from 45% for the comparable prior year three month period. For the nine
months ended September 30, 1997, selling, general and administrative expenses
increased 25% to $4.2 million from $3.3 million for the nine months ended
September 30, 1996, but decreased as a percentage of net sales to 34% for the
nine months ended September 30, 1997 from 44% for the comparable prior year nine
month period. The increases in sales, general and administrative expenses were
primarily due to the hiring of additional marketing and administrative employees
to address new opportunities, to support expanding unit volumes and the expenses
associated with the OcuLight GL and the DioLite 532. During 1995, the Company
began implementing a new management information system in manufacturing and
expects to continue to expand the implementation of this or another system
throughout the Company through the first half of 1998. The Company expects
sales, general and administrative expenses to continue to increase during the
balance of 1997 to support the increasing unit shipment volumes and additional
employees.
Income Taxes. The Company's effective tax rates for the three and nine
months ended September 30, 1997 were 36%. This rate differs from the federal
statutory rate primarily due to state income taxes, partially
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offset by the utilization of tax credits, non-taxable available-for-security
investments and tax benefits from the Company's foreign sales corporation.
RECENT ACCOUNTING PRONOUNCEMENTS
During February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share," (SFAS 128) which specifies the
computation, presentation and disclosure requirements for earnings per share.
SFAS 128 supersedes Accounting Principles Board Opinion No. 15 and will become
effective for the Company's 1997 fiscal year. SFAS 128 requires restatement of
all prior-period earnings per share data presented after the effective date.
SFAS 128 is not expected to have a material impact on the Company's financial
position, results of operations or cash flows.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 (SFAS 130), Reporting Comprehensive
Income. This statement establishes requirements for disclosure of comprehensive
income and becomes effective for the Company for fiscal years beginning after
December 15, 1997, with reclassification of earlier financial statements for
comparative purposes. Comprehensive income generally represents all changes in
stockholders' equity except those resulting from investments or contributions by
stockholders. The Company is evaluating alternative formats for presenting this
information, but does not expect this pronouncement to materially impact the
Company's results of operations.
In June 1997, The Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131 (SFAS 131), Disclosures about Segments
of an Enterprise and Related Information. This statement establishes standards
for disclosure about operating segments in annual financial statements and
selected information in interim financial reports. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. This statement supersedes Statement of Financial Accounting Standards
No. 14, Financial Reporting for Segments of a Business Enterprise. The new
standard becomes effective for fiscal years beginning after December 15, 1997,
and requires that comparative information from earlier years be restated to
conform to the requirements of this standard. The Company is evaluating the
requirements of SFAS 131 and the effects, if any, on the Company's current
reporting and disclosures.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company's primary sources of liquidity
included cash and cash equivalents and available-for-sale securities of $13.6
million.
During the nine months ended September 30, 1997, the Company used $0.1
million in operating activities. Sources of cash included net income of $1.3
million, depreciation of $0.3 million and increases in accounts payable of $0.5
million, offset by increases in inventories of $1.4 million, increases in
prepaid expenses of $0.5 million and decreases in accrued expenses of $0.3
million. The increase in inventories is primarily due to the purchase of
components for the Company's new dermatology product, the DioLite, which the
Company shipped in greater volume during the third quarter of 1997. Additional
supplies of components have also been purchased for the OcuLight GL, shipments
of which were delayed in the first quarter due to the unavailability of a sole
source component. The Company has qualified a second source for that component
and received deliveries from that second source during the second and third
quarters. The Company expects that deliveries from the two sources should meet
the Company's requirements for such diode components.
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The Company used $4.9 million in investing activities during the nine
months ended September 30, 1997. Investing activities consisted of the
acquisition of $1.7 million of property and equipment and leasehold improvements
of which $1.3 million were used in relocating the Company to a larger facility,
and net acquisition of $3.2 million of available-for-sale securities.
