2018 Annual Report to Stockholders
2018 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 29, 2018
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITY EXCHANGE ACT OF 1934
or
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 every Interactive Data File required to be submitted 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 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, a non-accelerated filer, a smaller reporting company or an
emerging growth company. See the definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule
12b-2 of the Exchange Act.:
Large accelerated filer
Non-accelerated filer
Emerging growth company
Accelerated filer
Smaller reporting company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
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 $40,449,599 as of June 29, 2018, 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 14, 2019, Registrant had 13,632,797 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain parts of the Proxy Statement for the Registrant’s 2019 Annual Meeting of Stockholders (the “Proxy Statement”) are incorporated by reference into Part
III of this Annual Report on Form 10-K.
USE OF FORWARD-LOOKING STATEMENTS
In this document, we refer to Iridex Corporation and its subsidiaries (unless the context otherwise requires) as “we,” the
“Company” or “Iridex.” With the exception of historical information contained in this Annual Report on Form 10-K, content
herein may contain “forward looking statements” that are made pursuant to the Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995. These statements are based on management’s current expectations and are subject
to uncertainty and changes in circumstances. We cannot guarantee that any forward-looking statements will be accurate,
although we believe that we have been reasonable in our expectations and assumptions. Investors should realize that if
underlying assumptions prove inaccurate or unknown risks or uncertainties materialize, actual results could vary materially
from our expectations and projections. These factors include general economic conditions, delays and risks associated with
the performance of contracts, risks associated with international sales and currency fluctuations, uncertainties as a result of
research and development, acceptable results from clinical studies, including publication of results and patient/procedure data
with varying levels of statistical relevance, risks involved in introducing and marketing new products, regulatory compliance,
potential acquisitions, consumer and industry acceptance, litigation and/or contemplated 510(k) filings, the ability to achieve
and maintain profitability in our business lines, and other factors discussed in this Annual Report on Form 10-K, subsequent
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. We disclaim any obligation to update any forward-
looking statements.
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Table of Contents
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 .............................................................................................................................
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 ....................................................................................................................................
Part III
Part IV
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 Matters .
Item 13. Certain Relationships and Related Transactions, and Director Independence .........................................
Item 14. Principal Accountant Fees and Services ...................................................................................................
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 laser 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 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 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 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.
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Our products are sold in the United States and Germany predominantly through a direct sales force and internationally
primarily through independent distributors. In 2017, we established direct sales capabilities in Germany. Total revenues in
2018 and 2017 were $42.6 million and $41.6 million, respectively. We generated net losses of $12.8 million and $12.9
million in 2018 and 2017, 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, while only about 30% of those patients have been diagnosed as having it. 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. Global sales of products used
to diagnose and treat glaucoma are expected to total $5.8 billion in 2018, according to Market Scope’s 2018 Global
Glaucoma Surgical Device Market.
Pharmaceutical products represent a majority of this revenue 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 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
Per Market Scope estimates in 2016, global sales of retinal surgical products will increase to $2.7 billion in 2021. 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. An estimated 285 million people worldwide had diabetes in 2010, according to the
International Diabetes Federation. The federation predicts as many as 438 million will have diabetes globally by 2030.
Previous clinical publications, such as an article cited at the U.S. National Institutes of Health’s National Library of
Medicine, 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
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.
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Our Solution
Our traditional laser technology was developed to perform laser photocoagulation by using a mode that 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
while minimizing 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 minimize 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 limited 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 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 lower IOP and
may reduce the number of eye drop medications. The MP3 procedure has the
potential to be used across a wide spectrum of glaucoma disease severity, given its
believed therapeutics benefits and non-incisional approach with minimal tissue
damage and complications. 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 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 that 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
Our current product portfolio utilizes a system approach. Each system includes a laser console, which generates the
laser energy, and a number of interchangeable delivery devices or disposable probes for use in specific clinical applications.
This approach allows our customers to purchase a basic laser system and add additional delivery devices or disposable probes
as their therapeutic needs expand or as new applications develop. We currently offer three basic product categories: 1) laser
consoles, 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 Cyclo G6 is an infrared (810nm) laser designed to treat patients diagnosed
with a range of glaucoma disease states. The Cyclo G6 system is sold with a family of probes that are disposable, including
our patented MP3 probe that utilizes our MicroPulse technology and our G-Probe.
Medical retina: IQ laser systems. Our IQ laser systems offer our MicroPulse technology 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 allows the physician to perform multi-spot pattern
scanning for efficient delivery of our MicroPulse laser.
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.
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 through a multi-factorial mechanism
of action - it perhaps improves outflow through natural drainage pathways such as the uveoscleral and the trabecular
meshwork while also reducing certain inflow. The MP3 Probe can be performed on an anesthetized eye in the doctor’s office
or OR. The non-incisional procedure takes just a few minutes and results in minimal 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 disposable product.
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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 disposable product.
G-Probe Illuminate. The G-Probe Illuminate 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 disposable 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 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 disposable product.
Research and Development
We have close working relationships with researchers, clinicians and practicing physicians around the world who
provide new ideas, evaluate prototypes 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 11 engineers 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, and industrial designs. The R&D process integrates all 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 or partnering with physicians known for their expertise. Research efforts are directed toward the development of
new 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 improving the treatment of serious eye diseases such as glaucoma and retinal disease. The
objectives of developing new treatments and applications are to expand the patient population, to better and more
economically treat diseases, to treat patients earlier in the treatment regimen and to reduce the side effects of treatment.
We consider clinical projects to be a component of our R&D efforts and they may or may not result in additional
commercial opportunities.
Customers and Customer Support
Our products are currently sold for use by ophthalmologists specializing in the treatment of eye disease in retina,
glaucoma and pediatric 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 2018 and 2017.
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 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 and Germany predominantly through our direct sales force and
internationally through independent distributors. Currently we have a direct sales force of 20 employees who are engaged in
sales efforts within the United States, 3 in Germany and 6 personnel engaged in managing our distribution sales efforts
internationally. Our sales are administered through our corporate headquarters in Mountain View, California.
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International revenues represented 48.1% and 44.7% of our revenues in 2018 and 2017, 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, social
media, email marketing, trade shows, public relations, market research, key opinion leader collaborations 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.
Clinical Affairs
Our clinical affairs group was established to support clinical research opportunities, provide specialized ophthalmic
surgeon training and credentialing for our proprietary MicroPulse™ products, establish strong relationships with prominent
key opinion leaders and assure the accuracy and consistency our messaging to the market. We believe that a strong research
program underlying marketing initiatives and professional level training for our customers are key to driving the application
of our technology for more widespread and consistent use.
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 we manufacture are subject to extensive regulation by numerous governmental authorities,
including federal, state, and foreign governmental agencies. The principal regulators in the United States are the Food and
Drug Administration (“FDA”) and the California Department of Public Health, Food and Drug Branch. In April 1998, we
received certification for ISO 9001/EN 46001, which is an international quality system standard that documents compliance
to the European Medical Device Directives. 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 December 2018, we were
certified to ISO 13485:2016, which superseded the 2003 version of the standard. 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 or MicroPulse 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 Directives 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 Directives. 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.
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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, Glaukos, New World Medical
and Ivantis. 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. Our patent portfolio includes 20 active United States patents and 13 active
foreign patents on the technologies related to our products and processes. In addition, we have 8 patent applications pending
in the United States and 12 foreign patent applications pending. Our patent applications may not be approved.
In addition to patents, we rely on trade secrets and proprietary know-how which we seek to protect, in part, through
proprietary information agreements with employees, consultants and other parties. Our proprietary information agreements
with our employees and consultants contain provisions requiring such individuals to assign to us, without additional
consideration, any inventions conceived or reduced to practice by them while employed or retained by us, subject to
customary exceptions.
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 (“FD&C Act”), as amended, and the regulations promulgated thereunder, 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.
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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” (NSE) 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 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 FD&C Act requires
devices to be manufactured to comply with applicable QSR regulations which impose certain procedural and documentation
requirements upon us with respect to design, development, manufacturing and quality assurance activities. We are subject to
unannounced inspections by the FDA and the Food and Drug Branch of the California Department of Public Health, 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 subject to the FD&C Act, 21 U.S.C. §§321-397, and other statutes
FDA administers, which greatly expanded the export of approved and unapproved United States medical devices. However,
some foreign countries require manufacturers to provide a specific type of FDA export certificate (such as a Certificate to
Foreign Government or Certificate of Exportability) 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 any export certificate if significant
outstanding QSR violations exist.
We are also regulated under the Radiation Control provisions (originally enacted as the Radiation Control for Health
and Safety Act of 1968) which are located in Sections 531 through 542 of the FD&C 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
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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 directives
(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.
In order to maintain medical device sales in Canada, Iridex must obtain the ISO 13485:2016 certificate through the
Medical Device Single Audit Program (MDSAP). This program allows a single audit of a medical device manufacturer's
Quality Management Systems which satisfies the requirements of multiple regulatory jurisdictions. Specifically, MDSAP is a
way that medical device manufacturers can be audited once for compliance with the standard and regulatory requirements of
up to five different medical device markets: Australia, Brazil, Canada, Japan and the United States. The MDSAP audit
program is voluntary in all countries except Canada. Iridex must pass comprehensive Stage I and Stage II audits and receive
the ISO certificate by December 31, 2019 in order to continue to distribute product in Canada after that date.
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
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.
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Employees
As of December 29, 2018, we had a total of 114 full-time equivalent employees engaged in our ongoing operations,
including 48 in operations (including manufacturing, quality, logistics and service), 40 in sales and marketing which does not
include 4 consultants and one independent sales representative, 11 in R&D and 15 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 29, 2018, we had 38 such persons serving in such roles. 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.
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Item 1A. Risk Factors
Factors That May Affect Future Results
In addition to the other information contained in this Annual Report Form 10-K, we have identified the following risks
and uncertainties that may have a material adverse effect on our business, common stock price, financial condition or results
of operations. You should carefully consider the risks described below before making an investment decision.
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 may experience manufacturing difficulties, quality control issues or assembly constraints.
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 past several years, we have experienced supply chain, production and training issues as we have expanded our
product lines and sales volumes, and may experience similar issues in the future as we continue to grow our business. These
issues have caused, and may in the future cause, us to reduce or delay the shipment of our products and incur costs to service
or replace products already shipped to customers. We have also incurred, and may in the future incur, additional costs to
rectify or prevent similar issues in the future. Our efforts to address these supply chain, production and training issues may
not be successful, and if we are unable to address these 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 business, results of operations and financial condition.
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 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:
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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 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, direct sales force in Germany and relationships with independent international distributors. Currently our
direct and independent sales forces within the United States consist of approximately 20 employees and one independent
representative, respectively and our direct sales force in Germany consists of 3 employees. Our international independent
distributors are managed by a team of 6 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 largely 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. As we establish our direct sales capabilities in Germany, we may be unable to
recruit and retain qualified personnel in this region. Any loss of the members of our existing direct or indirect sales
organizations, or any failure to execute on our plans to further develop our sales function, could have an adverse impact on
our business, results of operations and financial condition.
Growth in our sales and marketing organization may create operational challenges without immediately offsetting
benefits.
We have increased and continue to increase our internal sales and marketing functions. This growth may place a
significant strain on our management, operating and financial systems and our sales, marketing, training and administrative
resources. As a result of our growth, our operating costs may escalate even faster than planned, and some of our internal
systems may need to be enhanced or replaced. For example, if we are unable to provide adequate training for our expanding
sales force, our ability to fully utilize new sales and marketing resources may be adversely impacted, we could suffer
reputational harm and our ability to maintain our installed base of customers may be negatively impacted. If we cannot
effectively manage our expanding operations and our costs, we may not be able to grow effectively or we may grow at a
slower pace, and our business could be adversely affected.
It can take six months or longer before our internal sales representatives are fully trained and productive in selling our
solution to prospective clients. This ramp period presents a number of operational challenges as the cost of recruiting, hiring
and carrying new sales representatives cannot be offset by the revenue such new sales representatives produce until after they
complete their ramp periods. If we cannot reliably develop our sales representatives to a productive level, or if we lose
productive representatives in whom we have heavily invested, our future growth rates and revenue will suffer.
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 29, 2018, our international sales were $20.5 million, or 48.1% of total revenues. We anticipate that
international sales will continue to account for a significant portion of our revenues in the foreseeable future. All of our
international revenues and costs for the year ended December 29, 2018 have been denominated in U.S. dollars except for a
sale transacted through our German subsidiary. As a result, an increase in the value of the U.S. dollar relative to foreign
currencies makes our U.S. dollar-denominated 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:
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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;
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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.
If we fail to develop and successfully introduce new products and applications or fail to improve our existing
products, 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 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:
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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;
any delays or reductions in product shipments, or product recalls, resulting from manufacturing, distribution or
other operational issues;
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 quarters. 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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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:
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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 and clinical 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 MP3 and EndoProbe devices. 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,
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.
