2016 Annual Report to Stockholders
2016 Annual Report Consolidated Financial Statements
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITY EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITY 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
(State or other jurisdiction of incorporation or organization)
77-0210467
(I.R.S. Employer Identification No.)
1212 Terra Bella Avenue
Mountain View, CA
(Address of principal executive offices)
(650) 940-4700
(Registrant’s telephone number, including area code)
94043
(Zip Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common
Name of Each Exchange on Which Registered
NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933. Yes No
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 (the “Exchange
Act”). Yes No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or
for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be
contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definition of
“accelerated filer,” “large accelerated filer,”, and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
The aggregate market value of the voting common equity held by non-affiliates of the Registrant was approximately $98,053,088 as of July 2, 2016 the last business day of
the Registrant’s most recently completed second fiscal quarter, based on the closing price reported for such date on the NASDAQ Global Market. The registrant did not have any
non-voting common equity outstanding. For purposes of this disclosure, shares of common stock held by each executive officer and director and by each holder of 5% or more of
the outstanding shares of common stock have been excluded from this calculation, because such persons may be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
As of March 7, 2017, Registrant had 11,523,447 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain parts of the Proxy Statement for the Registrant’s 2017 Annual Meeting of Stockholders (the “Proxy Statement”) are incorporated by reference into Part III of this
Annual Report on Form 10-K.
EXPLANATORY NOTE
The registrant meets the “accelerated filer” requirements as of the end of its 2016 fiscal year pursuant to Rule 12b-2 of the Securities Exchange Act of 1934. However,
pursuant to Rule 12b-2 and SEC Release No. 33-8876, the registrant (as a smaller reporting company transitioning to the larger reporting company system based on its public float
as of July 2, 2016) is not required to satisfy the larger reporting company requirements until its first quarterly report on Form 10-Q for the 2017 fiscal year and thus remains
eligible to use the scaled disclosure requirements applicable to smaller reporting companies under Item 10 of Regulation S-K under the Securities Act of 1933 in this Annual
Report on Form 10-K.
Table of Contents
Page No.
Part I
Item 1. Business ...................................................................................................................................................................
Item 1A. Risk Factors...........................................................................................................................................................
Item 1B. Unresolved Staff Comments .................................................................................................................................
Item 2. Properties .................................................................................................................................................................
Item 3. Legal Proceedings ....................................................................................................................................................
Item 4. Mine Safety Disclosures ..........................................................................................................................................
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Part II
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters, and Issuer Purchases of
Equity Securities..............................................................................................................................................................
Item 6. Selected Financial Data............................................................................................................................................
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations..................................
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ..............................................................................
Item 8. Financial Statements and Supplementary Data........................................................................................................
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................................
Item 9A. Controls and Procedures .......................................................................................................................................
Item 9B. Other Information..................................................................................................................................................
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Part III
Item 10. Directors, Executive Officers and Corporate Governance.....................................................................................
Item 11. Executive Compensation........................................................................................................................................
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
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Matters.............................................................................................................................................................................
Item 13. Certain Relationships and Related Transactions, and Director Independence ......................................................
Item 14. Principal Accountant Fees and Services ................................................................................................................
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Part IV
Item 15. Exhibits and Financial Statement Schedules ........................................................................................................
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Signatures.......................................................................................................................................................................................
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
PART I
This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These
statements are based on management’s beliefs and assumptions and on information currently available to management.
These statements include statements concerning future demand and order levels for the Company's products, future operating
expenses, changes in personnel, product development and intellectual property related matters, the adoption and effect of
Company products on its results, the markets in which the Company operates, usage and efficacy of the Company's products,
the Company’s future financial results, and the Company's strategic plans and objectives In some cases, forward-looking
statements can be identified by terminology, such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,”
“believes,” “estimates,” “predicts,” “intends,” “potential,” “continue,” or the negative of such terms or other comparable
terminology, although not all forward-looking statements contain these words.
These statements involve known and unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to differ materially from those expressed or implied by such forward-looking
statements. The reader is strongly urged to read the information contained under the captions “Item 1A. Risk Factors -
Factors That May Affect Future Results” in this Annual Report on Form 10-K for a more detailed description of these
significant risks and uncertainties. The reader is cautioned not to place undue reliance on these forward-looking statements,
which reflect management’s analysis only as of the date of this Annual Report on Form 10-K. We undertake no obligation to
update such forward-looking statements to reflect events or circumstances occurring after the date of this report.
As used in this Annual Report on Form 10-K, the terms “Company,” “IRIDEX,” “we,” “us” and “our” refer to
IRIDEX Corporation, and its consolidated subsidiaries.
Item 1. Business
Overview
IRIDEX Corporation is an ophthalmic medical technology company focused on the development and
commercialization of breakthrough products and procedures used to treat sight-threatening eye conditions, including
glaucoma and retinal diseases. Certain of our products are powered by our proprietary MicroPulse technology, which is a
method of delivering laser energy using a mode which chops the continuous wave laser beam into short, microsecond-long
laser pulses. Our products consist of laser consoles, delivery devices and consumable instrumentation, including laser probes.
Our laser consoles consist of the following product lines:
• Glaucoma – This product line includes our recently introduced Cyclo G6 laser system used for the treatment of
glaucoma;
• Medical Retina – Our medical retina product line includes our IQ 532 and IQ 577 laser systems, which are used
for the treatment of diabetic macular edema and other retinal diseases; and
• Surgical Retina – Our surgical retina line of products includes our OcuLight TX, OcuLight SL, OcuLight SLx,
OcuLight GL and OcuLight GLx laser systems. These systems are often used in vitrectomy procedures, which are
used to treat proliferative diabetic retinopathy, macular holes, retinal tears and detachments.
Our business generates recurring revenues through sales of consumable products, predominantly single-use laser probe
devices and other instrumentation, as well as repair, servicing and extended service contracts for our laser systems. Our laser
probes consist of the following product lines:
• Glaucoma – Probes used in our glaucoma product line include our recently patented MicroPulse P3 (“MP3”) probe
and G-Probe; and
• Surgical Retina – Our surgical retina probes include our EndoProbe family of products used in vitrectomy
procedures.
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Ophthalmologists typically use our laser systems in hospital operating rooms (“ORs”) and ambulatory surgical centers
(“ASCs”), as well as their offices and clinics. In the ORs and ASCs, ophthalmologists use our laser systems with either an
indirect laser ophthalmoscope or a consumable, single use MP3 probe, G-Probe or EndoProbe.
Our products are sold in the United States predominantly through a direct sales force and internationally through
independent distributors. Total revenues in 2016, 2015 and 2014 were $46.2 million, $41.8 million and $42.8 million,
respectively. We generated net (loss) income of $(11.7) million, $0.5 million and $10.0 million in 2016, 2015 and 2014,
respectively.
IRIDEX Corporation was incorporated in California in February 1989 as IRIS Medical Instruments, Inc. In January
1996, we changed our name to IRIDEX Corporation and reincorporated in Delaware. Our executive offices are located at
1212 Terra Bella Avenue, Mountain View, California 94043-1824, and our telephone number is (650) 940-4700. We can also
be reached at our website at www.IRIDEX.com, however, the information on, or that can be accessed through, our website is
not part of this report.
Our Market Opportunity
Ophthalmology is a large and growing global market that is driven by the aging world population and the onset of
chronic diseases. We currently target the glaucoma and retina disease markets.
Glaucoma
Glaucoma is a leading cause of blindness in the world. Glaucoma is a progressive, chronic disease and vision loss
resulting from glaucoma currently cannot be regained. According to Market Scope, more than 80 million people worldwide
have glaucoma with only 24.7 million people that have been diagnosed. Glaucoma is most commonly associated with
elevated levels of pressure within the eye, or intraocular pressure (“IOP”). Elevated IOP often occurs when aqueous humor,
the thin watery fluid that fills the front of the eye, is not circulating normally and draining properly. Currently, reducing IOP
is the only proven treatment for glaucoma with treatments primarily focused on improving the flow of aqueous humor
through the eye’s trabecular meshwork and uveoscleral outflow pathways. Market Scope estimates 2015 global sales of $5.0
billion for products used to treat glaucoma.
Pharmaceutical products represent $4.7 billion of this estimate but have significant shortcomings. Pharmaceuticals are
typically the first treatment method prescribed for glaucoma. These pharmaceutical treatments are commonly self-
administered in drop form by the patients. Patients often have difficulties applying the pharmaceutical drops properly and
may fail to appropriately or timely apply the medication, which may significantly reduce the effectiveness of the
pharmaceutical. This poor adherence to and lack of persistence with glaucoma medication regimens have been documented in
numerous independent studies, which often place the incidence of patient noncompliance up to or above 50%, particularly in
patients on two or more prescription eye drops. Even when administered correctly, pharmaceuticals have demonstrated
reduced efficacy over time.
When pharmaceuticals lose their effectiveness, appropriate treatment options are determined based on the progression
and severity of the disease and include traditional laser therapy (e.g. selective laser trabeculoplasty (“SLT”), minimally
invasive stents/shunts (e.g. MIGS), and open surgery (e.g. trabeculectomy). These treatment alternatives also have
significant shortcomings due to treatment effects that dissipate over time, repeat procedures that are less effective or not
clinically advised, limited indications of use, and have significant complication risks.
We believe that because of the limitations of these traditional treatment alternatives, a clear unmet medical need exists
in the management of glaucoma patients.
Medical Retina
Market Scope estimates 2015 global sales of $9.0 billion for products used to treat retina diseases. Our medical retina
business focuses on the treatment of diabetic macular edema (“DME”) which is part of a broader disease state called diabetic
retinopathy. Diabetic retinopathy is a common complication of diabetes which impairs vision over time and if left untreated
can lead to blindness. It is projected by 2030 that there will be 430 million diabetic patients globally. Previous clinical
publications indicated 28.5% of diabetic patients can develop some form of diabetic retinopathy. Traditional laser
photocoagulation and a regimen of injected pharmaceuticals are currently the standard treatment for this disease and are
associated with significant shortcomings. Traditional laser photocoagulation can stabilize the patient’s vision over the long
term but presents a risk of varying degrees of vision loss to the patient. Pharmaceuticals can stabilize vision in the near term
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but require repeated injections. The injections are painful and the patients may experience side effects including increased
risk of eye infections. Furthermore, a regimen of repeated pharmaceutical injections is very costly to the physician and
patient, in terms of time, and to the healthcare system, in terms of dollars spent on treatment.
The shortcomings in treating retinal diseases have led to a renewed interest in alternative approaches that may provide
better or comparable patient outcomes at lower costs.
Our Solution
Our traditional laser technology was developed to perform laser photocoagulation by using a mode which delivers
continuously-on laser light, which is referred to as continuous wave (“CW”) mode. Laser photocoagulation generates a local
healing response and has been demonstrated to be a safe and effective therapy with long-term benefits for certain ophthalmic
procedures. However, use of the CW mode typically leads to local tissue damage and can cause loss of visual function,
which limits the applications of the technology.
We developed our proprietary MicroPulse technology with the goal of harnessing the clinical benefits of CW mode
without causing the associated tissue damage. MicroPulse is a method of delivering laser energy using a mode which chops
the CW beam into short, microsecond long, laser pulses. The laser pulses are intended to generate the desired therapeutic
response while the time in between laser pulses is believed to enable the tissue to cool and thereby avoid tissue damage. This
is analogous to holding one’s hand continuously over a candle versus waving it back and forth. When held continuously, the
candle would cause burning and scar tissue. However, when exposed intermittently the candle only heats the tissue without
burning.
There is a growing body of clinical evidence that has been published over the past 10 years that demonstrates that
MicroPulse therapy is clinically effective with no detectible tissue damage for the treatment of glaucoma and retinal diseases.
Currently, we have developed three applications of our MicroPulse technology for the treatment of eye diseases:
MicroPulse Applications
Description
Glaucoma – uveoscleral outflow
Glaucoma - trabecular meshwork
outflow
Medical Retina - DME
Treats glaucoma with our recently introduced Cyclo G6 laser system.
MicroPulse laser is delivered through a proprietary single-use disposable
probe we call the MicroPulse P3 (MP3) probe. By targeting an anatomical
area of the eye called “Pars Plana” it is believed that the MP3 procedure may
improve uveoscleral outflow and thus lowers IOP and may reduce the
number of eye drop medications. We believe that the MP3 procedure has
several important competitive advantages over alternative therapies with
respect to invasiveness, sustained IOP reduction and does not inhibit the
physicians from the use of alternative procedures.
Treats glaucoma with our IQ laser systems. MicroPulse laser is delivered
through a mechanical and optical delivery device and targets the trabecular
meshwork. Physicians describe the technique as MicroPulse Laser
Trabeculoplasty (“MLT”). It is believed that the MLT procedure improves
trabecular meshwork outflow and thus lowers IOP. We believe that the
MLT procedure provides incremental clinical benefits relative to other laser
trabeculoplasty procedures such as SLT.
Treats DME with our IQ laser systems. MicroPulse laser is administered
through a mechanical and optical delivery device that rapidly delivers
multiple treatment spots on the retina. Our MicroPulse laser is uniquely
believed to be “fovea friendly” in that the laser can be used to treat the
fovea, the center of the field of vision in the retina, without any loss of visual
function. Instead of causing thermal damage like traditional lasers,
MicroPulse is believed to induce a therapeutic response through the
recruitment of biological factors such as heat shock proteins. We believe that
the treatment of DME with MicroPulse has several competitive advantages
over alternate therapies with respect to long term vision stability, visual
function, and cost effectiveness.
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Our Strategy
We are one of the worldwide leaders in developing, manufacturing, marketing, selling and servicing innovative
medical laser systems and associated instrumentation for the treatment of the sight-threatening eye diseases. Our strategy is
to leverage our existing brand and distribution channel in the ophthalmology market to promote the adoption of MicroPulse
as a viable treatment alternative for glaucoma and retinal diseases and consequently to commercialize a broad array of
products that:
Improve therapeutic outcomes for patients suffering from sight-threatening eye diseases;
Improve the efficiency of physicians and reduce their costs; and
Provide economic benefits to healthcare systems.
To achieve these goals we are pursuing a number of organic initiatives which we anticipate will be supplemented from
time to time by acquisitions. We anticipate that the successful execution of this strategy will lead to profitable growth and
enhanced shareholder value.
Our Products
We utilize a systems approach to product design. Each system includes a laser console, which generates the laser
energy, and a number of interchangeable delivery devices for use in specific clinical applications. This approach allows our
customers to purchase a basic laser system and add additional delivery devices as their needs expand or as new applications
develop. We believe that this systems approach is our distinguishing characteristic and also brings economies-of-scale to our
product development and manufacturing efforts because individual applications do not require the design and manufacture of
complete stand-alone products. We offer three basic product categories: 1) lasers 2) delivery devices which are optical-
mechanical products that mount to ophthalmologists diagnostic equipment and transmit the laser and 3) single-use disposable
probes that transmit the laser light to a targeted region within the inside of an eye.
Laser Consoles
Our laser consoles, which are identified below, incorporate the economic and technical benefits of solid state and
semiconductor laser technology.
Glaucoma: Cyclo G6 Laser System. The newest addition to our console portfolio, the Cyclo G6 is an infrared (810nm)
laser designed to treat patients diagnosed with a range of glaucoma disease states. The product received U.S. Food and Drug
Administration (“FDA”) approval in January 2015, and commenced commercial sales in March 2015. Unlike our other
consoles, the Cyclo G6 system is sold with a family of probes that are single-use, including our patented MP3 disposable
probe that utilizes our MicroPulse technology and our G-Probe.
Medical retina: IQ laser systems. Our IQ laser systems are our typical MicroPulse laser platforms but also have CW
capabilities. Our IQ 577 delivers visible yellow (577nm) laser light and our IQ 532 delivers visible green (532nm) laser
light. Our IQ laser systems are typically used with our TxCell Scanning Laser Delivery System and our Slit Lamp Adapters
when used to treat DME with MicroPulse.
Surgical retina: OcuLight laser systems. Our OcuLight TX, OcuLight GL, and OcuLightGLx lasers deliver visible
green (532nm) laser light. Our OcuLight SL and OcuLightSLx lasers deliver infrared (810 nm) laser light.
Delivery Devices
The following delivery devices are typically used with our IQ and OcuLight laser systems:
TxCell Scanning Laser Delivery System (“TxCell”). TxCell was initially introduced in 2012. It allows the physician to
perform multi-spot pattern scanning for efficient delivery of our MicroPulse laser. The TxCell has been an important
contributor to the adoption of our IQ laser systems for the treatment of DME.
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Slit Lamp Adapter (“SLA”). These adapters allow the physician to utilize a standard slit lamp in both diagnosis and
treatment procedures. Physicians can install an SLA in a few minutes and convert standard diagnostic slit lamps into a
therapeutic laser delivery system. SLAs are used in treatment procedures for both retinal diseases and glaucoma.
TruFocus Laser Indirect Ophthalmoscope (“LIO”). The indirect ophthalmoscope is designed to be worn on the
physician’s head and to be used in procedures to treat peripheral retinal disorders, particularly in infants or adults requiring
treatment in the supine position. This product can be used in both diagnosis and treatment procedures at the point-of-care.
Single-use disposable probes
MicroPulse P3 Probe. The MP3 Probe is used with our Cylco G6 laser systems and is our probe that delivers our
MicroPulse laser to treat glaucoma. It is believed that the MP3 procedure reduces IOP by improving uveoscleral outflow.
The MP3 Probe can be performed on an anesthetized eye in the doctor’s office or OR. The non-invasive procedure takes just
a few minutes and results in minimal discomfort and post-operative recovery for the patient. We believe that the MP3
procedure may be used to treat a wide variety of glaucoma states, including early to late stage glaucoma as well as open-
angle and closed angle glaucoma. The MP3 Probe is a sterile single-use product.
G-Probe. The G-Probe is used in procedures to treat uncontrolled glaucoma, typically described as “refractory
glaucoma”. The G-Probe delivers CW laser to the ciliary body and is believed to stop the production of aqueous humor, thus
reducing IOP. The G-Probe’s non-invasive procedure takes approximately ten minutes and is performed on an anesthetized
eye in the doctor’s office or OR. The G-Probe is a sterile single-use product.
G-Probe Illuminate. We recently received regulatory clearance for our G-Probe Illuminate which is also used in
procedures to treat refractory glaucoma. The proprietary illumination feature allows for more targeted treatment and may
offer additional clinical benefits. The G-Probe Illuminate is a sterile single-use product.
EndoProbe. Our EndoProbe family of products are used for endophotocoagulation, a retinal treatment procedure
performed in the hospital OR or surgery center during a vitrectomy procedure. Vitrectomy procedures are performed to treat
proliferative diabetic retinopathy, macular holes, retinal tears and detachments. These sterile disposable probes are available
in tapered, angled, stepped, aspirating, illuminating, and adjustable styles, as well as a wide variety of sizes. The EndoProbe
is a sterile single-use product.
Research and Development
We have close working relationships with researchers, clinicians and practicing physicians around the world who
provide new ideas, test the feasibility of these new ideas and assist us in validating new products and new applications before
they are introduced.
Our internal research and development (“R&D”) activities are performed by a current team of 20 engineers, scientists
and regulatory professionals with experience in various aspects of medical products, laser systems, delivery devices, clinical
techniques, and regulatory affairs with a focus on introducing innovative products which satisfy the unmet and emerging
needs of our customers. The core competencies of the team include: mechanical engineering, electrical engineering, optics,
lasers, fiber optics, software, firmware and delivery devices. The R&D process integrates all of the necessary disciplines of
the Company from product inception through customer acceptance. This process facilitates reliable new product innovations
and a consistent pipeline of innovative products for our customers.
Our research activities are managed internally by our R&D staff. We supplement our internal R&D staff by hiring
consultants and/or partnering with physicians to gain specialized expertise and understanding. Research efforts are directed
toward the development of new products and new applications for our existing products, as well as the identification of
markets not currently addressed by our products.
We believe that it is important to make a substantial contribution to improving clinical outcomes. For instance, we have
made substantial investments in researching and improving the treatment of serious eye diseases such as glaucoma, diabetic
retinopathy, and AMD. The objectives of developing new treatments and applications are to expand the potential patient
population, to more effectively and more economically treat diseases, to treat patients earlier in the treatment regimen and to
reduce the side effects of treatment.
We spent $5.4 million on R&D in 2016, $5.2 million in 2015 and $4.6 million in 2014.
We consider clinical projects to be a component of our R&D efforts and they may or may not result in additional
commercial opportunities.
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Customers and Customer Support
Our products are currently sold for use by ophthalmologists specializing in the treatment of eye disease in the retina,
glaucoma and pediatrics eye diseases. Other customers include research and teaching hospitals, government installations,
surgical centers, hospitals, and office clinics (outpatient). No single customer or distributor accounted for 10% or more of
total revenues in fiscal years 2016, 2015 and 2014.
We seek to provide superior customer support and service and believe that our customer service and technical support
distinguish our product offerings from those of our competitors. We provide depot service at our Mountain View facility for
our ophthalmology products. Our customer support representatives assist customers with orders, warranty returns and other
administrative functions. Our technical support engineers provide customers with answers to technical and product-related
questions. We maintain an “around-the-clock” telephone service line to service our customers. If a problem with a depot
serviceable product cannot be diagnosed and resolved by telephone, a service loaner is shipped overnight to domestic
customers under warranty or service contract, and by the most rapid delivery means available to our international customers,
and the problem unit is returned to us. The small size and rugged design of our products allows for economical shipment and
quick response to customers worldwide.
Sales and Marketing
We sell and market our products in the United States predominantly through our direct sales force and internationally
through independent distributors. Currently we have a direct sales force of 16 employees who are engaged in sales efforts
within the United States and 5 personnel engaged in managing our distribution sales efforts internationally. We also contract
for the services of 12 independent sales representatives to supplement our U.S. direct sales efforts. Our sales are administered
through our corporate headquarters in Mountain View, California.
International sales represented 45.5%, 42.6% and 47.2% of our sales in 2016, 2015 and 2014, respectively. We believe
that our international sales will continue to represent a significant portion of our revenues for the foreseeable future. Our
international sales are made principally to customers in Europe, Asia, the Pacific Rim, the Middle East, Russia, Africa and
Latin America. Our distribution agreements with our international distributors are generally exclusive and typically can be
terminated by either party without cause with 90 days’ notice. International sales may be adversely affected by currency
fluctuations, the imposition of governmental controls, restrictions on export technology, political instability, trade
restrictions, changes in tariffs and the economic condition in each country in which we sell our products.
To support our sales process, we conduct marketing programs which include: our website, clinical education, email
marketing, trade shows, public relations, market research, and advertising in trade and academic journals and newsletters. We
typically participate in over 85 trade shows worldwide on an annual basis. These meetings allow us to present our products to
existing and prospective buyers.
Through marketing, we collaborate with our customers to identify new products and applications which help meet their
needs, and in turn provides us with new product concepts, enhances our ability to identify new applications for our products
and validates new procedures using our products. Customers include key opinion leaders who are often the heads of the
departments in which they work or professors at universities. We believe that these luminaries in the field of ophthalmology
are key to the successful introduction of new products and the subsequent acceptance of these new products by the general
market. Acceptance of our products by these early adopters is key to our strategy in the validation and commercialization of
our new products.
In March 2013, we entered into a global distribution and supply agreement with Peregrine Surgical Ltd. (“Peregrine”).
Under the agreement, we became a worldwide distributor for Peregrine labeled products and Peregrine became part of the
IRIDEX supply chain.
Operations
The manufacture of our visible light and infrared laser consoles and the related delivery devices is a highly complex
and precise process. Completed systems must pass quality control and reliability tests before shipment. Our manufacturing
activities consist of specifying, sourcing, assembling and testing of components and certain subassemblies for assembly into
our final product. Currently we have a total of 17 employees engaged in manufacturing activities for these products.
The medical devices manufactured by us are subject to extensive regulation by numerous governmental authorities,
including federal, state, and foreign governmental agencies. The principal regulator in the United States is the FDA. In April
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1998, we received certification for ISO 9001/EN 46001, which is an international quality system standard that documents
compliance to the European Medical Device Directive. In February 2004, we were certified to ISO 13485:2003, which
replaced ISO 9001/EN46001 as the international standard for quality systems as applied to medical devices. In August 2008,
we received FDA 510(k) clearance on our family of IRIDEX IQ laser systems. This clearance covers the IRIDEX IQ 532 and
IQ 577 laser systems and their associated delivery devices to deliver laser energy in either CW-Pulse, MicroPulse or
LongPulse mode. In January 2015, we received FDA 510(k) clearance for Cyclo G6. These laser systems are intended for a
wide range of specific applications in the medical specialties of ophthalmology.
International regulatory bodies often establish varying product standards, packaging requirements, labeling
requirements, tariff regulations, duties and tax requirements. As a result of our sales in Europe, we are required to have all
products “CE” marked, an international symbol affixed to all products demonstrating compliance to the European Medical
Device Directive and all applicable standards. In July 1998, we received CE mark certification under Annex II guidelines, the
most stringent path to CE certification. With Annex II CE mark certification, we have demonstrated our ability to both
understand and comply with all applicable standards under the European Medical Device Directive. Currently, all of our
released products are CE marked. Continued certification is based on successful review of the process by our European
Registrar during its annual audit. Any loss of certification would have a material adverse effect on our business, results of
operations and financial condition. We rely on third parties to manufacture substantially all of the components used in our
products, although we assemble critical subassemblies and the final product at our facility in Mountain View, California.
Some of these suppliers and manufacturers are sole source. We have some long-term or volume purchase agreements with
our suppliers but currently purchase most components on a purchase order basis. These components may not be available in
the quantities required, on reasonable terms, or at all. Financial or other difficulties faced by our suppliers or significant
changes in demand for these components or materials could limit their availability. Any failures by our third-party suppliers
to adequately perform may delay the submission of products for regulatory approval, impair our ability to deliver products on
a timely basis or otherwise impair our competitive position.
Competition
Competition in the market for laser systems and delivery devices used for ophthalmic treatment procedures is intense
and is expected to increase. This market is also characterized by technological innovation and change. We compete by
providing features and services that are valued by our customers such as: enhanced product performance, and clinical
outcomes, ease of use, durability, versatility, customer training services and rapid repair of equipment.