In February 1996, the Company sold 1,982,500 shares of its Common Stock
in connection with its initial public offering ("IPO"). The net proceeds of this
offering were approximately $15.7 million after deducting underwriting discounts
and commissions and expenses of the offering. The Company has used a portion of
the net proceeds from the IPO for purchases of inventory, leasehold improvements
and payment of certain accrued liabilities. The Company believes that, based on
current estimates, its current cash and cash equivalents, and available-for-sale
securities will be sufficient to meet its anticipated cash requirements through
1998.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Dependence on Visible Photocoagulator. The Company introduced a new
semiconductor-based photocoagulator system, the OcuLight GL, in the second half
of 1996. The Company devoted significant resources to the development and
commercial introduction of the OcuLight GL. The Company believes that the
continued growth of its sales, if any, will be substantially dependent upon
sales of this visible light laser system and other new products. While the
OcuLight GL has been successfully introduced, the Company has continued to face
risks associated with developing and manufacturing a new product. For example,
the Company experienced delays in its manufacturing of the OcuLight GL due to
the inability of a supplier of a sole-source component to deliver components in
volume and on a timely basis. The Company has worked with this supplier to
resolve these difficulties and has qualified a second source for that component.
The Company began to ship products incorporating components from this second
source during the second quarter of 1997 and believes that it can obtain
adequate supplies of this component on a timely basis. Other difficulties may
occur, for example, despite testing by the Company, quality and reliability
problems may arise which may result in reduced bookings, manufacturing rework
costs, delays in collecting accounts receivable, additional service and warranty
costs and a decline in the Company's competitive position. Moreover, the Company
believes that recommendations by ophthalmologists and clinicians for use of this
laser will be essential for its continued market acceptance. While the Company
believes that the OcuLight GL has been generally accepted by the market,
ophthalmologists and clinicians may not recommend this laser or related
treatments unless they conclude, based upon clinical data and other factors,
that it is a beneficial alternative to other technologies and treatments,
including more established argon gas lasers. There can be no assurance that the
Company will be able to manufacture this visible laser system on a
cost-effective, timely basis or that it will achieve widespread market
acceptance. Additionally, the OcuLight GL competes directly with established
ion-based and other photocoagulator systems currently sold by the Company's
competitors and new systems being introduced by competitors and the Company
expects to continue to experience significant competitive pressures. Failure of
the OcuLight GL system to achieve widespread market acceptance for any reason
would have a material adverse effect on the Company's business, results of
operations and financial condition.
Dependence on Continued Market Acceptance of Infrared Photocoagulators.
Prior to the third quarter of 1996, substantially all of the Company's revenues
had been derived from sales of its OcuLight Diode Laser Photocoagulator system
(the "OcuLight SL"), an infrared, invisible light, semiconductor-based laser
console and interchangeable delivery devices, into the ophthalmic medical device
market. The ophthalmic community historically has used argon-gas
photocoagulators which produce visible light and the substantial majority of
photocoagulators sold for ophthalmic purposes are argon-gas. Because sales of
the Company's OcuLight SL continued to represent a significant portion of the
infrared laser market, increased sales of the Company's infrared
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<PAGE> 12
system will depend on the rate at which users convert to infrared
photocoagulators. Equipment purchasing decisions may be based on a number of
factors, in addition to price and performance. For example, many
ophthalmologists have been trained in medical school to use visible lasers and
may be reticent to change to infrared lasers. There can be no assurance that the
OcuLight SL will continue to be accepted by the market or that other competitive
treatments will not be developed, and therefore that sales derived from the
OcuLight SL will continue to grow at historical rates or be sustainable at
current sales levels. Any decline in the demand for the OcuLight SL or any
failure of sales derived from such products to meet the Company's expectations
would have a material adverse effect on the business, results of operations and
financial condition of the Company.
Introduction and Market Acceptance of DioLite 532. In 1996, the Company
developed a new laser product which is intended to be used in the dermatology
market to treat vascular and pigmented skin lesions. The new product, the
DioLite 532, delivers pulsed laser power through a variety of fiber optic
delivery device hand pieces. While the Company has increased production of the
DioLite 532 during the third quarter of 1997, there can be no assurance that
such products will achieve a sufficient level of clinical or market acceptance
or that the Company can properly manage the successful introduction of such
product into the dermatology market, a market that the Company's products do not
currently address and in which the Company has limited experience. Additionally,
there can be no assurance that the Company will be able to manufacture this
laser product on a cost-effective, timely basis or that it will achieve
widespread market acceptance.