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, Glaukos, New World Medical
and Ivantis. Pharmaceuticals represent alternative treatments to our laser procedures. Some of our principal pharmaceutical
competitors are Alcon, Allergan, OSI Pharmaceuticals (Astellas), 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 device 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 Act and the Health
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Care and Education Reconciliation Act of 2010, collectively, the “Affordable Care Act”, and the current U.S. presidential
administration has announced certain policy changes that could impact the availability of benefits under 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 or related administrative policies. 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 for us. The laws that may affect our ability to operate include (i) the
federal 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 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.
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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 SoftTip 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 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 potential
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.
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 could 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. Our patent portfolio includes 20 active United States
patents and 13 active foreign patents on the technologies related to our products and processes. In addition, we have 8 patent
applications pending in the United States and 12 foreign patent applications pending. 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
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.
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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 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 internationally, we
cannot provide assurance 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 provide assurance 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.
Our ability to raise capital in the future may be limited, and future sales and issuances of securities could negatively
affect our stock price and dilute the ownership interest of our existing investors.
Our business and operations may consume resources faster than we anticipate. We may need in the future to raise
additional funds through future equity or debt financings to meet our operational needs and capital requirements for product
development, clinical trials and commercialization and may subsequently require additional fundraising. 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. 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 29, 2018, we had 13,602,052 shares of common stock
outstanding, all of which shares 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 29, 2018, holders of an aggregate of 982,742 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
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 may become eligible for sale in the public markets in the future, subject to certain legal and
control limitations.
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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.
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 or manufacture the necessary components, materials, and fully
assembled products. Lead times for components and fully assembled products vary significantly and depend on numerous
factors, including the specific supplier, the size of the order, contract terms and current market demand for such products. 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 components, materials and fully assembled products
requirements, we may have inadequate inventory, which could interrupt our manufacturing, delay delivery of our product to
our customers and result in the loss of customer sales. Any of these occurrences would negatively impact our business and
operating results.
We depend on sole source or limited source suppliers.
We rely on third parties to manufacture substantially all of the components used in our products, including optics, laser
diodes and crystals. We have some long term or volume purchase agreements with our suppliers and currently purchase
components and fully-assembled products 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:
•
•
•
•
unavailability of shortages or limitations on the ability to obtain supplies of components and products in the
quantities that we require;
delays in delivery or failure of suppliers to deliver critical components and products on the dates we require;
failure of suppliers to manufacture and assemble components and products to our specifications, and potentially
reduced quality; and
inability to obtain components and products 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 and fully-assembled products. 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 or products 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 or products 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 or fully-assembled products 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.
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If we experience a significant disruption in our information technology systems or breaches of data security, our
business could be adversely affected.
We rely on information technology systems to keep financial records and corporate records, communicate with staff
and external parties and operate other critical functions, including sales and manufacturing processes. Our information
technology systems are potentially vulnerable to disruption due to breakdown or malicious intrusion and computer viruses. If
we were to experience a prolonged system disruption in our information technology systems, it could negatively impact the
coordination of our sales, planning and manufacturing activities, which could adversely affect our business. In addition, in
order to maximize our information technology efficiency, we have physically consolidated our primary corporate data and
computer operations. This concentration, however, exposes us to a greater risk of disruption to our internal information
technology systems. Although we maintain offsite back-ups of our data, if operations at our facilities were disrupted, it may
cause a material disruption in our business if we are not capable of restoring function on an acceptable time frame.
In addition, our information technology systems are potentially vulnerable to cyber-attacks or other data security
breaches-whether by employees or others-which may expose sensitive data to unauthorized persons. Such data security
breaches could lead to the loss of trade secrets or other intellectual property, or could lead to the public exposure of sensitive
and confidential information of our employees, customers, suppliers and others, any of which could have a material adverse
effect on our business, financial condition and results of operations.
While we have implemented a number of protective measures, including firewalls, antivirus and malware detection
tools, patches, log monitors, routine back-ups, system audits, routine password modifications and disaster recovery
procedures, such measures may not be adequate or implemented properly to prevent or fully address the adverse effect of
such events, and in some cases we may be unaware of an incident or its magnitude and effects. If we are unable to prevent
such security breaches or privacy violations or implement satisfactory remedial measures, our operations could be disrupted,
and we may suffer loss of reputation, financial loss and other regulatory penalties because of lost or misappropriated
information. In addition, these breaches and other inappropriate access can be difficult to detect, and any delay in identifying
them may lead to increased harm of the type described above.
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, ASCs, 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 FD&C Act and the related regulations, the FDA regulates the design, development, clinical
testing, manufacture, labeling, sale, distribution and promotion of medical devices. Before a new device can be introduced
into the market, the product must be shown to meet regulatory requirements established by the FD&C Act 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 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.
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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 Directives 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 directives (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.
Further, in order to maintain medical device sales in Canada, we must obtain the ISO 13485:2016 certificate through
the MDSAP. MDSAP allows a single audit of a medical device manufacturer's Quality Management Systems which satisfies
the requirements of multiple regulatory jurisdictions - Australia, Brazil, Canada, Japan and the United States. The MDSAP
audit program is voluntary in all countries except Canada. MDSAP may impose a higher compliance burden than the CE
Mark through more rigorous audit requirements. If we do not comply with the new MDSAP standard, we will not be able to
sell our products in Canada after December 31, 2019.
Any clinical trials necessary that we may undertake for regulatory approval or marketing reasons 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.
We may be required to undertake clinical trials often required to obtain regulatory approvals or may choose to
undertake such trials for marketing or other reasons. Clinical trials for products such as ours are complex and expensive and
their outcomes are uncertain. Any clinical trials that we may undertake would require the investment of significant financial
and administrative resources. Moreover, the results of clinical trials are uncertain, and inconclusive or negative results may
not support, or may impair, the sale and adoption of our products. We may 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
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
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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 cleared 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 actual or potential component
failures, adverse event reports, manufacturing errors or design defects, including defects in labeling. Furthermore, we may
from time to time initiate a recall of a component or set of components comprising a portion of our laser systems, which
could increase customer returns, warranty claims and associated reserve levels. A recall could divert management’s attention,
cause us to incur significant expenses, harm our reputation with customers and negatively affect our future sales and financial
results.
For example, on February 23, 2018, we initiated a worldwide voluntary recall of a specific laser accessory called the
TruFocus LIO Premiere™ (“LIO”). The LIO is a head-mounted indirect ophthalmoscope that connects to our laser console
and is used to view and perform laser treatment on a patient’s retina. This recall was prompted after we received reports of
three adverse events from one physician in the U.S., resulting in focal cataracts and iris burns occurring during procedures in
which the TruFocus LIO Premiere was used. We identified several potential root causes for the adverse events, including use
error. The recall is still in progress and expected to be completed by end of first quarter of fiscal year 2019.
We recently obtained FDA clearance for an updated TruFocus LIO Premiere™ device. The updated device includes
expanded user instructions and minor design changes. Use of the updated LIO may result in adverse events, including those
observed with the prior LIO device. If physician use of our updated LIO results in serious adverse events, we may have to
initiate another recall or utilize additional resources to further evaluate the design of the LIO device. Furthermore, in light of
the recall, we cannot provide any assurance that the updated LIO, once launched, will achieve market acceptance. We will be
25
required to devote significant resources to launch and market the updated LIO and cannot provide any assurance that these
activities will generate revenue as anticipated. If our revenue grows more slowly than we expect because of a delay in or a
lack of market acceptance for our updated LIO, our business and financials will be adversely affected.
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.
Significant developments resulting from recent and potential changes in United States trade policies could have a
material adverse effect on us.
Certain of our materials may be subject to the effects of various trade agreements, treaties and tariffs. The current U.S.
presidential administration has publicly stated its intention to renegotiate or withdraw from the North American Free Trade
Agreement and has imposed tariffs on various goods from various countries, including China, Canada and the European
Union (“EU”), and announced intentions to impose furthermore significant tariffs on certain United States imports. As a
result, Canada, the EU, China and other countries have responded with retaliatory tariffs on certain United States exports. We
cannot predict the effect these and potential additional tariffs will have on our business, including in the context of escalating
trade tensions. Further tariffs, additional taxes, or trade barriers, both domestically and internationally, may affect our selling
and/or manufacturing costs and margins, the competitiveness of our products, or our ability to sell products or purchase
necessary equipment and supplies, and consequently affect our business, results of operations, or financial conditions. To the
extent that trade tariffs and other restrictions imposed by the United States increase the price of, or limit the amount of, raw
materials and finished goods imported into the United States, the costs of our raw materials may be adversely affected and
the demand from our customers for products and services may be diminished, which could adversely affect our revenues and
profitability.
In addition, these potential developments and any market perceptions concerning these and related issues and the
attendant regulatory uncertainty regarding, for example, the posture of governments with respect to international trade, could
have a material adverse effect on global trade and economic growth which, in turn can adversely affect our business.
Furthermore, changes in United States trade policy have resulted and could result in additional reactions from United States
trading partners and other countries, including adopting responsive trade policies that make it more difficult or costly for us
to export our products to those countries. We sell a significant majority of our products into countries outside the United
States and we purchase a significant portion of equipment and supplies from suppliers outside the United States. These
measures could also result in increased costs for goods imported into the U.S. or may cause us to adjust our worldwide
supply chain. Any of these effects could require us to increase prices to our customers which may reduce demand, or, if we
are unable to increase prices, may result in lowering our margin on products sold.
We cannot predict future trade policy or the terms of any renegotiated trade agreements and their impacts on our
business. The adoption and expansion of trade restrictions, the occurrence of a trade war, or other governmental action related
to tariffs or trade agreements or policies has the potential to adversely impact demand for our products, our costs, our
customers, our suppliers, and the United States economy, which in turn could adversely impact our business, financial
condition and results of operations.
Changes in U.S. tax laws could have a material adverse effect on our business, cash flow, results of operations or
financial conditions.
The comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”) was enacted in
the United States on December 22, 2017 and includes, among other items, a reduction in the federal corporate income tax rate
from 35% to 21%, certain interest expense deduction limitations and changes in the timing of certain taxable income. We are
required to recognize the effect of the tax law changes in the period of enactment, such as remeasuring our U.S. deferred tax
assets and liabilities and reassessing the net realizability of our deferred tax assets and liabilities.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) which provides guidance
on accounting for the tax effects of the Tax Act. We have completed our analysis and accounting with respect the Tax Act,
and identified no additional changes from amounts previously recorded. However, changes in law, interpretations, and facts
may result in adjustments to these amounts. Based on the Company’s net operating loss carryovers and valuation allowance,
there is no impact to its consolidated financial statements as a result of the accounting for the tax effects of the Tax Act.
Subsequent legislations, guidance, regulations or audits that differ from our prior assumptions and interpretations, or
other factors which were not anticipated at the time we estimated our tax provision could have a material adverse effect on
our business, cash flow, results of operations or financial condition.
26
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 not willing or not able 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.
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.
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:
•
•
•
•
•
•
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.
Moreover, we cannot assure you that the anticipated benefits of any acquisition or investment would be realized or that
we would not be exposed to unknown liabilities. In connection with these types of transactions, we may issue additional
equity securities that would dilute the ownership interest of existing investors or earnings per share, use cash that we may
need in the future to operate our business, incur debt on terms unfavorable to us or that we are unable to repay, incur large
charges or substantial liabilities, encounter difficulties integrating diverse business cultures and become subject to adverse tax
consequences, substantial depreciation or deferred compensation charges. These challenges related to acquisitions or
investments could adversely affect our business, operating results and financial condition.
Divestitures of some of our businesses or product lines may materially and adversely affect our financial condition,
results of operations or cash flows and require us to raise additional capital to replace revenue from those business units
or product lines.
We evaluate the performance and strategic fit of all of our businesses and may sell businesses or product lines.
Divestitures involve risks, including difficulties in the separation of operations, services, products and personnel, the
diversion of management's attention from other business concerns, the disruption of our business, the potential loss of key
employees and the retention of uncertain environmental or other contingent liabilities related to the divested business. In
addition, divestitures may result in significant asset impairment charges, including those related to goodwill and other
intangible assets, and the loss of revenue which could have a material adverse effect on our financial condition and results of
operations. In addition, we may need to raise additional capital to replace the revenue generated from the business or product
line that is divested and we can provide no assurance that such capital will be available or available on terms that are
acceptable to us. We cannot assure you that we will be successful in managing these or any other significant risks that we
encounter in divesting a business or product line, and any divestiture we undertake could materially and adversely affect our
27
business, financial condition, results of operations and cash flows, and may also result in a diversion of management attention,
operational difficulties and losses.
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 with
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 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. 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 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. During the fiscal year ended
December 29, 2018, the trading price of our common stock fluctuated from a low of $3.85 per share to a high of $9.15 per
share. During the fourth fiscal quarter ended December 29, 2018, the trading price of our common stock fluctuated from
$3.85 per share to a high of $6.30 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.
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.
28
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 29, 2018. 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.
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 were to persist. As of June 30, 2018, we became a “smaller reporting company” as defined in the Exchange Act,
and effective with our Annual Report covering our fiscal year 2018, our independent registered public accounting firm will
not be required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404.
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:
•
•
•
•
•
the authorized number of directors may 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, the chairman of the board,
chief executive officer or president, 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.
29
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 2022.
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.