Our principal ophthalmic laser competitors are Alcon Inc. (Novartis AG), Bausch and Lomb (Valeant), Carl Zeiss
Meditec AG, Ellex Medical Lasers, Ltd., Lumenis Ltd., Nidek Co. Ltd., Quantel Medical SA, and Topcon Corporation. We
also compete with alternative glaucoma surgical device companies such as Alcon, Allergan, and Glaukos. Pharmaceuticals
represent alternative treatments to our laser procedures. Some of our principal pharmaceutical competitors are Alcon,
Allergan, OSI Pharmaceuticals, Pfizer, Regeneron, Roche (Genentech), and Valeant Pharmaceuticals. Some of our
competitors have substantially greater financial, engineering, product development, manufacturing, marketing and technical
resources than we do. Some companies also have greater name recognition than us and long-standing customer relationships.
In addition, other medical companies, academic and research institutions, or others, may develop new technologies or
therapies, including medical devices, surgical procedures or pharmacological treatments and obtain regulatory approval for
products utilizing such techniques that are more effective in treating the conditions targeted by us, or are less expensive than
our current or future products. Our technologies and products could be rendered obsolete by such developments. Any such
developments could have a material adverse effect on our business, financial condition and results of operations.
Patents and Proprietary Rights
Our success and ability to compete is dependent in part upon our proprietary information. We rely on a combination of
patents, trade secrets, copyright and trademark laws, nondisclosure and other contractual agreements and technical measures
to protect our intellectual property rights. These are either developed internally or obtained from acquisitions such as
RetinaLabs and Ocunetics. We file patent applications to protect technology, inventions and improvements that are
significant to the development of our business. We have been issued 28 United States patents and 20 foreign patents on the
technologies related to our continuing products and processes, which have expiration dates ranging from 2017 to 2034. We
have 9 pending patent applications in the United States and 18 foreign pending patent applications that have been filed. Our
patent applications may not be approved.
In addition to patents, we rely on trade secrets and proprietary know-how which we seek to protect, in part, through
proprietary information agreements with employees, consultants and other parties. Our proprietary information agreements
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with our employees and consultants contain provisions requiring such individuals to assign to us, without additional
consideration, any inventions conceived or reduced to practice by them while employed or retained by us, subject to
customary exceptions.
Government Regulation
The medical devices marketed and manufactured by us are subject to extensive regulation by numerous governmental
authorities, including federal, state, and foreign governmental agencies. Pursuant to the Federal Food, Drug, and Cosmetic
Act, as amended, and the regulations promulgated thereunder (“FDA Act”), the FDA serves as the principal federal agency
within the United States with authority over medical devices and regulates the research, clinical testing, manufacture,
labeling, distribution, sale, marketing and promotion of such devices. Noncompliance with applicable requirements can result
in, among other things, warning letters, fines, injunctions, civil penalties, recall or seizures of products, total or partial
suspension of production, failure of the government to grant pre-market clearance or approval for devices, withdrawal of
marketing approvals, and criminal prosecution. The FDA also has the authority to request repair, replacement or refund of the
cost of any medical device manufactured or distributed by us.
In the United States, medical devices are classified into one of three classes (Class I, II or III). The class to which the
device is assigned determines, among other things, the type of pre-marketing submission/application required for FDA
clearance to market. If the device is classified as Class I or II, and if it is not exempt, a 510(k) pre-market notification will be
required for marketing. Under FDA regulations, Class I devices are subject to general controls (for example, labeling, pre-
market notification and adherence to Quality System Regulations (“QSRs”) requirements). Class II devices receive marketing
clearance through a 510(k) pre-market notification. For Class III devices, a pre-market approval (“PMA”) application will be
required unless the device is a pre-amendments device (on the market prior to the passage of the medical device amendments
in 1976, or substantially equivalent to such a device) and PMAs have not been called for. In that case, a 510(k) will be the
route to market. A 510(k) clearance will be granted if the submitted information establishes that the proposed device is
substantially equivalent to a legally marketed Class I or II medical device, or to a Class III medical device for which the FDA
has not called for a PMA. The FDA may determine that a proposed device is not substantially equivalent to a legally
marketed device or that additional information or data are needed before a substantial equivalence determination can be
made. A request for additional data may require that clinical studies of the device’s safety and efficacy be performed.
Commercial distribution of a device for which a 510(k) notification is required can begin only after the FDA issues an
order finding the device to be substantially equivalent to a previously cleared device. The FDA has recently been requiring a
more rigorous demonstration of substantial equivalence than in the past. Even in cases where the FDA grants a 510(k)
clearance, it can take the FDA between three and six months from the date of submission to grant a 510(k) clearance, but it
may take longer.
A not substantially equivalent determination, or a request for additional information, could delay the market
introduction of new products that fall into this category and could have a materially adverse effect on our business, financial
condition and results of operations. For any of our products that are cleared through the 510(k) process, modifications or
enhancements that could significantly affect the safety or efficacy of the device or that constitute a major change to the
intended use of the device will require new 510(k) submissions.
We have obtained 510(k) clearances for all of our marketed products. We have also modified aspects of our products
since receiving regulatory clearance, and we have submitted special 510(k)s for those modifications as required by FDA
regulations. After a device receives a 510(k) clearance or a PMA, any modification that could significantly affect its safety or
effectiveness, or that would constitute a major change in its intended use, will require a new clearance or approval. The FDA
requires each manufacturer to make this determination initially, but the FDA can review any such decision and can disagree
with a manufacturer’s determination. If the FDA disagrees with our determination not to seek a new 510(k) clearance or
PMA, the FDA may retroactively require us to seek 510(k) clearance or pre-market approval. The FDA could also require us
to cease marketing and distribution and/or recall the modified device until a 510(k) clearance or a PMA approval is obtained.
Also, in these circumstances, we may be subject to significant regulatory fines or penalties.
Any products manufactured or distributed by us pursuant to FDA clearances or approvals are subject to pervasive and
continuing regulation by the FDA, including record keeping requirements and reporting of adverse experiences with the use
of the device. Device manufacturers are required to register their establishments and list their devices with the FDA and
certain state agencies, and are subject to periodic inspections by the FDA and certain state agencies. The FDA Act requires
devices to be manufactured to comply with applicable QSR regulations which impose certain procedural and documentation
requirements upon us with respect to design, development, manufacturing and quality assurance activities. We are subject to
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unannounced inspections by the FDA and the Food and Drug Branch of the California Department of Health Services, to
determine our compliance with the QSR and other regulations, and these inspections may include the manufacturing facilities
of our subcontractors.
Labeling and promotion activities are subject to scrutiny by the FDA and in certain instances, by the Federal Trade
Commission. The FDA actively enforces regulations prohibiting marketing of products for unapproved uses. We and our
products are also subject to a variety of state laws and regulations in those states or localities where our products are or will
be marketed. Any applicable state or local regulations may hinder our ability to market our products in those states or
localities. Manufacturers are also subject to numerous federal, state and local laws relating to such matters as safe working
conditions, manufacturing practices, environmental protection, fire hazard control and disposal of hazardous or potentially
hazardous substances. We may be required to incur significant costs to comply with such laws and regulations now or in the
future. Such laws or regulations may have a material adverse effect upon our ability to do business.
Export of our products is regulated by the FDA and is covered by the Export Amendment of 1996, which greatly
expanded the export of approved and unapproved United States medical devices. However, some foreign countries require
manufacturers to provide an FDA certificate of products for export (“CPE”) which requires the device manufacturer to certify
to the FDA that the product has been granted pre-market clearance in the United States and that the manufacturing facilities
appeared to be in compliance with QSR at the time of the last QSR inspection. The FDA will refuse to issue a CPE if
significant outstanding QSR violations exist.
We are also regulated under the Radiation Control for Health and Safety Act, which requires laser products to comply
with performance standards, including design and operation requirements, and manufacturers to certify in product labeling
and in reports to the FDA that their products comply with all such standards. The law also requires laser manufacturers to file
new product and annual reports, maintain manufacturing, testing and sales records and report product defects. Various
warning labels must be affixed and certain protective devices installed, depending on the class of the product.
The introduction of our products in foreign markets will also subject us to foreign regulatory clearances which may
impose substantial additional costs and burdens. International sales of medical devices are subject to the regulatory
requirements of each country. The regulatory review process varies from country to country. Many countries also impose
product standards, packaging requirements, labeling requirements and import restrictions on devices. In addition, each
country has its own tariff regulations, duties and tax requirements. The approval by the FDA and foreign government
authorities is unpredictable and uncertain. The necessary approvals or clearances may not be granted on a timely basis, if at
all. Delays in receipt of, or a failure to receive, such approvals or clearances, or the loss of any previously received approvals
or clearances, could have a material adverse effect on our business, financial condition and results of operations. There are a
number of major regulatory changes occurring in the regulation of medical devices in the European Union. A new revision of
the quality system regulation (ISO 13485:2016) has been released that substantially increases the requirements for a medical
device quality system. The Medical Device Regulation (“MDR”) will replace the current medical device directive
(93/42/EEC), and it substantially changes the way that medical devices are brought to market in the European Union and how
they maintain compliance throughout the product’s life cycle. Additionally, the new revision 4 of the clinical evaluation
report guidance document (MEDDEV 2.7.1) severely restricts the use of substantial equivalence for new products, resulting
in the need for formal clinical trial data for most new products. These changes will increase the cost for compliance and for
product development, and they lengthen product introduction cycles. Failure to comply with these changes can have an
adverse effect on our ability to release new products in a timely manner.
Changes in existing requirements or adoption of new requirements or policies by the FDA or other foreign and
domestic regulatory authorities could adversely affect our ability to comply with regulatory requirements. Failure to comply
with regulatory requirements could have a material adverse effect on our business, financial condition and results of
operations. We may be required to incur significant costs to comply with laws and regulations in the future. These laws or
regulations may have a material adverse effect upon our business, financial condition or results of operations.
Reimbursement
The cost of a significant portion of medical care in the United States is funded by government programs, health
maintenance organizations and private insurance plans. Our ophthalmology products are typically purchased by doctors,
clinics, hospitals and other users, which bill various third-party payers, such as government programs and private insurance
plans, for the health care services provided to their patients. Government imposed limits on reimbursement of hospitals and
other health care providers have significantly affected the spending budgets of doctors, clinics and hospitals to acquire new
equipment, including our products. Under certain government insurance programs, a health care provider is reimbursed for a
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fixed sum for services rendered in treating a patient, regardless of the actual charge for such treatment. The Center for
Medicare and Medicaid Services reimburses hospitals on a prospectively-determined fixed amount basis for the costs
associated with an in-patient hospitalization based on the patient’s discharge diagnosis, regardless of the actual costs incurred
by the hospital or physician in furnishing the care and regardless of the specific devices used in that procedure.
Private third-party reimbursement plans are also developing increasingly sophisticated methods of controlling health-
care costs by imposing limitations on reimbursable procedures and the exploration of more cost-effective methods of
delivering health care. In general, these government and private measures have caused health care providers, including our
customers, to be more selective in the purchase of medical products. In addition, changes in government regulation or in
private third-party payers’ policies may limit or eliminate reimbursement for procedures employing our products, which
could have a material adverse effect on our business, results of operations and financial condition.
Doctors, clinics, hospitals and other users of our products may not obtain adequate reimbursement for use of our
products from third-party payers. While we believe that the laser procedures using our products have generally been
reimbursed, payers may deny coverage and reimbursement for our products if they determine that the device was not
reasonable and necessary for the purpose used, was investigational or was not cost-effective.
Backlog and Seasonality
We generally do not maintain a material level of backlog. As a result, we do not believe that our backlog at any
particular time is indicative of future sales levels. Our quarterly results have been, and are expected to continue to be, affected
by seasonal factors. For example, our European sales during the third quarter are generally lower due to many businesses
being closed for the summer vacation season.
Employees
As of December 31, 2016, we have a total of 121 full-time equivalent employees engaged in our ongoing operations,
including 57 in operations (including manufacturing, quality, logistics and service), 30 in sales and marketing which does not
include the 12 independent sales representatives, 20 in R&D and 14 in finance and administration. We also employ, from
time to time, a number of temporary and part-time employees as well as consultants on a contract basis. As of December 31,
2016, we employed 33 such persons. Our future success will depend in part on our ability to attract, train, retain and motivate
highly qualified employees, who are in great demand. We may not be successful in attracting and retaining such personnel.
Our employees are not represented by a collective bargaining organization, and we have never experienced a work stoppage
or strike. We consider our employee relations to be good.
Available Information
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to
reports pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available, free of charge,
through the U.S. Securities and Exchange Commission’s (“SEC”) website at www.sec.gov. These periodic reports and
amendments are also available, free of charge, on our website at www.IRIDEX.com, as soon as reasonably practicable after
such reports are electronically filed with the SEC.
Investors and others should note that we announce material financial information to our investors using SEC filings,
press releases, our investor relations website, public conference calls and webcasts. We use these channels as well as social
media to communicate with investors, customers and the public about our company, our products and other issues. It is
possible that the information we post on social media channels could be deemed to be material information. We encourage
investors, our customers, and others interested in IRIDEX to review the information we post on our Facebook page
(www.facebook.com/IRIDEX) and Twitter feed (https://twitter.com/IRIDEX). Any information on, or that can be accessed
through, our website and social media channels is not part of this report.
Item 1A. Risk Factors
Factors That May Affect Future Results
In addition to the other information contained in this Annual Report Form 10-K, we have identified the following risks
and uncertainties that may have a material adverse effect on our business, common stock price, financial condition or results
of operations. You should carefully consider the risks described below before making an investment decision.
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Risks Relating to our Business
We face quality control and other production issues that could materially and adversely impact our sales and
financial results and the acceptance of our products.
The manufacture of our infrared and visible laser consoles and related delivery devices is a highly complex and precise
process. We assemble critical subassemblies and substantially all of our final products at our facility in Mountain View,
California. We may experience manufacturing difficulties, quality control issues or assembly constraints, particularly with
regard to new products that we may introduce.
If our sales increase substantially, we may need to increase our production capacity and may not be able to do so in a
timely, effective or cost-efficient manner. We may not be able to manufacture sufficient quantities of our products, which
may require that we qualify other manufacturers for our products. Furthermore, we may experience delays, disruptions,
capacity constraints or quality control problems in our manufacturing operations.
In the recent past, we have experienced supply chain, production and training issues as we have expanded our product
lines and sales volumes. For example, in our third quarter of fiscal 2016, we experienced certain supply chain and sales force
training issues in certain of our medical retina products. As a result of these issues, we reduced the shipment of these
products in that fiscal quarter. In fiscal 2015, we experienced product issues with certain of our products, which caused us to
reduce shipments, particularly to international distributors.
While we have taken steps to address these issues, there is no assurance that these steps will be effective in rectifying or
preventing similar issues in the future. If we are unable to address these supply chain, production and training issues in a
timely and cost-effective manner, product shipments to our customers could be delayed, our sales levels may suffer and
manufacturing and operational costs may increase, any of which would negatively impact our net revenues.
Some of our laser systems are complex in design and may contain defects that are not detected until deployed by our
customers, which could increase our costs and reduce our revenues.
Laser systems are inherently complex in design and require ongoing regular maintenance. The manufacture of our
lasers, laser products and systems involves a highly complex and precise process. As a result of the technical complexity of
our products, changes in our or our suppliers’ manufacturing processes or the inadvertent use of defective materials by us or
our suppliers could result in a material adverse effect on our ability to achieve acceptable manufacturing yields and product
reliability. To the extent that we do not achieve such yields or product reliability, our business, operating results, financial
condition and customer relationships would be adversely affected. We provide warranties on certain of our product sales, and
allowances for estimated warranty costs are recorded during the period of sale. The determination of such allowances
requires us to make estimates of failure rates and expected costs to repair or replace the products under warranty. We
currently establish warranty reserves based on historical warranty costs. If actual return rates and/or repair and replacement
costs differ significantly from our estimates, adjustments to recognize additional cost of revenues may be required in future
periods.
Our customers may discover defects in our products after the products have been fully deployed and operated under
peak stress conditions. In addition, some of our products are combined with products from other vendors, which may contain
defects. As a result, should problems occur, it may be difficult to identify the source of the problem. If we are unable to
identify and fix defects or other problems, we could experience, among other things:
loss of customers;
increased costs of product returns and warranty expenses;
damage to our brand reputation;
failure to attract new customers or achieve market acceptance;
diversion of development and engineering resources; and
legal actions by our customers.
The occurrence of any one or more of the foregoing factors could seriously harm our business, financial condition and
results of operations.
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We depend on international sales for a significant portion of our operating results.
We derive, and expect to continue to derive, a large portion of our revenues from international sales. For the fiscal year
ended December 31, 2016, our international sales were $21.0 million, or 45.5% of total revenues. We anticipate that
international sales will continue to account for a significant portion of our revenues in the foreseeable future. None of our
international revenues and costs for the year ended December 31, 2016 have been denominated in foreign currencies. As a
result, an increase in the value of the U.S. dollar relative to foreign currencies makes our products more expensive and thus
less competitive in foreign markets and may negatively affect our reported revenue in any particular reporting period. Our
international operations and sales are subject to a number of risks and potential costs, including:
fluctuations in foreign currency exchange rates;
product and production issues;
performance of our international channel of distributors;
longer accounts receivable collection periods;
impact of recessions in global economies and availability of credit;
political and economic instability;
trade sanctions and embargoes;
impact of international conflicts, terrorist and military activity, civil unrest;
foreign certification requirements, including continued ability to use the “CE” mark in Europe, and other local
regulatory requirements;
differing local product preferences and product requirements;
cultural differences;
changes in foreign medical reimbursement and coverage policies and programs;
reduced or limited protections of intellectual property rights in jurisdictions outside the United States;
potentially adverse tax consequences;
protectionist, adverse and changing foreign governmental laws and regulations;
greater risk of our employees failing to comply with both U.S. and foreign laws, including anti-trust regulations,
the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act of 2010 and any trade regulations designed to
ensure fair trade practices; and
compliance costs and risks of non-compliance with multiple regulatory regimes governing the production,
marketing, sale and use of our products.
Any one or more of these factors stated above could have a material adverse effect on our business, financial condition
or results of operations.
As we expand our existing international operations we may encounter new risks in addition to the above factors. For
example, as we focus on building our international sales and distribution networks in new geographic regions, we must
continue to develop relationships with qualified local distributors and trading companies. If we are not successful in
developing these relationships, we may not be able to grow sales in these geographic regions. These or other similar risks
could adversely affect our revenues, profitability and the price of our common stock.
We are exposed to risks associated with worldwide economic slowdowns and related uncertainties.
We are subject to macro-economic fluctuations in the U.S. and worldwide economy. Concerns about consumer and
investor confidence, volatile corporate profits and reduced capital spending, international conflicts, terrorist and military
activity, civil unrest and pandemic illness could reduce customer orders or cause customer order cancellations. In addition,
political and social turmoil related to international conflicts and terrorist acts may put further pressure on economic
conditions in the United States and abroad.
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Weak economic conditions and declines in consumer spending and consumption may harm our operating results.
Purchases of our products are often discretionary. During uncertain economic times, customers or potential customers may
delay, reduce or forego their purchases of our products and services, which may impact our business in a number of ways,
including lower prices for our products and services and reducing or delaying sales. There could be a number of follow-on
effects from economic uncertainty on our business, including insolvency of key suppliers resulting in product delays, delays
in customer payments of outstanding accounts receivable and/or customer insolvencies, counterparty failures negatively
impacting our operations, and increasing expense or inability to obtain future financing.
If economic uncertainty persisted, or if the economy entered a prolonged period of decelerating growth, our results of
operations may be harmed.
Our operating results may fluctuate from quarter to quarter and year to year.
Our sales and operating results may vary significantly from quarter to quarter and from year to year in the future. Our
operating results are affected by a number of factors, many of which are beyond our control. Factors contributing to these
fluctuations include the following:
changes in the prices at which we can sell our products, including the impact of changes in exchange rates;
general economic uncertainties and political concerns;
introduction of new products, product enhancements and new applications by our competitors, including new
drugs, entry of new competitors into our markets, pricing pressures and other competitive factors;
the timing of the introduction and market acceptance of new products, product enhancements and new
applications;
changes in demand for our existing line of ophthalmology products;
the cost and availability of components and subassemblies, including the willingness and ability of our sole or
limited source suppliers to timely deliver components at the times and prices that we have planned;
our ability to maintain sales volumes at a level sufficient to cover fixed manufacturing and operating costs;
fluctuations in our product mix within ophthalmology products and foreign and domestic sales;
the effect of regulatory approvals and changes in domestic and foreign regulatory requirements;
our long and highly variable sales cycle;
changes in customers’ or potential customers’ budgets as a result of, among other things, reimbursement policies
of government programs and private insurers for treatments that use our products;
variances in shipment volumes as a result of product, supply chain and training issues; and
increased product innovation costs.
In addition to these factors, our quarterly results have been, and are expected to continue to be, affected by seasonal
factors. For example, our European sales during the third quarter are generally lower due to many businesses being closed for
the summer vacation season.
Our expense levels are based, in part, on expected future sales. If sales levels in a particular quarter do not meet
expectations, we may be unable to adjust operating expenses quickly enough to compensate for the shortfall of sales, and our
results of operations may be adversely affected. In addition, we have historically made a significant portion of each quarter’s
product shipments near the end of the quarter. If that pattern continues, any delays in shipment of products could have a
material adverse effect on results of operations for such quarter. Due to these and other factors, we believe that quarter to
quarter and year to year comparisons of our past operating results may not be meaningful. You should not rely on our results
for any quarter or year as an indication of our future performance. Our operating results in future quarters and years may be
below expectations, which would likely cause the price of our common stock to fall.
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If we fail to develop and successfully introduce new products and applications, our business prospects and operating
results may suffer.
Our ability to generate incremental revenue growth will depend, in part, on the successful outcome of research and
development activities, which may include clinical trials that lead to the development of new products and new applications
using our products. Our research and development process is expensive, prolonged, and entails considerable uncertainty. Due
to the complexities and uncertainties associated with ophthalmic research and development, products we are currently
developing may not complete the development process or obtain the regulatory approvals required to market such products
successfully.
Successful commercialization of new products and new applications will require that we effectively transfer production
processes from research and development to manufacturing and effectively coordinate with our suppliers. In addition, we
must successfully sell and achieve market acceptance of new products and applications and enhanced versions of existing
products. The extent of, and rate at which, market acceptance and penetration are achieved by future products is a function of
many variables, which include, among other things, price, safety, efficacy, reliability, marketing and sales efforts, the
development of new applications for these products, the availability of third-party reimbursement of procedures using our
new products, the existence of competing products and general economic conditions affecting purchasing patterns.
Our ability to market and sell new products is subject to government regulation, including approval or clearance by the
FDA and foreign government agencies. Any failure in our ability to successfully develop and introduce new products or
enhanced versions of existing products and achieve market acceptance of new products and new applications could have a
material adverse effect on our operating results and would cause our net revenues to decline.
We rely on continued market acceptance of our existing products and any decline in sales of our existing products
would adversely affect our business and results of operations.
We currently market visible and infrared medical laser systems and delivery devices to the ophthalmology market. We
believe that continued and increased sales, if any, of these medical laser systems is dependent upon a number of factors
including the following:
acceptance of product performance, features, ease of use, scalability and durability, including with respect to our
MicroPulse laser photocoagulation systems;
recommendations and opinions by ophthalmologists, other clinicians, and their associated opinion leaders;
marketing study outcomes;
price of our products and prices of competing products and technologies, particularly in light of the current
macro-economic environment where healthcare systems and healthcare operators are becoming increasingly
price sensitive;
availability of competing products, technologies and alternative treatments; and
level of reimbursement for treatments administered with our products.
In addition, we derive a meaningful portion of our sales in the form of recurring revenues from selling consumable
instrumentation, including our EndoProbe devices and service. Our ability to increase recurring revenues from the sale of
consumable products will depend primarily upon the features of our current products and product innovation, the quality of
our products, ease of use and prices of our products, including the relationship to prices of competing products. The level of
our service revenues will depend on the quality of service we provide and the responsiveness and the willingness of our
customers to request our services rather than purchase competing products or services. Any significant decline in market
acceptance of our products or our revenues derived from the sales of laser consoles, delivery devices, consumables or
services may have a material adverse effect on our business, results of operations and financial condition.
We face strong competition in our markets and expect the level of competition to grow in the foreseeable future.
Competition in the market for laser systems and delivery devices used for ophthalmic treatment procedures is intense
and is expected to increase. This market is also characterized by technological innovation and change. We compete by
providing features and services that are valued by our customers such as: enhanced product performance, and clinical
outcomes, ease of use, durability, versatility, customer training services and rapid repair of equipment.
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Our principal ophthalmic laser competitors are Alcon Inc. (Novartis AG), Bausch and Lomb (Valeant), Carl Zeiss
Meditec AG, Ellex Medical Lasers, Ltd., Lumenis Ltd., Nidek Co. Ltd., Quantel Medical SA, and Topcon Corporation. We
also compete with alternative glaucoma surgical device companies such as Alcon, Allergan, and Glaukos. Pharmaceuticals
represent alternative treatments to our laser procedures. Some of our principal pharmaceutical competitors are Alcon,
Allergan, OSI Pharmaceuticals, Pfizer, Regeneron, Roche (Genentech), and Valeant Pharmaceuticals. Some of our
competitors have substantially greater financial, engineering, product development, manufacturing, marketing and technical
resources than we do. Some companies also have greater name recognition than us and long-standing customer relationships.
In addition, other medical companies, academic and research institutions, or others, may develop new technologies or
therapies, including medical devices, surgical procedures or pharmacological treatments and obtain regulatory approval for
products utilizing such techniques that are more effective in treating the conditions targeted by us, or are less expensive than
our current or future products. Our technologies and products could be rendered obsolete by such developments. Any such
developments could have a material adverse effect on our business, financial condition and results of operations.
Our operating results may be adversely affected by uncertainty regarding healthcare reform measures and changes
in third- party coverage and reimbursement policies.
Our products are typically purchased by doctors, clinics, hospitals and other users, which bill various third-party payers,
such as governmental programs and private insurance plans, for the health care services provided to their patients. Changes in
government legislation or regulation or in private third-party payers’ policies toward reimbursement for procedures
employing our products may prohibit adequate reimbursement. There have been a number of legislative and regulatory
proposals to change the healthcare system, reduce the costs of healthcare and change medical reimbursement policies.