Management of Growth. With the introduction of the OcuLight GL and the
DioLite 532, the Company has recently experienced, and may continue to
experience growth in production, the number of employees, the scope of its
business, its operating and financial systems and the geographic area of its
operations. This growth has resulted in new and increased responsibilities for
management personnel and has placed and continues to place a significant strain
upon the Company's management, operating, inventory and financial systems and
resources. To accommodate recent growth and to compete effectively and manage
future growth, if any, the Company has been required to continue to implement
and improve operational, financial and management information systems,
procedures and controls and to expand, train, motivate and manage its work
force. The Company has been implementing a new management information system in
manufacturing and expects to continue to expand the implementation of this or
another system throughout the Company through the first half of 1998. The
Company's future success will depend on the successful installation of these
systems as well as on the ability of its current and future executive officers
to operate effectively, both independently and as a group. There can be no
assurance that the Company's personnel, systems, procedures and controls will be
adequate to support the Company's existing and future operations. Any failure to
implement and improve the Company's operational, financial and management
systems or to expand, train, motivate or manage employees could have a material
adverse effect on the Company's business, results of operations and financial
condition.
Dependence on Development of New Products and New Applications. The
Company's future success is dependent upon, among other factors, its ability to
develop, obtain regulatory approval, manufacture and introduce on a timely and
cost-effective basis as well as successfully sell and achieve market acceptance
of new products and applications and enhanced versions of existing products. The
extent of, and rate at which, market acceptance and penetration are achieved by
future products, is a function of many variables, including price, safety,
efficacy, reliability, marketing and sales efforts, the development of new
applications for these products and general economic conditions affecting
purchasing patterns. Even if the Company's products achieve clinical acceptance,
there can be no assurance that the Company can successfully manage the
introduction of such products into the ophthalmic or other markets. In 1996, the
Company developed a new product which is intended to be used in the dermatology
market to treat vascular and pigmented skin lesions. The new product, the
DioLite 532, delivers pulsed laser power through a variety of fiber optic
delivery device hand pieces. While the Company has increased production of the
DioLite 532 during the third quarter of 1997, there can be no assurance
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<PAGE> 13
that such products will achieve clinical or market acceptance or that the
Company can properly manage the successful introduction of such product into the
dermatology market, a market that the Company's products do not currently
address and in which the Company has limited experience. The failure of the
Company to successfully develop and introduce new products or enhanced versions
of existing products could have a material adverse effect on the Company's
business, operating results and financial condition. The Company is seeking to
expand the market for its existing and new products by working with clinicians
and third parties to identify new applications for its products, validating new
procedures which utilize its products and responding more effectively to new
procedures. There can be no assurance that the Company's efforts to develop new
applications for its products will be successful, that it can obtain regulatory
approvals to use its products in new clinical applications in a timely manner,
or at all, or gain satisfactory market acceptance for such new applications.
Failure to develop and achieve market acceptance of new applications or new
products would have a material adverse effect on the Company's business, results
of operations and financial condition.
Dependence on Key Manufacturers and Suppliers. The Company relies on
third parties to manufacture substantially all of the components used in its
products, although the Company assembles critical subassemblies as well as the
final product at its facility in Mountain View, California. There are risks
associated with the use of independent manufacturers, including unavailability
of or delays in obtaining adequate supplies of components such as optics and
laser diodes and potentially reduced control of quality, production costs and
the timing of delivery. The Company has qualified two or more sources for most
of the components used in its products. Certain diodes purchased from SDL, Inc.
("SDL") were not readily available from other suppliers until the second quarter
of 1997. During the last half 1996 and first quarter 1997, the Company
experienced delays in its manufacturing of the OcuLight GL due to the inability
of SDL to deliver components in volume and on a timely basis. The Company
continues to work with this supplier to ensure such difficulties do not reoccur.
Additionally, during the first quarter of 1997, the Company qualified Opto-Power
as a second source in this diode component. This component is also required for
the DioLite 532, which the Company shipped in greater volumes in the third
quarter of 1997. Deliveries from SDL and Opto-Power should meet the Company's
future requirements for such diode components. The process of qualifying
suppliers is ongoing and may be lengthy, particularly as new products are
introduced. The Company does not have long-term or volume purchase agreements
with any of its suppliers and currently purchases components on a purchase order
basis. No assurance can be given that these components will be available in the
quantities required by the Company, on reasonable terms, or at all. Establishing
its own capabilities to manufacture these components would require significant
scale-up expenses and additions to facilities and personnel and could
significantly decrease the Company's profit margins. The Company's business,
results of operations and financial condition would be adversely affected if it
is unable to continue to obtain components as required at a reasonable cost.