Item 3. Legal Proceedings
In January 2018, we filed a lawsuit against Quantel Medical, S.A., Quantel USA, Inc., and Quantel, S.A. (collectively,
“Quantel”) in the U.S. District Court for the Northern District of California. The lawsuit alleges that Quantel products
infringe U.S. Patent No. 7,771,417, that Quantel breached an earlier agreement between Quantel and the Company, and that
Quantel has infringed upon the Company’s MicroPulse® trademark, Registration No. 4550188 on the principal register.
Quantel previously had a limited license to the asserted Company patent and trademark. Our complaint filed in connection
with this matter asserts that the license was terminated in early 2017 for material breach, but that Quantel continued to use
our intellectual property without authorization.
In March 2017, OD-OS GmbH noticed an opposition to the Company’s European Patent No. currently EP 1 856 774 at
the European Patent Office (“EPO”). On June 8, 2018, Quantel intervened in the Opposition. Oral proceedings on the
opposition took place on July 13, 2018. At the conclusion of those proceedings, the EPO’s Opposition Division
communicated that it would move to revoke the patent. The formal written decision from the Opposition Division was issued
on October 1, 2018. The Company filed its notice of appeal on October 10, 2018.
In late May of 2018, Quantel applied to the Paris District Court in Paris, France for a ruling that its products do not
infringe the French Part of Iridex’s European Patent at issue in the opposition, EP 1 856 774.
On February 12, 2019, we announced the resolution of our dispute with Quantel and dismissed the lawsuit we filed
against Quantel in the U.S. District Court for the Northern District of California. Quantel dismissed and ceased its
participation in parallel proceedings against us in Europe.
In addition, 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.
30
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 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 in fiscal years 2017 and 2018.
Fiscal 2018
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Fiscal 2017
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
High
Low
6.30
9.15
7.24
8.28
9.94
10.25
11.52
15.99
$
$
$
$
$
$
$
$
3.85
6.00
5.33
5.72
7.62
8.19
8.95
11.87
$
$
$
$
$
$
$
$
On March 14, 2019, the closing price for our common stock on the Nasdaq Global Market was $4.53 per share. As of
March 14, 2019, there were approximately 35 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 September 18, 2018, we sold 1,916,667 shares of the Company’s common stock (including 250,000 shares of
common stock from the exercise of the overallotment option of shares granted to the underwriters) at a price of $6.00 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). We entered into an underwriting agreement with underwriters for
whom Stifel, Nicolaus & Company, Incorporated acted as representative. The net proceeds to the Company after deducting
estimated underwriting discounts and commissions, fees and expenses of approximately $1.0 million were approximately
$10.5 million. There has been no material change in the planned use of proceeds as described in our final prospectus filed
with the SEC on September 14, 2018 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
As a “smaller reporting company,” as defined in Rule 12b-2 of the Exchange Act, we are not required to provide the
information called for by this Item.
31
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 laser 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 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, G-Probe and G-Probe Illuminate; 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 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 and Germany predominantly through a direct sales force and internationally,
through independent distributors. Total revenues in 2018 and 2017 were $42.6 million and $41.6 million, respectively. We
generated net losses of $12.8 million and $12.9 million in 2018 and 2017.
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.
Results of Operations - 2018 and 2017
Our fiscal year ends on the Saturday closest to December 31. Fiscal 2018 ended on December 29, 2018 and fiscal 2017
ended on December 30, 2017. Fiscal years 2018 and 2017 each included 52 weeks of operations.
32
The following table sets forth certain operating data as a percentage of revenue for the periods indicated.
Revenues
Cost of revenues
Gross margin
Operating expenses:
Research and development
Sales and marketing
General and administrative
Gain on sale of intellectual property
Impairment of long-lived assets
Total operating expenses
(Loss) income from operations
Other (expense) income, net
(Loss) income from operations before (benefit from) provision
for income taxes
(Benefit from) provision for income taxes
Net (loss) income
Percentage of Revenue
Years Ended
FY 2018
December 29,
2018
FY 2017
December 30,
2017
100.0 %
59.0 %
41.0 %
9.4 %
39.4 %
22.4 %
0.0 %
0.0 %
71.2 %
(30.2 %)
0.2 %
(30.0 %)
0.1 %
(30.1 %)
100.0 %
62.7 %
37.3 %
12.5 %
35.0 %
21.1 %
(0.4 %)
0.1 %
68.3 %
(31.0 %)
(0.3 %)
(31.2 %)
(0.3 %)
(30.9 %)
Comparison of 2018 and 2017
Revenues.
Our total revenues increased $1.0 million or 2.4% from $41.6 million in 2017 to $42.6 million in 2018. The increase
was due primarily to an increase in our international systems revenues and recurring revenues, partially offset by a decrease
in our domestic systems sales. Domestic systems sales were impacted by a decrease in retina system sales primarily due to
the impact of our voluntary recall. The increase in international systems revenues was primarily due to an increase in G6
system sales. Our recurring revenues increased due to an increase in G6 related probes sales, partially offset by a decrease in
legacy probes sales.
(in millions)
Systems – domestic
Systems – international
Recurring revenues
Total revenues
FY 2018
FY 2017
Change in $
Change in %
$
$
7.3 $
12.7
22.6
42.6 $
8.0 $
11.7
21.9
41.6 $
(0.7 )
1.0
0.7
1.0
(8.8 %)
8.5 %
3.2 %
2.4 %
Gross Profit.
Gross profit increased $2.0 million or 12.7% from $15.5 million in 2017 to $17.5 million in 2018. Gross margin
increased 3.7 percentage points from 37.3% in 2017 to 41.0% in 2018. Gross margin improved primarily due to lower
manufacturing costs and elimination of costs associated with our voluntary LIO product recall in 2017, partially offset by the
impact of a shift in geographic mix.
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, sales return and a variety of other factors.
Research and Development.
R&D expenses decreased $1.2 million or 23.1% from $5.2 million in 2017 to $4.0 million in 2018. The decrease was
attributable primarily to a decrease in salaries and related costs as a result of decrease in headcount and a decrease in share-
based compensation expense.
33
Sales and Marketing.
Sales and marketing expenses increased $2.2 million or 15.4%, from $14.5 million in 2017 to $16.8 million in 2018.
The increase was attributable primarily to an increase in salaries and related costs due to an increase in headcount and an
increase in other general selling and marketing expenses.
General and Administrative.
General and administrative expenses increased $0.8 million or 8.8% from $8.8 million in 2017 to $9.6 million in 2018.
The increase in spending was attributable primarily to an increase in headcount and associated costs, an increase in our
German operations and an increase in legal expense.
Gain on sale of intellectual property
During 2017, we recognized a $0.2 million gain on sale of intellectual property which was written off in 2016.
Other Income (Expense).
Other expense totaled $0.1 million in 2018 and was attributable primarily to interest income, partially offset by an
increase in the fair value re-measurement of the contingent earn-out liabilities of the RetinaLabs acquisition. Other expense
totaled $0.1 million in 2017 and was attributed primarily to an increase in the fair value re-measurement of the contingent
earn-out liabilities of the RetinaLabs acquisition, partially offset by interest income.
Income Taxes.
We recorded a provision for income taxes of $37 thousand for the year ended December 29, 2018 compared to a
benefit from income taxes of $0.1 million for the year ended December 30, 2017. The effective tax rate for the year ended
December 29, 2018 was negative 0.29% compared to an effective tax rate of 0.98% for the year ended December 30, 2017.
The income tax valuation allowance was $15.5 million at the end of 2018 compared to $12.3 million at the end of 2017.
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 2018 and 2017
As of December 29, 2018, we had cash and cash equivalents of $21.2 million, no debt and working capital of $28.5
million compared to cash and cash equivalents of $21.7 million, no debt and working capital of $29.1 million as of December
30, 2017.
Net cash used in operating activities was $10.0 million in 2018 compared to $3.6 million in 2017. The increase in net
cash used in operating activities was primarily due to changes in working capital, driven by lower cash collections, timing of
vendor payments and increase in operating expenses.
During 2018, net cash used in investing activities was $0.8 million, which consisted of $0.4 million for capital
expenditures and $0.4 million payments of the contingent earn-out liability. Net cash used in investing activities during 2017
was $0.8 million, which consisted of $0.6 million for capital expenditures and $0.4 million for payment of the contingent
earn-out liability, partially offset by $0.2 million proceeds from sale of intellectual property.
During 2018, net cash provided by financing activities was $10.4 million, which consisted of $10.5 million net
proceeds arising from the issuance of common stock and $0.1 million proceeds from stock option exercises, partially offset
by $0.2 million payroll taxes related to net share settlement of equity awards. Net cash provided by financing activities
during 2017 was $2.3 million, which consisted of $2.3 million net proceeds arising from issuance of common stock and $0.4
million proceeds from stock option exercises, partially offset by $0.3 million payroll taxes related to net share settlement of
equity awards.
We believe our existing cash and cash equivalents will be sufficient to meet our anticipated cash needs over the next 12
months.
Critical Accounting Policies
Revenue Recognition.
Our revenues arise from the sale of laser consoles, delivery devices, consumables, service, and support activities. We
also derive revenue from royalties from third parties which are typically based on licensees’ net sales of products that utilize
our technology. Our revenue is recognized in accordance with Accounting Standards Codification (“ASC”) 606, “Revenue
from Contracts with Customers.”
34
The Company has the following revenue transaction types: (1) Product Sale Only, (2) VIP/LAP Programs, (3)
Extended Warranty, (4) System Repairs (outside of warranty) and (5) Royalty Revenue.
(1) Product Sale Only: The Company’s products consist of laser consoles, delivery devices and consumable
instrumentation, including laser probes. The Company’s products are currently sold for use by ophthalmologists
specializing in the treatment of glaucoma and retinal diseases. Inside the United States and Germany the
products are sold directly to the end users. In other countries outside of the United States, the Company utilizes
independent, third-party distributors to market and sell the Company’s products. There is no continuing
obligation subsequent to the shipment to the distributors.
Under the new guidance, there is no change in our revenue recognition for product-sale-only transactions, as
compared to revenue recognition for these transactions under the prior revenue recognition standards. The
Company recognizes revenue from product sale at a point in time. When a system or disposables are sold
without any additional deliverables, the Company recognizes revenue using the five-step model: (1) identifying
the contract with the customer, (2) identifying the performance obligations in the contract, (3) determining
expected transaction price, (4) allocating the transaction price to the distinct performance obligations in the
contract, and (5) recognizing revenue when (or as) the performance obligations are satisfied.
(2) VIP/LAP Programs: The Company sometimes enters into VIP or Laser Advantage Program (LAP) contracts with
customers. For the VIP program, under the terms of such contracts, the customer is not charged for the system
upon the initial agreement, but rather is obligated to purchase a quarterly minimum quantity of Endoprobes
(classified as disposables) at a premium during the contract period, such that at the end of the contract period the
system has been paid in full. The Company decided to replace its previously utilized VIP program (contract
length of two years) with an LAP program (contract length of 12 months or less) beginning in fourth quarter of
2016. Under the LAP program, the system is given away free of charge and title is transferred after the customer
purchases the minimum required number of boxes of probes (classified as disposables). Customers with older
machines have the ability to trade in their old machines for the most current laser equipment offered in the
program (G6 Laser) and receive a discount on the program’s minimum purchase requirements. Under ASC 606,
this non-cash consideration must be included in the transaction price. However, the Company has determined
that there is no value associated with the old machine and the trade in is essentially offered to encourage
customers to purchase more consumables under the program.
Under the new guidance, there is no change in our revenue recognition for product sales under VIP/LAP
programs as compared to revenue recognition for these transactions under the prior revenue recognition standards.
The Company recognizes revenue from product sales under VIP/LAP programs at a point in time. For both
programs, the Company allocates the transaction price of the distinct performance obligations in the contract by
determining stand-alone selling price using historical pricing net of any variable consideration or discounts to
specifically allocate to a particular performance obligation.
(3) Extended Warranty: The Company offers a standard 2 year warranty on all system sales (5 years on the laser
heads for its IQ 532/577 laser consoles). The Company also offers an extended warranty which is sold to
customers in incremental, one-year warranty periods which begin subsequent to the expiration of the standard 2
year warranty. The customer can opt to purchase the extended warranty at the time of the system sale or after the
initial system sale.
Under the new guidance, there is no change in our revenue recognition for extended warranty as compared to
revenue recognition for these transactions under the prior revenue recognition standards. The Company
recognizes revenue from extended warranty ratably over the warranty period. Revenue recognition for the sale
of an extended warranty is largely dependent on the timing of the sale as follows:
a.
b.
Extended Warranty Sale in Conjunction with System Sale: If the customer opts to purchase an extended warranty
at the time of the system sale, the Company allocates the transaction price of the distinct performance obligations
in the contract by determining stand-alone selling price using historical pricing net of any variable consideration
or discounts to specifically allocate to a particular performance obligation.
Extended Warranty Sale Subsequent to System Sale: If the customer opts to purchase an extended warranty after
the initial system sale, the Company determines the amount of time that has elapsed since the initial system sale.