Doctors, clinics, hospitals and other users of our products may decline to purchase our products to the extent there is
uncertainty regarding reimbursement of medical procedures using our products and any healthcare reform measures. Further
proposed legislation, regulation and policy changes affecting third-party reimbursement are likely. Among other things,
Congress has in the past proposed changes to and the repeal of the Patient Protection and Affordable Care and Health Care
and Education Affordability Reconciliation Act of 2010 (collectively, the “Affordable Care Act”). At this time, it remains
unclear whether there will be any changes made to or any repeal of the Affordable Care Act, with respect to certain of its
provisions or in its entirety. Various healthcare reform proposals have also emerged at the state level.
We are unable to predict what legislation or regulation, if any, relating to the health care industry or third-party
coverage and reimbursement may be enacted in the future at the state or federal level, or what effect such legislation or
regulation may have on us. Furthermore, existing legislation and regulation related to the health care industry and third-party
coverage reimbursement, including the Affordable Care Act, has been subject to judicial challenge, and may be subject to
similar challenges from time to time in the future. Denial of coverage and reimbursement of our products, or the revocation
or changes to coverage and reimbursement policies, could have a material adverse effect on our business, results of
operations and financial condition.
Third-party payers are increasingly scrutinizing and continue to challenge the coverage of new products and the level of
reimbursement for covered products. Doctors, clinics, hospitals and other users of our products may not obtain adequate
reimbursement for use of our products from third-party payers. While we believe that the laser procedures using our products
have generally been reimbursed, payers may deny coverage and reimbursement for our products if they determine that the
device was not reasonable and necessary for the purpose used, was investigational or was not cost-effective.
If we fail to comply with healthcare laws, we could face substantial penalties and financial exposure, and our
business, operations and financial condition could be adversely affected.
While we do not bill directly to Medicare, Medicaid or other third-party payors, because payment is in many cases available
for our products from such payors, many healthcare laws place limitations and requirements on the manner in which we
conduct our business (including our sales and promotional activities and interactions with healthcare professionals and
facilities) and could result in liability and exposure to us. The laws that may affect our ability to operate include, among
others: (i) the federal healthcare programs Anti-Kickback Statute, which prohibits, among other things, persons from
knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or to
induce either the referral of an individual for, or the purchase, order or recommendation of, any good or service for which
payment may be made under federal healthcare programs such as Medicare or Medicaid, (ii) federal false claims laws which
prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for
payment from Medicare, Medicaid, or other third-party payors that are false or fraudulent, and which may apply to entities
like us if we provide coding and billing advice to customers, or under theories of “implied certification” where the
government and qui tam relators may allege that device companies are liable where a product that was paid for by the
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government in whole or in part was promoted “off-label,” lacked necessary clearance or approval, or failed to comply with
good manufacturing practices or other laws; (iii) transparency laws and related reporting and disclosures requirements such
as the federal Sunshine Act, now known as Open Payments; and/or (iv) state law equivalents of each of the above federal
laws, including, without limitation anti-kickback and false claims laws which may apply to items or services reimbursed by
any third-party payor, including commercial insurers, many of which differ from their federal counterparts in significant
ways, thus complicating compliance efforts.
If our operations are found to be in violation of any of the laws described above or any other governmental regulations
that apply to us, we may be subject to penalties, including civil and criminal penalties, exclusion from participation in
government healthcare programs, damages, fines and the curtailment or restructuring of our operations. Any penalties,
damages, fines, curtailment or restructuring of our operations could adversely affect our ability to operate our business and
our financial results. The risk of our being found in violation of these laws is increased by the fact that their provisions are
open to a variety of evolving interpretations and enforcement discretion. Open Payments, commonly known as the Sunshine
Act, is a relatively new law, and compliance with this law has presented a number of challenges to companies such as ours, in
terms of interpretation of the law and its implementation. Under the Sunshine Act, Centers for Medicare & Medicaid Services
(“CMS”) has the potential to impose penalties of up to $1.15 million per year for violations, depending on the circumstances,
although enforcement has been negligible to date. Payments reported under the Sunshine Act also have the potential to draw
scrutiny on payments to and relationships with physicians, which may have implications under the Anti-Kickback Statute and
other healthcare laws. The risk that we are our being found in violation of these laws may be increased by the fact that we do
not have a formal healthcare compliance program in place. Further, while safe harbors may in some instances be available
and utilized by companies to reduce risks associated with the Anti-Kickback Statute and certain other healthcare laws, we
have not necessarily utilized such safe harbors nor fully followed all elements required to claim the benefit of such safe
harbors in all possible instances. Any action against us for violation of these laws, even if we successfully defend against it,
could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business.
We depend on collaborative relationships to develop, introduce and market new products, product enhancements
and new applications.
We depend on both clinical and commercial collaborative relationships. We have entered into collaborative
relationships with academic medical centers and physicians in connection with the research and innovation and clinical
testing of our products. Commercially, we currently have a distribution and licensing agreement with Alcon for our GreenTip
SoftTip Cannula. Sales of and royalties from the GreenTip Soft Tip Cannula are dependent upon the sales performance of
Alcon, which depends on their efforts and is beyond our control. The failure to obtain any additional future clinical or
commercial collaborations and the resulting failure or success of such arrangements of any current or future clinical or
commercial collaboration relationships could have a material adverse effect on our ability to introduce new products or
applications and therefore could have a material adverse effect on our business, results of operations and financial condition.
If we cannot increase our sales volumes, reduce our costs or introduce higher margin products to offset anticipated
reductions in the average unit price of our products, our operating results may suffer.
The average unit price of our products may decrease in the future in response to changes in product mix, competitive
pricing pressures, new product introductions by our competitors or other factors. If we are unable to offset the anticipated
decrease in our average selling prices by increasing our sales volumes or through new product introductions, our net revenues
will decline. In addition, to maintain our gross margins we must continue to reduce the manufacturing cost of our products. If
we cannot maintain our gross margins our business could be seriously harmed, particularly if the average selling price of our
products decreases significantly without a corresponding increase in sales.
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We rely on our direct and independent sales forces and network of international distributors to sell our products and
any failure to maintain our sales force and distributor relationships could harm our business.
Our ability to sell our products and generate revenues depends upon our direct and independent sales forces within the
United States and relationships with independent distributors outside the United States. Currently our direct and independent
sales forces within the United States consist of approximately 16 employees and 12 independent representatives, respectively.
Our international independent distributors are managed by a team of five people. We generally grant our distributors
exclusive territories for the sale of our products in specified countries. The amount and timing of resources dedicated by our
distributors to the sales of our products is not within our control. Our international sales are entirely dependent on the efforts
of these third parties. If any distributor breaches the terms of its distribution agreement with us or fails to generate sales of
our products, we may be forced to replace the distributor and our ability to sell our products into that exclusive sales territory
would be adversely affected.
We do not have any long-term employment contracts with the members of our direct sales force. We may be unable to
replace our direct sales force personnel with individuals of equivalent technical expertise and qualifications, which may harm
our revenues and our ability to maintain market share. Similarly, our independent and distributor agreements are generally
terminable at will by either party and independents and distributors may terminate their relationships with us, which would
affect our sales and results of operations.
Our promotional practices are subject to extensive government scrutiny. We may be subject to governmental,
regulatory and other legal proceedings relative to advertising, promotion, and marketing that have a significant negative
effect on our business.
We are subject to governmental oversight and associated civil and criminal enforcement relating to drug and medical
device advertising, promotion, and marketing, and such enforcement is evolving and intensifying. In the United States, we
are subject to potential enforcement from the FDA, the U.S. Federal Trade Commission, the Department of Justice, the CMS,
other divisions of the Department of Health and Human Services and state and local governments. Other parties, including
private plaintiffs, also are commonly bringing suit against pharmaceutical and medical device companies, alleging off-label
marketing and other violations. We may be subject to liability based on the actions of individual employees and contractors
carrying out activities on our behalf, including sales representatives who may interact with healthcare professionals.
If we fail to manage growth effectively, our business could be disrupted which could harm our operating results.
We have experienced and may in the future experience growth in our business, both organically and through the
acquisition of businesses and products. We have made and expect to continue to make significant investments to enable our
future growth through, among other things, new product innovation and clinical trials for new applications and products. We
must also be prepared to expand our work force and to train, motivate and manage additional employees as the need for
additional personnel arises. Our personnel, systems, procedures and controls may not be adequate to support our future
operations. Any failure to effectively manage future growth could have a material adverse effect on our business, results of
operations and financial condition.
We rely on patents and proprietary rights to protect our intellectual property and business.
Our success and ability to compete is dependent in part upon our proprietary information. We rely on a combination of
patents, trade secrets, copyright and trademark laws, nondisclosure and other contractual agreements and technical measures
to protect our intellectual property rights. We file patent applications to protect technology, inventions and improvements that
are significant to the development of our business. We have been issued 28 United States patents and 20 foreign patents on
the technologies related to our products and processes. We have 9 pending patent applications in the United States and 18
foreign pending patent applications that have been filed. Our patent applications may not be approved. Any patents granted
now or in the future may offer only limited protection against potential infringement and development by our competitors of
competing products. Moreover, our competitors, many of which have substantial resources and have made substantial
investments in competing technologies, may seek to apply for and obtain patents that will prevent, limit or interfere with our
ability to make, use or sell our products either in the United States or in international markets. Patents have a limited lifetime
and once a patent expires competition may increase.
In addition to patents, we rely on trade secrets and proprietary know-how which we seek to protect, in part, through
proprietary information agreements with employees, consultants and other parties. Our proprietary information agreements
with our employees and consultants contain industry standard provisions requiring such individuals to assign to us without
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additional consideration any inventions conceived or reduced to practice by them while employed or retained by us, subject
to customary exceptions. Proprietary information agreements with employees, consultants and others may be breached, and
we may not have adequate remedies for any breach. Also, our trade secrets may become known to or independently
developed by competitors.
The laser and medical device industry is characterized by frequent litigation regarding patent and other intellectual
property rights. Companies in the medical device industry have employed intellectual property litigation to gain a
competitive advantage.
Numerous patents are held by others, including academic institutions and our competitors. Patent applications filed in
the United States after November 2000 generally will be published eighteen months after the filing date. However, since
patent applications continue to be maintained in secrecy for at least some period of time, both within the United States and
with regards to international patent applications, we cannot assure you that our technology does not infringe any patents or
patent applications held by third parties. We have, from time to time, been notified of, or have otherwise been made aware of,
claims that we may be infringing upon patents or other proprietary intellectual property owned by others. If it appears
necessary or desirable, we may seek licenses under such patents or proprietary intellectual property. Although patent holders
commonly offer such licenses, licenses under such patents or intellectual property may not be offered or the terms of any
offered licenses may not be reasonable.
Any claims, with or without merit, and regardless of whether we are successful on the merits, would be time-consuming,
result in costly litigation and diversion of technical and management personnel, cause shipment delays or require us to
develop non-infringing technology or to enter into royalty or licensing agreements. An adverse determination in a judicial or
administrative proceeding and failure to obtain necessary licenses or develop alternate technologies could prevent us from
manufacturing and selling our products, which would have a material adverse effect on our business, results of operations and
financial condition.
If we lose key personnel or fail to integrate replacement personnel successfully, our ability to manage our business
could be impaired.
Our future success depends upon the continued service of our key management, technical, sales, and other critical
personnel. Our officers and other key personnel are employees-at-will, and we cannot assure you that we will be able to
retain them. Key personnel have left our company in the past, and there likely will be additional departures of key personnel
from time to time in the future. The loss of any key employee could result in significant disruptions to our operations,
including adversely affecting the timeliness of product releases, the successful implementation and completion of company
initiatives, and the results of our operations. Competition for these individuals is intense, and we may not be able to attract,
assimilate or retain highly qualified personnel. Competition for qualified personnel in our industry and the San Francisco Bay
Area, as well as other geographic markets in which we recruit, is intense and characterized by increasing salaries, which may
increase our operating expenses or hinder our ability to recruit qualified candidates. In addition, the integration of
replacement personnel could be time consuming, may cause additional disruptions to our operations, and may be
unsuccessful.
If we fail to accurately forecast demand for our product and component requirements for the manufacture of our
product, we could incur additional costs or experience manufacturing delays and may experience lost sales or significant
inventory carrying costs.
We use quarterly and annual forecasts based primarily on our anticipated product orders to plan our manufacturing
efforts and determine our requirements for components and materials. It is very important that we accurately predict both the
demand for our product and the lead times required to obtain the necessary components and materials. Lead times for
components vary significantly and depend on numerous factors, including the specific supplier, the size of the order, contract
terms and current market demand for such components. If we overestimate the demand for our product, we may have excess
inventory, which would increase our costs. If we underestimate demand for our product and consequently, our component
and materials requirements, we may have inadequate inventory, which could interrupt our manufacturing, delay delivery of
our product to our customers and result in the loss of customer sales. Any of these occurrences would negatively impact our
business and operating results.
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We depend on sole source or limited source suppliers.
We rely on third parties to manufacture substantially all of the components used in our products, including optics, laser
diodes and crystals. We have some long term or volume purchase agreements with our suppliers and currently purchase
components on a purchase order basis. Some of our suppliers and manufacturers are sole or limited sources. In addition, some
of these suppliers are relatively small private companies whose operations may be disrupted or discontinued at any time.
There are risks associated with the use of independent manufacturers, including the following:
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unavailability of shortages or limitations on the ability to obtain supplies of components in the quantities that
we require;
delays in delivery or failure of suppliers to deliver critical components on the dates we require;
failure of suppliers to manufacture components to our specifications, and potentially reduced quality; and
inability to obtain components at acceptable prices.
Our business and operating results may suffer from the lack of alternative sources of supply for critical sole and limited
source components. The process of qualifying suppliers is complex, requires extensive testing with our products, and may be
lengthy, particularly as new products are introduced. New suppliers would have to be educated in our production processes.
In addition, the use of alternate components may require design alterations to our products and additional product testing
under FDA and relevant foreign regulatory agency guidelines, which may delay sales and increase product costs. Any failures
by our vendors to adequately supply limited and sole source components may impair our ability to offer our existing products,
delay the submission of new products for regulatory approval and market introduction, materially harm our business and
financial condition and cause our stock price to decline. Establishing our own capabilities to manufacture these components
would be expensive and could significantly decrease our profit margins. Our business, results of operations and financial
condition would be adversely affected if we are unable to continue to obtain components in the quantity and quality desired
and at the prices we have budgeted.
If our facilities were to experience catastrophic loss, our operations would be seriously harmed.
Our facilities could be subject to catastrophic loss such as fire, flood or earthquake. All of our research and
development activities, manufacturing, our corporate headquarters and other critical business operations are located near
major earthquake faults in Mountain View, California. Any such loss at any of our facilities could disrupt our operations,
delay production, shipments and revenue and result in large expense to repair and replace our facilities.
If we fail to maintain our relationships with health care providers, customers may not buy our products and our
revenue and profitability may decline. At the same time, relationships with these individuals and entities are the subject of
heightened scrutiny and may present the potential for healthcare compliance risks.
We market our products to numerous health care providers, including physicians, hospitals, ASC’s, government
affiliated groups and group purchasing organizations. We have developed and strive to maintain close relationships with
members of each of these groups who assist in product research and development and advise us on how to satisfy the full
range of surgeon and patient needs. We rely on these groups to recommend our products to their patients and to other
members of their organizations. The failure of our existing products and any new products we may introduce to retain the
support of these various groups could have a material adverse effect on our business, financial condition and results of
operations. In addition, our interactions, communications, and financial relationships with these individuals and entities
present potential healthcare compliance risks.
We are subject to government regulations which may cause us to delay or withdraw the introduction of new products
or new applications for our products.
The medical devices that we market and manufacture are subject to extensive regulation by the FDA and by foreign and
state governments. Under the Food, Drug and Cosmetic Act (“FDCA”) and the related regulations, the FDA regulates the
design, development, clinical testing, manufacture, labeling, sale, distribution and promotion of medical devices. Before a
new device can be introduced into the market, the product must be shown to meet regulatory requirements established by the
FDCA and implemented by the FDA. Unless otherwise exempt, a device manufacturer must obtain marketing “clearance”
through the 510(k) premarket notification process, or “approval” through the lengthier premarket approval application
(“PMA”) process. Not all devices are eligible for the 510(k) clearance process. Depending upon the type, complexity and
novelty of the device and the nature of the disease or disorder to be treated, the FDA process can take several years, require
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extensive clinical testing and result in significant expenditures. Even if regulatory clearance or approval is obtained, later
discovery of previously unknown safety issues may result in restrictions on the product, including withdrawal of the product
from the market. Other countries also have extensive regulations regarding clinical trials and testing prior to new product
introductions. Our failure to obtain government approvals or any delays in receipt of such approvals would have a material
adverse effect on our business, results of operations and financial condition.
The FDA imposes a broad range of additional requirements on medical device companies. Our products must be
produced in compliance with the Quality System Regulation (“QSR”) and our manufacturing facilities are subject to
establishment registration and device listing requirements from the FDA, and similar requirements from certain state
authorities, and ongoing periodic inspections by the FDA, including unannounced inspections for compliance with applicable
requirements. We are subject to monitoring, recordkeeping, and reporting obligations for medical device adverse events and
malfunctions; notification of our products’ defects or failure to comply with the FDA’s laser regulations; and reporting of
recalls, corrections, or removals of our products. The FDA also imposes requirements for the labeling of our products, and
places limitations on claims we are permitted to make about our products in promotional labeling. The Federal Trade
Commission has jurisdiction over the advertising of all of our products, which are non-restricted devices, and exercises
oversight in coordination with the FDA.
Noncompliance with the applicable requirements can result in, among other things, regulatory citations (including “483
Observations”) and Warning Letters, fines, injunctions, civil penalties, recall or seizure of products, total or partial
suspension of production, withdrawal of marketing approvals, and criminal prosecution. The FDA also has the authority to
request repair, replacement or refund of the cost of any device we manufacture or distribute. Any of these actions by the FDA
would materially and adversely affect our ability to continue operating our business and the results of our operations. Such
enforcement action can also result in negative publicity.
In addition, we are also subject to varying product standards, packaging requirements, labeling requirements, tariff
regulations, duties and tax requirements. As a result of our sales in Europe, we are required to have all products “CE” marked,
an international symbol affixed to all products demonstrating compliance with the European Medical Device Directive and
all applicable standards. While currently all of our released products are CE marked, continued certification is based on the
successful review of our quality system by our European Registrar during their annual audit. Any loss of certification would
have a material adverse effect on our business, results of operations and financial condition. There are a number of major
regulatory changes occurring in the regulation of medical devices in the EU. A new revision of the quality system regulation
(ISO 13485:2016) has been released that substantially increases the requirements for a medical device quality system. The
Medical Device Regulation (MDR) will replace the current medical device directive (93/42/EEC), and it substantially
changes the way that medical devices are brought to market in the EU and how they maintain compliance throughout the
product’s life cycle. Additionally, the new revision 4 of the clinical evaluation report guidance document (MEDDEV 2.7.1)
severely restricts the use of substantial equivalence for new products, resulting in the need for formal clinical trial data for
most new products. These changes will increase the cost for compliance and for product development, and they lengthen
product introduction cycles. Failure to comply with these changes can have an adverse effect on our ability to release new
products in a timely manner.
If required, clinical trials necessary to support a 510(k) or PMA application will be an expensive, lengthy, costly, and
uncertain process, and could result in delays in new product introductions or even an inability to release a product.
The clinical trials often required to obtain regulatory approvals for products such as ours are complex and expensive
and their outcomes are uncertain. If we were to embark upon clinical trials, we would incur substantial expense for, and
devote significant time to, these trials but could not be certain that the trials would ever support the commercial sale of a
product. We could suffer significant setbacks in clinical trials, even after earlier clinical trials showed promising results. Any
of our products could produce undesirable side effects that could cause us or regulatory authorities to interrupt, delay or halt
clinical trials of a product candidate. We, the FDA, or another regulatory authority could suspend or terminate clinical trials
at any time if they or we believed the trial participants faced unacceptable health risks.
If we fail to comply with the FDA’s quality system regulation and laser performance standards, our manufacturing
operations could be halted, and our business would suffer.
We are currently required to demonstrate and maintain compliance with the FDA’s QSR. The QSR is a complex
regulatory scheme that covers the methods and documentation of the design, testing, control, manufacturing, labeling, quality
assurance, packaging, storage and shipping of our products. Because our products involve the use of lasers, our products also
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are covered by a performance standard for lasers set forth in FDA regulations. The laser performance standard imposes
specific record-keeping, reporting, product testing and product labeling requirements. These requirements include affixing
warning labels to laser products, as well as incorporating certain safety features in the design of laser products. The FDA
enforces the QSR and laser performance standards through periodic unannounced inspections. We have been, and anticipate
in the future being, subject to such inspections. Our failure to take satisfactory corrective action in response to an adverse
QSR inspection or our failure to comply with applicable laser performance standards could result in enforcement actions,
including a public warning letter, a shutdown of our manufacturing operations, a recall of our products, civil or criminal
penalties, or other sanctions, which would cause our sales and business to suffer.
If we modify one of our FDA approved devices, we may need to submit a new 510(k), or potentially a PMA, and if
clearance or approval is not obtained, it would prevent us from selling our modified products or cause us to redesign our
products.
Any modifications to an FDA-cleared device that would significantly affect its safety or effectiveness or that would
constitute a major change in its intended use would require a new 510(k) clearance or possibly a PMA. We may not be able
to obtain additional 510(k) clearances or premarket approvals for new products or for modifications to, or additional
indications for, our existing products in a timely fashion, or at all. Delays in obtaining future clearances would adversely
affect our ability to introduce new or enhanced products in a timely manner, which in turn would harm our revenues and
future profitability. We have made modifications to our devices in the past and may make additional modifications in the
future that we believe do not or will not require additional clearances or approvals. If the FDA disagrees, and requires new
clearances or approvals for the modifications, we may be required to recall and to stop marketing the modified devices, which
could harm our operating results and require us to redesign our products.
Our products may be misused, which could harm our reputation and our business.
We market and sell our products for use by highly skilled physicians with specialized training and experience in the
treatment of eye-related disorders. We, and our distributors, generally offer but do not require purchasers or operators of our
products to attend training sessions, nor do we supervise the procedures performed with our products. The physicians who
operate our products are responsible for their use and the treatment regime for each individual patient. In addition, non-
physicians, particularly in countries outside of the United States, or poorly trained or inexperienced physicians, may make
use of our products. Our efforts to market our MicroPulse systems as a Fovea-friendly alternative to traditional continuous
wavelength systems or alternative treatment methods may result in users failing to implement adequate safety precautions
and thereby increase the risks associated with the misuse of our product. The lack of training and the purchase and use of our
products by non-physicians or poorly trained or inexperienced physicians may result in product misuse and adverse treatment
outcomes, which could harm our reputation and expose us to costly product liability litigation, or otherwise cause our
business to suffer.
Inability of customers to obtain credit or material increases in interest rates may harm our sales.
Some of our products are sold to health care providers in general practice. Many of these health care providers purchase
our products with funds they secure through various financing arrangements with third-party financial institutions, including
credit facilities and short-term loans. If availability of credit becomes more limited, or interest rates increase, these financing
arrangements may be harder to obtain or become more expensive for our customers, which may decrease demand for our
products. Any reduction in the sales of our products would cause our business to suffer.
Our products could be subject to recalls even after receiving FDA approval or clearance. A recall would harm our
reputation and adversely affect our operating results.
The FDA and similar governmental authorities in other countries in which we market and sell our products have the
authority to require the recall of our products in the event of material deficiencies or defects in the design or manufacture of
our products, or in other cases we may determine that we will recall a product because we have determined that the product is
violative, in order to avoid further enforcement action and protect the public health. A government mandated recall, or a
voluntary recall by us, could occur as a result of component failures, manufacturing errors or design defects, including
defects in labeling. A recall could divert management’s attention, cause us to incur significant expenses, harm our reputation
with customers and negatively affect our future sales.
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If product liability claims are successfully asserted against us, we may incur substantial liabilities that may adversely
affect our business or results of operations.
We may be subject to product liability claims from time to time. Our products are highly complex and some are used to
treat extremely delicate eye tissue. We believe we maintain adequate levels of product liability insurance. However, product
liability insurance is expensive and we might not be able to obtain product liability insurance in the future on acceptable
terms or in sufficient amounts to protect us, if at all. A successful claim brought against us in excess of our insurance
coverage could have a material adverse effect on our business, results of operations and financial condition.
Efforts to acquire additional companies or product lines may divert our managerial resources away from our
business operations, and if we complete additional acquisitions, we may incur or assume additional liabilities or
experience integration problems.
Since 1989, we have completed six acquisitions. As part of our growth strategy we seek to acquire businesses or
product lines for various reasons, including adding new products, adding new customers, increasing penetration with existing
customers, adding new manufacturing capabilities or expanding into new geographic markets. Our ability to successfully
grow through acquisitions depends upon our ability to identify, negotiate, complete and integrate suitable acquisitions and to
obtain any necessary financings. These efforts could divert the attention of our management and key personnel from our
business operations. If we complete future acquisitions, we may also experience:
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difficulties integrating any acquired products into our existing business;
difficulties in integrating an acquired company’s technologies, services, employees, customers, partners,
business operations and administrative and software management systems with ours;
delays in realizing the benefits of the acquired products;
diversion of our management’s time and attention from other business concerns;
adverse customer reaction to the product acquisition; and
increases in expenses.
Any one or more of these factors stated above could have a material adverse effect on our business, financial condition
or results of operations. Furthermore, acquisitions could materially impair our operating results by causing us to amortize
acquired assets, incur acquisition expenses and add debt.
We are subject to federal, state and foreign laws governing our business practices which, if violated, could result in
substantial penalties. Additionally, challenges to or investigation into our practices could cause adverse publicity and be
costly to respond to and thus could harm our business.