Quarterly Fluctuations in Operating Results. Although the Company has
been profitable on an annual and quarterly basis for the last four years, the
Company's sales and operating results have varied substantially on a quarterly
basis and such fluctuations are expected to continue in future periods. The
Company believes that its gross margins in 1997 will continue to be lower than
gross margins in 1996, primarily because of increases in international sales,
increases in costs incurred to support expansion of the Company's business,
capital expenditures associated with the Company's move to its new facility, the
higher cost of certain components associated with the OcuLight GL, the
introduction of the DioLite 532 and the slight downward trend in average selling
prices, primarily due to increased competition. The Company expects
international sales of the OcuLight GL to continue to exceed domestic sales of
this product during the balance of 1997. The gross margins on international
shipments of the OcuLight GL are significantly lower than the gross margins on
domestic shipments of the OcuLight GL, primarily due to distributor discounts.
Additionally, the Company expects to continue to incur increased operating
expenses in the balance of 1997 associated with the introduction of the OcuLight
GL and DioLite 532. Such increases may result in lower operating margins in the
fourth quarter of 1997. The ability
-13-
<PAGE> 14
of the Company to increase its operating margins during the fourth quarter of
1997 and thereafter will depend primarily on timely receipt of components from
its two diode sources and other critical components, successful and timely
manufacturing of the OcuLight SL, OcuLight GL and DioLite 532 and continued
market acceptance of the OcuLight GL and DioLite 532, as well as increased sales
of the OcuLight SL. The Company's operating results are affected by a number of
factors, many of which are beyond the Company's control. Factors contributing to
these fluctuations include the timing of the introduction and market acceptance
of new products or product enhancements by the Company and its competitors, the
cost and availability of components and subassemblies, changes in pricing by the
Company and its competitors, the timing of the development and market acceptance
of new applications for the Company's products, the relatively long and highly
variable sales cycle for the Company's products to hospitals and other health
care institutions, fluctuations in economic and financial market conditions and
resulting changes in customers' or potential customers' budgets and increased
product development costs. Any inability to obtain adequate quantities of the
critical components used in the system products would adversely impact the
Company's ability to ship the OcuLight SL, OcuLight GL and the DioLite 532. In
addition to these factors, the Company's quarterly results have been and are
expected to continue to be affected by seasonal factors. For example, domestic
sales of ten decline slightly prior to the meeting of the American Academy of
Ophthalmology in October. The Company manufactures its products to forecast
rather than to outstanding purchase orders, and products are typically shipped
shortly after receipt of a purchase order. While backlog increased in 1996 and
during the first half of 1997, because of manufacturing difficulties associated
with the Company's new product, the Company does not expect significant backlog
in the future and the amount of backlog at any particular date is generally not
indicative of its future level of sales. Although the Company's manufacturing
procedures are designed to assure rapid response to customer orders, they may in
certain instances create a risk of excess or inadequate inventory levels if
orders do not match forecasts. The Company increased its inventory of the
OcuLight SL system during 1996 in anticipation of allocating substantial
manufacturing resources to producing the OcuLight GL. As of September 30, 1997,
the Company no longer maintains an excess inventory level of manufactured
OcuLight SL systems. The Company's expense levels are based, in part, on
expected future sales. If sales levels in a particular quarter do not meet
expectations, the Company may be unable to adjust operating expenses quickly
enough to compensate for the shortfall, and the Company's results of operations
may be adversely affected. In addition, the Company has historically made a
significant portion of each quarter's product shipments near the end of the
quarter. If that pattern continues, even short delays in shipment of products at
the end of a quarter could have a material adverse effect on results of
operations for such quarter. As a result of the above factors, sales for any
future quarter are not predictable with any significant degree of accuracy and
operating results in any period should not be considered indicative of the
results to be expected for any future period. There can be no assurance that the
Company will remain profitable in the future or that operating results will not
vary significantly.