If the extended warranty is purchased within 60 days of the initial sale, the Company considers this sale to be an
additional element of the original sale and allocates the transaction price of the distinct performance obligations
in the contract by determining stand-alone selling price using historical pricing net of any variable consideration
or discounts to specifically allocate to a particular performance obligation. If the extended warranty is purchased
subsequent to sixty days after the initial sale, the sale of the extended warranty is deemed a separate contract and
is deferred at the selling price and recognized ratably over the extended warranty period as the performance
obligation is satisfied.
35
(4) System Repairs (outside of warranty): Customers will sometime request repairs from the Company subsequent to
the expiration of the standard warranty and outside of an extended warranty contract.
Under the new guidance, there is no change in our revenue recognition for system repairs (outside warranty) as
compared to revenue recognition for these transactions under the prior revenue recognition standards. The
Company recognizes revenue from system repairs (outside of warranty) at a point in time. When the customer
requests repairs from the Company subsequent to the expiration of the standard warranty and outside of an
extended warranty contracts, these repair contracts are considered separate from the initial sale, and as such,
revenue is recognized as the repair services are rendered and the performance obligation satisfied.
(5) Royalty Revenue: The Company has royalty agreements with two customers related to the sale of the Company’s
intellectual property. Under the terms of these agreements, the customer is to remit a percentage of sales to the
Company.
Under the new guidance, since these arrangements are for sales-based licenses of intellectual property, for which
the guidance in paragraph ASC 606-10-55-65 applies, the Company recognizes revenue only as the subsequent
sale occurs. However, the Company notes that such sales being reported by the licensee with a quarter in arrear,
such revenue is recognized at the time it is reported and paid by the licensee given that any estimated variable
consideration would have to be fully constrained due to the unpredictability of such estimate and the unavoidable
risk that it may lead to significant revenue reversals.
The Company elected the practical expedient allowing it to not recognize as a contract asset the commission paid to its
salesforce on the sale of its products as an incremental cost of obtaining a contract with a customer but rather recognize such
commission as expense when incurred as the amortization period of the asset that the Company would have otherwise
recognized is one year or less. There is no change in the Company’s accounting for commissions.
Inventories.
Inventories are stated at the lower of cost or net realizable value 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 net realizable value 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.
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 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.
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.
36
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 2018, based on the Company's recent history of losses and its
forecasted losses, management believes on the more likely than not basis that a full valuation allowance is required.
Accordingly, in the fourth quarter of fiscal year 2018, the Company 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 was no accrued interest and penalties during the year ended December 29, 2018.
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 a 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 Adopted Accounting Standards.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2014-09 Revenue from Contracts with Customers (Topic 606) (“ASC 606”), which, along with amendments issued in 2015,
2016 and 2017, replaces nearly all current U.S. GAAP guidance on this topic with a comprehensive revenue measurement
and recognition standard and expanded disclosure requirements. This new guidance provides a five-step analysis in
determining when and how revenue is recognized. Under the new guidance, revenue is recognized when a customer obtains
control of promised goods or services and is recognized in an amount that reflects the consideration which the entity expects
to receive in exchange for those goods or services. In addition, the new guidance requires disclosure of the nature, amount,
timing and uncertainty of revenue and cash flows arising from contracts with customers.
As part of our assessment and implementation plan, we evaluated our policies, procedures and internal controls. In
preparation for adoption of the standard, the Company has implemented internal controls to enable the preparation of
financial information, including the assessment of the impact of the standard. The Company has adopted this guidance using
the modified retrospective method in the first quarter of fiscal 2018. Under the modified retrospective method, the new
standards apply to all new contracts initiated on or after the effective date, and for contracts which have remaining
obligations as of the effective date, an adjustment to the opening balance of retained earnings is required. Based on the results
of the procedures taken in adopting this standard, we determined that our accounting for revenues under the then prescribed
standard (ASC 605) was not different from the new ASC 606 standard. As such, we did not have any adjustments to our
opening balance of our retained earnings.
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. The adoption of this standard in
fiscal year 2018 did not have a material impact on our consolidated financial statements.
37
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. The
adoption of this standard in fiscal year 2018 did not have a material impact on the Company’s consolidated financial
statements.
In May 2017, the FASB issued ASU 2017-09, “Compensation – Stock Compensation (Topic 718): Scope of
Modification Accounting.” The amendments in ASU 2017-09 include guidance on determining which changes to the terms
and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. These
amendments require the entity to account for the effects of a modification unless all of the following conditions are met: the
fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is
the same as the fair value (or value using an alternative measurement method) of the original award immediately before the
original award is modified; the vesting conditions of the modified award are the same as the vesting conditions of the original
award immediately before the original award is modified; and the classification of the modified award as an equity
instrument or a liability instrument is the same as the classification of the original award immediately before the original
award is modified. This guidance is effective for annual reporting periods beginning after December 15, 2017, including
interim periods within that reporting period, with early adoption permitted. The adoption of this standard in fiscal year 2018
did not have a material impact on the Company’s consolidated financial statements.
Recent Accounting Standards Not Yet Adopted.
In February 2016, the FASB issued ASU 2016-02, “Leases,” which, along with subsequent amendments, modified
lessee accounting guidance under Topic 840. This ASU requires the Company 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 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. The Company will adopt the new standard in the first quarter of its fiscal year 2019 using the optional
transition method. The Company will elect not to reassess whether any expired or existing contracts are or contain leases, not
to reassess the lease classification for any expired or existing leases, not to reassess initial direct costs for any existing leases
and not to separate non-lease components from lease components and instead account for each separate lease component and
the non-lease components associated with that lease component as a single lease component for new or modified leases.
While we continue to evaluate certain provisions of the standard, based on our current estimates, we expect the adoption of
the standard will result in recognition of right-of-use assets and lease liabilities, primarily relating to real estate operating
leases, of approximately $4.0 million and $4.5 million, respectively, as of the first day of fiscal year 2019, on the Company’s
consolidated balance sheets. No material impact is expected to the Company’s consolidated statements of operations or its
consolidated statements of cash flows.
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework –
Changes to the Disclosure Requirements for Fair Value Measurement,” which removes, modifies and adds certain disclosure
requirements on fair value measurements. The new guidance is effective for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the effect
of the adoption of this guidance on its consolidated financial statements.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
As a “smaller reporting company,” as defined in Rule 12b-2 of the Exchange Act, we are not required to provide the
information called for by this Item.
Item 8. Financial Statements and Supplementary Data.
Our consolidated balance sheets as of December 29, 2018 and December 30, 2017 and the consolidated statements of
operations, comprehensive income, stockholders’ equity and cash flows for each of our fiscal years 2018 and 2017 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
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of IRIDEX Corporation (a Delaware corporation) and
its subsidiaries (the “Company”) as of December 29, 2018 and December 30, 2017, and the related consolidated statements
of operations, comprehensive loss, stockholders’ equity, and cash flows for each of the two years in the period ended
December 29, 2018, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion,
the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of
December 29, 2018 and December 30, 2017, and the results of its operations and its cash flows for each of the two years in
the period ended December 29, 2018, in conformity with accounting principles generally accepted in the United States of
America.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for revenues
from contracts with customers in 2018 due to the adoption of the new revenue standard.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit
of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal
control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our
audits also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable
basis for our opinion.
/s/ BPM LLP
We have served as the Company’s auditor since 2007.
San Jose, California
March 29, 2019
39
IRIDEX Corporation
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
Current assets:
ASSETS
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts of $213 as of
December 29, 2018 and $226 as of December 30, 2017
Inventories
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Intangible assets, net
Goodwill
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:
Accrued warranty
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note 9)
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 13,602,052 and 11,596,274 shares as of December 29,
2018 and December 30, 2017, respectively
Additional paid-in capital
Accumulated other comprehensive income
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
FY 2018
FY 2017
December 29, 2018 December 30, 2017
$
21,194 $
21,707
$
$
9,083
8,794
547
39,618
1,220
100
533
201
41,672 $
2,516 $
2,962
2,763
622
2,225
11,088
238
385
11,711
7,863
9,381
500
39,451
1,403
116
533
143
41,646
1,724
2,459
2,153
1,536
2,520
10,392
199
533
11,124
—
—
145
71,548
70
(41,802 )
29,961
41,672 $
126
59,385
—
(28,989 )
30,522
41,646
$
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)
Total revenues
Cost of revenues
Gross profit
Operating expenses:
Research and development
Sales and marketing
General and administrative
Gain on sale of intellectual property
Impairment of long-lived assets
Total operating expenses
Loss from operations
Other income (expense), net
Loss from operations before provision for (benefit from) income taxes
Provision for (benefit from) income taxes
Net loss
Net loss per share:
Basic
Diluted
Weighted average shares used in computing net loss per common share:
Basic
Diluted
$
$
$
FY 2018
Year Ended
December 29, 2018
$
FY 2017
Year Ended
December 30, 2017
41,593
26,090
15,503
42,600 $
25,129
17,471
4,006
16,782
9,551
—
—
30,339
(12,868 )
92
(12,776 )
37
(12,813 ) $
(1.05 ) $
(1.05 ) $
12,199
12,199
5,208
14,541
8,782
(175 )
35
28,391
(12,888 )
(107 )
(12,995 )
(128 )
(12,867 )
(1.11 )
(1.11 )
11,555
11,555
The accompanying notes are an integral part of these consolidated financial statements.
41
IRIDEX Corporation
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
FY 2018
Year Ended
FY 2017
Year Ended
Net loss
Change in foreign currency translation adjustments
Comprehensive loss
December 29, 2018 December 30, 2017
(12,867 )
$
—
(12,867 )
(12,813 ) $
70
(12,743 ) $
$
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 2016: Balances, December 31, 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
Net loss
FY 2017: Balances, December 30, 2017
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
Other comprehensive income
Net loss
FY 2018: Balances, December 29, 2018
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive Accumulated
Income (Loss)
Deficit
Total
11,304,736 $
124 $
55,158 $
— $
(16,122 ) $
39,160
172,500
64,380
54,658
2
2,261
377
1,922
(333 )
11,596,274
126
59,385
—
(12,867 )
(28,989 )
1,916,667
24,050
65,061
19
10,456
98
1,803
(194 )
13,602,052 $
145 $
71,548 $
70 $
(12,813 )
(41,802 ) $
70
2,263
377
1,922
(333 )
(12,867 )
30,522
10,475
98
1,803
(194 )
70
(12,813 )
29,961
The accompanying notes are an integral part of these consolidated financial statements.
43
IRIDEX Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
FY 2018
Year Ended
FY 2017
Year Ended
December 29, 2018 December 30, 2017
$
(12,813 ) $
(12,867 )
Operating activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Gain on sale of intellectual property
Impairment of long-lived assets
Loss on disposal of property and equipment
Depreciation and amortization
Change in fair value of earn-out liability
Stock-based compensation
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 operating activities
Investing activities:
Acquisition of property and equipment
Proceeds from sale of intellectual property
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
Taxes paid related to net share settlements of equity awards
Net cash provided by financing activities
Effect of foreign exchange rate changes
Net 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:
Income taxes
Supplemental disclosure of non-cash activities:
Transfer of inventory to property and equipment
$
$
$
—
—
4
809
149
1,803
(1,159 )
463
(54 )
(49 )
788
503
614
(875 )
(295 )
87
(10,025 )
(440 )
—
(387 )
(827 )
10,475
98
(194 )
10,379
(40 )
(513 )
21,707
21,194 $
13 $
166 $
(175 )
35
—
858
260
1,922
2,162
2,091
(50 )
(63 )
(270 )
113
25
1,132
1,137
125
(3,565 )
(575 )
175
(382 )
(782 )
2,263
377
(333 )
2,307
—
(2,040 )
23,747
21,707
7
171
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 and Germany predominantly through a direct 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 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 2018 ended on December 29, 2018 (“FY
2018”) and Fiscal 2017 ended on December 30, 2017 (“FY 2017”). Fiscal years 2018 and 2017 each included 52 weeks of
operations.
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 for sales returns was $277 thousand and $570 thousand as of December 29,
2018 and December 30, 2017, 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
A reconciliation of the changes in our allowance for doubtful accounts balances for the years ended December 29, 2018
and December 30, 2017 are as follows (in thousands):
Description
Allowance for doubtful accounts
Years ended
December 29, 2018
December 30, 2017
Inventories.
Balance at
Beginning of
The period
Additions
Balance
at End of
(Deductions) The period
226
230
31
24
(44 )
(28 )
213
226
Inventories are stated at the lower of cost or net realizable value 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 net realizable value 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 and marketing expense while the amortization on the loaners is charged to cost of revenues. The
gross value of demos and loaners was $3.1 million and $2.4 million, and the accumulated amortization was $1.4 million and
$0.9 million as of December 29, 2018 and December 30, 2017, 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. The Company reviews goodwill for impairment on an annual basis or whenever
events or changes in circumstances indicate the carrying value may not be recoverable. The Company performs an annual
impairment test 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 carrying amount of the reporting unit should be considered when measuring the goodwill impairment
loss, if applicable. The Company has determined that it has a single reporting unit for purposes of performing its goodwill
impairment test. As the Company uses the market approach to assess impairment, its common stock price is an important
component of the fair value calculation. If the Company’s 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. The
Company performed its annual impairment test during the second quarter of fiscal 2018 and determined that its goodwill was
not impaired. As of December 29, 2018, 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”).