The Dodd-Frank Wall Street Reform and Consumer Protection Act requires us to track and disclose the source of
certain metals used in manufacturing which may stem from minerals (so called “conflict minerals”) which originate in the
Democratic Republic of the Congo or adjoining regions. These metals include tantalum, tin, gold and tungsten. These metals
are central to the technology industry and are present in some of our products as component parts. In most cases no
acceptable alternative material exists which has the necessary properties. It is not possible to determine the source of the
metals by analysis but instead a good faith description of the source of the intermediate components and raw materials must
be obtained. The components which incorporate those metals may originate from many sources and we purchase fabricated
products from manufacturers who may have a long and difficult-to-trace supply chain. As the spot price of these materials
varies, producers of the metal intermediates can be expected to change the mix of sources used, and components and
assemblies which we buy may have a mix of sources as their origin. We are required to carry out a diligent effort to
determine and disclose the source of these materials. There can be no assurance we can obtain this information from
intermediate producers who are unwilling or unable to provide this information or further identify their sources of supply or
to notify us if these sources change. These metals are subject to price fluctuations and shortages which can affect our ability
to obtain the manufactured materials we rely on at favorable terms or from consistent sources. These changes could have an
adverse impact on our ability to manufacture and market our devices and products.
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If we fail to comply with environmental requirements, our business, financial condition, operating results and
reputation could be adversely affected.
Our products and operations are subject to various federal, state, local and foreign environmental laws and regulations,
including those governing the use, storage, handling, exposure to, and disposal of hazardous materials and a large and
growing body of international standards which govern the design, manufacture, materials content and sourcing, testing,
certification, packaging, installation, use and disposal of our products. We must continually keep abreast of these standards
and requirements and integrate compliance to these with the development and regulatory documentation for our products.
Failure to meet these standards could limit the ability to market our products in those regions which require compliance to
such standards or subject us to fines and penalties. Examples of such standards include laws governing the hazardous
material content of our devices and products, such as the European Union (“EU”) Directive 2011/65/EU relating to
Restrictions on the Use of Certain Hazardous Substances “RoHS Directive, and the EU Directive 2012/19/EU on Waste
Electrical and Electronic Equipment or “WEEE Directive”. Similar laws and regulations have been passed or are pending in
several other jurisdictions and may be enacted in other regions, including in the United States, and we are, or may in the
future be, subject to these laws and regulations.
Our failure to comply with past, present and future similar laws could result in reduced sales of our devices and
products, inventory write-offs, reputational damage, penalties and other sanctions, any of which could harm our business and
financial condition. We also expect that our devices and products will be affected by new environmental laws and regulations
on an ongoing basis. New environmental laws and regulations will likely result in additional costs and may increase penalties
associated with violations or require us to change the content of our devices and products or how they are manufactured,
which could have a material adverse effect on our business, operating results and financial condition.
Risks Relating to Our Ownership of Our Common Stock
Our stock price has been and may continue to be volatile and an investment in our common stock could suffer a
decline in value.
The trading price of our common stock has been subject to wide fluctuations in response to a variety of factors, some of
which are beyond our control, including changes in foreign currency exchange rates, quarterly variations in our operating
results, announcements by us or our competitors of new products or of significant clinical achievements, changes in market
valuations of other similar companies in our industry and general market conditions. For the fiscal year ended December 31,
2016, the trading price of our common stock fluctuated from a low of $8.80 per share to a high of $16.39 per share. For the
fourth fiscal quarter ended December 31, 2016, the trading price of our common stock fluctuated from $12.58 per share to a
high of $16.26 per share. There can be no assurance that our common stock trading price will not suffer declines. Our
common stock may experience an imbalance between supply and demand resulting from low trading volumes and therefore
broad market fluctuations could have a significant impact on the market price of our common stock regardless of our
performance.
Future sales and issuances of securities could negatively affect our stock price and dilute the ownership interest of
our existing investors.
Future sales or issuances of securities by us could decrease the value of our common stock, dilute stockholders’ voting
power and reduce future potential earnings per share. To raise capital, we may sell common stock, convertible securities or
other equity-linked securities in one or more transactions at prices and in a manner we determine from time to time. If we sell
additional equity securities, our existing stockholders may be materially diluted. Additionally, new investors could gain rights,
preferences and privileges senior to those of existing holders of our common stock. We may also issue debt securities, which
may impose restrictive covenants on our operations or otherwise adversely affect the holdings or the rights of our
stockholders.
Sales or issuances of a substantial amount of securities, or the perception that such sales could occur, may adversely
affect prevailing market prices for our common stock. As of December 31, 2016, we had 11,304,736 shares of common stock
outstanding, all of which shares, other than shares held by our directors, our executive officers and certain investment funds
affiliated with BlueLine Partners, L.L.C. were, and continue to be, eligible for sale in the public market, subject in some
cases to compliance with the requirements of Rule 144, including the volume limitations and manner of sale requirements.
Future resales of our common stock by our existing stockholders could cause the market price of our common stock to
decline.
As of December 31, 2016, holders of an aggregate of 2,060,688 shares of our common stock have rights, subject to
some conditions, to require us to file registration statements covering their shares or to include their shares in registration
25
statements that we may file for ourselves or our other stockholders. In addition, the shares of common stock subject to
outstanding options and restricted stock units under our 2008 Equity Incentive Plan and the shares reserved for future
issuance under the Incentive Plan will become eligible for sale in the public markets in the future, subject to certain legal and
control limitations.
We may sell shares or other securities in any offering at a price per share that is less than the price per share paid by
existing investors, and investors purchasing shares or other securities in the future could have rights superior to existing
stockholders. The price per share at which we sell additional shares of our common stock, or securities convertible or
exchangeable into common stock, in future transactions may be higher or lower than the price per share paid by existing
investors.
Because we do not intend to pay dividends, stockholders will benefit from an investment in our common stock only if
it appreciates in value.
We expect to retain any earnings for use to further develop our business, and do not expect to declare cash dividends on
our common stock in the foreseeable future. The declaration and payment of any such dividends in the future depends upon
our earnings, financial condition, capital needs and other factors deemed relevant by the board of directors, and may be
restricted by future agreements with lenders. In addition, our loan facility with Silicon Valley Bank restricts us from paying
any dividends or making any other distribution or payment on account of our common stock. As a result, the success of an
investment in our common stock will depend entirely upon any future appreciation. There is no guarantee that our common
stock will appreciate in value or even maintain the price at which stockholders have purchased their shares.
If securities or industry analysts do not continue to publish research or publish incorrect or unfavorable research
about our business, our stock price and trading volume could decline.
The trading market for our common stock depends in part on the research and reports that securities or industry analysts
publish about us, our market and our competitors. If no or few securities or industry analysts cover our Company, the trading
price for our stock could be negatively impacted. If one or more of the analysts who covers us downgrades our stock or
publishes incorrect or unfavorable research about our business, our stock price could decline. If one or more of these analysts
ceases coverage of our Company or fails to publish reports on us regularly, demand for our stock could decrease, which could
cause our stock price or trading volume to decline.
Ownership of our common stock is concentrated among a few investors, which may affect the ability of a third party
to acquire control of us. Substantial sales by such investors could cause our stock price to decline.
Our directors, executive officers, current five percent or greater stockholders and affiliated entities together beneficially
own a significant portion of our common stock outstanding as of December 31, 2016. Having such a concentration of
ownership may have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from
seeking to acquire, a majority of our outstanding common stock or control of our board of directors through a proxy
solicitation.
Our ability to raise capital in the future may be limited, and our failure to raise capital when needed could prevent
us from growing.
Our business and operations may consume resources faster than we anticipate. In the future, we may need to raise
additional funds to invest in future growth opportunities. Additional financing may not be available on favorable terms, if at
all. If adequate funds are not available on acceptable terms, we may be unable to invest in future growth opportunities, which
could seriously harm our business and operating results.
As a public company, we are obligated to develop and maintain proper and effective internal control over financial
reporting. We may not complete our analysis of our internal control over financial reporting in a timely manner, or these
internal controls may not be determined to be effective, which may adversely affect investor confidence in our company
and, as a result, the value of our common stock.
We are required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among
other things, the effectiveness of our internal control over financial reporting. This assessment must include disclosure of any
material weaknesses identified by our management in our internal control over financial reporting. We may experience
difficulty in meeting these reporting requirements in a timely manner, particularly if material weaknesses or significant
deficiencies persist. As of July 2, 2016, we became an accelerated filer and effective with our Annual Report covering our
fiscal year 2016, our independent registered public accounting firm will be required to formally attest to the effectiveness of
26
our internal control over financial reporting pursuant to Section 404 as defined in the Exchange Act. If we are unable to
comply with the requirements of Section 404 in a timely manner, the market price of our stock could decline and we could be
subject to sanctions or investigations by the NASDAQ Stock Market, the SEC or other regulatory authorities, which could
require additional financial and management resources.
Any failure to develop or maintain effective controls, or any difficulties encountered in their implementation or
improvement, could harm our operating results or cause us to fail to meet our reporting obligations. Any failure to implement
and maintain effective internal controls also could adversely affect the results of periodic management evaluations regarding
the effectiveness of our internal control over financial reporting. Ineffective disclosure controls and procedures or internal
control over financial reporting could also cause investors to lose confidence in our reported financial and other information,
which could likely have a negative effect on the trading price of our common stock.
Implementing any appropriate changes to our internal controls may require specific compliance training of our directors,
officers and employees, entail substantial costs in order to modify our existing accounting systems, and take a significant
period of time to complete. Such changes may not, however, be effective in maintaining the adequacy of our internal controls,
and any failure to maintain that adequacy, or consequent inability to produce accurate financial statements on a timely basis,
could increase our operating costs and could materially impair our ability to operate our business. In the event that we are not
able to demonstrate compliance with Section 404 of the Sarbanes-Oxley Act in a timely manner, that our internal controls are
perceived as inadequate or that we are unable to produce timely or accurate financial statements, investors may lose
confidence in our operating results and our stock price could decline.
Our charter documents, anti-takeover provisions of Delaware law, and contractual provisions could delay or prevent
an acquisition or sale of our company.
Our Certificate of Incorporation empowers the board of directors to establish and issue a class of preferred stock, and to
determine the rights, preferences and privileges of the preferred stock. These provisions give the board of directors the ability
to deter, discourage or make more difficult a change in control of our company, even if such a change in control could be
deemed in the interest of our stockholders or if such a change in control would provide our stockholders with a substantial
premium for their shares over the then-prevailing market price for the common stock. Our certificate of incorporation and
bylaws contain other provisions that could have an anti-takeover effect, including the following:
•
•
•
allow the authorized number of directors to be changed only by resolution of our board of directors;
only our board of directors is authorized to fill vacant directorships, including newly created seats;
special meetings of our stockholders may be called only by our board of directors or by a committee of our
board of directors, thus prohibiting a stockholder from calling a special meeting;
•
•
stockholders must give advance notice to nominate directors or propose other business; and
stockholders are not permitted to cumulate votes in the election of directors.
In addition, we are generally subject to the anti-takeover provisions of Section 203 of the Delaware General
Corporation Law, which regulates corporate acquisitions. These provisions could discourage potential acquisition proposals
and could delay or prevent a change in control transaction. They could also have the effect of discouraging others from
making tender offers for our common stock or prevent changes in our management.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We lease a 37,166 square feet facility in Mountain View, California pursuant to a lease that is scheduled to expire in
February 2019.
This facility is being substantially utilized for all of our manufacturing, research and development efforts and also
serves as our corporate headquarters. Management believes that these facilities are adequate for our current needs and that
suitable additional space or an alternative space would be available as needed in the future on commercially reasonable terms.
27
Item 3. Legal Proceedings
From time to time, we may be involved in legal proceedings arising in the ordinary course of business. Although the
results of litigation and claims cannot be predicted with certainty, we currently believe that the final outcome of these
ordinary course matters will not have a material adverse effect on our business, operating results, financial condition or cash
flows. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs,
diversion of management resources and other factors.
Item 4. Mine Safety Disclosures
Not applicable.
28
PART II
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters, and Issuer Purchases of Equity
Securities
Market Information for Common Equity
Our common stock is currently and since our initial public offering on February 15, 1996, has been quoted on the
NASDAQ Global Market under the symbol “IRIX”. The following table sets forth for the periods indicated the high and low
sales prices for our common stock, as reported on the NASDAQ Global Market.
Fiscal 2016
Fourth Quarter ...................................................................... $
Third Quarter........................................................................ $
Second Quarter ..................................................................... $
First Quarter ......................................................................... $
Fiscal 2015
Fourth Quarter ...................................................................... $
Third Quarter........................................................................ $
Second Quarter ..................................................................... $
First Quarter ......................................................................... $
High
Low
16.26 $
16.39 $
15.51 $
10.70 $
10.21 $
8.67 $
11.09 $
11.28 $
12.58
13.52
10.02
8.80
7.43
6.42
7.64
8.46
On March 7, 2017, the closing price on the NASDAQ Global Market for our common stock was $14.61 per share. As
of March 7, 2017, there were approximately 41 holders of record (not in street name) of our common stock. Because many of
our shares of common stock are held by brokers and other institutions on behalf of our stockholders, we are unable to
estimate the total number of stockholders represented by these record holders.
Dividend Policy
We have never paid cash dividends on our common stock. We currently intend to retain any earnings for use in our
business and do not anticipate paying cash dividends in the foreseeable future.
Sales of Unregistered Securities
None.
Use of Proceeds
On December 14, 2016, we sold 1,332,500 shares of the Company’s common stock (including 172,500 shares of
common stock from the exercise of the overallotment option of shares granted to the underwriters) at a price of $14.00 per
share. The offer and sale of all of the shares in the public offering were registered under the Securities Act pursuant to a
registration statement on Form S-3 (File No. 333- 213094). Roth Capital Partners, LLC acted as the underwriter. The net
proceeds to the Company after deducting estimated underwriting discounts and commissions will be approximately
$17,404,100. There has been no material change in the planned use of proceeds as described in our final prospectus filed with
the SEC on December 9, 2016 pursuant to Rule 424(b) of the Securities Act. We invested the funds received in registered
money market funds.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Not applicable.
Item 6. Selected Financial Data
Not applicable.
29
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
IRIDEX Corporation is an ophthalmic medical technology company focused on the development and
commercialization of breakthrough products and procedures used to treat sight-threatening eye conditions, including
glaucoma and retinal diseases. Certain of our products are powered by our proprietary MicroPulse technology, which is a
method of delivering laser energy using a mode which chops the continuous wave laser beam into short, microsecond-long
laser pulses. Our products consist of laser consoles, delivery devices and consumable instrumentation, including laser probes.
Our laser consoles consist of the following product lines:
• Glaucoma – This product line includes our recently introduced Cyclo G6 laser system used for the treatment of
glaucoma;
• Medical Retina – Our medical retina product line includes our IQ 532 and IQ 577 laser photocoagulation systems,
which are used for the treatment of diabetic macular edema and other retinal diseases; and
• Surgical Retina – Our surgical retina line of products includes our OcuLight TX, OcuLight SL, OcuLight SLx,
OcuLight GL and OcuLight GLx laser photocoagulation systems. These systems are often used in vitrectomy
procedures, which are used to treat proliferative diabetic retinopathy, macular holes, retinal tears and detachments.
Our business generates recurring revenues through sales of consumable products, predominantly single-use laser probe
devices and other instrumentation, as well as repair, servicing and extended service contracts for our laser systems. Our laser
probes consist of the following product lines:
• Glaucoma – Probes used in our glaucoma product line include our recently patented MicroPulse P3 (“MP3”) probe
and G-Probe; and
• Surgical Retina – Our surgical retina probes include our EndoProbe family of products used in vitrectomy
procedures.
Ophthalmologists typically use our laser systems in hospital OR and ambulatory surgical centers (“ASCs”), as well as
their offices and clinics. In the ORs and ASCs, ophthalmologists use our laser systems with either an indirect laser
ophthalmoscope or a consumable, single use MP3 probe, G-Probe or EndoProbe.
Our products are sold in the United States predominantly through a direct sales force and internationally through
independent distributors. Total revenues in 2016, 2015 and 2014 were $46.2 million, $41.8 million and $42.8 million,
respectively. We generated net (loss) income of $(11.8) million, $0.5 million and $10.0 million in 2016, 2015 and 2014,
respectively.
Sales to international distributors are made on open credit terms or letters of credit and are currently denominated in
U.S. dollars and accordingly, are not subject to risks associated with currency fluctuations. However, increases in the value of
the US dollar against any local currencies could cause our products to become relatively more expensive to customers in a
particular country or region, leading to reduced revenue or profitability in that country or region.
Cost of revenues consists primarily of the cost of components and sub-systems, assembling, packaging, shipping and
testing components at our facility, direct labor and associated overhead; warranty, royalty and amortization of intangible
assets and depot service costs.
Research and development expenses consist primarily of personnel costs, materials to support new product
development and research support provided to clinicians at medical institutions developing new applications which utilize
our products and regulatory expenses. Research and development costs have been expensed as incurred.
Sales and marketing expenses consist primarily of costs of personnel, sales commissions, travel expenses, advertising
and promotional expenses.
General and administrative expenses consist primarily of costs of personnel, legal, accounting and other public
company costs, insurance and other expenses not allocated to other departments.
30
On August 12, 2016, we filed a universal shelf registration statement to offer up to $50.0 million of our securities. The
shelf registration statement also covers the resale of the shares held by investment funds affiliated with BlueLine Partners,
L.L.C. The registration statement was declared effective by the SEC on August 26, 2016. In December 2016 and January
2017, we completed a registered public offering under this shelf registration statement of 1,332,500 shares of our common
stock for net proceeds of $17.4 million after deducting underwriting discounts and commissions of approximately $1.1
million. The 1,332,500 shares include the exercise in full by the underwriters of their option to purchase an additional
172,500 shares of our common stock.
Results of Operations - 2016, 2015 and 2014
Our fiscal year ends on the Saturday closest to December 31. Fiscal 2016 ended on December 31, 2016, fiscal 2015
ended on January 2, 2016 and fiscal 2014 ended on January 3, 2015. Consequently, fiscal years 2016 and 2015 included only
52 weeks of operations while fiscal year 2014 included 53 weeks.
The following table sets forth certain operating data as a percentage of revenue for the periods indicated.
Percentage of Revenue
Years Ended
FY 2015
January 2,
2016
FY 2016
December 31,
2016
FY 2014
January 03,
2015
Revenues................................................................
Cost of revenues ....................................................
Gross margin .........................................................
Operating expenses:
Research and development ....................................
Sales and marketing...............................................
General and administrative....................................
Impairment of intangible assets.............................
Total operating expenses .......................................
(Loss) income from operations..............................
Other (expense) income, net..................................
(Loss) income from operations before benefit
from income taxes .................................................
Provision for (benefit from) income taxes.............
Net (loss) income...................................................
100.0%
54.9%
45.1%
11.6%
22.3%
16.5%
0.3%
50.7%
(5.6%)
(0.2%)
(5.8%)
19.6%
(25.4%)
100.0%
52.2%
47.8%
12.5%
21.3%
13.3%
0.0%
47.1%
0.7%
0.0%
0.7%
(0.4%)
1.1%
100.0%
50.0%
50.0%
10.8%
19.1%
14.1%
0.0%
44.0%
6.0%
(2.9%)
3.1%
(20.3%)
23.4%
Comparison of 2016 and 2015
Revenues.
Our total revenues increased $4.4 million or 10.5% from $41.8 million in 2015 to $46.2 million in 2016. The
increase is due primarily to an increase in our international system sales and to a lesser extent, our domestic system sales.
This increase in our system sales is due to an increase in sales of our flagship product Cyclo G6 lasers, which was partially
offset by a decrease in sales of our legacy products, mainly in the US. Our recurring revenues also increased, mainly due to
the increase in sales of our Cyclo G6 probes, partially offset by a decrease in sales of our legacy probes.
(in millions)
Systems – domestic ..................................................... $
Systems – international ...............................................
Recurring revenues .....................................................
Total revenues ............................................................. $
Gross Profit.
FY 2016
FY 2015
10.3 $
13.7
22.2
46.2 $
Change in $ Change in %
0.1
2.1
2.2
4.4
1.0%
18.1%
11.0%
10.5%
10.2 $
11.6
20.0
41.8 $
Gross profit was $20.8 million in 2016 compared with $20.0 million in 2015, an increase of $0.9 million or 4.4%.
Gross margin, which is defined as gross profit as a percentage of revenues, was 45.1% in 2016 compared with 47.8% in 2015,
31
a decrease of 2.7 percentage points. The decrease in gross margin was attributable primarily to an unfavorable shift in
geographic mix; our international sales which are lower margin sales, increased versus our domestic sales. We are also
continuing to experience price compression on our international sales due to the strength of the US dollar.
Gross margins are expected to continue to fluctuate due to changes in the relative proportions of domestic and
international sales, the product mix of sales, manufacturing variances, total unit volume changes that lead to greater or lesser
production efficiencies and a variety of other factors.
Research and Development.
R&D expenses increased $0.2 million or 2.9% from $5.2 million in 2015 to $5.4 million in 2016. The increase in
spending was attributable primarily to an increase in investments in headcount and associated costs. The increase in
headcount reflects our continuing investment in enhancements of existing products as well as development associated with
bringing new products to market.
Sales and Marketing.
Sales and marketing expenses increased $1.4 million or 15.5%, from $8.9 million in 2015 to $10.3 million in 2016. The
increase was attributable primarily to an increase in headcount and associated costs, an increase in commissions, an increase
in trade shows, as well as an increase in other general selling and marketing expenses to support growth in revenues.
General and Administrative.
General and administrative expenses increased $2.1 million or 37.6%, from $5.6 million in 2015 to $7.6 million in
2016. The increase in spending was attributable primarily to an increase in severance costs, an increase in non-cash stock-
based compensation charges, an increase in bonus and profit sharing, an increase in consulting and temporary employees, an
increase in legal expenses, an increase in audit and tax expenses, and an increase in public company expenses. We expect an
increase in our audit and tax expenses, as well as other public company expenses, as a result of the change in our filing status
from a small reporting company to an accelerated filer.
Impairment of intangible assets.
Impairment of intangible assets which increased $0.1 million was attributable primarily to the impairment of
Ocunetics assets.
Other Income (Expense).
Other income (expense) totaled $0.1 million in 2016 and was attributable to an increase in the fair value re-
measurement of the contingent earn-out liabilities of our other acquisition.
Income Taxes.
Based on our current fiscal year’s performance and our forecast of future losses, it is more likely than not that we will
not realize our deferred tax assets. Therefore we recorded a full valuation allowance against all of our deferred tax assets. We
recorded a provision for income taxes of $9.1 million in 2016 compared to a benefit from income taxes of $0.2 million in
2015, which was attributed primarily to the establishment of a valuation allowance for the deferred tax asset.
32
Comparison of 2015 and 2014
Revenues.
Our total revenues decreased $1.1 million or 2.5% from $42.8 million in 2014 to $41.8 million in 2015. Our fiscal year
2015 revenues were impacted by reduced shipments of laser systems throughout the second and third quarters of 2015 as a
result of supply chain issues. During the second quarter of 2015, we experienced production difficulties as we continued to
increase production for certain legacy and new product offerings to meet increased sales volumes. These production
difficulties manifested themselves as quality issues and we reduced shipments, particularly to international distributors,
which had a negative impact on sales in 2015. In addition, our international business continued to be negatively impacted by
the changes in foreign currency exchange rates. As a result, we experienced a decrease in our international systems sales,
which was partially offset by an increase in our domestic systems sales. Our total recurring revenues increased as a result of
an increase in our domestic disposables, mainly fueled by the sales of the Cyclo G6 MP3 probes, partially offset by a
decrease in our international disposables, and service and support.
(in millions)
Systems – domestic..................................................... $
Systems – international...............................................
Recurring revenues .....................................................
Total revenues............................................................. $
10.2 $
11.6
20.0
41.8 $
FY 2015
FY 2014
Change in $ Change in %
0.2
(1.9)
0.7
(1.0)
1.8%
(14.0%)
3.4%
(2.5%)
10.0 $
13.5
19.3
42.8 $
Gross Profit.
Gross profit was $20.0 million in 2015 compared with $21.4 million in 2014, a decrease of $1.4 million or 6.8%. Gross
margin, which is defined as gross profit as a percentage of revenues, was 47.8% in 2015 compared with 50.0% in 2014, a
decrease of 2.2 percentage points. The decrease in gross margin was attributable to special introductory prices for the Cyclo
G6 glaucoma laser system, product mix, and lower manufacturing overhead absorption due to the decrease in revenues
resulting from supply chain issues encountered in the second and third quarters of 2015.
Research and Development.
R&D expenses increased $0.6 million or 12.6% from $4.6 million in 2014 to $5.2 million in 2015. The increase in
spending was attributable primarily to an increase in investments in headcount and associated costs, as well as ongoing
investments in new product development. In 2015, we incurred additional expenditures related to solving the production and
quality issues we experienced during the second and third quarters of 2015.
Sales and Marketing.
Sales and marketing expenses increased $0.7 million or 9.1%, from $8.2 million in 2014 to $8.9 million in 2015. The
increase in spending was attributable primarily to an increase in commissions as a result of an increase in commission rates to
incentivize product sales mix, as well as an increase in other general selling and marketing expenses to support growth in
revenues.
General and Administrative.
General and administrative expenses decreased $0.5 million or 8.0%, from $6.0 million in 2014 to $5.6 million in
2015. The decrease in spending was attributable primarily to a decrease in non-cash stock-based compensation charges, a
decrease in bonus and profit sharing and a decrease in severance costs, offset in part by an increase in legal expenses.
Other Income (Expense).
Other income (expense) consisting primarily of expense recorded for the fair value re-measurement of the contingent
earn-out liabilities incurred as a result of our acquisitions, was $5 thousand in 2015 compared to $1.3 million in 2014. The
decrease in re-measurement of the contingent earn-out was due to a decrease in expected future revenues to be generated
from these acquisitions.
Income Taxes.
We recorded a benefit from income taxes of $0.2 million in 2015 compared to a benefit from income taxes of $8.7
million in 2014.
33
Liquidity and Capital Resources
Liquidity is our ability to generate sufficient cash flows from operating activities to meet our obligations and
commitments. In addition, liquidity includes the ability to obtain appropriate financing or to raise capital.
Comparison of 2016 and 2015
As of December 31, 2016, we had cash and cash equivalents of $23.7 million, no debt and working capital of $37.4
million compared to cash and cash equivalents of $10.0 million, no debt and working capital of $23.3 million as of January 2,
2016.