Competition. Competition in the market for devices used for ophthalmic
treatments is intense and is expected to increase. This market is also
characterized by rapid technological innovation and change and the Company's
products could be rendered obsolete as a result of future innovations. The
Company's competitive position depends on a number of factors including product
performance, characteristics and functionality, ease of use, scalability,
durability and cost. In addition to photocoagulators, the Company competes with
pharmaceuticals, other technologies and other surgical techniques. Although many
of the Company's current competitors do not currently sell semiconductor lasers
such as those used in the Company's products, the Company believes that
competitors will be introducing competitive products and may compete directly
with the Company. The Company's principal competitors are Coherent, Inc., Nidek,
Zeiss, Alcon International, Keeler and HGM Medical Laser Systems, Inc. Of these
companies, only Nidek, Zeiss, Alcon International and Keeler currently offer a
semiconductor-based laser system. Other competitors have substantially greater
financial, engineering, product development, manufacturing, marketing and
technical resources than the Company. Such companies also have greater name
recognition than the Company and long-standing customer relationships. In
addition, there can be no assurance
-14-
<PAGE> 15
that other medical companies, academic and research institutions or others will
not develop new technologies or therapies, including medical devices, surgical
procedures or pharmacological treatments and obtain regulatory approval for
products utilizing such techniques that are more effective in treating the
ophthalmic conditions targeted by the Company or are less expensive than the
Company's current or future products, and that the Company's technologies and
products would not be rendered obsolete by such developments. Any such
developments could have a material adverse effect on the business, financial
condition and results of operations of the Company.
Dependence on Collaborative Relationships. The Company has entered into
collaborative relationships with academic medical centers and physicians in
connection with the research and development and clinical testing 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 Miravant Medical Technologies, formerly known as PDT Corporation,
("MRVT"), a maker of photodynamic drugs, under which the Company and MRVT have
collaborated to develop a device which will emit a laser beam to activate a
photodynamic drug being developed by MRVT to achieve a desired therapeutic
result. The development of this new photodynamic system will require at least
three years and significant financial and other resources. There can be no
assurance that this collaborative development effort will continue or that it
will result in the successful development and introduction of a photodynamic
system. The Company believes that these current and future relationships are
important because they would allow the Company greater access to funds, to
research, development and testing resources and to manufacturing, sales and
distribution resources. However, the amount and timing of resources to be
devoted to these activities are not within the Company's control. There can be
no assurance that such parties will perform their obligations as expected or
that the Company's reliance on others for clinical development, manufacturing
and distribution of its products will not result in unforeseen problems.
Further, there can be no assurance that the Company's collaborative partners
will not develop or pursue alternative technologies either on their own or in
collaboration with others, including the Company's competitors, as a means of
developing or marketing products for the diseases targeted by the collaborative
programs and by the Company's products. The failure of any current or future
collaboration efforts could have a material adverse effect on the Company's
ability to introduce new products or applications and therefore could have a
material adverse effect on the Company's business, results of operations and
financial condition.
Dependence on International Sales. The Company derives, and expects to
continue to derive, a large portion of its revenue from international sales. In
1995, 1996 and nine months ended September 30, 1997, the Company's international
sales were $4.3 million, $6.1 million, and $6.9 million, or 49%, 50% and 56%,
respectively, of total sales. Therefore, a large portion of the Company's
revenues will continue to be subject to the risks associated with international
sales, including fluctuations in foreign currency exchange rates, shipping
delays, generally longer receivables collection periods, changes in applicable
regulatory policies, international monetary conditions, domestic and foreign tax
policies, trade restrictions, duties and tariffs, and economic and political
instability. Each of these factors could have a significant impact on the
Company's ability to deliver products on a competitive and timely basis.