46
Revenue Recognition.
Our revenues arise from the sale of laser consoles, delivery devices, consumables, service, and support activities. We
also derive revenue from royalties from third parties which are typically based on licensees’ net sales of products that utilize
our technology. Our revenue is recognized in accordance with Accounting Standards Codification (“ASC”) 606, “Revenue
from Contracts with Customers.”
The Company has the following revenue transaction types: (1) Product Sale Only, (2) VIP/LAP Programs, (3)
Extended Warranty, (4) System Repairs (outside of warranty) and (5) Royalty Revenue.
(1) Product Sale Only: The Company’s products consist of laser consoles, delivery devices and consumable
instrumentation, including laser probes. The Company’s products are currently sold for use by ophthalmologists
specializing in the treatment of glaucoma and retinal diseases. Inside the United States and Germany the products
are sold directly to the end users. In other countries outside of the United States, the Company utilizes
independent, third-party distributors to market and sell the Company’s products. There is no continuing
obligation subsequent to the shipment to the distributors.
Under the new guidance, there is no change in our revenue recognition for product-sale-only transactions, as
compared to revenue recognition for these transactions under the prior revenue recognition standards. The
Company recognizes revenue from product sale at a point in time. When a system or disposables are sold
without any additional deliverables, the Company recognizes revenue using the five-step model: (1) identifying
the contract with the customer, (2) identifying the performance obligations in the contract, (3) determining
expected transaction price, (4) allocating the transaction price to the distinct performance obligations in the
contract, and (5) recognizing revenue when (or as) the performance obligations are satisfied.
(2) VIP/LAP Programs: The Company sometimes enters into VIP or Laser Advantage Program (LAP) contracts with
customers. For the VIP program, under the terms of such contracts, the customer is not charged for the system
upon the initial agreement, but rather is obligated to purchase a quarterly minimum quantity of Endoprobes
(classified as disposables) at a premium during the contract period, such that at the end of the contract period the
system has been paid in full. The Company decided to replace its previously utilized VIP program (contract
length of two years) with an LAP program (contract length of 12 months or less) beginning in fourth quarter of
2016. Under the LAP program, the system is given away free of charge and title is transferred after the customer
purchases the minimum required number of boxes of probes (classified as disposables). Customers with older
machines have the ability to trade in their old machines for the most current laser equipment offered in the
program (G6 Laser) and receive a discount on the program’s minimum purchase requirements. Under ASC 606,
this non-cash consideration must be included in the transaction price. However, the Company has determined
that there is no value associated with the old machine and the trade in is essentially offered to encourage
customers to purchase more consumables under the program.
Under the new guidance, there is no change in our revenue recognition for product sales under VIP/LAP
programs as compared to revenue recognition for these transactions under the prior revenue recognition standards.
The Company recognizes revenue from product sales under VIP/LAP programs at a point in time. For both
programs, the Company allocates the transaction price of the distinct performance obligations in the contract by
determining stand-alone selling price using historical pricing net of any variable consideration or discounts to
specifically allocate to a particular performance obligation.
(3) Extended Warranty: The Company offers a standard 2-year warranty on all system sales (5 years on the laser
heads for its IQ 532/577 laser consoles). The Company also offers an extended warranty which is sold to
customers in incremental, one-year warranty periods which begin subsequent to the expiration of the standard 2-
year warranty. The customer can opt to purchase the extended warranty at the time of the system sale or after the
initial system sale.
Under the new guidance, there is no change in our revenue recognition for extended warranty as compared to
revenue recognition for these transactions under the prior revenue recognition standards. The Company
recognizes revenue from extended warranty ratably over the warranty period. Revenue recognition for the sale
of an extended warranty is largely dependent on the timing of the sale as follows:
a.
Extended Warranty Sale in Conjunction with System Sale: If the customer opts to purchase an extended warranty
at the time of the system sale, the Company allocates the transaction price of the distinct performance obligations
in the contract by determining stand-alone selling price using historical pricing net of any variable consideration
or discounts to specifically allocate to a particular performance obligation.
47
b.
Extended Warranty Sale Subsequent to System Sale: If the customer opts to purchase an extended warranty after
the initial system sale, the Company determines the amount of time that has elapsed since the initial system sale.
If the extended warranty is purchased within 60 days of the initial sale, the Company considers this sale to be an
additional element of the original sale and allocates the transaction price of the distinct performance obligations
in the contract by determining stand-alone selling price using historical pricing net of any variable consideration
or discounts to specifically allocate to a particular performance obligation. If the extended warranty is purchased
subsequent to sixty days after the initial sale, the sale of the extended warranty is deemed a separate contract and
is deferred at the selling price and recognized ratably over the extended warranty period as the performance
obligation is satisfied.
(4) System Repairs (outside of warranty): Customers will sometime request repairs from the Company subsequent to
the expiration of the standard warranty and outside of an extended warranty contract.
Under the new guidance, there is no change in our revenue recognition for system repairs (outside warranty) as
compared to revenue recognition for these transactions under the prior revenue recognition standards. The
Company recognizes revenue from system repairs (outside of warranty) at a point in time. When the customer
requests repairs from the Company subsequent to the expiration of the standard warranty and outside of an
extended warranty contracts, these repair contracts are considered separate from the initial sale, and as such,
revenue is recognized as the repair services are rendered and the performance obligation satisfied.
(5) Royalty Revenue: The Company has royalty agreements with two customers related to the sale of the Company’s
intellectual property. Under the terms of these agreements, the customer is to remit a percentage of sales to the
Company.
Under the new guidance, since these arrangements are for sales-based licenses of intellectual property, for which
the guidance in paragraph ASC 606-10-55-65 applies, the Company recognizes revenue only as the subsequent
sale occurs. However, the Company notes that such sales being reported by the licensee with a quarter in arrear,
such revenue is recognized at the time it is reported and paid by the licensee given that any estimated variable
consideration would have to be fully constrained due to the unpredictability of such estimate and the unavoidable
risk that it may lead to significant revenue reversals.
The Company elected the practical expedient allowing it to not recognize as a contract asset the commission paid to its
salesforce on the sale of its products as an incremental cost of obtaining a contract with a customer but rather recognize such
commission as expense when incurred as the amortization period of the asset that the Company would have otherwise
recognized is one year or less. There is no change in the Company’s accounting for commissions.
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.
Deferred revenue represents contract liabilities. Revenue related to extended service contracts is deferred and
recognized on a straight-line basis over the period of the applicable service period. Costs associated with these service
arrangements are recognized as incurred. Approximately $1.6 million of the deferred revenue balance is expected to be
recognized over the next 12 months.
A reconciliation of the changes in our deferred revenue balances for the years ended December 29, 2018 and
December 30, 2017 are as follows (in thousands):
FY 2016: Balance as of December 31, 2016
Additions to deferral
Revenue recognized
FY 2017: Balance as of December 30, 2017
Additions to deferral
Revenue recognized
FY 2018: Balance as of December 29, 2018
$
$
1,383
2,451
(1,314 )
2,520
1,984
(2,279 )
2,225
48
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. In March 2017, the Company began offering a 5 year warranty on the laser
heads for its IQ 532/577 laser consoles. Actual warranty costs incurred have not materially differed from those accrued. The
Company’s warranty policy is applicable to products which are considered defective in their performance or fail to meet the
product specifications. Additionally, from time to time, specific warranty accruals may be made if unforeseen technical
problems arise. 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 statements of operations as costs of revenues.
A reconciliation of the changes in our warranty liability for the years ended December 29, 2018 and December 30,
2017 are as follows (in thousands):
FY 2016: Balance as of December 31, 2016
Accruals for product warranties
Cost of warranty claims
FY 2017: Balance as of December 30, 2017
Accruals for product warranties
Cost of warranty claims
FY 2018: Balance as of December 29, 2018
Shipping and Handling Costs.
$
$
603
1,476
(344 )
1,735
454
(1,329 )
860
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 billed to customers amounted to $0.3 million for each
of the fiscal years 2018 and 2017.
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 $0.5 million in 2018
and $0.2 million in 2017 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 2018, based on the Company's recent history of losses and its
forecasted losses, management believes on the more likely than not basis that a full valuation allowance is required.
Accordingly, in the fourth quarter of fiscal year 2018, the Company provided a full valuation allowance on its federal and
states deferred tax assets.
49
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 years ended December 29, 2018 and December 30,
2017.
Accounting for Stock-Based Compensation.
The Company accounts for stock-based compensation granted to employees and directors, including employees stock
option awards, restricted stock and restricted stock units in accordance with ASC 718, “Compensation – Stock Compensation”
(“ASC 718”). Accordingly, stock-based compensation cost is measured at grant date, based on the fair value of the award,
and is recognized as expense over the employee’s service period. The Company recognizes compensation expense on a
ratable basis over the requisite service period of the award.
The Company values 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
with market conditions 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 stock-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 29, 2018 and
December 30, 2017, no single customer accounted for greater than 10% of total revenues. As of December 29, 2018 and
December 30, 2017, 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 and release (vesting) of restricted stock units and awards 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 15 -
Computation of Basic and Diluted Net Income Per Common Share.
50
Reclassifications
Certain reclassifications have been made to the prior year statements included in these consolidated financial
statements to conform to the current year presentation. The reclassifications had no impact on previously reported net loss or
accumulated deficit.
Recently Adopted Accounting Standards.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2014-09 Revenue from Contracts with Customers (Topic 606) (“ASC 606”), which, along with amendments issued in 2015,
2016 and 2017, replaces nearly all current U.S. GAAP guidance on this topic with a comprehensive revenue measurement
and recognition standard and expanded disclosure requirements. This new guidance provides a five-step analysis in
determining when and how revenue is recognized. Under the new guidance, revenue is recognized when a customer obtains
control of promised goods or services and is recognized in an amount that reflects the consideration which the entity expects
to receive in exchange for those goods or services. In addition, the new guidance requires disclosure of the nature, amount,
timing and uncertainty of revenue and cash flows arising from contracts with customers.
As part of our assessment and implementation plan, we evaluated our policies, procedures and internal controls. In
preparation for adoption of the standard, the Company has implemented internal controls to enable the preparation of
financial information, including the assessment of the impact of the standard. The Company has adopted this guidance using
the modified retrospective method in the first quarter of fiscal 2018. Under the modified retrospective method, the new
standards apply to all new contracts initiated on or after the effective date, and for contracts which have remaining
obligations as of the effective date, an adjustment to the opening balance of retained earnings is required. Based on the results
of the procedures taken in adopting this standard, we determined that our accounting for revenues under the then prescribed
standard (ASC 605) was not different from the new ASC 606 standard. As such, we did not have any adjustments to our
opening balance of our retained earnings.
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. The adoption of this standard in
fiscal year 2018 did not have a material impact 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. The
adoption of this standard in fiscal year 2018 did not have a material impact on the Company’s consolidated financial
statements.
In May 2017, the FASB issued ASU 2017-09, “Compensation – Stock Compensation (Topic 718): Scope of
Modification Accounting.” The amendments in ASU 2017-09 include guidance on determining which changes to the terms
and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. These
amendments require the entity to account for the effects of a modification unless all of the following conditions are met: the
fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is
the same as the fair value (or value using an alternative measurement method) of the original award immediately before the
original award is modified; the vesting conditions of the modified award are the same as the vesting conditions of the original
award immediately before the original award is modified; and the classification of the modified award as an equity
instrument or a liability instrument is the same as the classification of the original award immediately before the original
award is modified. This guidance is effective for annual reporting periods beginning after December 15, 2017, including
interim periods within that reporting period, with early adoption permitted. The adoption of this standard in fiscal year 2018
did not have a material impact on the Company’s consolidated financial statements.
51
Recent Accounting Standards Not Yet Adopted.
In February 2016, the FASB issued ASU 2016-02, “Leases,” which, along with subsequent amendments, modified
lessee accounting guidance under Topic 840. This ASU requires the Company 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 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. The Company will adopt the new standard in the first quarter of its fiscal year 2019 using the optional
transition method. The Company will elect not to reassess whether any expired or existing contracts are or contain leases, not
to reassess the lease classification for any expired or existing leases, not to reassess initial direct costs for any existing leases
and not to separate non-lease components from lease components and instead account for each separate lease component and
the non-lease components associated with that lease component as a single lease component for new or modified leases.
While we continue to evaluate certain provisions of the standard, based on our current estimates, we expect the adoption of
the standard will result in recognition of right-of-use assets and lease liabilities, primarily relating to real estate operating
leases, of approximately $4.0 million and $4.5 million, respectively, as of the first day of fiscal year 2019, on the Company’s
consolidated balance sheets. No material impact is expected to the Company’s consolidated statements of operations or its
consolidated statements of cash flows.
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework –
Changes to the Disclosure Requirements for Fair Value Measurement,” which removes, modifies and adds certain disclosure
requirements on fair value measurements. The new guidance is effective for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the effect
of the adoption of this guidance on its 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 29, 2018 and December 30, 2017, approximate fair value because of
the short maturity of these instruments.