During 2016, net cash of $0.1 million was used in operating activities, primarily from our net loss of $11.7 million, and
operating assets and liabilities consumed $0.2 million net cash, primarily from an increase in accounts receivable of $0.9
million, an increase in inventory of $0.5 million, a decrease in accounts payable of $0.2 million, partially offset by an
increase in accrued compensation of $0.8 million, an increase in accrued expenses of $0.5 million and a net change in other
operating assets and liabilities of $0.1 million. This was partially offset by the add back of the following non-cash items -
decrease in deferred income taxes of $9.0 million, stock-based compensation of $1.8 million, depreciation and amortization
of $0.6 million and other non-cash items of $0.3 million. We used $1.5 million net cash in investing activities, $1.1 million
on capital expenditures and $0.4 million to pay a contingent earn-out liability arising from our acquisitions. $15.4 million net
cash was provided by financing activities, which consisted of $14.8 million net proceeds arising from the issuance of
common stock and $0.7 million from exercises of stock options, partially offset by $0.1 million to pay for payroll taxes
related to net shares settlement of equity awards and $0.1 million to purchase stock under our stock repurchase program.
We believe our existing cash and cash equivalents will be sufficient to meet our anticipated cash needs over the next 12
months.
Comparison of 2015 and 2014
As of January 2, 2016, we had cash and cash equivalents of $10.0 million, no debt and working capital of $23.3 million
compared to cash and cash equivalents of $13.3 million, no debt and working capital of $25.9 million as of January 3, 2015.
During 2015, net cash of $0.6 million was used in operating activities. Changes in operating assets and liabilities
consumed $2.3 million, net cash, primarily from purchases of inventory in the amount of $2.0 million and an increase in
accounts receivable in the amount of $1.0 million, partially offset by net income of $0.5 million and the add back of non-cash
items of $1.3 million. We used $1.3 million net cash in investing activities. $0.9 million on capital expenditures and $0.4
million to pay the contingent earn-out liability arising from our acquisitions. We used $1.4 million net cash in financing
activities; which consisted of $1.6 million used to purchase stock under our stock repurchase program, $0.6 million to pay
payroll withholding taxes related to net shares settlement of equity awards and $0.3 million to pay for the cancellation of an
employee stock option, which was partially offset by $1.0 million generated from exercises of stock options.
Contractual Payment Obligations
As of December 31, 2016, our contractual payment obligations that were fixed and determinable to third parties for
non-cancelable operating leases, contract manufacturers and other purchase commitments were as follows (in thousands):
Operating leases payments ............................................... $
Commitments to contract manufacturers and suppliers ...
Total contractual cash obligations.................................... $
2,366 $
8,527
10,893 $
1,068 $
7,440
8,508 $
1,295 $
1,087
2,382 $
3 $
—
3 $
—
—
—
Total
<1 year
1-3 years
3-5 years
More than 5
years
Critical Accounting Policies
Revenue Recognition.
Our revenues arise from the sale of laser consoles, delivery devices, consumables and service and support activities.
Revenue from product sales is recognized upon receipt of a purchase order and product shipment provided that no significant
34
obligations remain and collectibility is reasonably assured. Shipments are generally made with Free-On-Board (“FOB”)
shipping point terms, whereby title passes upon shipment from our dock. Any shipments with FOB receiving point terms are
recorded as revenue when the shipment arrives at the receiving point. Cost is recognized as product sales revenue is
recognized. Our sales may include post-sales obligations for training or other deliverables. For revenue arrangements such as
these, we recognize revenue in accordance with Accounting Standards Codification (“ASC”) 605, “Revenue Recognition,
Multiple-Element Arrangements”. We allocate revenue among deliverables in multiple-element arrangements using the
relative selling price method. Revenue allocated to each element is recognized when the basic revenue recognition criteria is
met for each element. We are required to apply a hierarchy to determine the selling price to be used for allocating revenue to
deliverables: (i) vendor-specific objective evidence of selling price (“VSOE”), (ii) third-party evidence of selling price
(“TPE”) and (iii) best estimate of the selling price (“ESP”). In general, we are unable to establish VSOE or TPE for all of the
elements in the arrangement; therefore, revenue is allocated to these elements based on the our ESP, which we determine
after considering multiple factors such as management approved pricing guidelines, geographic differences, market
conditions, competitor pricing strategies, internal costs and gross margin objectives. These factors may vary over time
depending upon the unique facts and circumstances related to each deliverable. As a result, our ESP for products and services
could change. Revenues for post-sales obligations are recognized as the obligations are fulfilled.
In international regions, we utilize distributors to market and sell our products. We recognize revenue upon shipment
for sales to these independent, third-party distributors as we have no continuing obligations subsequent to shipment.
Generally our distributors are responsible for all marketing, sales, installation, training and warranty labor coverage for our
products. Our standard terms and conditions do not provide price protection or stock retention rights to any of our
distributors.
Royalty revenues are typically based on licensees’ net sales of products that utilize our technology and are recognized
as earned in accordance with the contract terms when royalties from licensees can be reliably measured and collectibility is
reasonably assured, such as upon the earlier of the receipt of a royalty statement from the licensee or upon payment by the
licensee.
Inventories.
Inventories are stated at the lower of cost or market and include on-hand inventory physically held at our facility, sales
demo inventory and service loaner inventory. Cost is determined on a standard cost basis which approximates actual cost on a
first-in, first-out (“FIFO”) method. Lower of cost or market is evaluated by considering obsolescence, excessive levels of
inventory, deterioration and other factors. Adjustments to reduce the cost of inventory to its net realizable value, if required,
are made for estimated excess, obsolete or impaired inventory and are charged to cost of revenues. Once the cost of the
inventory is reduced, a new lower-cost basis for that inventory is established, and subsequent changes in facts and
circumstances do not result in the restoration or increase in that newly established cost basis. Factors influencing these
adjustments include changes in demand, product life cycle and development plans, component cost trends, product pricing,
physical deterioration and quality issues. Revisions to these adjustments would be required if these factors differ from our
estimates.
Sales Returns Allowance and Allowance for Doubtful Accounts.
We estimate future product returns related to current period product revenue. We analyze historical returns, and
changes in customer demand and acceptance of our products when evaluating the adequacy of the sales returns allowance.
Significant management judgment and estimates must be made and used in connection with establishing the sales returns
allowance in any accounting period. Material differences may result in the amount and timing of our revenue for any period if
management made different judgments or utilized different estimates. Our provision for sales returns is recorded net of the
associated costs. The balance for the provision of sales returns have not historically been material.
Similarly management must make estimates regarding the uncollectibility of accounts receivable. We are exposed to
credit risk in the event of non-payment by customers to the extent of amounts recorded on the consolidated balance sheets.
As sales levels increase the level of accounts receivable would likely also increase. In addition, in the event that customers
were to delay their payments to us, the levels of accounts receivable would likely also increase. We maintain allowances for
doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. The
allowance for doubtful accounts is based on past payment history with the customer, analysis of the customer’s current
financial condition, the aging of the accounts receivable balance, customer concentration and other known factors.
35
Warranty.
We provide reserves for the estimated cost of product warranties at the time revenue is recognized based on historical
experience of known product failure rates and expected material and labor costs to provide warranty services. We generally
provide a two-year warranty on our products. Additionally, from time to time, specific warranty accruals may be made if
unforeseen technical problems arise. Alternatively, if estimates are determined to be greater than the actual amounts
necessary, we may reverse a portion of such provisions in future periods. Actual warranty costs incurred have not materially
differed from those accrued. Our warranty policy is applicable to products which are considered defective in their
performance or fail to meet the product specifications. Warranty costs are reflected in the consolidated statements of
operations as cost of revenues.
Income Taxes.
We account for income taxes in accordance with ASC 740, “Income Taxes” (“ASC 740”), which requires that deferred
tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and
tax bases of recorded assets and liabilities. Under ASC 740, the liability method is used in accounting for income taxes.
Deferred tax assets and liabilities are determined based on the differences between financial reporting and the tax basis of
assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are
expected to reverse. ASC 740 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely
than not that some or all of the deferred tax asset will not be realized. We annually evaluate the realizability of our deferred
tax assets by assessing our valuation allowance and by adjusting the amount of such allowance, if necessary. The factors used
to assess the likelihood of realization include our forecast of future taxable income and available tax planning strategies that
could be implemented to realize the net deferred tax assets. In 2014, we released the valuation allowance against most of our
deferred tax assets except that we retained a valuation allowance for certain deferred tax assets associated with our California
research and development credit (“CA R&D credit”). In 2016, management has determined that the negative evidence
overweighs the positive evidence and that it is “more-likely-than-not” that the benefit of all of its deferred tax assets will not
be realized. Accordingly, in the fourth quarter of fiscal year 2017, we provided a full valuation allowance on its federal and
states deferred tax assets.
Accounting for Uncertainty in Income Taxes.
We account for uncertain tax positions in accordance with ASC 740. ASC 740 seeks to reduce the diversity in practice
associated with certain aspects of measurement and recognition in accounting for income taxes. ASC 740 prescribes a
recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax provision
that an entity takes or expects to take in a tax return. Additionally, ASC 740 provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods, disclosures, and transition. Under ASC 740, an entity may
only recognize or continue to recognize tax positions that meet a "more-likely-than-not" threshold. In accordance with our
accounting policy, we recognize accrued interest and penalties related to unrecognized tax benefits as a component of income
tax expense. There were no accrued interest and penalties during the year ended December 31, 2016.
Accounting for Stock-Based Compensation.
We account for stock-based compensation granted to employees and directors, including employees stock option
awards, restricted stock and restricted stock units at grant date, based on the fair value of the award. Stock-based
compensation is recognized as expense on a ratable basis over the requisite service period of the award.
We value options using the Black-Scholes option pricing model. Restricted stock and time-based restricted stock units
are valued at the grant date fair value of the underlying common shares. Performance-based restricted stock units are valued
using the Monte Carlo simulation model. The Black-Scholes option pricing model requires the use of highly subjective and
complex assumptions which determine the fair value of share-based awards, including the option’s expected term and the
price volatility of the underlying stock. The Monte Carlo simulation model incorporates assumptions for the holding period,
risk-free interest rate, stock price volatility and dividend yield.
Recently Issued and Adopted Accounting Standards
Recently Issued and Adopted Accounting Standards.
In May 2014, as part of its ongoing efforts to assist in the convergence of accounting principles generally accepted
in the United States (“U.S. GAAP”) and International Financial Reporting Standards (“IFRS”), the Financial Accounting
36
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with
Customers (Topic 606).” The new guidance sets forth a new five-step revenue recognition model which replaces the prior
revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue
recognition guidance that have historically existed in U.S. GAAP. The underlying principle of the new standard is that a
business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an
amount that reflects what it expects in exchange for the goods or services. The standard also requires more detailed
disclosures and provides additional guidance for transactions that were not addressed completely in the prior accounting
guidance. The ASU provides alternative methods of initial adoption and is effective for annual and interim periods beginning
after December 15, 2017. The FASB has issued several updates to the standard which i) defer the original effective date from
January 1, 2017 to January 1, 2018, while allowing for early adoption as of January 1, 2017 (ASU 2015-14); ii) clarify the
application of the principal versus agent guidance (ASU 2016-08); iii) clarify the guidance on inconsequential and
perfunctory promises and licensing (ASU 2016-10); and clarify the guidance on certain sections of the guidance providing
technical corrections and improvements (ASU 2016-10). In May 2016, the FASB issued ASU 2016-12, “Revenue from
Contracts with Customers (Topic 606) Narrow-Scope Improvements and Practical Expedients”, to address certain narrow
aspects of the guidance including collectability criterion, collection of sales taxes from customers, noncash consideration,
contract modifications and completed contracts. This issuance does not change the core principle of the guidance in the initial
topic issued in May 2014. We are currently evaluating the impact that this standard will have on our consolidated financial
statements.
In June 2014, the FASB issued ASU 2014-12, “Accounting for Share-Based Payments When the Terms of an Award
Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB
Emerging Issues Task Force)”. The ASU clarifies that entities should treat performance targets that can be met after the
requisite service period of a share-based payment award as performance conditions that affect vesting. Therefore, an entity
would not record compensation expense (measured as of the grant date without taking into account the effect of the
performance target) related to an award for which transfer to the employee is contingent on the entity’s satisfaction of a
performance target until it becomes probable that the performance target will be met. The ASU does not contain any new
disclosure requirements. The ASU is effective for reporting periods beginning after
December 15, 2015. Early adoption is permitted. The adoption of this standard in fiscal year 2016 did not have a material
impact on our consolidated financial statements.
In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory.” Under this ASU,
inventory will be measured at the “lower of cost and net realizable value” and options that currently exist for “market value”
will be eliminated. The ASU defines net realizable value as the “estimated selling prices in the ordinary course of business,
less reasonably predictable costs of completion, disposal, and transportation.” No other changes were made to the current
guidance on inventory measurement. ASU 2015-11 is effective for interim and annual periods beginning after December 15,
2016. Early application is permitted and should be applied prospectively. We are currently evaluating the impact that this
standard will have on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, "Leases," amending ASC 842. This ASU requires us to recognize
on the balance sheet the assets and liabilities for the rights and obligations created by leases with terms of more than twelve
months. This ASU also requires disclosures enabling the users of financial statements to understand the amount, timing and
uncertainty of cash flows arising from leases. This new standard will become effective for us for annual periods beginning
after December 15, 2018 (including interim reporting periods within those periods). Early adoption is permitted as of the
beginning of an interim or annual reporting period. We are currently evaluating the impact of this new standard on our
consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting."
This ASU affects entities that issue share-based payment awards to their employees. The ASU is designed to simplify
several aspects of accounting for share-based payment award transactions, which include the income tax consequences,
classification of awards as either equity or liabilities, classification on the statement of cash flows and forfeiture rate
calculations. This ASU will become effective for us on December 15, 2016 (including interim reporting periods within
those periods). Early adoption is permitted in any interim or annual period. If an entity early adopts the amendments in an
interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.
An entity that elects early adoption must adopt all of the amendments in the same period. We are currently evaluating the
impact of this new standard on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15 "Statement of Cash Flows (Topic 230): Classification of Certain
Cash Receipts and Cash Payments". The amendment gives guidance and reduces diversity in practice with respect to certain
types of cash flows. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within
37
those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the
amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that
interim period. An entity that elects early adoption must adopt all of the amendments in the same period. We are currently
evaluating the impact of this guidance on our consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16 to ASC 740 "Income Taxes," which simplifies the recording of an
inter-entity transfer of assets other than inventory. The new guidance requires that a company recognize the income tax
consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The new guidance becomes
effective for annual reporting periods beginning after December 15, 2017 and must be applied using a modified retrospective
basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the adoption period. We are
currently evaluating the impact of this guidance on our consolidated financial statements and the timing of adoption.
In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows, Restricted Cash (Topic 230)”. This
guidance requires that a statement of cash flows explain the total change during the period of cash, cash equivalents, and
amounts generally described as restricted cash or restricted cash equivalents. Amounts described as restricted cash and
restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning of period and
end of period to total amounts shown on the statement of cash flows. This guidance is effective for annual reporting periods
beginning after December 15, 2017, including interim periods within that reporting periods, with early adoption permitted.
We are currently evaluating the effect of the adoption of this guidance on our consolidated financial statements.
In January 2017, the FASB has issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying
the Test for Goodwill Impairment”. To simplify the subsequent measurement of goodwill, the amendments eliminate Step 2
from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value
of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the
carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of
goodwill allocated to that reporting unit. In addition, income tax effects from any tax deductible goodwill on the carrying
amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The
amendments should be applied on a prospective basis. The nature of and reason for the change in accounting principle should
be disclosed upon transition. A public business entity that is a U.S. Securities and Exchange Commission (SEC) filer should
adopt the amendments for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15,
2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1,
2017. We are currently evaluating the impact that this standard will have on our consolidated financial statements.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Market risk represents the risk of loss that may impact the financial position, results of operations or cash flows due to
adverse changes in financial and commodity market prices and rates. None of our international revenues and costs for the
fiscal year ended December 31, 2016 have been denominated in foreign currencies and therefore changes in foreign currency
rates will not have an impact on our income statement or cash flows. However, increases in the value of the U.S. dollar
against any local currencies could cause our products to become relatively more expensive to customers in a particular
country or region, leading to reduced revenue or profitability in that country or region. As we continue to expand our
international sales, our non-U.S. dollar denominated revenue and our exposure to gains and losses on international currency
transactions may increase. We currently do not engage in transactions to hedge against the risk of the currency fluctuation,
but we may do so in the future.
Item 8. Financial Statements and Supplementary Data.
Our consolidated balance sheets as of December 31, 2016 and January 2, 2016 and the consolidated statements of
operations, comprehensive income, stockholders’ equity and cash flows for each of our fiscal years 2016, 2015 and 2014
together with the related notes and the report of our independent registered public accounting firm, are on the following
pages. Additional required financial information is described in Item 15.
38
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of IRIDEX Corporation
We have audited the accompanying consolidated balance sheets of IRIDEX Corporation (a Delaware corporation)
and its subsidiaries (the “Company”) as of December 31, 2016 and January 2, 2016, and the related consolidated statements
of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period
ended December 31, 2016. These consolidated financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of IRIDEX Corporation and its subsidiaries as of December 31, 2016 and January 2, 2016, and the results
of their operations and their cash flows for each of the three years in the period ended December 31, 2016 in conformity with
accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the Company’s internal control over financial reporting as of December 31, 2016, based on criteria established in
Internal Control — Integrated Framework (2013 Framework) issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated March 15, 2017 expressed an unqualified opinion thereon.
/s/ BPM LLP
San Jose, California
March 15, 2017
39
IRIDEX Corporation
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
FY 2016
December 31, 2016
FY 2015
January 2, 2016
Current assets:
ASSETS
Cash and cash equivalents .................................................................... $
Accounts receivable, net of allowance for doubtful accounts of
$230 as of December 31, 2016 and $140 as of January 2, 2016 ..........
Inventories ............................................................................................
Prepaid expenses and other current assets ............................................
Total current assets.....................................................................................
Property and equipment, net.......................................................................
Intangible assets, net ..................................................................................
Goodwill.....................................................................................................
Deferred income taxes................................................................................
Other long-term assets................................................................................
Total assets ................................................................................................. $
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable.................................................................................. $
Accrued compensation..........................................................................
Accrued expenses .................................................................................
Accrued warranty..................................................................................
Deferred revenue...................................................................................
Total current liabilities ...............................................................................
Long-term liabilities:
Other long-term liabilities.....................................................................
Total liabilities............................................................................................
Stockholders’ equity:
Preferred stock, $0.01 par value, 2,000,000 shares authorized, no shares
issued and outstanding ...............................................................................
Common stock, $0.01 par value:
Authorized: 30,000,000 shares;
Issued and outstanding 11,304,736 and 10,009,408 shares
as of December 31, 2016 and January 2, 2016, respectively................
Additional paid-in capital...........................................................................
Accumulated deficit ...................................................................................
Total stockholders’ equity ..........................................................................
Total liabilities and stockholders’ equity ................................................... $
23,747 $
10,025
11,643
450
45,865
1,534
132
533
-
80
48,144 $
1,994 $
2,346
2,135
603
1,383
8,461
523
8,984
-
124
55,158
(16,122)
39,160
48,144 $
9,995
9,282
11,106
386
30,769
1,104
268
533
8,985
164
41,823
2,223
1,572
1,722
603
1,311
7,431
704
8,135
-
111
37,986
(4,409)
33,688
41,823
The accompanying notes are an integral part of these consolidated financial statements.
40
IRIDEX Corporation
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
FY 2016
Year Ended
December 31,
2016
FY 2015
Year Ended
FY 2014
Year Ended
January 2, 2016
41,757 $
21,804
19,953
January 3, 2015
42,814
21,409
21,405
Total revenues......................................................................................... $
Cost of revenues .....................................................................................
Gross profit .............................................................................................
Operating expenses:
Research and development................................................................
Sales and marketing ..........................................................................
General and administrative................................................................
Impairment of intangible assets.........................................................
Total operating expenses ........................................................................
(Loss) income from operations...............................................................
Other (expense) income, net ...................................................................
(Loss) income from operations before provision for (benefit from)
income taxes ...........................................................................................
Provision for (benefit from) income taxes..............................................
Net (loss) income.................................................................................... $
Net (loss) income per share:
46,158 $
25,319
20,839
5,365
10,281
7,638
120
23,404
(2,565)
(91)
(2,656)
9,057
(11,713) $
Basic .................................................................................................. $
Diluted............................................................................................... $
(1.15) $
(1.15) $
Weighted average shares used in computing net (loss) income per
common share:
5,214
8,901
5,550
—
19,665
288
3
291
(183)
474 $
0.05 $
0.05 $
4,629
8,155
6,034
—
18,818
2,587
(1,255)
1,332
(8,706)
10,038
1.01
0.97
Basic ..................................................................................................
Diluted...............................................................................................
10,173
10,173
9,962
10,128
9,892
10,357
The accompanying notes are an integral part of these consolidated financial statements.
41
IRIDEX Corporation
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
Net (loss) income ................................................................... $
Other comprehensive loss, net of tax.....................................
Comprehensive (loss) income................................................ $
(11,713) $
—
(11,713) $
474 $
—
474 $
10,038
—
10,038
FY 2016
Year Ended
December 31, 2016
FY 2015
Year Ended
January 2, 2016
FY 2014
Year Ended
January 3, 2015
The accompanying notes are an integral part of these consolidated financial statements.
42
IRIDEX Corporation
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
FY 2013: Balances, December 28, 2013 ...............
Issuance of common stock under stock option
plan ........................................................................
Employee stock-based compensation expense ......
Excess tax benefits from stock-based awards .......
Release of restricted stock .....................................
Stock repurchase....................................................
Net income.............................................................
FY 2014: Balances, January 3, 2015 .....................
Issuance of common stock under stock option
plan ........................................................................
Employee stock-based compensation expense ......
Release of restricted stock .....................................
Repurchase of employee share awards..................
Stock repurchase....................................................
Net income.............................................................
FY 2015: Balances, January 2, 2016 .....................
Proceeds from issuance of common stock, net of
issuance costs.........................................................
Issuance of common stock under stock option
plan ........................................................................
Employee stock-based compensation expense ......
Release of restricted stock .....................................
Repurchase of employee share awards..................
Stock repurchase....................................................
Net loss ..................................................................
FY 2016: Balances, December 31, 2016 ...............
Common Stock
Shares
9,899,483 $
Amount
Additional
Paid-in
Capital
Accumulated
Deficit
Total
104 $
40,671 $
(14,921) $
25,854
399,390
4
50,262
(562,440)
1,497
972
36
(4,665)
9,786,695
108
38,511
10,038
(4,883)
277,733
3
144,756
(199,776)
1,024
895
(606)
(275)
(1,563)
10,009,408
111
37,986
1,150,000
12
14,801
126,077
1
25,795
(6,544)
708
1,821
(99)
(59)
474
(4,409)
11,304,736 $
124 $
55,158 $
(11,713)
(16,122) $
1,501
972
36
—
(4,665)
10,038
33,736
1,027
895
(606)
(275)
(1,563)
474
33,688
14,813
709
1,821
(99)
—
(59)
(11,713)
39,160
The accompanying notes are an integral part of these consolidated financial statements.
43
IRIDEX Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
FY 2016
Year Ended
December 31, 2016
FY 2015
Year Ended
January 2, 2016
FY 2014
Year Ended
January 3, 2015
Operating activities:
Net (loss) income...................................................................... $
Adjustments to reconcile net (loss) income to net cash (used
in) provided by operating activities:
Impairment of intangible assets ................................................
Depreciation and amortization..................................................
Change in fair value of earn-out liability..................................
Stock-based compensation........................................................
Deferred income taxes ..............................................................
Excess tax benefits from stock-based awards...........................
Provision for doubtful accounts................................................
Changes in operating assets and liabilities:
Accounts receivable.......................................................
Inventories .....................................................................
Prepaid expenses and other current assets .....................
Other long-term assets ...................................................
Accounts payable...........................................................
Accrued compensation...................................................
Accrued expenses ..........................................................
Accrued warranty...........................................................
Deferred revenue ...........................................................
Other long-term liabilities..............................................
Net cash (used in) provided byoperating activities...................
Investing activities:
Acquisition of property and equipment .........................
Payment on earn-out liability.........................................
Net cash used in investing activities .........................................
Financing activities:
Proceeds from issuance of common stock, net of
issuance costs.................................................................
Proceeds from stock option exercises............................
Excess tax benefits from stock-based awards................
Taxes paid related to net share settlements of equity
awards ............................................................................
Repurchase of employee share awards ..........................
Repurchase of common stock ........................................
Net cash provided by (used in) financing activities..................
Net increase (decrease) in cash and cash equivalents...............
Cash and cash equivalents, beginning of year ..........................
Cash and cash equivalents, end of year .................................... $
Supplemental disclosure of cash flow information:
Cash paid during the year for:
(11,713) $
474 $
10,038
120
648
95
1,821
8,985
—
122
(865)
(537)
(64)
84
(229)
774
478
—
72
65
(144)
(1,062)
(406)
(1,468)
14,813
709
—
(99)
—
(59)
15,364
13,752
9,995
23,747 $
—
522
5
895
(209)
—
62
(1,007)
(1,987)
124
57
465
(291)
(36)
134
132
67
(593)
(875)
(423)
(1,298)
—
1,027
—
(606)
(275)
(1,563)
(1,417)
(3,308)
13,303
9,995 $
—
420
1,258
972
(8,776)
(36)
86
(1,078)
1,486
66
82
(520)
(28)
17
1
46
(20)
4,014
(568)
(459)
(1,027)
—
1,501
36
—
—
(4,665)
(3,128)
(141)
13,444
13,303
Income taxes .................................................................. $
22 $
27 $
35
The accompanying notes are an integral part of these consolidated financial statements.
44
IRIDEX Corporation
Notes to Consolidated Financial Statements
1. Organization
Description of Business.
IRIDEX Corporation (“IRIDEX”, the “Company”, “we”, “us”, or “our”) is a leading worldwide provider of therapeutic
based laser systems, delivery devices and consumable instrumentation used to treat sight-threatening eye diseases in
ophthalmology. Our ophthalmology products are sold in the United States predominantly through a direct sales force, and an
independent sales force, and internationally through independent distributors.
2. Summary of Significant Accounting Policies
Financial Statement Presentation.
The consolidated financial statements include the accounts of IRIDEX and our wholly owned non-operating
subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Our fiscal year always ends on the Saturday closest to December 31. Fiscal 2016 ended on December 31, 2016 (“FY
2016”), Fiscal 2015 ended on January 2, 2016 (“FY 2015”) and fiscal 2014 ended on January 3, 2015 (“FY 2014”).