Patents and Proprietary Rights. The Company's success and ability to
compete is dependent in part upon its proprietary information. The Company
relies on a combination of patents, trade secrets, copyright and trademark laws,
nondisclosure and other contractual agreements and technical measures to protect
its intellectual property rights. The Company files patent applications to
protect technology, inventions and improvements that are significant to the
development of its business. The Company has been issued six United States
patents on the technologies related to its products and processes. The Company
has applied for two additional patents related to its solid state laser
products. There can be no assurance that any of the Company's patent
applications will issue as patents, that any patents now or hereafter held by
the Company will offer any degree of protection,
-15-
<PAGE> 16
or that the Company's patents or patent applications will not be challenged,
invalidated or circumvented in the future. Moreover, there can be no assurance
that the Company's competitors, many of which have substantial resources and
have made substantial investments in competing technologies, will not seek to
apply for and obtain patents that will prevent, limit or interfere with the
Company's ability to make, use or sell its products either in the United States
or in international markets.
In addition to patents, the Company relies on trade secrets and
proprietary know-how which it seeks to protect, in part, through proprietary
information agreements with employees, consultants and other parties. The
Company's proprietary information agreements with its employees and consultants
contain industry standard provisions requiring such individuals to assign to the
Company without additional consideration any inventions conceived or reduced to
practice by them while employed or retained by the Company, subject to customary
exceptions. There can be no assurance that proprietary information agreements
with employees, consultant and others will not be breached, that the Company
would have adequate remedies for any breach, or that the Company's trade secrets
will not otherwise become known to or independently developed by competitors.
The laser and medical device industry is characterized by frequent
litigation regarding patent and other intellectual property rights and companies
in the medical device industry have employed intellectual property litigation to
gain a competitive advantage. Numerous patents are held by others, including
academic institutions and competitors of the Company. Because patent
applications are maintained in secrecy in the United States until patents are
issued and are maintained in secrecy for a period of time outside the United
States, the Company has not conducted any searches to determine whether the
Company's technology infringes any patents or patent applications. The Company
has from time to time been notified of, or has otherwise been made aware of
claims that it may be infringing upon patents or other proprietary intellectual
property owned by others. If it appears necessary or desirable, the Company may
seek licenses under such patents or proprietary intellectual property. Although
patent holders commonly offer such licenses, no assurance can be given that
licenses under such patents or intellectual property will be offered or that the
terms of any offered licenses will be reasonable or will not adversely impact
the Company's operating results. Any claims, with or without merit, could be
time-consuming, result in costly litigation and diversion of technical and
management personnel, cause shipment delays or require the Company to develop
noninfringing technology or to enter into royalty or licensing agreements.
Although patent and intellectual property disputes in the medical device area
have often been settled through licensing or similar arrangements, costs
associated with such arrangements may be substantial and could include ongoing
royalties. An adverse determination in a judicial or administrative proceeding
or failure to obtain necessary licenses could prevent the Company from
manufacturing and selling its products, which would have a material adverse
effect on the Company's business, results of operations and financial condition.
Conversely, litigation may be necessary to enforce patents issued to the
Company, to protect trade secrets or know-how owned by the Company or to
determine the enforceability, scope and validity of the proprietary rights of
others. Both the defense and prosecution of intellectual property suits or
interference proceedings are costly and time consuming.
Government Regulation. The medical devices marketed and manufactured by
the Company are subject to extensive regulation by the FDA and, in some
instances, by foreign and state governments. Pursuant to the Federal Food, Drug
and Cosmetic Act of 1976, as amended, and the regulations promulgated
thereunder, the FDA regulates the clinical testing, manufacture, labeling, sale,
distribution and promotion of medical devices. Before a new device can be
introduced into the market, the manufacturer must obtain market clearance
through either the 510(k) premarket notification process or the lengthier
premarket approval ("PMA") application process. Obtaining these approvals can
take a long time and delay the introduction of a product. For example, the
introduction of the OcuLight GL in the United States was delayed about three
months from the Company's expectations due to the longer than expected time
period required to obtain FDA premarket clearance.
-16-
<PAGE> 17
Noncompliance with applicable requirements, including good manufacturing
practices ("GMP"), can result in, among other things, fines, injunctions, civil
penalties, recall or seizure of products, total or partial suspension of
production, failure of the government to grant premarket clearance or premarket
approval for devices, withdrawal of marketing approvals, and criminal
prosecution. The FDA also has the authority to request repair, replacement or
refund of the cost of any device manufactured or distributed by the Company. The
failure of the Company to obtain government approvals or any delays in receipt
of such approvals would have a material adverse effect on the Company's
business, results of operations and financial condition.