52
As of December 29, 2018 and December 30, 2017, 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 29, 2018
Fair Value Measurements
As of December 30, 2017
Fair Value Measurements
Level 1 Level 2 Level 3 Total
Level 1 Level 2 Level 3 Total
Money market funds
$ 20,708 $ — $ — $ 20,708 $ 20,950 $ — $ — $ 20,950
Liabilities:
Earn-out liability
$ — $ — $
334 $
334 $ — $ — $
572 $
572
The Company’s Level 1 financial assets are money market funds whose fair values are based on quoted market prices.
The Company does not have any Level 2 financial assets or liabilities. The fair value of the earn-out liability arising from the
acquisition of RetinaLabs, Inc. 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
by the Company based on a collaborative effort of the Company’s operations, finance and accounting groups as additional
information becomes available. Any change in the fair value adjustment is recorded in the 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. The deal was 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.
Charges related to fair value adjustments for the earn-out liability were $149 thousand and $260 thousand for the fiscal
years 2018 and 2017, 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 29, 2018 and December 30, 2017.
As of December 29, 2018
Fair Value
(in thousands)
Valuation
Technique
Earn-out liability
$
334 Discounted cash flow
As of December 30, 2017
Fair Value
(in thousands)
Valuation
Technique
Earn-out liability
$
572 Discounted cash flow
Significant
Unobservable
Input
Projected royalties
(in thousands)
Discount rate
Significant
Unobservable
Input
Projected royalties
(in thousands)
Discount rate
Weighted
Average
(range)
$1,245
10.33%
(10.20% - 27.00%)
Weighted
Average
(range)
$1,622
10.90%
(10.90% - 27.00%)
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 December 31, 2016
Payments against earn-out
Change in fair value of earn-out liability
Balance as of December 30, 2017
Payments against earn-out
Change in fair value of earn-out liability
Balance as of December 29, 2018
$
$
694
(382 )
260
572
(387 )
149
334
53
4. Inventories
The components of our inventories are as follows (in thousands):
Raw materials
Work in process
Finished goods
Total inventories
FY 2018
December 29, 2018
FY 2017
December 30, 2017
$
$
2,675 $
1,075
5,044
8,794 $
4,147
1,278
3,956
9,381
5. Property and Equipment
The components of our property and equipment are as follows (in thousands):
FY 2018
December 29, 2018
FY 2017
December 30, 2017
Equipment
Leasehold improvements
Less: accumulated depreciation and
amortization
Property and equipment, net
$
$
10,502 $
2,516
(11,798 )
1,220 $
10,088
2,364
(11,049 )
1,403
Depreciation expense related to property and equipment was $793 thousand and $842 thousand for the fiscal years
2018 and 2017, respectively.
6. Goodwill
The carrying value of goodwill was $533 thousand as of December 29, 2018 and December 30, 2017, 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 an impairment test performed in accordance with ASC 350. There was no impairment of goodwill recognized
during fiscal years 2018 and 2017.
7. Intangible Assets
The components of our purchased intangible assets as of December 29, 2018 are as follows (in thousands):
Customer relations
Patents
Useful
Lives
15 Years
Varies
FY 2018
Annual
Amortization
Gross
Carrying
Value
Accumulated
Amortization
Net
Carrying
Value
$
$
16 $
—
16 $
240 $
600
840 $
140 $
600
740 $
100
—
100
Useful Lives
Remaining
6.25 Years
Varies
The components of our purchased intangible assets as of December 30, 2017 are as follows (in thousands):
Customer relations
Patents
Useful
Lives
15 Years
Varies
FY 2017
Annual
Amortization
Gross
Carrying
Value
Accumulated
Amortization
Net
Carrying
Value
$
$
16 $
—
16 $
240 $
600
840 $
124 $
600
724 $
116
—
116
Useful Lives
Remaining
7.25 Years
Varies
Aggregate amortization expense for each of the fiscal years 2018 and 2017 was $16 thousand. The amortization of
customer relations was charged to sales and marketing expense and the amortization of patents was charged to cost of
revenues.
54
Estimated future amortization expense for purchased intangible assets is as follows (in thousands):
Fiscal Year:
2019
2020
2021
2022
2023
Thereafter
Total
$
$
16
16
16
16
16
20
100
8. Accrued Expenses
The components of our accrued expenses are as follows (in thousands):
Customer deposits
Earn-out – short term
Distributor commission
Sales and use tax payable
Royalties payable
Deferred rent
Other accrued expenses
Total accrued expenses
9. Commitments and Contingencies
Lease Agreements.
FY 2018
FY 2017
December 29, 2018 December 30, 2017
509
671 $
$
337
334
293
291
57
26
82
84
—
131
875
1,226
2,153
2,763 $
$
We lease our operating facilities in Mountain View, California, under a non-cancelable operating lease through
February 28, 2022. There are no remaining options to extend or renew the terms of this lease. Rent expense for fiscal years
2018 and 2017 was approximately $1.2 million and $1.1 million, respectively.
Our operating lease commitments consist of facility and office equipment leases. Future minimum lease payments
under current operating leases as of December 29, 2018 are summarized as follows (in thousands):
Fiscal Year
2019
2020
2021
2022
2023
Total future minimum lease payments
Operating
Lease Payments
$
$
1,430
1,509
1,495
310
—
4,744
Manufacture and Supply Agreement.
Future minimum payments for manufacture and supply commitments as of December 29, 2018 are summarized as
follows (in thousands):
Contract
Manufacturing
and Supply
Commitments
$
9,035
1,407
$
10,442
Fiscal Year
2019
2020
Total contract manufacturing and supply
commitments
55
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 for each of the fiscal years 2018 and 2017.
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 parties (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. These agreements also require us 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.
Legal Proceedings.
In January 2018, we filed a lawsuit against Quantel Medical, S.A., Quantel USA, Inc., and Quantel, S.A. (collectively,
“Quantel”) in the U.S. District Court for the Northern District of California. The lawsuit alleges that Quantel products
infringe U.S. Patent No. 7,771,417, that Quantel breached an earlier agreement between Quantel and the Company, and that
Quantel has infringed upon the Company’s MicroPulse® trademark, Registration No. 4550188 on the principal register.
Quantel previously had a limited license to the asserted Company patent and trademark. Our complaint filed in connection
with this matter asserts that the license was terminated in early 2017 for material breach, but that Quantel continued to use
our intellectual property without authorization.
In March 2017, OD-OS GmbH noticed an opposition to the Company’s European Patent No. currently EP 1 856 774 at
the European Patent Office (“EPO”). On June 8, 2018, Quantel intervened in the Opposition. Oral proceedings on the
opposition took place on July 13, 2018. At the conclusion of those proceedings, the EPO’s Opposition Division
communicated that it would move to revoke the patent. The formal written decision from the Opposition Division was issued
on October 1, 2018. The Company filed its notice of appeal on October 10, 2018.
In late May of 2018, Quantel applied to the Paris District Court in Paris, France for a ruling that its products do not
infringe the French Part of Iridex’s European Patent at issue in the opposition, EP 1 856 774.
On February 12, 2019, we announced the resolution of our dispute with Quantel and dismissed the lawsuit we filed
against Quantel in the U.S. District Court for the Northern District of California. Quantel dismissed and ceased its
participation in parallel proceedings against us in Europe.
In addition, from time to time, we may be involved in legal proceedings arising in the ordinary course of business.
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.
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
56
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. 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 2,850,000 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.
The following table represents the shares activity and the total number of shares available for grant under the Incentive
Plan:
Balances as of December 31, 2016
Additional shares reserved
Options granted
Restricted stock granted
Options cancelled
Awards cancelled
Balances as of December 30, 2017
Additional shares reserved
Options granted
Restricted stock granted
Options cancelled
Awards cancelled
Balances as of December 29, 2018
Shares
Available
for Grant
162,155
650,000
(524,400 )
(212,538 )
73,694
48,059
196,970
1,000,000
(178,435 )
(628,125 )
166,798
143,754
700,962
Awards (RSU, PSU, RSA) with a per share or unit purchase price lower than 100% of the fair market value of the Company's common stock on the
date of grant under the 2008 Equity Incentive Plan, as amended, are counted against shares authorized under the plan as one and one-half shares of
common stock for each share. When cancelled, these shares are added back to the Plan as one and one-half shares.
The following table shows stock-based compensation expenses by functional area in the consolidated statements of
operations for 2018 and 2017(in thousands):
Cost of revenues
Research and development
Sales and marketing
General and administrative
Total stock-based compensation expense
FY 2018
FY 2017
Year Ended
December 29,
2018
Year Ended
December 30,
2017
$
$
47 $
129
448
1,179
1,803 $
152
354
307
1,109
1,922
Stock-based compensation expense capitalized to inventory was immaterial for 2018 and 2017.
57
As of December 29, 2018, there was $4.8 million of total unrecognized compensation cost related to non-vested share-
based compensation arrangements under the Incentive Plan. The cost is expected to be recognized over a weighted average
period of 2.38 years.
Summary of Stock Options
The following table summarizes information regarding activity in our stock option plans during the fiscal years ended
2018 and 2017 (in thousands except share and per share data):
Balances as of December 31, 2016
Options granted
Options exercised
Options cancelled or forfeited
Balances as of December 30, 2017
Options granted
Options exercised
Options cancelled or forfeited
Balances as of December 29, 2018
Outstanding Options
Number
of Shares
470,985
524,400
(64,380 )
(73,694 )
857,311 $
178,435
(24,050 )
(166,798 )
844,898 $
Weighted
Average
Exercise
Price
8.69
9.90
5.86
10.47
9.49
6.00
4.09
9.85
8.84
The following table summarizes information with respect to stock options outstanding and exercisable as of
December 29, 2018:
Options Outstanding
Weighted
Average
Remaining
Contractual
Life (years)
Weighted
Average
Exercise
Price
Options Vested and Exercisable
Number of
Shares
Exercisable
Weighted
Average
Exercise
Price
Number of
Shares
Outstanding
99,341
89,926
85,912
85,874
11,875
324,854
83,853
15,394
25,000
22,869
844,898
4.77 $
5.28 $
3.85 $
4.11 $
1.40 $
5.08 $
3.81 $
4.70 $
5.19 $
3.18 $
4.61 $
5.03
5.93
7.24
8.83
9.36
9.54
10.80
12.85
14.61
16.29
8.84
37,966 $
25,390 $
50,582 $
55,959 $
11,875 $
135,188 $
65,004 $
8,520 $
10,939 $
16,893 $
418,316 $
4.37
5.91
7.23
8.71
9.36
9.54
10.75
12.85
14.61
16.29
9.12
Range of Exercise Prices
$3.49 - $5.69
$5.81 - $6.00
$6.30 - $8.47
$8.58 - $9.05
$9.34 - $9.40
$9.54 - $9.54
$10.14 - $11.16
$12.85 - $12.85
$14.61 - $14.61
$16.29 - $16.29
$3.49 - $16.29
The determination of the fair value of options granted is computed using the Black-Scholes option pricing model with
the following weighted average assumptions:
Average risk free interest rate
Expected life (in years)
Dividend yield
Average volatility
Employee Stock Option Plan
FY 2017
FY 2018
2.69 %
1.83 %
4.55 years
—
40.9 %
4.55 years
—
41.8 %
The weighted average grant date fair value of options granted as calculated using the Black-Scholes option pricing was
$2.27 and $3.68 per share for the fiscal years 2018 and 2017, 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
58
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.
Information regarding stock options outstanding, exercisable and expected to vest as of December 29, 2018 is
summarized below:
Number of
Shares
Weighted Average
Exercise Price
Weighted
Average
Remaining
Contractual
Life (years)
Aggregate
Intrinsic
Value
(thousands)
Options outstanding
Options vested and expected to vest
Options exercisable
844,898
797,921
418,316
$
$
$
8.84
8.87
9.12
4.61 $
4.53 $
3.38 $
12
12
12
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 2018 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 29,
2018. 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 2018 and 2017 was approximately $0.1 million and $0.3 million, respectively.
Restricted Stock Awards/Restricted Stock Units
Effective for the 2018 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 $40
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 29, 2018 is
summarized below:
Restricted stock units outstanding
Restricted stock units vested and expected to
vest
Weighted
Average
Remaining
Contractual
Life (years)
Aggregate
Intrinsic
Value (thousands)
2,657
1.44 $
Number of
Shares
597,121
492,239
1.33 $
2,190
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 fiscal year, December 28, 2018, of $4.45.
The majority of the restricted stock units that were released in fiscal year 2018 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 29, 2018, 86,941 shares of
restricted stock units were released with an intrinsic value of approximately $0.6 million. We withheld 26,181 shares to
satisfy approximately $194 thousand of employees’ minimum tax obligation on the released restricted stock units.
59
Information regarding the RSU activity during the years ended December 29, 2018 and December 30, 2017 is
summarized below:
Outstanding as of December 31, 2016
Restricted stock units granted
Restricted stock units released
Restricted stock units forfeited
Outstanding as of December 30, 2017
Restricted stock units granted
Restricted stock units released
Restricted stock units forfeited
Outstanding as of December 29, 2018
Number of
Shares
Weighted
Average
Grant Date Fair
Value
335,805 $
137,391 $
(80,009 ) $
(32,039 ) $
361,148 $
418,750 $
(86,941 ) $
(95,836 ) $
597,121 $
11.20
9.88
12.37
11.44
10.42
7.79
7.38
10.01
9.08
During the year ended December 29, 2018, the Company awarded 418,750 restricted stock units at a weighted average
grant date fair value of $7.79 per share. Of this amount, 238,200 stock units represent performance-based shares that are
subject to service, performance or market vesting conditions with a weighted average grant date fair value of $7.89 per share.