Consequently, fiscal years 2016 and 2015 included only 52 weeks of operations while fiscal year 2014 included 53 weeks.
Use of Estimates.
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the
United States of America (“U.S. GAAP”) requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues, and expenses and the related disclosure of contingent assets and liabilities. We base our estimates
on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates. In addition, any change in these estimates or
their related assumptions could have an adverse effect on our operating results.
Cash and Cash Equivalents.
We consider all highly liquid debt instruments with insignificant interest rate risk and an original maturity of three
months or less when purchased to be cash equivalents. Cash equivalents consist primarily of cash deposits in money market
funds that are available for withdrawal without restriction.
Sales Returns Allowance and Allowance for Doubtful Accounts.
We estimate future product returns related to current period product revenue. We analyze historical returns, and
changes in customer demand and acceptance of our products when evaluating the adequacy of the sales returns allowance.
Significant management judgment and estimates must be made and used in connection with establishing the sales returns
allowance in any accounting period. Material differences may result in the amount and timing of our revenue for any period if
management made different judgments or utilized different estimates. Our provision for sales returns is recorded net of the
associated costs. The balance for the provision of sales returns was $44 thousand and $60 thousand as of December 31, 2016
and January 2, 2016, respectively, and is recorded within the deferred revenue accounts in the consolidated balance sheets.
Similarly management must make estimates regarding the uncollectibility of accounts receivable. We are exposed to
credit risk in the event of non-payment by customers to the extent of amounts recorded on the consolidated balance sheets.
As sales levels change, the level of accounts receivable would likely also change. In addition, in the event that customers
were to delay their payments to us, the levels of accounts receivable would likely increase. We maintain allowances for
doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. The
allowance for doubtful accounts is based on past payment history with the customer, analysis of the customer’s current
financial condition, the aging of the accounts receivable balance, customer concentration and other known factors.
45
Inventories.
Inventories are stated at the lower of cost or market and include on-hand inventory physically held at our facility, sales
demo inventory and service loaner inventory. Cost is determined on a standard cost basis which approximates actual cost on a
first-in, first-out (“FIFO”) method. Lower of cost or market is evaluated by considering obsolescence, excessive levels of
inventory, deterioration and other factors. Adjustments to reduce the cost of inventory to its net realizable value, if required,
are made for estimated excess, obsolescence or impaired inventory and are charged to cost of revenues. Once the cost of the
inventory is reduced, a new lower-cost basis for that inventory is established, and subsequent changes in facts and
circumstances do not result in the restoration or increase in that newly established cost basis. Factors influencing these
adjustments include changes in demand, product life cycle and development plans, component cost trends, product pricing,
physical deterioration and quality issues. Revisions to these adjustments would be required if these factors differ from our
estimates.
As part of our normal business, we generally utilize various finished goods inventory as either sales demos to facilitate
the sale of our products to prospective customers, or as loaners that we allow our existing customers to use while we repair
their products. We are amortizing these demos and loaners over an estimated useful life of four years. The amortization of the
demos is charged to sales expense while the amortization on the loaners is charged to cost of revenues. The gross value of
demos and loaners was $1.6 million and $1.6 million and the accumulated amortization was $490 thousand and $575
thousand as of December 31, 2016 and January 2, 2016, respectively. The net book value of demos and loaners is charged to
cost of revenues when such demos or loaners are sold.
Property and Equipment.
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and
amortization are calculated on a straight–line basis over the estimated useful lives of the assets, which is generally three
years. Leasehold improvements are amortized over the lesser of their estimated useful lives or the lease term. Repairs and
maintenance costs are expensed as incurred.
Valuation of Goodwill and Intangible Assets.
Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible
assets acquired in a business combination. We review goodwill for impairment on an annual basis or whenever events or
changes in circumstances indicate the carrying value may not be recoverable. We first assess qualitative factors to determine
whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for
determining whether it is necessary to perform the two-step quantitative goodwill impairment test. If, after assessing the
totality of circumstances, an entity determines that it is more likely than not that the fair value of a reporting unit is less than
its carrying amount, then it is required to perform the two-step impairment test. It does not require an entity to calculate the
fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its
carrying value. However, an entity also has the option to bypass the qualitative assessment for any reporting unit in any
period and proceed directly to performing the first step of the two-step goodwill impairment test. We have determined that
we have a single reporting unit for purposes of performing our goodwill impairment test. As we use the market approach to
assess impairment, our common stock price is an important component of the fair value calculation. If our stock price
continues to experience significant price and volume fluctuations, this will impact the fair value of the reporting unit and can
lead to potential impairment in future periods. We performed our annual impairment test during the second quarter of 2016
and determined that our goodwill was not impaired. As of December 31, 2016, we had not identified any factors that
indicated there was an impairment of our goodwill and determined that no additional impairment analysis was then required.
Intangible assets with definite lives are amortized over the useful life of the asset. We review our amortizing intangible
assets for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable.
An asset is considered impaired if its carrying amount exceeds the future non-discounted net cash flow the asset is expected
to generate. If an asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the asset exceeds its fair value. In such circumstances, we conduct an impairment analysis in accordance
with Accounting Standard Codification (“ASC”) 350, “Intangibles – Goodwill and Other” (“ASC 350”).
During the fourth quarter of 2016, we reviewed our long-lived assets for indicators of impairment. Based on reduced
estimates of future revenues and future negative cash flow, we identified potential indicators of impairment. As a result, we
compared the fair value of our long-lived assets to their carrying value. Based on our discounted future cash flow and revenue
projections, we recorded a non-cash impairment charge of $120 thousand for the Ocunetics patent. The impairment charge
represents the excess of the carrying value of the asset over its fair value.
The impairment charge is not expected to result in any future cash expenditures.
46
Revenue Recognition.
Our revenues arise from the sale of laser consoles, delivery devices, consumables and service and support activities.
Revenue from product sales is recognized upon receipt of a purchase order and product shipment provided that no significant
obligations remain and collection of the receivables is reasonably assured. Shipments are generally made with Free-On-Board
(“FOB”) shipping point terms, whereby title passes upon shipment from our dock. Any shipments with FOB receiving point
terms are recorded as revenue when the shipment arrives at the receiving point. Cost is recognized as product sales revenue is
recognized. Our sales may include post-sales obligations for training or other deliverables. For revenue arrangements such as
these, we recognize revenue in accordance with ASC 605, “Revenue Recognition, Multiple-Element Arrangements”. We
allocate revenue among deliverables in multiple-element arrangements using the relative selling price method. Revenue
allocated to each element is recognized when the basic revenue recognition criteria is met for each element. We are required
to apply a hierarchy to determine the selling price to be used for allocating revenue to deliverables: (i) vendor-specific
objective evidence of selling price (“VSOE”), (ii) third-party evidence of selling price (“TPE”) and (iii) best estimate of the
selling price (“ESP”). In general, we are unable to establish VSOE or TPE for all of the elements in the arrangement;
therefore, revenue is allocated to these elements based on our ESP, which we determine after considering multiple factors
such as management approved pricing guidelines, geographic differences, market conditions, competitor pricing strategies,
internal costs and gross margin objectives. These factors may vary over time depending upon the unique facts and
circumstances related to each deliverable. As a result, our ESP for products and services could change. Revenues for post-
sales obligations are recognized as the obligations are fulfilled.
In international regions, we utilize distributors to market and sell our products. We recognize revenue upon shipment
for sales to these independent, third-party distributors as we have no continuing obligations subsequent to shipment.
Generally our distributors are responsible for all marketing, sales, installation, training and warranty labor coverage for our
products. Our standard terms and conditions do not provide price protection or stock return rights to any of our distributors.
Royalty revenues are typically based on licensees’ net sales of products that utilize our technology and are recognized
as earned in accordance with the contract terms when royalties from licensees can be reliably measured and collectibility is
reasonably assured, such as upon the earlier of the receipt of a royalty statement from the licensee or upon payment by the
licensee.
Taxes Collected from Customers and Remitted to Governmental Authorities.
Taxes collected from customers and remitted to governmental authorities are recognized on a net basis in the
accompanying consolidated statements of operations as well as accrued expenses to the degree which is appropriate.
Deferred Revenue.
Revenue related to service contracts is deferred and recognized on a straight line basis over the period of the applicable
service period. Costs associated with these service arrangements are recognized as incurred. A reconciliation of the changes
in our deferred revenue balances for the years ended December 31, 2016 and January 2, 2016 are as follows (in thousands):
FY 2014: Balance as of January 3, 2015................................................................................. $
Additions to deferral................................................................................................................
Revenue recognized.................................................................................................................
FY 2015: Balance as of January 2, 2016.................................................................................
Additions to deferral................................................................................................................
Revenue recognized.................................................................................................................
FY 2016: Balance as of December 31, 2016........................................................................... $
1,179
1,495
(1,363)
1,311
1,430
(1,358)
1,383
Warranty.
We provide reserves for the estimated cost of product warranties at the time revenue is recognized based on historical
experience of known product failure rates and expected material and labor costs to provide warranty services. We generally
provide a two-year warranty on our products. Additionally, from time to time, specific warranty accruals may be made if
unforeseen technical problems arise. Alternatively, if estimates are determined to be greater than the actual amounts
necessary, we may reverse a portion of such provisions in future periods. Warranty costs are reflected in the consolidated
47
statements of operations as costs of revenues. A reconciliation of the changes in our warranty liability for the years ended
December 31, 2016 and January 2, 2016 are as follows (in thousands):
FY 2014: Balance as of January 3, 2015................................................................................. $
Accruals for product warranties ..............................................................................................
Cost of warranty claims...........................................................................................................
FY 2015: Balance as of January 2, 2016.................................................................................
Accruals for product warranties ..............................................................................................
Cost of warranty claims...........................................................................................................
FY 2016: Balance as of December 31, 2016........................................................................... $
469
401
(267)
603
469
(469)
603
Shipping and Handling Costs.
Our shipping and handling costs billed to customers are included in revenues and the associated expense is recorded in
cost of revenues for all periods presented. Shipping and handling costs amounted to $0.3 million for each of the fiscal years
2016, 2015 and 2014.
Research and Development.
Research and development expenditures are charged to operations as incurred.
Advertising.
Advertising and promotion costs are expensed as they are incurred; such costs were approximately $0.1 million in
2016, $0.1 million in 2015, and $0.2 million in 2014 and are included in sales and marketing expenses in the accompanying
consolidated statements of operations.
Income Taxes.
We account for income taxes in accordance with ASC 740, “Income Taxes” (“ASC 740”), which requires that deferred
tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and
tax bases of recorded assets and liabilities. Under ASC 740, the liability method is used in accounting for income taxes.
Deferred tax assets and liabilities are determined based on the differences between financial reporting and the tax basis of
assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are
expected to reverse. ASC 740 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely
than not that some or all of the deferred tax asset will not be realized. We annually evaluate the realizability of our deferred
tax assets by assessing our valuation allowance and by adjusting the amount of such allowance, if necessary. The factors used
to assess the likelihood of realization include our forecast of future taxable income and available tax planning strategies that
could be implemented to realize the net deferred tax assets. In 2014, we released valuation allowance against most of our
deferred tax assets except that we retained a valuation allowance for certain deferred tax assets associated with our California
research and development credit (“CA R&D credit”). In 2016, based on our recent history of losses and forecasted losses,
management believes on a “more-likely-than-not” basis that a full valuation allowance is required. Accordingly, in the fourth
quarter of fiscal year 2017, we provided a full valuation allowance on our federal and state deferred tax assets.
Accounting for Uncertainty in Income Taxes.
We account for uncertain tax positions in accordance with ASC 740. ASC 740 seeks to reduce the diversity in
practice associated with certain aspects of measurement and recognition in accounting for income taxes. ASC 740 prescribes
a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax provision
that an entity takes or expects to take in a tax return. Additionally, ASC 740 provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods, disclosures, and transition. Under ASC 740, an entity may
only recognize or continue to recognize tax positions that meet a "more-likely-than-not" threshold. In accordance with our
accounting policy, we recognize accrued interest and penalties related to unrecognized tax benefits as a component of income
tax expense. There were no accrued interest and penalties during the year ended December 31, 2016.
48
Accounting for Stock-Based Compensation.
We account for stock-based compensation granted to employees and directors, including employees stock option
awards, restricted stock and restricted stock units at grant date, based on the fair value of the award. Stock-based
compensation is recognized as expense on a ratable basis over the requisite service period of the award.
We value options using the Black-Scholes option pricing model. Restricted stock and time-based restricted stock units
are valued at the grant date fair value of the underlying common shares. Performance-based restricted stock units are valued
using the Monte Carlo simulation model. The Black-Scholes option pricing model requires the use of highly subjective and
complex assumptions which determine the fair value of share-based awards, including the option’s expected term and the
price volatility of the underlying stock. The Monte Carlo simulation model incorporates assumptions for the holding period,
risk-free interest rate, stock price volatility and dividend yield.
Concentration of Credit Risk and Other Risks and Uncertainties.
Our cash and cash equivalents are deposited in demand and money market accounts. Deposits held with banks may
exceed the amount of insurance provided on such deposits. Generally these deposits may be redeemed upon demand and
therefore, bear minimal risk.
We market our products to distributors and end-users throughout the world. Sales to international distributors are
generally made on open credit terms and letters of credit. Management performs ongoing credit evaluations of our customers
and maintains an allowance for potential credit losses. Historically, we have not experienced any significant losses related to
individual customers or a group of customers in any particular geographic area. For the years ended December 31, 2016,
January 2, 2016 and January 3, 2015, no single customer accounted for greater than 10% of total revenues. As of
December 31, 2016 and January 2, 2016, no customer accounted for more than 10% of accounts receivable balance.
Our products require approvals from the Food and Drug Administration and international regulatory agencies prior to
commercialized sales. Our future products may not receive required approvals. If we were denied such approvals, or if such
approvals were delayed, it would have a materially adverse impact on our business, results of operations and financial
condition.
Reliance on Certain Suppliers.
Certain components and services used to manufacture and develop our products are presently available from only one
or a limited number of suppliers or vendors. The loss of any of these suppliers or vendors would potentially require a
significant level of hardware and/or software development efforts to incorporate the products or services into our products.
Net Income per Share.
Basic net income per share is based upon the weighted average number of common shares outstanding during the
period. Diluted net income per share is based upon the weighted average number of common shares outstanding and dilutive
common stock equivalents outstanding during the period. Common stock equivalents consist of incremental common shares
issuable upon the exercise of stock options, release (vesting) of restricted stock units and awards, and the conversion of
Series A Preferred Stock into common stock and are calculated under the treasury stock method. Common stock equivalent
shares from unexercised stock options and unvested restricted stock units are excluded from the computation for periods in
which we incur a net loss or if the exercise price of such options is greater than the average market price of our common
stock for the period as their effect would be anti-dilutive. See Note 14 - Computation of Basic and Diluted Net Income Per
Common Share.
Recently Issued and Adopted Accounting Standards.
In May 2014, as part of its ongoing efforts to assist in the convergence of accounting principles generally accepted
in the United States (“U.S. GAAP”) and International Financial Reporting Standards (“IFRS”), the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with
Customers (Topic 606).” The new guidance sets forth a new five-step revenue recognition model which replaces the prior
revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue
recognition guidance that have historically existed in U.S. GAAP. The underlying principle of the new standard is that a
business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an
amount that reflects what it expects in exchange for the goods or services. The standard also requires more detailed
disclosures and provides additional guidance for transactions that were not addressed completely in the prior accounting
guidance. The ASU provides alternative methods of initial adoption and is effective for annual and interim periods beginning
after December 15, 2017. The FASB has issued several updates to the standard which i) defer the original effective date from
49
January 1, 2017 to January 1, 2018, while allowing for early adoption as of January 1, 2017 (ASU 2015-14); ii) clarify the
application of the principal versus agent guidance (ASU 2016-08); iii) clarify the guidance on inconsequential and
perfunctory promises and licensing (ASU 2016-10); and clarify the guidance on certain sections of the guidance providing
technical corrections and improvements (ASU 2016-10). In May 2016, the FASB issued ASU 2016-12, “Revenue from
Contracts with Customers (Topic 606) Narrow-Scope Improvements and Practical Expedients”, to address certain narrow
aspects of the guidance including collectability criterion, collection of sales taxes from customers, noncash consideration,
contract modifications and completed contracts. This issuance does not change the core principle of the guidance in the initial
topic issued in May 2014. We are currently evaluating the impact that this standard will have on our consolidated financial
statements.
In June 2014, the FASB issued ASU 2014-12, “Accounting for Share-Based Payments When the Terms of an Award
Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB
Emerging Issues Task Force)”. The ASU clarifies that entities should treat performance targets that can be met after the
requisite service period of a share-based payment award as performance conditions that affect vesting. Therefore, an entity
would not record compensation expense (measured as of the grant date without taking into account the effect of the
performance target) related to an award for which transfer to the employee is contingent on the entity’s satisfaction of a
performance target until it becomes probable that the performance target will be met. The ASU does not contain any new
disclosure requirements. The ASU is effective for reporting periods beginning after
December 15, 2015. Early adoption is permitted. The adoption of this standard in fiscal year 2016 did not have a material
impact on our consolidated financial statements.
In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory.” Under this ASU,
inventory will be measured at the “lower of cost and net realizable value” and options that currently exist for “market value”
will be eliminated. The ASU defines net realizable value as the “estimated selling prices in the ordinary course of business,
less reasonably predictable costs of completion, disposal, and transportation.” No other changes were made to the current
guidance on inventory measurement. ASU 2015-11 is effective for interim and annual periods beginning after December 15,
2016. Early application is permitted and should be applied prospectively. We are currently evaluating the impact that this
standard will have on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, "Leases," amending ASC 842. This ASU requires us to recognize
on the balance sheet the assets and liabilities for the rights and obligations created by leases with terms of more than twelve
months. This ASU also requires disclosures enabling the users of financial statements to understand the amount, timing and
uncertainty of cash flows arising from leases. This new standard will become effective for us for annual periods beginning
after December 15, 2018 (including interim reporting periods within those periods). Early adoption is permitted as of the
beginning of an interim or annual reporting period. We are currently evaluating the impact of this new standard on our
consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting."
This ASU affects entities that issue share-based payment awards to their employees. The ASU is designed to simplify several
aspects of accounting for share-based payment award transactions, which include the income tax consequences, classification
of awards as either equity or liabilities, classification on the statement of cash flows and forfeiture rate calculations. This
ASU will become effective for us on December 15, 2016 (including interim reporting periods within those periods). Early
adoption is permitted in any interim or annual period. If an entity early adopts the amendments in an interim period, any
adjustments should be reflected as of
the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the
amendments in the same period. We are currently evaluating the impact of this new standard on our consolidated financial
statements.
In August 2016, the FASB issued ASU 2016-15 "Statement of Cash Flows (Topic 230): Classification of Certain
Cash Receipts and Cash Payments". The amendment gives guidance and reduces diversity in practice with respect to certain
types of cash flows. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within
those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the
amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that
interim period. An entity that elects early adoption must adopt all of the amendments in the same period. We are currently
evaluating the impact of this guidance on our consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16 to ASC 740 "Income Taxes," which simplifies the recording of an
inter-entity transfer of assets other than inventory. The new guidance requires that a company recognize the income tax
50
consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The new guidance becomes
effective for annual reporting periods beginning after December 15, 2017 and must be applied using a modified retrospective
basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the adoption period. We are
currently evaluating the impact of this guidance on our financial statements and the timing of adoption.
In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows, Restricted Cash (Topic 230)”. This
guidance requires that a statement of cash flows explain the total change during the period of cash, cash equivalents, and
amounts generally described as restricted cash or restricted cash equivalents. Amounts described as restricted cash and
restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning of period and
end of period to total amounts shown on the statement of cash flows. This guidance is effective for annual reporting periods
beginning after December 15, 2017, including interim periods within that reporting periods, with early adoption permitted.
We are currently evaluating the effect of the adoption of this guidance on our consolidated financial statements.
In January 2017, the FASB has issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying
the Test for Goodwill Impairment”. To simplify the subsequent measurement of goodwill, the amendments eliminate Step 2
from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value
of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the
carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of
goodwill allocated to that reporting unit. In addition, income tax effects from any tax deductible goodwill on the carrying
amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The
amendments should be applied on a prospective basis. The nature of and reason for the change in accounting principle should
be disclosed upon transition. A public business entity that is a U.S. Securities and Exchange Commission (SEC) filer should
adopt the amendments for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15,
2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1,
2017. We are currently evaluating the impact that this standard will have on our consolidated financial statements.
3. Fair Value Measurement
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The fair value hierarchy distinguishes between (1) market
participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an
entity’s own assumptions about market participant assumptions developed based on the best information available in the
circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority
to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to
unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or
liabilities.
Level 2: Directly or indirectly observable inputs as of the reporting date through correlation with market data,
including quoted prices for similar assets and liabilities in active markets and quoted prices in markets that are
not active. Level 2 also includes assets and liabilities that are valued using models or other pricing methodologies
that do not require significant judgment since the input assumptions used in the models, such as interest rates and
volatility factors, are corroborated by readily observable data from actively quoted markets for substantially the
full term of the financial instrument.
Level 3: Unobservable inputs that are supported by little or no market activity and reflect the use of significant
management judgment. These values are generally determined using pricing models for which the assumptions
utilize management’s estimates of market participant assumptions.
In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the
use of unobservable inputs to the extent possible as well as considers counterparty credit risk in our assessment of fair value.
The carrying amounts of our financial assets and liabilities, including cash and cash equivalents, accounts receivable,
accounts payable, and accrued expenses as of December 31, 2016 and January 2, 2016, approximate fair value because of the
short maturity of these instruments.
51
As of December 31, 2016 and January 2, 2016, financial assets and liabilities measured and recognized at fair value on
a recurring basis and classified under the appropriate level of the fair value hierarchy as described above was as follows (in
thousands):
(in thousands)
Assets:
As of December 31, 2016
Fair Value Measurements
As of January 2, 2016
Fair Value Measurements
Level 1 Level 2 Level 3
Total
Level 1 Level 2 Level 3
Total
Money market funds ......... $ 8,270
—
— $
8,270 $ 9,212
—
— $
9,212
Liabilities:
Earn-out liability ............... $
—
— $
694 $
694 $
—
— $ 1,005 $
1,005
Our Level 1 financial assets are money market funds whose fair values are based on quoted market prices. We do not
have any Level 2 financial assets or liabilities. The fair value of the earn-out liability arising from the acquisitions of
RetinaLabs and Ocunetics is classified within Level 3 of the fair value hierarchy since it is based on significant unobservable
inputs. The significant unobservable inputs include projected royalties and discount rates to present value the payments. A
significant increase (decrease) in the projected royalty payments in isolation could result in a significantly higher (lower) fair
value measurement and a significant increase (decrease) in the discount rate in isolation could result in a significantly lower
(higher) fair value measurement. The fair value of the earn-out liability is calculated on a quarterly basis based on a
collaborative effort of our operations, finance and accounting groups based on additional information as it becomes available.
Any change in the fair value adjustment is recorded in the consolidated statement of operations of that period. The decrease
in re-measurement of the contingent earn-out was due to a decrease in expected future revenues to be generated from these
acquisitions. Both of these deals were structured with an earn-out component. The earn-out liability is included in accrued
expenses and other long-term liabilities in the consolidated balance sheets. In December 31, 2016, we reduced the fair value
of the earn-out liability related to Ocunetics to zero as we do not expect to generate any revenues related to the acquired
Ocunetics patent. The Ocunetics patent was written off in December 2016, see Note 7 – Intangible Assets.
Charges related to fair value adjustments were $95 thousand, $5 thousand and $1.3 million for the fiscal years 2016,
2015 and 2014, respectively
The following table presents quantitative information about the inputs and valuation methodologies used for our fair
value measurements classified in Level 3 of the fair value hierarchy as of December 31, 2016 and January 2, 2016.
As of December 31, 2016
Fair Value
(in thousands)
Valuation
Technique
Earn-out liability............................ $
694 Discounted cash flow
As of January 2, 2016
Fair Value
(in thousands)
Valuation
Technique
Earn-out liability............................ $
1,005 Discounted cash flow
Significant
Unobservable
Input
Projected royalties
(in thousands)
Discount rate
Significant
Unobservable
Input
Projected royalties
(in thousands)
Discount rate
Weighted
Average
(range)
$2,154
11.22%
(11.22% - 27.00%)
Weighted
Average
(range)
$2,949
($134 - $3,153)
11.36%
(10.23% - 27.00%)
52
The following table provides a reconciliation of the beginning and ending balances of the contingent consideration – cash
(Level 3 liabilities) (in thousands):
Balance as of January 3, 2015 ................................................ $
Payments against earn-out......................................................
Change in fair value of earn-out liability ...............................
Balance as of January 2, 2016 ................................................
Payments against earn-out......................................................
Change in fair value of earn-out liability ...............................
Balance as of December 31, 2016 .......................................... $
1,423
(423)
5
1,005
(406)
95
694
4. Inventories
The components of our inventories are as follows (in thousands):
FY 2016
December 31, 2016
FY 2015
January 2, 2016
Raw materials ..................................... $
Work in process..................................
Finished goods....................................
Total inventories................................. $
5,331 $
2,337
3,975
11,643 $
4,578
1,791
4,737
11,106
5. Property and Equipment
The components of our property and equipment are as follows (in thousands):
FY 2016
December 31, 2016
Equipment ........................................................... $
Leasehold improvements ....................................
Less: accumulated depreciation and
amortization ........................................................
Property and equipment, net ............................... $
9,560 $
2,309
(10,335)
1,534 $
FY 2015
January 2, 2016
8,498
2,309
(9,703)
1,104
Depreciation expense related to property and equipment was $632 thousand, $506 thousand and $376 thousand for the
fiscal years 2016, 2015 and 2014, respectively.
6. Goodwill
The carrying value of goodwill was $533 thousand as of December 31, 2016 and January 2, 2016, respectively.
Goodwill is tested for impairment at least annually or whenever there is a change in circumstances that indicates the
carrying value of these assets may be impaired. The determination of whether any potential impairment of goodwill exists is
based upon a two-step impairment test performed in accordance with ASC 350. There was no impairment of goodwill
recognized during fiscal years 2016, 2015 or 2014.