Product Liability and Insurance. The Company may be subject to product
liability claims in the future. The Company's products are highly complex, used
to treat extremely delicate eye tissue and are often used in situations where
there is a high risk of serious injury or adverse side effects. In addition,
although the Company recommends that its disposable products only be used once
and so prominently labels these disposables, the Company believes that certain
customers may reuse these disposables. Were such a disposable not adequately
sterilized by the customer between such uses, a patient could suffer serious
consequences, possibly resulting in a suit against the Company for damages.
Accordingly, the manufacture and sale of medical products entails significant
risk of product liability claims. Although the Company maintains product
liability insurance with coverage limits of $5.0 million per occurrence and an
annual aggregate maximum of $6.0 million, there can be no assurance that the
coverage of the Company's insurance policies will be adequate. Such insurance is
expensive and in the future may not be available on acceptable terms, if at all.
A successful claim brought against the Company in excess of its insurance
coverage could have a material adverse effect on the Company's business, results
of operations and financial condition. To date, the Company has not experienced
any product liability claims.
Volatility of Stock Price. The trading price of the Company's Common
Stock has been subject to wide fluctuations in response to a variety of factors
since the Company's initial public offering in February 1996, including
quarterly variations in operating results, announcements of technological
innovations or new products by the Company or its competitors, developments in
patents or other intellectual property rights, general conditions in the
ophthalmic laser industry, revised earning estimates, comments or
recommendations issued by analysts who follow the Company, its competitors or
the ophthalmic laser industry and general economic and market conditions.
Additionally, the stock market in general, and the market for technology stocks
in particular, have experienced extreme price volatility in recent years.
Volatility in price and volume has had a substantial effect on the market prices
of many technology companies for reasons unrelated or disproportionate to the
operating performance of such companies. These broad market fluctuations could
have a significant impact on the market price of the Common Stock.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
-17-
<PAGE> 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.1 Statement Regarding Computation of Net Income Per Share
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the period for
which this report is filed.
-18-
<PAGE> 19
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IRIDEX CORPORATION
(Registrant)
Date: November 13, 1997 By: /s/ Robert Kamenski
-----------------------
Robert Kamenski
Chief Financial Officer
(Principal Financial and
Principal Accounting Officer)
-19-
<PAGE> 20
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT PAGE
<S> <C> <C>
11.1 Statement Regarding Computation of Net Income Per Share 21
27.1 Financial Data Schedule 22
</TABLE>
-20-
<PAGE> 1
EXHIBIT 11.1
IRIDEX CORPORATION AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30
----------------- -----------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Weighted average shares outstanding
Common stock .............................................. 6,427 6,339 6,390 4,860
Conversion of preferred stock ............................. -- -- -- 946
Common equivalent shares pursuant to Staff Accounting .....
Bulletin No. 83(2) ........................................ -- -- -- 273
Conversion of stock options under the treasury stock method 422 411 329 323
------ ------ ------ ------
Weighted average common shares and equivalents ............... 6,849 6,750 6,719 6,402
====== ====== ====== ======
Net income ................................................... $ 596 $ 242 $1,295 $ 649
====== ====== ====== ======
Net income per share(1) ...................................... $ .09 $ .04 $ .19 $ .10
====== ====== ====== ======
</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.
-21-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 9,405
<SECURITIES> 4,152
<RECEIVABLES> 5,838
<ALLOWANCES> (350)
<INVENTORY> 3,261
<CURRENT-ASSETS> 23,308
<PP&E> 2,905
<DEPRECIATION> (832)
<TOTAL-ASSETS> 25,429
<CURRENT-LIABILITIES> 2,443
<BONDS> 0
0
0
<COMMON> 21,548
<OTHER-SE> 1,438
<TOTAL-LIABILITY-AND-EQUITY> 25,429
<SALES> 12,317
<TOTAL-REVENUES> 12,317
<CGS> 5,267
<TOTAL-COSTS> 5,267
<OTHER-EXPENSES> 5,496
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,026
<INCOME-TAX> (731)
<INCOME-CONTINUING> 1,295
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,295
<EPS-PRIMARY> .19
<EPS-DILUTED> .19
</TABLE>