RSUs granted with market conditions are valued using a 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 makes a determination regarding the probability of the performance criteria being achieved and compensation
expense is recognized ratably over the requisite service period, if it is expected that the performance criteria will be met.
Information regarding the restricted stock awards activity during the year ended December 29, 2018 and December 30,
2017 is summarized below:
Outstanding as of December 31, 2016
Restricted stock awards granted
Restricted stock awards released
Outstanding as of December 30, 2017
Restricted stock awards granted
Restricted stock awards released
Outstanding as of December 29, 2018
11. Employee Benefit Plan
Number of
Shares
Weighted
Average
Grant Date Fair
Value
1,289 $
4,301 $
(1,289 ) $
4,301 $
—
(4,301 ) $
—
15.51
9.30
15.51
9.30
—
9.30
—
We have a plan known as the Iridex Corporation Profit Sharing/401(k) Plan 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. In 2018 and 2017, total matching contributions made by
the Company were $233 thousand and $248 thousand, respectively.
60
12. Income Taxes
Loss from operations before provision for (benefit from) income taxes was comprised of the following:
United States
Foreign
Total
The provision for (benefit from) income taxes includes:
FY 2018
FY 2017
Year Ended
December 29,
2018
Year Ended
December 30,
2017
$
$
(12,671 ) $
(105 )
(12,776 ) $
(12,800 )
(195 )
(12,995 )
FY 2018
FY 2017
Year Ended
December 29,
2018
Year Ended
December 30,
2017
Current:
Federal
State
Foreign
Deferred:
Federal
State
$
Provision for (benefit from) income taxes
$
— $
26
9
35
1
1
2
37 $
(90 )
16
—
(74 )
(55 )
1
(54 )
(128 )
Our effective tax rate differs from the statutory federal income tax rate as shown in the following schedule:
Income tax provision at statutory rate
State income taxes, net of federal benefit
Permanent differences
Research and development credits
Change in valuation allowance
Foreign rate differential
Other
Effective tax rate
FY 2018
Year Ended
December 29,
2018
FY 2017
Year Ended
December 30,
2017
21.0 %
2.7 %
(0.4 )%
0.1 %
(24.8 )%
(0.2 )%
1.3 %
(0.3 )%
34.0 %
2.4 %
(0.0 )%
0.6 %
(32.5 )%
(0.5 )%
(3.0 )%
1.0 %
61
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):
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
FY 2018
FY 2017
Year Ended
December 29,
2018
Year Ended
December 30,
2017
$
$
8,195 $
3,048
2,357
304
314
452
797
1
15,468
(15,485 )
(17 ) $
5,757
2,839
2,031
341
314
495
528
1
12,306
(12,320 )
(14 )
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 29, 2018, based on the Company's recent history of losses and its forecasted losses, management
believes on the more likely than not basis that a full valuation allowance is required. Accordingly, in the fourth quarter of
fiscal year 2018, the Company provided a full valuation allowance on its federal and state deferred tax assets. As of
December 29, 2018, the Company had federal and state net operating loss (“NOL”) carry forwards of $32.3 million and
$21.1 million respectively. The federal NOL will begin to expire in 2033 and the state NOL will begin to expire in 2021.
The Company has federal and state research credit carry forwards of approximately $1.9 million and $2.7 million,
respectively, available to and development credits are subject to IRC 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.
The comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”) was enacted in
the United States on December 22, 2017 and includes, among other items, a reduction in the federal corporate income tax rate
from 35% to 21%, certain interest expense deduction limitations and changes in the timing of certain taxable income. We are
required to recognize the effect of the tax law changes in the period of enactment, such as remeasuring our U.S. deferred tax
assets and liabilities and reassessing the net realizability of our deferred tax assets and liabilities.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) which provides guidance
on accounting for the tax effects of the Tax Act. We have completed our analysis and accounting with respect the Tax Act
and identified no additional changes from amounts previously recorded. However, changes in law, interpretations, and facts
may result in adjustments to these amounts. Based on the Company’s net operating loss carryovers and valuation allowance,
there is no impact to its consolidated financial statements as a result of the accounting for the tax effects of the Tax Act.
The Company accounts 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 29,
2018.
62
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
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
Balance at the end of the year
$
$
1,105 $
35
15
1,155 $
1,029
73
3
1,105
FY 2018
FY 2017
Year Ended
December 29,
2018
Year Ended
December 30,
2017
If the ending balance of $1.2 million of unrecognized tax benefits at December 29, 2018 were recognized, $0 of the
recognition would affect the income tax rate. The Company does not anticipate any material change in our unrecognized tax
benefits 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.
The Company files U.S. federal and state returns. The tax years 2011 to 2017 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 29, 2018 and December 30, 2017, there were no amounts 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 product is as follows (in thousands):
FY 2018
Year Ended
December 29, 2018
FY 2017
Year Ended
December 30, 2017
Systems
Recurring revenues(1)
Total revenues
(1) Include service contract revenues of $1,318 and $1,160 recognized during fiscal years 2018 and 2017,
respectively. Service contract revenues are recognized ratably over the service contract period.
20,009 $
22,591
42,600 $
$
$
19,703
21,890
41,593
Revenue information shown by geographic region is as follows (in thousands):
United States
Europe
Americas, excluding the U.S.
Asia/Pacific Rim
FY 2018
Year Ended
December 29, 2018
FY 2017
Year Ended
December 30, 2017
$
$
22,097 $
9,742
2,590
8,171
42,600 $
23,017
8,097
2,319
8,160
41,593
Revenues are attributed to countries based on location of end customers. For fiscal years 2018 and 2017 no individual
country accounted for more than 10% of our sales, except for the United States, which accounted for 51.9% and 55.3% of
revenues in 2018 and 2017, respectively.
63
15. Computation of Basic and Diluted Net Loss 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):
Numerator:
Net loss
Denominator:
FY 2018
Year Ended
December 29, 2018
FY 2017
Year Ended
December 30, 2017
$
(12,813 ) $
(12,867 )
Weighted average shares of common
stock (basic)
Weighted average shares of common
stock (diluted)
Per share data:
Basic net (loss) income per share
$
Diluted net (loss) income per share $
12,199
11,555
12,199
(1.05 ) $
(1.05 ) $
11,555
(1.11 )
(1.11 )
As of December 29, 2018 and December 30, 2017, stock options, restricted stock units and restricted stock awards of
1,196,352 and 837,269 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
The Company has evaluated subsequent events and has concluded that no subsequent events that require disclosure in
the financial statements have occurred since the fiscal year ended December 29, 2018.
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 29, 2018, 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 29, 2018. 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 29, 2018, our internal control over
financial reporting is effective.
This Annual Report on Form 10-K does not include an attestation report of our independent registered public
accounting firm regarding internal control over financial reporting. Management’s report is not subject to attestation by our
independent registered public accounting firm.
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 2018 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 Principal Executive and Financial Officer and Principal Accounting 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, 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.
Item 9B. Other Information
Not applicable.
65
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 2019.
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.
66
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 ........................................................................................
Consolidated Balance Sheets as of December 29, 2018 and December 30, 2017........................................................
Consolidated Statements of Operations for the years ended December 29, 2018 and December 30, 2017 .................
Consolidated Statements of Comprehensive Loss for the years ended December 29, 2018 and December 30, 2017 .
Consolidated Statements of Stockholders’Equity for the years ended December 29, 2018 and December 30, 2017
Consolidated Statements of Cash Flows for the years ended December 29, 2018 and December 30, 2017 ................
Notes to Consolidated Financial Statements ................................................................................................................
39
40
41
42
43
44
45
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.
3. Exhibits
Exhibits
2.1(13)
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.
3.1(1) (P)
Amended and Restated Certificate of Incorporation of Registrant.
3.2
Amended and Restated Bylaws of Registrant.
4.1(3)
Certificate of Designation, Preferences and Rights of Series A Preferred Stock.
4.2(3)
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)
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.
67
Exhibits
10.3(5)
Exhibit Title
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.
10.3.2(23)
Fourth Amendment to Lease Agreement dated January 31, 2016 by and between ZIC 12112 Terra Bella LLC
and the Registrant.
10.3.3(24)
Triple Net Lease dated April 26, 2017 by and between ZIC 12112 Terra Bella LLC and the Registrant.
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.
10.10(3)
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)*
Change in Control Severance Agreement dated as of December 6, 2017 by and between the Company and
George Marcellino
10.17(20)*
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) (P) Subsidiaries of Registrant
23.1
Consent of BPM LLP, Independent Registered Public Accounting Firm.
24.1
Power of Attorney (included on signature page).
31.1
Certification of Principal Executive and Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
31.2
Certification of Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
32.2
Certification of Principal Executive and Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Certification of Principal Accounting 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.
68
Exhibits
Exhibit Title
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)
(3)
(4)
(5)
(8)
(9)
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 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 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.
(10) Incorporated by reference to Exhibit 99.1 filed with Registrant’s Registration Statement on Form S-8 on November 21,
2008.
(11) Incorporated by reference to Exhibit 99.(d)(5) filed with the Registration Statement on Form SC TO-I July 30, 2009.
(12) Incorporated by reference to the Exhibits filed with the Registrant’s Report on Form 10-Q for the quarter ended July 2,
2011.
(13) Incorporated by reference to the Exhibit 10.1 filed with the Registrant’s Report on Form 8-K on March 27, 2013.
(14) Incorporated by reference to the Exhibit 2.1 filed with the Registrant’s Report on Form 8-K on January 4, 2012.
(15) Incorporated by reference to Exhibit 10.1 filed with the Registrant’s Report on Form 10-Q on November 3, 2014.
(16) Incorporated by reference to the Exhibit 10.1 filed with the Registrant’s Report on Form 8-K on January 9, 2014.
(17) Incorporated by reference to the Exhibits filed with the Registrant’s Report on Form 10-Q on May 12, 2015.
(18) Incorporated by reference to the Exhibit 10.1 filed with the Registrant’s Report on Form 10-K on March 31, 2016.
(19) Incorporated by reference to the Exhibit 10.1 filed with the Registrant’s Report on Form 8-K on December 6, 2017.
(20) Incorporated by reference to the Exhibits filed with the Registrant’s Report on Form 8-K on July 11, 2016,
(21) If applicable, to be filed by amendment to the S-3 (No. 333-213094) which was declared effective on August 26, 2016,
or as an exhibit to a report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and
incorporated by reference therein.
(22) Incorporated by reference to Exhibit 10.1 filed with the Registrant’s Report on Form 8-K on November 3, 2016.
(23) Incorporated by reference to Exhibit 10.1 filed with the Registrant’s Report on Form 10-K on March 31, 2016.
(24) Incorporated by reference to Exhibit 10.1 filed with the Registrant’s Report on Form 8-K on May 1, 2017.
(P) Print filing.
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.
69
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 29th day of March 2019.