7. Intangible Assets
During the fourth quarter of 2016, we reviewed our long-lived assets for indicators of impairment. Based on
reduced estimates of future revenues and future negative cash flow, we identified potential indicators of impairment. As a
result, we compared the fair value of our long-lived assets to their carrying value. Based on our discounted future cash flow
and revenue projections, we recorded a non-cash impairment charge of $120 thousand for the Ocunetics patent. The
impairment charge represents the excess of the carrying value of the asset over its fair value.
The impairment charge is not expected to result in any future cash expenditures.
53
The components of our purchased intangible assets as of December 31, 2016 are as follows (in thousands):
Customer relations .................................................. 15 Years $
Patents..................................................................... Varies
$
16 $
-
16 $
240 $
720
960 $
108 $
720
828 $
Useful
Lives
FY 2016
Annual
Amortization
Gross
Carrying
Value
Accumulated
Amortization
Net
Carrying
Value
The components of our purchased intangible assets as of January 2, 2016 are as follows (in thousands):
Customer relations .................................................. 15 Years $
Patents..................................................................... Varies
$
16 $
-
16 $
240 $
720
960 $
92 $
600
692 $
Useful
Lives
FY 2015
Annual
Amortization
Gross
Carrying
Value
Accumulated
Amortization
Net
Carrying
Value
Useful Lives
Remaining
132 8.25 Years
- Varies
132
Useful Lives
Remaining
148 9.25 Years
120 Varies
268
Aggregate amortization expense for the fiscal years 2016, 2015 and 2014 was $16 thousand, $16 thousand and $44
thousand, respectively. The amortization of customer relations was charged to sales and marketing expense and the
amortization of patents was charged to cost of revenues.
Estimated future amortization expense for purchased intangible assets is as follows (in thousands):
Fiscal Year:
2017 ........................................................................................ $
2018 ........................................................................................
2019 ........................................................................................
2020 ........................................................................................
2021 ........................................................................................
Thereafter................................................................................
Total .................................................................................. $
16
16
16
16
16
52
132
8. Accrued Expenses
The components of our accrued expenses are as follows (in thousands):
FY 2016
December 31,
2016
FY 2015
January 2,
2016
Customer deposits ................................................................ $
Earn-out – short term............................................................
Distributor commission ........................................................
Sales and use tax payable .....................................................
Royalties payable .................................................................
Other accrued expenses ........................................................
Total accrued expenses......................................................... $
496 $
305
171
94
66
1,003
2,135 $
336
370
234
105
52
625
1,722
9. Commitments and Contingencies
Lease Agreements.
We lease our operating facilities in Mountain View, California, under a non-cancelable operating lease that was
initially scheduled to expire in February 28, 2017. In February 2016, we executed an agreement to extend the term of the
lease through February 28, 2019. There are no remaining options to extend or renew the terms of this lease. Rent expense for
fiscal years 2016, 2015 and 2014 was $0.9 million, $0.8 million and $0.6 million, respectively.
54
Future minimum lease payments under current operating leases as of December 31, 2016 are summarized as follows (in
thousands):
Fiscal Year
2017........................................................................... $
2018...........................................................................
2019...........................................................................
2020...........................................................................
2021...........................................................................
Total future minimum lease payments...................... $
Operating
Lease Payments
1,068
1,056
206
33
3
2,366
Manufacture and Supply Agreement.
Future minimum payments for manufacture and supply commitments as of December 31, 2016 are summarized as
follows (in thousands):
Fiscal Year
2017........................................................................................ $
2018........................................................................................
Total contract manufacturing and supply commitments ........ $
Contract
Manufacturing
and Supply
Commitments
7,440
1,087
8,527
License Agreements.
We are obligated to pay royalties equivalent to 5% of sales on certain products under certain license agreements with
termination dates as early as the end of 2018 and as late as the end of 2021. Royalty expense, charged to cost of revenues,
was approximately $0.3 million, $0.1 million, and $0.2 million for the fiscal years 2016, 2015 and 2014, respectively.
Indemnification Arrangements.
We enter into standard indemnification arrangements in our ordinary course of business. Pursuant to these
arrangements, we indemnify, hold harmless, and agree to reimburse the indemnified parties for losses suffered or incurred by
the indemnified party, generally our business partners or customers, in connection with any trade secret, copyright, patent or
other intellectual property infringement claim by any third-party with respect to our products. The term of these
indemnification agreements is generally perpetual any time after the execution of the agreement. The maximum potential
amount of future payments we could be required to make under these agreements is not determinable. We have never
incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, we believe the
estimated fair value of these agreements is minimal.
We have entered into indemnification agreements with our directors and officers that may require us to indemnify our
directors and officers against liabilities that may arise by reason of their status or service as directors or officers, other than
liabilities arising from willful misconduct of a culpable nature; to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified; and to make good faith determination whether or not it is
practicable for us to obtain directors and officers insurance. We currently have directors and officers liability insurance.
In general, management believes that claims which are pending or known to be threatened, will not have a material
adverse effect on our financial position or results of operations and are adequately covered by our liability insurance.
However, it is possible that cash flows or results of operations could be materially affected in any particular period by the
unfavorable resolution of one of more of these contingencies or because of the diversion of management’s attention and the
incurrence of significant expenses.
55
10. Stockholders’ Equity
1998 Stock Plan.
The 1998 Stock Plan (the “1998 Plan”), as amended, provides for the granting to employees (including officers and
non-employee directors) of incentive stock options and for the granting to employees (including officers and non-employee
directors) and consultants of nonstatutory stock options, stock purchase rights (“SPRs”), restricted stock, restricted stock
units (“RSUs”), performance shares, performance units and stock appreciation rights. The exercise price of incentive stock
options and stock appreciation rights granted under the 1998 Plan must be at least equal to the fair market value of the shares
at the time of grant. With respect to any recipient who owns stock possessing more than 10% of the voting power of our
outstanding capital stock, the exercise price of any option or SPR granted must be at least equal to 110% of the fair market
value at the time of grant. Options granted under the 1998 Plan are exercisable at such times and under such conditions as
determined by the administrator; generally over a four year period. The maximum term of incentive stock options granted to
any recipient must not exceed ten years; provided, however, that the maximum term of an incentive stock option granted to
any recipient possessing more than 10% of the voting power of our outstanding capital stock must not exceed five years. In
the case of SPRs, unless the administrator determines otherwise, we have a repurchase option exercisable upon the voluntary
or involuntary termination of the purchaser’s employment with us for any reason (including death or disability). Such
repurchase option lapses at a rate determined by the administrator. The purchase price for shares repurchased is the original
price paid by the purchaser. As of December 31, 2016 and January 2, 2016, no shares were subject to repurchase. The form of
consideration for exercising an option or stock purchase right, including the method of payment, is determined by the
administrator. The 1998 Plan expired in February 2008.
2008 Equity Incentive Plan.
On June 11, 2008, the shareholders approved the adoption of the 2008 Equity Incentive Plan, (the “Incentive Plan”).
There are no material changes in the Incentive Plan from the 1998 Plan. In 2014, the stockholders approved an amendment to
the Incentive Plan for purposes of complying with Section 162(m) of the Internal Revenue Code of 1986, as amended, to
increase the share reserve under the Incentive Plan, and to make certain other amendments to the terms of the Incentive Plan.
The maximum aggregate number of shares that may be awarded and sold under the Incentive Plan is 300,000 shares plus any
shares subject to stock options or similar awards granted under the 1998 Plan that expire or otherwise terminate without
having been exercised in full and shares issued pursuant to awards granted under the 1998 Plan that are forfeited to us on or
after February 23, 2008, which was the date the 1998 Plan expired.
56
The following table summarizes information regarding activity in our stock option plans during the fiscal years ended
2016, 2015 and 2014 (in thousands except share and per share data):
Outstanding Options
Shares
Available
for Grant
Number
of Shares
Weighted
Average
Exercise
Price
Balances as of December 28, 2013.....................................
Additional shares reserved..................................................
Options granted...................................................................
Restricted stock granted......................................................
Options exercised................................................................
Options cancelled................................................................
Awards cancelled................................................................
Options expired...................................................................
Balances as of January 3, 2015...........................................
Additional shares reserved..................................................
Options granted...................................................................
Restricted stock granted......................................................
Options exercised................................................................
Options cancelled................................................................
Awards cancelled................................................................
Options expired...................................................................
Balances as of January 2, 2016...........................................
Additional shares reserved..................................................
Options granted...................................................................
Restricted stock granted......................................................
Options exercised................................................................
Options cancelled................................................................
Awards cancelled................................................................
Options expired...................................................................
Balances as of December 31, 2016.....................................
476,545
503,306
(158,300)
(62,225)
—
27,957
79,890
(13,056)
854,117
1,000
(170,300)
(227,905)
—
174,870
146,000
(7,000)
770,782
-
(112,277)
(286,294)
1,102,842
—
158,300
—
(399,390)
(27,957)
—
—
833,795
—
170,300
—
(277,733)
(174,870)
—
—
551,492
—
112,277
—
66,707
66,000
-
504,918
(126,077)
(66,707)
—
—
470,985 $
3.97
—
8.61
—
3.76
6.13
—
—
4.88
—
9.38
—
3.70
4.71
—
—
6.92
—
13.71
—
5.62
7.37
—
—
8.69
There were 975,903 shares reserved for future issuance under the stock option plans as of December 31, 2016.
The following table summarizes information with respect to stock options outstanding and exercisable as of
December 31, 2016:
Range of Exercise Prices
$3.46 - $3.92..................................
$3.95 - $5.92..................................
$6.00 - $8.16..................................
$8.29 - $8.58..................................
$8.60 - $10.33................................
$10.45 - $10.45..............................
$10.73 - $10.73..............................
$11.04 - $11.04..............................
$12.85 - $12.85..............................
$16.29 - $16.29..............................
$3.46 - $16.29................................
Options Outstanding
Weighted
Average
Remaining
Contractual
Life (years)
Number of
Shares
Outstanding
Options Vested and Exercisable
Weighted
Average
Exercise
Price
Number of
Shares
Exercisable
Weighted
Average
Exercise
Price
47,935
73,182
82,169
60,799
59,500
400
61,223
15,800
32,500
37,477
470,985
2.18 $
2.87 $
5.19 $
4.17 $
4.96 $
5.17 $
5.15 $
5.17 $
6.82 $
6.57 $
4.58 $
57
3.84
5.01
7.38
8.45
9.39
10.45
10.73
11.04
12.85
16.29
8.69
47,164 $
60,241 $
35,615 $
38,325 $
27,067 $
200 $
26,098 $
885 $
118 $
686 $
236,399 $
3.84
4.86
7.08
8.45
9.10
10.45
10.73
11.04
12.85
16.29
6.77
The determination of the fair value of options granted is computed using the Black-Scholes option pricing model with
the following weighted average assumptions:
FY 2016
Employee Stock Option Plan
FY 2015
Average risk free interest rate..........................
Expected life (in years)....................................
Dividend yield .................................................
Average volatility ............................................
1.33%
4.55 years
—
44.5%
1.38%
4.55 years
—
49.3%
FY 2014
1.49%
4.50 years
—
56.2%
The weighted average grant date fair value of options granted as calculated using the Black-Scholes option pricing was
$5.06, $3.95, and $4.02 per share for the fiscal years 2016, 2015 and 2014, respectively.
Option pricing models require the input of various subjective assumptions, including the option’s expected life and the
price volatility of the underlying stock. The expected stock price volatility is based on analysis of our stock price history over
a period commensurate with the expected term of the options, trading volume of our stock, look-back volatilities and
Company specific events that affected volatility in a prior period. The expected term of employee stock options represents the
weighted average period the stock options are expected to remain outstanding and is based on the history of exercises and
cancellations on all past option grants made, the contractual term, the vesting period and the expected remaining term of the
outstanding options. The risk-free interest rate is based on the U.S. Treasury interest rates whose term is consistent with the
expected life of the stock options. No dividend yield is included as we have not issued any dividends and does not anticipate
issuing any dividends in the future.
The following table shows stock-based compensation expense by functional line item in the consolidated statements of
operations for 2016, 2015 and 2014 (in thousands):
FY 2016
FY 2015
Year Ended
December 31,
2016
Year Ended
January 2,
2016
FY 2014
Year Ended
January 3,
2015
Cost of revenues ................................................................. $
Research and development .................................................
Sales and marketing............................................................
General and administrative .................................................
Total stock-based compensation expense ........................... $
119 $
134
164
1,404
1,821 $
223 $
176
185
311
895 $
149
105
118
600
972
Stock-based compensation expense capitalized to inventory was immaterial for 2016, 2015, and 2014.
Information regarding stock options outstanding, exercisable and expected to vest as of December 31, 2016 is
summarized below:
Options outstanding...........................................................
Options vested and expected to vest..................................
Options exercisable ...........................................................
Shares
470,985
436,564
236,399
$
$
$
Number of
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Aggregate
Intrinsic
Value
Life (years)
(thousands)
2,611
2,505
1,725
4.58 $
4.48 $
3.66 $
8.69
8.48
6.77
The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between our
closing stock price on the last trading day of fiscal 2016 and the exercise price, multiplied by the number of in-the-money
options) that would have been received by the option holders had all option holders exercised their options on December 31,
2016. This amount is subject to change due to changes to the fair market value of our common stock. The total intrinsic value
of options exercised for fiscal years 2016, 2015 and 2014 was approximately $0.8 million, $1.5 million, and $1.9 million,
respectively.
58
As of December 31, 2016, there was $3.3 million of total unrecognized compensation cost related to non-vested share-
based compensation arrangements under both of the plans. The cost is expected to be recognized over a weighted average
period of 2.52 years.
Cash flows resulting from excess tax benefits are classified as a part of cash flows from financing activities. Excess tax
benefits are realized tax benefits from tax deductions for exercised stock options and vested restricted stock units and awards
in excess of the deferred tax asset attributable to stock-based compensation expense for such stock-based awards. Excess tax
benefits are considered realized when the tax deductions reduce taxes that otherwise would be payable. Excess tax benefits
classified as a financing cash inflow for fiscal 2016, 2015 and 2014 were $0, $0 and $36 thousand, respectively.
Restricted Stock Awards/Restricted Stock Units
Effective for the 2011 fiscal year and thereafter, each non-employee member of the Board of Directors received an
annual equity award of either restricted stock or RSU, at the election of such Board member, in each case equal to $20
thousand worth of our common stock (determined at the fair market value of the shares at the time such award is granted)
under our Incentive Plan. Each equity award or RSU vests in full on the one-year anniversary of the date of grant provided
that the non-employee member continues to serve on the Board through such date.
Summary of Restricted Stock Units and Awards
We recognize the estimated compensation expense of restricted stock units and awards, net of estimated forfeitures,
over the vesting term. The estimated compensation expense is based on the fair value of our common stock on the date of
grant.
Information regarding the restricted stock units outstanding, vested and expected to vest as of December 31, 2016 is
summarized below:
Restricted stock units outstanding ......................................
Restricted stock units vested and expected to vest .............
Number of
Shares
335,805
218,412
Weighted
Average
Remaining
Contractual
Life (years)
1.95 $
1.87 $
Aggregate
Intrinsic
Value
(thousands)
4,721
3,071
The intrinsic value of the restricted stock units is calculated based on the closing price of our shares as quoted on the
NASDAQ Global Market on the last trading day of the year, December 30, 2016, of $14.06.
The majority of the restricted stock units that were released in fiscal year 2016 were net-share settled such that we
withheld shares with value equivalent to the employees’ minimum statutory obligation for the applicable income and other
employment taxes, and remitted the cash to the appropriate taxing authorities. The total shares withheld were based on the
value of the restricted stock units on their release date as determined by our closing stock price. These net-share settlements
had the effect of share repurchases as they reduced and retired the number of shares that would have otherwise been issued as
a result of the release and did not represent an expense to us. For the fiscal year ended December 31, 2016, 30,789 shares of
restricted stock units were released with an intrinsic value of approximately $0.4 million. We withheld 7,507 shares to satisfy
approximately $100 thousand of employees’ minimum tax obligation on the released restricted stock units.
59
Information regarding the RSU activity during the years ended December 31, 2016, January 2, 2016 and January 3,
2015 is summarized below:
Number of
Shares
Weighted Average
Grant Date Fair
Value
Outstanding as of December 28, 2013 ...............
Restricted stock units granted ............................
Restricted stock units released ...........................
Restricted stock units forfeited...........................
Outstanding as of January 3, 2015 .....................
Restricted stock units granted ............................
Restricted stock units released ...........................
Restricted stock units forfeited...........................
Outstanding as of January 2, 2016 .....................
Restricted stock units granted ............................
Restricted stock units released ...........................
Restricted stock units forfeited...........................
Outstanding as of December 31, 2016 ...............
269,259 $
59,780 $
(46,759) $
(4,890) $
277,390 $
225,392 $
(209,193) $
(146,000) $
147,589 $
285,005 $
(30,789) $
(66,000) $
335,805 $
4.42
9.76
4.29
8.18
5.52
8.66
4.82
8.28
8.59
11.89
8.30
9.67
11.20
During the year ended December 31, 2016, the Company awarded 285,005 restricted stock units at a weighted
average grant date fair value of $11.89 per share. Of this amount, 256,138 stock units represent performance based shares that
are subject to service, performance and market vesting conditions with a weighted average grant date fair value of $11.40 per
share.
RSUs granted with market conditions are valued using the Monte Carlo simulation model and compensation
expense is recognized ratably during the service period even if the market condition is not satisfied. To the extent that the
market condition is not met, the RSUs will not vest and will be cancelled.
RSUs granted with performance conditions are valued at the grant date fair value of the underlying common shares.
The Company make a determination regarding the probability of the performance criteria being achieved and compensation
expense is recognized ratably over the vesting period, if it is expected that the performance criteria will be met.
During the year ended December 31, 2016, the Company accelerated the vesting of 6,400 of restricted stock units
and 10,000 performance-based restricted stock units in connection with an employee termination. In connection with the
acceleration, the Company recorded a $220 thousand charge to general and administrative expenses.
Information regarding the restricted stock awards activity during the year ended December 31, 2016, January 2, 2016
and January 3, 2015 is summarized below:
Number of
Shares
Weighted
Average
Grant Date Fair
Value
Outstanding as of December 28, 2013...............................................
Restricted stock awards granted.........................................................
Restricted stock awards released .......................................................
Outstanding as of January 3, 2015.....................................................
Restricted stock awards granted.........................................................
Restricted stock awards released .......................................................
Outstanding as of January 2, 2016.....................................................
Restricted stock awards granted.........................................................
Restricted stock awards released .......................................................
Outstanding as of December 31, 2016...............................................
3,503 $
2,445 $
(3,503) $
2,445 $
2,513 $
(2,445) $
2,513 $
1,289 $
(2,513) $
1,289 $
5.71
8.18
5.71
8.18
7.96
7.96
7.96
15.51
7.96
15.51
60
Stock Repurchase Program.
In February 2013, the Board of Directors approved a one year $3.0 million stock repurchase program that replaced
the prior two year $4.0 million stock repurchase program. In February 2014, the Board of Directors approved the extension of
the plan for an additional year. In July 2014, the Board of Directors approved an extension of the plan for an additional year
and authorized an additional $3.0 million of stock repurchases. In August 2015, the Board of Directors approved a further
extension of the plan for another year and authorized an additional $2.0 million of stock repurchases. During the years ended
December 31, 2016, January 2, 2016 and January 3, 2015, the Company repurchased 6,544, 199,776 and 562,440 shares at an
average price of $9.00, $7.92 and $8.29 per share, respectively. On September 9, 2015, the Company made a payment to
James H. Mackaness, our former Chief Financial Officer and Chief Operating Officer, of approximately $275 thousand in
cash in exchange for Mr. Mackaness’ agreement to cancel vested stock options exercisable for an aggregate of 92,656 shares
of our common stock. This payment to Mr. Mackaness was made using funds authorized and available under the stock
repurchase program discussed above, and resulted in a reduction of the approximate dollar value of shares that may yet be
purchased under this program. As of December 31, 2016, we have repurchased 843,785 shares for approximately $6.7
million under this current program. The remaining balance of approximately $1.0 million approved under the plan was not
used when the plan lapsed in August 2016.
11. Employee Benefit Plan
We have a plan known as the Iridex Corporation Profit Sharing/401(k) Plan Trust to provide retirement benefits
through the deferred salary deductions for substantially all U.S. employees. Employees may contribute up to 15% of their
annual compensation to the plan, limited to a maximum amount set by the Internal Revenue Service. The plan also provides
for Company contributions at the discretion of the Board of Directors. Prior to the start of fiscal 2009, we suspended the
matching contributions. Subsequent to December 28, 2013, we reinstated a Company match in the amount of 50% of
employee contributions up to a maximum of $3 thousand. In 2016, 2015 and 2014, total matching contributions made by the
Company were $226 thousand, $218 thousand, and $186 thousand, respectively.
12. Income Taxes
Income before (benefit from) provision for income taxes was comprised of the following:
FY 2016
Year Ended
December 31, 2016
FY 2015
Year Ended
January 2, 2016
United States ........................................... $
Foreign ....................................................
Total ........................................................ $
(2,656) $
—
(2,656) $
291 $
—
291 $
FY 2014
Year Ended
January 3, 2015
1,332
—
1,332
The provision for (benefit from) income taxes includes:
FY 2016
Year Ended
December 31, 2016
FY 2015
Year Ended
FY 2014
Year Ended
January 2, 2016
January 3, 2015
Current:
Federal ............................................... $
State ...................................................
Deferred:
Federal ...............................................
State ...................................................
Provision for (benefit from) income
taxes ........................................................ $
- $
4
4
9,271
(218)
9,053
(4) $
30
26
(12)
(197)
(209)
54
16
70
(7,862)
(914)
(8,776)
9,057 $
(183) $
(8,706)
61
Our effective tax rate differs from the statutory federal income tax rate as shown in the following schedule:
FY 2016
Year Ended
December 31,
2016
FY 2015
Year Ended
January 2,
2016
FY 2014
Year Ended
January 3,
2015
Income tax provision at statutory rate.............
State income taxes, net of federal benefit .......
Permanent differences.....................................
Research and development credits ..................
Change in valuation allowance .......................
Other................................................................
Effective tax rate .............................................
34.0%
9.6%
(1.5)%
3.0%
(387.4)%
1.3%
(341.0)%
34.0%
(70.8)%
12.0%
(34.8)%
—
(3.3)%
(62.9)%
34.0%
(68.0)%
(1.1)%
(2.6)%
(613.5)%
(2.4)%
(653.6)%
The tax effect of temporary differences and carryforwards that give rise to significant portions of the net deferred tax
assets are presented below (in thousands):
FY 2016
December 31,
2016
FY 2015
January 2,
2016
Net operating losses ............................................................. $
Research and development credits.......................................
Accruals and reserves ..........................................................
Deferred revenue..................................................................
Property and equipment .......................................................
Intangible assets ...................................................................
Stock compensation .............................................................
Other tax credits...................................................................
Net deferred tax asset...........................................................
Valuation allowance.............................................................
Net deferred tax (liabilities) assets....................................... $
4,411 $
2,113
2,158
104
396
783
972
90
11,027
(11,095)
(68) $
4,135
1,820
1,823
120
399
792
613
89
9,791
(806)
8,985
Our accounting for deferred taxes involves the evaluation of a number of factors concerning the realizability of our
deferred tax assets. Assessing the realizability of deferred tax assets is dependent upon several factors, including the
likelihood and amount, if any, of future taxable income in relevant jurisdictions during the periods in which those temporary
differences become deductible. Our management forecasts taxable income by considering all available positive and negative
evidence including our history of operating income or losses and our financial plans and estimates which are used to manage
the business. These assumptions require significant judgment about future taxable income. The amount of deferred tax assets
considered realizable is subject to adjustment in future periods if estimates of future taxable income are reduced.
As of December 31, 2016, based on the Company’s recent history of losses and its forecasted losses, management
believes on a “more-likely-than-not” basis that a full valuation allowance is required. Accordingly, in the fourth quarter of
fiscal year 2016, the Company provided a full valuation allowance on its federal and state deferred tax assets. As of
December 31, 2016, the Company had federal and state net operating loss (“NOL”) carryforwards of $13.8 million and $15.3
million, respectively. Of the total NOL carryforwards, $3.0 million for federal and $2.5 million for states, relate to windfall
stock option deductions which, when realized, will be credited to equity. The federal NOL will begin to expire in 2032 and
the state NOL will begin to expire in 2020, in each case if not used.
In December 2015, Congress passed a tax extenders package, Protecting Americans from Tax Hikes (PATH) Act of
2015, and permanently extended the federal R&D credit. As of December 31, 2016, we had federal and state R&D credit
carryforwards of approximately $1.6 million and $2.3 million, respectively, available to offset future tax liabilities. The
federal credits will begin expiring in 2026 if not used. The state R&D credits do not expire. The above NOL and research and
development credits are subject to Internal Revenue Code sections 382 and 383. In the event of a change in ownership as
defined by these code sections, the usage of the above mentioned NOL’s and credits may be limited.
62
We account for uncertain tax positions in accordance with ASC 740, “Income Taxes”. ASC 740 seeks to reduce the
diversity in practice associated with certain aspects of measurement and recognition in accounting for income taxes. ASC 740
prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a
tax provision that an entity takes or expects to take in a tax return. Additionally, ASC 740 provides guidance on de-
recognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. Under ASC 740,
an entity may only recognize or continue to recognize tax positions that meet a "more-likely-than-not" threshold. In
accordance with our accounting policy, we recognize accrued interests and penalties related to unrecognized tax benefits as a
component of income tax expense. There is no accrued interest and penalty during the year ended December 31, 2016.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
FY 2016
Year Ended
December 31,
2016
FY 2015
Year Ended
January 2,
2016
FY 2014
Year Ended
January 3,
2015
Balance at the beginning of the year .................................. $
Additions based upon tax positions related to the current
year .....................................................................................
Additions based upon tax positions related to the prior
year .....................................................................................
Reductions based upon tax positions related to the prior
year .....................................................................................
Balance at the end of the year ............................................ $
937 $
861 $
1,027
75
17
73
—
53
51
-
1,029 $
3
937 $
(270)
861
Recognition of the unrecognized tax benefits of $1.0 million as of December 31, 2016 would affect our effective tax
rate. We do not anticipate any material change in our unrecognized tax benefits of $1.0 million over the next twelve months.
The unrecognized tax benefits may change during the next year for items that arise in the ordinary course of business.
We file U.S. federal and state returns. The tax years 2010 to 2016 remain open in several jurisdictions, none of which
have individual significance.
13. Loan and Security Agreement
In November 2016, the Company entered into a Loan and Security Agreement (“Loan Agreement”) with Silicon
Valley Bank providing for a $15.0 million secured revolving loan facility (“Revolving Loan Facility”), with availability
subject to an accounts receivable borrowing base formula. Borrowings under the Revolving Loan Facility accrue interest at a
per annum rate equal to the Wall Street Journal Prime Rate as in effect from time to time, plus 1.5%. The Loan Agreement
does not include any financial covenants. The Company may borrow, repay and reborrow funds under the Revolving Loan
Facility until November 2, 2019, at which time the Revolving Loan Facility matures and all outstanding amounts must be
repaid. As of December 31, 2016, there was no amount outstanding.
14. Business Segments and Geographical Information
We operate in one segment, ophthalmology. We develop, manufacture and market medical devices. Our revenues arise
from the sale of consoles, delivery devices, consumables, service and support activities.
Revenue information shown by geographic region is as follows (in thousands):
United States....................................................................... $
Europe.................................................................................
Rest of Americas.................................................................
Asia/Pacific Rim.................................................................
$
FY 2016
FY 2014
FY 2015
Year Ended Year Ended Year Ended
January 2,
December 31,
2016
2016
23,952 $
25,171 $
7,968
9,567
2,676
2,800
7,161
8,620
41,757 $
46,158 $
January 3,
2015
22,590
9,096
3,199
7,929
42,814
63
Revenues are attributed to countries based on location of end customers. For fiscal years 2016, 2015 and 2014 no
individual country accounted for more than 10% of our sales, except for the United States, which accounted for 54.5%,
57.4%, and 52.8% of revenues in 2016, 2015, and 2014 respectively.
As of December 31, 2016 and January 2, 2016, we had no long-lived assets in any country other than in the United
States.
15. Computation of Basic and Diluted Net Income Per Common Share
A reconciliation of the numerator and denominator of basic and diluted net income per common share is provided as
follows (in thousands, except per share amounts):
FY 2016
FY 2015
Year Ended Year Ended Year Ended
January 2,
2016
December 31,
2016
January 3,
2015
FY 2014
Numerator:
Net (loss) income ..................................................... $
(11,713) $
474 $
10,038
Denominator:
Weighted average shares of common stock (basic) ......
Effect of dilutive preferred shares ...........................
Effect of dilutive stock options................................
Effect of dilutive contingent shares .........................
10,173
—
—
—
9,962
—
154
12
9,892
—
291
174
Weighted average shares of common stock
(diluted) ..............................................................
10,173
10,128
10,357
Per share data:
Basic net (loss) income per share ............................ $
Diluted net (loss) income per share ......................... $
(1.15) $
(1.15) $
0.05 $
0.05 $
1.01
0.97
As of December 31, 2016, January 2, 2016 and January 3, 2015 stock options to purchase 470,985, 249,064 and
116,320 shares, respectively, were excluded from the computation of diluted weighted average shares outstanding because to
do so would have been anti-dilutive.
16. Subsequent Events
On January 3, 2017, the Company issued an additional 172,500 new common shares in connection with the
underwriters exercising their overallotment option at $14.00 per share, before underwriting discount and commissions. The
new stock issuance generated net proceeds to the Company of approximately $2.3 million, after deducting underwriting
commissions of $0.1 million.
64
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures.
Our management, with the participation of our Principal Executive and Financial Officer and Principal Accounting
Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange
Act. In designing and evaluating our disclosure controls and procedures, management recognizes that disclosure controls and
procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the
objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures,
our management was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls
and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all
potential future conditions.
Based on management’s evaluation, our Principal Executive and Financial Officer and Principal Accounting Officer
concluded that, as of December 31, 2016, our disclosure controls and procedures are designed at a reasonable assurance level
and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit
under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and
forms, and that such information is accumulated and communicated to our management, including our Principal Executive
and Financial Officer and Principal Accounting Officer, as appropriate, to allow timely decisions regarding required
disclosure.
Management’s Report on Internal Control over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over the company’s financial
reporting. There are inherent limitations in the effectiveness of any internal control, including the possibility of human error
and the circumvention or overriding of controls. Accordingly, even any effective internal control can provide only reasonable
assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of any
internal control may vary over time. Our management assessed the effectiveness of the company’s internal control over
financial reporting as of December 31, 2016. In making this assessment, we used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based
on our assessment using those criteria, our management concluded that, as of December 31, 2016, our internal control over
financial reporting is effective.
Attestation Report of the Independent Registered Public Accounting Firm.
BPM LLP, our independent registered public accounting firm, has issued an audit report on the effectiveness of our
internal control over financial reporting as of December 31, 2016, which report is included herein.
Changes in Internal Control over Financial Reporting.
There were no changes in our internal control over financial reporting that occurred during the fourth quarter of fiscal
year 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting, as defined in Rule 13a-15(f) and 15(d)-15(f) under the Exchange Act.
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure
controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of
achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that
our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A
control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any,
65
have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that
breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts
of some persons, by collusion of two or more persons or by management override of the controls. The design of any system
of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may
become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not
be detected.
66
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Board of Directors and Stockholders of IRIDEX Corporation
We have audited the internal control over financial reporting of IRIDEX Corporation (a Delaware Corporation) and
its subsidiaries (the “Company”) as of December 31, 2016, based on criteria established in Internal Control — Integrated
Framework (2013 Framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”). The Company’s management is responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying
Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, IRIDEX Corporation and its subsidiaries maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated
Framework (2013 Framework) issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated balance sheets of IRIDEX Corporation and its subsidiaries as of December 31, 2016 and January 2,
2016, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash
flows for each of the three years in the period ended December 31, 2016 and our report dated March 15, 2017 expressed an
unqualified opinion thereon.
/s/ BPM LLP
San Jose, California
March 15, 2017
67
Item 9B. Other Information
Not applicable.
68
PART III
Certain information required by Part III has been omitted from this Form 10-K. This information is instead
incorporated herein by reference to our definitive Proxy Statement, which we will file within 120 days after the end of our
fiscal year pursuant to Regulation 14A in time for our Annual Meeting of Stockholders to be held in 2017.
Item 10. Directors, Executive Officers and Corporate Governance
Information regarding our directors is incorporated herein by reference to “Proposal One - Election of Directors -
Nominees” in our Proxy Statement. The information concerning our current executive officers is incorporated herein by
reference to “Executive Officers” in our Proxy Statement. Information regarding delinquent filers is incorporated by
reference to “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement. Information regarding our
code of business conduct and ethics is incorporated herein by reference to “Corporate Governance Matters - Code of
Business Conduct and Ethics” in our Proxy Statement.
Item 11. Executive Compensation
The information required by this item is incorporated herein by reference to “Executive Compensation” in our Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item is incorporated herein by reference to “Security Ownership of Certain Beneficial
Owners and Management” in our Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item is incorporated herein by reference to “Certain Relationships and Related
Transactions” in our Proxy Statement.
Item 14. Principal Accountant Fees and Services.
The information required by this item is incorporated herein by reference to “Proposal Two - Ratification of the
Appointment of Independent Registered Public Accounting Firm” in our Proxy Statement.
69
Item 15. Exhibits and Financial Statement Schedules
(a) The following documents are filed in Part II of this Annual Report on Form 10-K:
PART IV
Page in
Form 10-K
Report
1. Index to Financial Statements
Report of Independent Registered Public Accounting Firm ......................................................................................................
39
40
Consolidated Balance Sheets as of December 31, 2016 and January 2, 2016 ...........................................................................
Consolidated Statements of Operations for the years ended December 31, 2016, January 2, 2016, and January 3,
41
2015 .......................................................................................................................................................................................
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2016, January 2,
42
2016, and January 3, 2015.....................................................................................................................................................
Consolidated Statements of Stockholders’Equity for the years ended December 31, 2016, January 2, 2016, and
43
January 3, 2015......................................................................................................................................................................
Consolidated Statements of Cash Flows for the years ended December 31, 2016, January 2, 2016, and January 3,
2015 .......................................................................................................................................................................................
44
45
Notes to Consolidated Financial Statements ..............................................................................................................................
2. Financial Statement Schedule
Schedules have been omitted because they are either not required, not applicable, or the required information is
included in the consolidated financial statements or notes thereto.
70
3. Exhibits
Exhibits
2.1(13)
3.1(1)
3.2(2)
4.1(3)
4.2(3)
Exhibit Index
Exhibit Title
Asset Purchase Agreement by and among Cutera, Inc., Registrant, and U.S. Bank, National Association, as
Escrow Agent, dated December 30, 2011.
Amended and Restated Certificate of Incorporation of Registrant.
Amended and Restated Bylaws of Registrant.
Certificate of Designation, Preferences and Rights of Series A Preferred Stock.
Investor Rights Agreement, dated as of August 31, 2007, by and among the Registrant, BlueLine Capital
Partners, LP; BlueLine Capital Partners III, LP and BlueLine Capital Partners II, LP.
4.3(4)
Amendment No. 1 to Investor Rights Agreement, dated as of March 31, 2009.
4.4(21)
4.5(21)
4.6(21)
4.7(21)
4.8(21)
4.9(21)
4.10(21)
4.11(21)
4.12(21)
10.1.(18)
10.2(20)
10.3(5)
Form of senior indenture, to be entered into between the Registrant and the trustee designated therein.
Form of senior note with respect to each particular series of senior notes.
Form of subordinated indenture to be entered into between the Registrant and the trustee designated therein.
Form of subordinated note with respect to each particular series of subordinated notes.
Form of warrant with respect to each warrant.
Certificate of designation, preferences and rights with respect to any preferred stock.
Form of Depositary Agreement with respect to the depositary shares.
Form of Subscription Agreement.
Form of Unit with respect to any contractual units.
Fourth Amendment to Lease Agreement dated February 9, 2016 by and between Zappettini Investment Co.
and the Registrant.
Form of Indemnification Agreement with directors and officers.
Lease Agreement dated December 6, 1996 by and between Zappettini Investment Co. and the Registrant, as
amended pursuant to Amendment No. 1 dated September 15, 2003 and Amendment No. 2 dated December
22, 2008.
10.3.1(14)
Third Amendment to Lease Agreement dated August 4, 2014 by and between Zappettini Investment Co.
and the Registrant.
10.4(6)*
1995 Director Option Plan.
10.5(7)*
1998 Stock Plan.
10.6(8)*
2005 Employee Stock Purchase Plan.
10.7(9)*
2008 Equity Incentive Plan.
10.8(10)*
Form of 2008 Equity Incentive Plan Option Agreement.
10.9(11)*
Form of Stand-alone stock option agreement.
71
Exhibits
10.10(3)
Exhibit Title
Securities Purchase Agreement, dated August 31, 2007, by and among BlueLine Capital Partners, LP,
BlueLine Capital Partners III, LP, BlueLine Capital Partners II, LP and the Registrant.
10.11(12)*
Form of 2008 Equity Incentive Plan Restricted Stock Award Agreement.
10.12(12)*
Form of 2008 Equity Incentive Plan Restricted Stock Unit Award Agreement.
10.13(13)*
Restricted Stock Unit Award Agreement granted to William M. Moore under the Company’s 2008 Equity
Incentive Plan, as amended.
10.14(16)*
Restricted Stock Unit Award Agreement granted to William M. Moore under the Company’s 2008 Equity
Incentive Plan, as amended.
10.15(17)*
10.16(19)*
Change in Control Severance Agreement dated March 30, 2015, between the Registrant and William M.
Moore.
Confidential Separation Agreement and Release of All Claims dated as of June 15, 2016 by and between the
Company and Ronald Steckel
10.17(20)* Offer Letter between the Company and Mr. Mokari effective as of May 13, 2016.
Change in Control Severance Agreement, between the Company and Mr. Mokari
10.18(20)*
10.19(22)
Loan and Security Agreement, dated as of November 2, 2016, between IRIDEX Corporation and Silicon
Valley Bank.
21.1 (1)
23.1
24.1
31.1
31.2
32.1
32.2
Subsidiaries of Registrant
Consent of BPM LLP, Independent Registered Public Accounting Firm.
Power of Attorney (included on signature page).
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
101.INS
XBRL Instance Document.
101.SCH
XBRL Taxonomy Extension Schema Document.
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB
XBRL Taxonomy Extension Labels Linkbase Document.
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document.
*
(1)
(2)
(3)
(4)
(5)
Indicates a management contract or compensatory plan or arrangement.
Incorporated by reference to the Exhibits filed with the Registration Statement on Form SB-2 (No. 333-00320-LA)
which was declared effective on February 15, 1996.
Incorporated by reference to the Exhibits filed with the Registrant’s Report on Form 8-K on November 21, 2007.
Incorporated by reference to the Exhibits filed with the Registrant’s Report on Form 8-K on September 7, 2007.
Incorporated by reference to the Exhibits filed with the Registrant’s Report on Form 8-K on April 6, 2009.
Incorporated by reference to the Exhibits filed with the Registrant’s Report on Form 10-K for the year ended January 3,
2009.
72
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
(18)
(19)
(20)
(21)
(22)
Incorporated by reference to Exhibit 10.3 filed with the Registrant’s Registration Statement on Form S-8 on August 3,
2004.
Incorporated by reference to the definitive proxy statement on Schedule 14A filed on May 4, 2009.
Incorporated by reference to the appendix filed with the Registrant’s Proxy Statement for the Registrant’s 2004 Annual
Meeting of Stockholders which was filed on April 30, 2004.
Incorporated by reference to the appendix filed with the Registrant’s Proxy Statement for the Registrant’s 2008 Annual
Meeting of Stockholders which was filed on April 24, 2008.
Incorporated by reference to Exhibit 99.1 filed with Registrant’s Registration Statement on Form S-8 on November 21,
2008.
Incorporated by reference to Exhibit 99.(d)(5) filed with the Registration Statement on Form SC TO-I July 30, 2009.
Incorporated by reference to the Exhibits filed with the Registrant’s Report on Form 10-Q for the quarter ended July 2,
2011.
Incorporated by reference to the Exhibit 10.1 filed with the Registrant’s Report on Form 8-K on March 27, 2013.
Incorporated by reference to the Exhibit 2.1 filed with the Registrant’s Report on Form 8-K on January 4, 2012.
Incorporated by reference to Exhibit 10.1 filed with the Registrant’s Report on Form 10-Q on November 3, 2014.
Incorporated by reference to the Exhibit 10.1 filed with the Registrant’s Report on Form 8-K on January 9, 2014.
Incorporated by reference to the Exhibits filed with the Registrant’s Report on Form 10-Q on May 12, 2015.
Incorporated by reference to the Exhibit 10.1 filed with the Registrant’s Report on Form 10-K on March 31, 2016.
Incorporated by reference to the Exhibit 10.1 filed with the Registrant’s Report on Form 8-K on June 21, 2016,
Incorporated by reference to the Exhibits filed with the Registrant’s Report on Form 8-K on July 11, 2016,
Incorporated by reference to the Exhibits filed with the Registration Statement on Form S-3 (No. 333-213094) which
was declared effective on August 26, 2016,
Incorporated by reference to Exhibit 10.1 filed with the Registrant’s Report on Form 8-K on November 3, 2016.
Trademark Acknowledgments
IRIDEX, the IRIDEX logo, IRIS Medical, MicroPulse, OcuLight, SmartKey, and EndoProbe, are our registered
trademarks. G-Probe, DioPexy, DioVet, TruFocus, TrueCW, IQ 577, IQ 532, Cyclo G6, TxCell, OtoProbe, Symphony,
EasyFit, Endoview, MoistAir and GreenTip product names are our trademarks. All other trademarks or trade names
appearing in this Annual Report on Form 10-K are the property of their respective owners.
73
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Mountain View,
State of California, on the 15th day of March 2017.
SIGNATURES
IRIDEX CORPORATION
By: /s/ William M. Moore
William M. Moore
President and Chief Executive Officer
/s/ Atabak Mokari
Atabak Mokari
Chief Financial Officer and Vice President of
Corporate Development
/s/ Romeo R. Dizon
Romeo R. Dizon
Vice President and Controller
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints William M. Moore, Atabak Mokari and Romeo Dizon, jointly and severally, their attorney-in-fact, each with full
power of substitution, for him in any and all capacities, to sign on behalf of the undersigned any amendments to this Annual
Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, and each of the undersigned does hereby ratifying and confirming all that each of said
attorneys-in-fact, or his substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, this report has been signed by the following persons in the
capacities and on the dates indicated.
Signature
Title
/s/ William M. Moore
(William M. Moore)
/s/ Atabak Mokari
(Atabak Mokari)
/s/ Romeo R. Dizon
(Romeo R. Dizon)
/s/ Sanford Fitch
(Sanford Fitch)
/s/ George R. Marcellino
(George R. Marcellino)
/s/ Ruediger Naumann-Etienne
(Ruediger Naumann-Etienne)
/s/ (Scott A. Shuda)
(Scott A. Shuda)
President, Chief Executive Officer, and Chairman of the
Board
(Principal Executive Officer)
Chief Financial Officer and Vice President of Corporate
Development
(Principal Financial Officer)
Vice President and Controller
(Principal Accounting Officer)
Director
Director
Director
Director
74
Date
March 15, 2017
March 15, 2017
March 15, 2017
March 15, 2017
March 15, 2017
March 15, 2017
March 15, 2017
Exhibit Index
Exhibits
2.1(13)
Exhibit Title
Asset Purchase Agreement by and among Cutera, Inc., Registrant, and U.S. Bank, National Association, as
Escrow Agent, dated December 30, 2011.
3.1(1)
3.2(2)
4.1(3)
4.2(3)
Amended and Restated Certificate of Incorporation of Registrant.
Amended and Restated Bylaws of Registrant.
Certificate of Designation, Preferences and Rights of Series A Preferred Stock.
Investor Rights Agreement, dated as of August 31, 2007, by and among the Registrant, BlueLine Capital
Partners, LP; BlueLine Capital Partners III, LP and BlueLine Capital Partners II, LP.
4.2(4)
Amendment No. 1 to Investor Rights Agreement, dated as of March 31, 2009.
4.4(21)
Form of senior indenture, to be entered into between the Registrant and the trustee designated therein.
4.5(21)
Form of senior note with respect to each particular series of senior notes.
4.6(21)
Form of subordinated indenture to be entered into between the Registrant and the trustee designated therein.
4.7(21)
Form of subordinated note with respect to each particular series of subordinated notes.
4.8(21)
Form of warrant with respect to each warrant.
4.9(21)
Certificate of designation, preferences and rights with respect to any preferred stock .
4.10(21)
Form of Depositary Agreement with respect to the depositary shares.
4.11(21)
Form of Subscription Agreement.
4.12(21)
Form of Unit with respect to any contractual units.
10.1(18)
Fourth Amendment to Lease Agreement dated February 9, 2016 by and between Zappettini Investment Co.
and the Registrant.
10.2(20)
Form of Indemnification Agreement with directors and officers.
10.3(5)
Lease Agreement dated December 6, 1996 by and between Zappettini Investment Co. and the Registrant, as
amended pursuant to Amendment No. 1 dated September 15, 2003 and Amendment No. 2 dated December
22, 2008.
10.3.1(14)
Third Amendment to Lease Agreement dated August 4, 2014 by and between Zappettini Investment Co.
and the Registrant.
10.4(6)*
1995 Director Option Plan.
10.5(7)*
1998 Stock Plan.
10.6(8)*
2005 Employee Stock Purchase Plan.
10.7(9)*
2008 Equity Incentive Plan.
10.8(10)*
Form of 2008 Equity Incentive Plan Option Agreement.
10.9(11)*
Form of Stand-alone stock option agreement.
75
Exhibits
10.10(3)
Exhibit Title
Securities Purchase Agreement, dated August 31, 2007, by and among BlueLine Capital Partners, LP,
BlueLine Capital Partners III, LP, BlueLine Capital Partners II, LP and the Registrant.
10.11(12)*
Form of 2008 Equity Incentive Plan Restricted Stock Award Agreement.
10.12(12)*
Form of 2008 Equity Incentive Plan Restricted Stock Unit Award Agreement.
10.13(13)*
Restricted Stock Unit Award Agreement granted to William M. Moore under the Company’s 2008 Equity
Incentive Plan, as amended.
10.14(16)*
Restricted Stock Unit Award Agreement granted to William M. Moore under the Company’s 2008 Equity
Incentive Plan, as amended.
10.15(17)*
Change in Control Severance Agreement dated March 30, 2015, between the Registrant and William M.
Moore.
10.16(19)*
10.17(20)*
Confidential Separation Agreement and Release of All Claims dated as of June 15, 2016 by and between the
Company and Ronald Steckel
Offer Letter between the Company and Mr. Mokari effective as of May 13, 2016.
10.18(20)*
Change in Control Severance Agreement, between the Company and Mr. Mokari.
10.19(22)
Loan and Security Agreement, dated as of November 2, 2016, between IRIDEX Corporation and Silicon
Valley Bank.
21.1(1)
Subsidiaries of Registrant.
23.1
24.1
31.1
31.2
32.1
32.2
Consent of BPM LLP, Independent Registered Public Accounting Firm.
Power of Attorney (included on signature page).
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
XBRL Instance Document.
101.SCH
XBRL Taxonomy Extension Schema Document.
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB
XBRL Taxonomy Extension Labels Linkbase Document.
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document.
*
(1)
(2)
(3)
(4)
(5)
(6)
Indicates a management contract or compensatory plan or arrangement.
Incorporated by reference to the Exhibits filed with the Registration Statement on Form SB-2 (No. 333-00320-LA)
which was declared effective on February 15, 1996.
Incorporated by reference to the Exhibits filed with the Registrant’s Report on Form 8-K on November 21, 2007.
Incorporated by reference to the Exhibits filed with the Registrant’s Report on Form 8-K on September 7, 2007.
Incorporated by reference to the Exhibits filed with the Registrant’s Report on Form 8-K on April 6, 2009.
Incorporated by reference to the Exhibits filed with the Registrant’s Report on Form 10-K for the year ended January 3,
2009.
Incorporated by reference to Exhibit 10.3 filed with the Registrant’s Registration Statement on Form S-8 on August 3,
2004.
76
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
(18)
(19)
(20)
(21)
(22)
Incorporated by reference to the definitive proxy statement on Schedule 14A filed on May 4, 2009.
Incorporated by reference to the appendix filed with the Registrant’s Proxy Statement for the Registrant’s 2004 Annual
Meeting of Stockholders which was filed on April 30, 2004.
Incorporated by reference to the appendix filed with the Registrant’s Proxy Statement for the Registrant’s 2008 Annual
Meeting of Stockholders which was filed on April 24, 2008.
Incorporated by reference to Exhibit 99.1 filed with Registrant’s Registration Statement on Form S-8 on November 21,
2008.
Incorporated by reference to Exhibit 99.(d)(5) filed with the Registration Statement on Form SC TO-I July 30, 2009.
Incorporated by reference to the Exhibits filed with the Registrant’s Report on Form 10-Q for the quarter ended July 2,
2011.
Incorporated by reference to the Exhibit 10.1 filed with the Registrant’s Report on Form 8-K on March 27, 2013.
Incorporated by reference to the Exhibit 2.1 filed with the Registrant’s Report on Form 8-K on January 4, 2012.
Incorporated by reference to Exhibit 10.1 filed with the Registrant’s Report on Form 10-Q on November 3, 2014.
Incorporated by reference to the Exhibit 10.1 filed with the Registrant’s Report on Form 8-K on January 9, 2014.
Incorporated by reference to the Exhibits filed with the Registrant’s Report on Form 10-Q on May 12, 2015.
Incorporated by reference to the Exhibit 10.1 filed with the Registrant’s Report on Form 10-K on March 31, 2016.
Incorporated by reference to the Exhibit 10.1 filed with the Registrant’s Report on Form 8-K on June 21, 2016,
Incorporated by reference to the Exhibits filed with the Registrant’s Report on Form 8-K on July 11, 2016,
Incorporated by reference to the Exhibits filed with the Registration Statement on Form S-3 (No. 333-213094) which
was declared effective on August 26, 2016,
Incorporated by reference to Exhibit 10.1 filed with the Registrant’s Report on Form 8-K on November 3, 2016.
77
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23.1
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (333-213094) and Form S-8
(333-197934, 333-183513, 333-161630, 333-155598, 333-147866, 333-135822, 333-127716, 333-117885, 333-107700, 333-97541,
333-67480, 333-45736, 333-86091, 333-57573, 333-32161) of our reports dated March 15, 2017 relating to the consolidated financial
statements and the effectiveness of internal control over financial reporting as of December 31, 2016, which appear in this Annual
Report on Form 10-K.
/s/ BPM LLP
San Jose, California
March 15, 2017
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 13(a) or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, William M. Moore, certify that:
EXHIBIT 31.1
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of IRIDEX Corporation;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report
is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d) Disclosed in this report any changes in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect the registrant’s internal control over financial
reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 15, 2017
By: /s/ WILLIAM M. MOORE
Name: William M. Moore
Title: President and Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 13(a) or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Atabak Mokari, certify that:
EXHIBIT 31.2
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of IRIDEX Corporation;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report
is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect the registrant’s internal control over financial
reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 15, 2017
By: /s/ ATABAK MOKARI
Name: Atabak Mokari
Title: Chief Financial Officer and Vice President of Corporate
Development
(Principal Financial Officer)
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.1
I, William M. Moore, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, certify that the Annual Report of IRIDEX Corporation on Form 10-K for the fiscal year ended December 31, 2016 (i) fully
complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) that information contained in
such Annual Report on Form 10-K fairly presents, in all material respects, the financial condition and results of operations of IRIDEX
Corporation.
Date: March 15, 2017
By: /s/ WILLIAM M. MOORE
Name: William M. Moore
Title: President and Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.2
I, Atabak Mokari, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
certify that the Annual Report of IRIDEX Corporation on Form 10-K for the fiscal year ended December 31, 2016 (i) fully complies
with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) that information contained in such
Annual Report on Form 10-K fairly presents, in all material respects, the financial condition and results of operations of IRIDEX
Corporation.
Date: March 15, 2017
By: /s/ ATABAK MOKARI
Name: Atabak Mokari
Title: Chief Financial Officer and Vice President of Corporate
Development
(Principal Financial Officer)