SIGNATURES
IRIDEX CORPORATION
By: /s/ William M. Moore
William M. Moore
President and Chief Executive Officer
/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, 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
Date
/s/ William M. Moore
(William M. Moore)
/s/ Romeo R. Dizon
(Romeo R. Dizon)
/s/ David I. Bruce
(David I. Bruce)
/s/ Sanford Fitch
(Sanford Fitch)
/s/ Robert E. Grove
(Robert E. Grove)
/s/ Ruediger Naumann-Etienne
(Ruediger Naumann-Etienne)
/s/ (Maria Sainz)
(Maria Sainz)
President, Chief Executive Officer, and Chairman of the Board March 29, 2019
(Principal Executive and Financial Officer)
March 29, 2019
March 29, 2019
March 29, 2019
March 29, 2019
March 29, 2019
March 29, 2019
Vice President and Controller
(Principal Accounting Officer)
Director
Director
Director
Director
Director
70
Exhibit 3.2
AMENDED AND RESTATED BYLAWS
OF
IRIDEX CORPORATION
TABLE OF CONTENTS
ARTICLE I STOCKHOLDERS
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
1.10
1.11
ANNUAL MEETINGS
SPECIAL MEETINGS
NOTICE OF MEETINGS
ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND
STOCKHOLDER BUSINESS
ADJOURNMENTS
QUORUM
ORGANIZATION
VOTING; PROXIES
FIXING DATE FOR DETERMINATION OF STOCKHOLDERS OF RECORD
LIST OF STOCKHOLDERS ENTITLED TO VOTE
ACTION BY CONSENT OF STOCKHOLDERS
ARTICLE II BOARD OF DIRECTORS
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
NUMBER; QUALIFICATIONS
ELECTION; RESIGNATION; REMOVAL; VACANCIES
REGULAR MEETINGS
SPECIAL MEETINGS
TELEPHONIC MEETINGS PERMITTED
QUORUM; VOTE REQUIRED FOR ACTION
ORGANIZATION
BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
ARTICLE III COMMITTEES
3.1
3.2
COMMITTEES
COMMITTEE RULES
ARTICLE IV OFFICERS
4.1
4.2
EXECUTIVE OFFICERS; ELECTION; QUALIFICATIONS; TERM OF
OFFICE; RESIGNATION; REMOVAL; VACANCIES
POWERS AND DUTIES OF EXECUTIVE OFFICERS
ARTICLE V STOCK
5.1
5.2
5.3
5.4
STOCK CERTIFICATES
LOST, STOLEN OR DESTROYED STOCK CERTIFICATES; ISSUANCE OF
NEW CERTIFICATES
TRANSFERS
REGISTERED STOCKHOLDERS
ARTICLE VI INDEMNIFICATION
6.1
6.2
THIRD PARTY ACTIONS
ACTIONS BY OR IN THE RIGHT OF THE CORPORATION
-i-
Page
1
1
1
2
6
7
7
7
8
9
10
13
13
13
13
14
14
14
15
15
15
15
16
16
16
16
17
17
17
17
18
18
18
18
TABLE OF CONTENTS
(Continued)
6.3
6.4
6.5
6.6
6.7
6.8
6.9
6.10
6.11
6.12
6.13
6.14
6.15
SUCCESSFUL DEFENSE
DETERMINATION OF CONDUCT
PAYMENT OF EXPENSES IN ADVANCE
LIMITATION ON INDEMNIFICATION
DETERMINATION; CLAIM
INDEMNITY NOT EXCLUSIVE
INSURANCE
THE CORPORATION
EMPLOYEE BENEFIT PLANS
INDEMNITY FUND
INDEMNIFICATION OF OTHER PERSONS
SAVINGS CLAUSE
CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF
EXPENSES
ARTICLE VII MISCELLANEOUS
7.1
7.2
7.3
7.4
7.5
7.6
7.7
FISCAL YEAR
SEAL
WAIVER OF NOTICE OF MEETINGS OF STOCKHOLDERS, DIRECTORS
AND COMMITTEES
NOTICE BY ELECTRONIC TRANSMISSION
NOTICE TO STOCKHOLDERS SHARING AN ADDRESS
INTERESTED DIRECTORS; QUORUM
AMENDMENT OF BYLAWS
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BYLAWS
OF
IRIDEX CORPORATION
ARTICLE I
STOCKHOLDERS
1.1
ANNUAL MEETINGS
An annual meeting of stockholders shall be held for the election of directors at such date,
time and place (if any), within or without the state of Delaware, as may be designated by
resolution of the Board of Directors from time to time and stated in the corporation’s notice of
annual meeting. The Board of Directors may, in its sole discretion, determine that a meeting of
stockholders shall not be held at any place, but may instead by held solely by means of remote
communication as authorized by Section 211(a)(2) of the Delaware General Corporation Law
(the “DGCL”). In the absence of any such designation or determination, stockholders’ meetings
shall be held at the corporation’s principal executive office. At the annual meeting, directors
shall be elected and any other proper business brought in accordance with Section 1.4 of these
bylaws may be transacted. The Board of Directors may cancel, postpone or reschedule any
previously scheduled annual meeting at any time, before or after the notice for such meeting has
been sent to the stockholders.
1.2
SPECIAL MEETINGS
(1)
Special meetings of stockholders, other than as required by statute, may be
called at any time by the Board of Directors, the Chairman of the Board, the chief executive
officer or the President (in the absence of a chief executive officer), but a special meeting may
not be called by any other person or persons. The Board of Directors may cancel, postpone or
reschedule any previously scheduled special meeting at any time, before or after the notice for
such meeting has been sent to the stockholders.
(2)
The notice of a special meeting shall include the purpose for which the
meeting is called. Only such business shall be conducted at a special meeting of stockholders as
shall have been brought before the meeting by or at the direction of the Board of Directors, the
Chairman of the Board, the chief executive officer or the President (in the absence of a chief
executive officer). Nothing contained in this Section 1.2(2) shall be construed as limiting, fixing
or affecting the time when a meeting of stockholders called by action of the Board of Directors
may be held.
1.3
NOTICE OF MEETINGS
Whenever stockholders are required or permitted to take any action at a meeting, a
written notice of the meeting shall be given that shall state the place (if any), date and hour of the
meeting, the means of remote communications, if any, by which stockholders and proxy holders
may be deemed to be present in person and vote at such meeting, the record date for determining
the stockholders entitled to vote at the meeting, if such date is different from the record date for
determining stockholders entitled to notice of the meeting, and, in the case of a special meeting,
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the purpose or purposes for which the meeting is called. Unless otherwise provided by law, the
certificate of incorporation or these bylaws, the written notice of any meeting shall be given not
less than ten nor more than sixty days before the date of the meeting to each stockholder entitled
to vote at such meeting as of the record date for determining the stockholders entitled to notice of
the meeting. If mailed, such notice shall be deemed to be given when deposited in the mail,
postage prepaid, directed to the stockholder at his address as it appears on the records of the
corporation.
1.4
ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND
STOCKHOLDER BUSINESS
(1)
Advance Notice of Stockholder Business. At an annual meeting of the
stockholders, only such business shall be conducted as shall have been properly brought before
the meeting. To be properly brought before an annual meeting, business must be brought:
(A) pursuant to the corporation’s proxy materials with respect to such meeting; (B) by or at the
direction of the Board of Directors; or (C) by a stockholder of the corporation who (1) is a
stockholder of record at the time of the giving of the notice required by this Section 1.4(1), on
the record date for the determination of stockholders entitled to notice of the annual meeting and
on the record date for the determination of stockholders entitled to vote at the annual meeting
and (2) has timely complied in proper written form with the notice procedures set forth in this
Section 1.4(1). In addition, for business to be properly brought before an annual meeting by a
stockholder, such business must be a proper matter for stockholder action pursuant to these
bylaws and applicable law. For the avoidance of doubt, clause (C) above shall be the exclusive
means for a stockholder to bring business (other than business included in the corporation’s
proxy materials pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as amended,
or any successor thereto (the “1934 Act”)) before an annual meeting of stockholders.
(i)
To comply with clause (C) of Section 1.4(1) above, a stockholder’s
notice must set forth all information required under this Section 1.4(1) and must be timely
received by the Secretary. To be timely, a stockholder’s notice must be received by the Secretary
at the principal executive offices of the corporation not later than the close of business on the
ninetieth day or earlier than the close of business on the one hundred twentieth day before the
anniversary of the date of the immediately preceding annual meeting; provided, however, that in
the event that the annual meeting is called for a date that is not within twenty-five days before or
after such anniversary date, then, for notice by the stockholder to be timely, it must be so
received by the Secretary not later than the close of business on the tenth day following the day
on which Public Announcement (as defined below) of the date of such annual meeting is first
made. In no event shall any adjournment, rescheduling or postponement of an annual meeting or
the announcement thereof commence a new time period for the giving of a stockholder’s notice
as described in this Section 1.4(1)(i). “Public Announcement” shall mean disclosure in a press
release reported by the Dow Jones News Service, Associated Press or a comparable national
news service or in a document publicly filed by the corporation with the Securities and Exchange
Commission pursuant to Section 13, 14 or 15(d) of the 1934 Act.
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(ii)
To be in proper written form, a stockholder’s notice to the
Secretary must set forth as to each matter of business that the stockholder intends to bring before
the annual meeting: (1) a brief description of the business intended to be brought before the
annual meeting, the text of the proposed business (including the text of any resolutions proposed
for consideration) and the reasons for conducting such business at the annual meeting; (2) the
name and address, as they appear on the corporation’s books, of the stockholder proposing such
business and any Stockholder Associated Person (as defined below); (3) the class and number of
shares of the corporation that are held of record or are beneficially owned by the stockholder or
any Stockholder Associated Person and any derivative positions held or beneficially held by the
stockholder or any Stockholder Associated Person; (4) whether and the extent to which any
hedging or other transaction or series of transactions has been entered into by or on behalf of
such stockholder or any Stockholder Associated Person with respect to any securities of the
corporation, and a description of any other agreement, arrangement or understanding (including
any short position or any borrowing or lending of shares), the effect or intent of which is to
mitigate loss to, or to manage the risk or benefit from share price changes for, or to increase or
decrease the voting power of, such stockholder or any Stockholder Associated Person with
respect to any securities of the corporation; (5) any material interest of the stockholder or a
Stockholder Associated Person in such business; (6) a completed and duly executed written
questionnaire with respect to the background of the stockholder and any Stockholder Associated
Person (which questionnaire shall be provided by the Secretary promptly upon written request);
(7) any other information relating to such stockholder or any Stockholder Associated Person that
would be required to be disclosed in a proxy statement or other filings required to be made in
connection with solicitations of proxies for the business pursuant to Regulation 14A under the
1934 Act; and (8) a representation and undertaking that such stockholder or any Stockholder
Associated Person will deliver a proxy statement and form of proxy to holders of at least the
percentage of the corporation’s voting shares required under applicable law to carry the proposal
(such information provided and statements made as required by clauses (1) through (8), a
“Business Solicitation Statement”). In addition, to be in proper written form, a Business
Solicitation Statement must be supplemented, if necessary, not later than ten days following the
record date for the determination of stockholders entitled to notice of the meeting so that the
information contained in such Business Solicitation Statement is true and correct as of such
record date. For purposes of these bylaws, a “Stockholder Associated Person” of any
stockholder shall mean (i) any person controlling, directly or indirectly, or acting in concert with,
such stockholder; (ii) any beneficial owner of shares of stock of the corporation owned of record
or beneficially by such stockholder and on whose behalf the proposal, nomination or request, as
the case may be, is being made; or (iii) any person controlling, controlled by or under common
control with such person referred to in the preceding clauses (i) and (ii).
(iii) Without exception, no business shall be conducted at any annual
meeting except in accordance with the provisions set forth in this Section1.4(1) and, if
applicable, Section 1.4(2). In addition, business proposed to be brought by a stockholder may not
be brought before the annual meeting if such stockholder or a Stockholder Associated Person, as
applicable, takes action contrary to the representations and undertakings made in the Business
Solicitation Statement or if the Business Solicitation Statement contains an untrue statement of a
material fact or omits to state a material fact necessary to make the statements therein not
misleading. The chairperson of the annual meeting shall, if the facts warrant, determine and
declare at the annual meeting that business was not properly brought before the annual meeting
and in accordance with the provisions of this Section 1.4(1), and, if the chairperson should so
determine, he or she shall so declare at the annual meeting that any such business not properly
brought before the annual meeting shall not be conducted.
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(2)
Advance Notice of Director Nominations at Annual Meetings.
Notwithstanding anything in these bylaws to the contrary, only persons who are nominated in
accordance with the procedures set forth in this Section 1.4(2) shall be eligible for election as
directors at an annual meeting of stockholders. Nominations of persons for election to the Board
of Directors shall be made at an annual meeting of stockholders only (A) by or at the direction of
the Board of Directors; or (B) by a stockholder of the corporation who (1) was a stockholder of
record at the time of the giving of the notice required by this Section 1.4(2), on the record date
for the determination of stockholders entitled to notice of the annual meeting and on the record
date for the determination of stockholders entitled to vote at the annual meeting and (2) has
complied with the notice procedures set forth in this Section 1.4(2).
(i)
To comply with clause (B) of Section 1.4(2) above, a nomination
to be made by a stockholder must set forth all information required under this Section 1.4(2) and
must be received by the Secretary at the principal executive offices of the corporation not later
than the close of business on the ninetieth day or earlier than the close of business on the one
hundred twentieth day before the anniversary of the date of the immediately preceding annual
meeting; provided, however, that in the event that the annual meeting is called for a date that is
not within twenty-five days before or after such anniversary date, then, for notice by the
stockholder to be timely, it must be so received by the Secretary not later than the close of
business on the tenth day following the day on which Public Announcement of the date of such
annual meeting is first made; provided further, however, that in the event that the number of
directors to be elected to the Board of Directors is increased and there is no Public
Announcement specifying the size of the increased board made by the corporation at least ten
days before the last day that a stockholder may deliver a notice of nomination pursuant to the
foregoing provisions, a stockholder’s notice required by this Section 1.4(2) shall also be
considered timely, but only with respect to nominees for any new positions created by such
increase, if it shall be received by the Secretary at the principal executive offices of the
corporation not later than the close of business on the tenth day following the day on which such
Public Announcement is first made by the corporation. In no event shall any adjournment,
rescheduling or postponement of an annual meeting or the announcement thereof commence a
new time period for the giving of a stockholder’s notice as described in this Section 1.4(2)(i).
(ii)
Secretary must set forth:
To be in proper written form, such stockholder’s notice to the
(1)
as to each person (a “nominee”) whom the stockholder
proposes to nominate for election as a director: (A) the name, age, business address and
residence address of the nominee; (B) the principal occupation or employment of the nominee;
(C) the class and number of shares of the corporation that are held of record or are beneficially
owned by the nominee and any derivative positions held or beneficially held by the nominee;
(D) whether and the extent to which any hedging or other transaction or series of transactions has
been entered into by or on behalf of the nominee with respect to any securities of the corporation,
and a description of any other agreement, arrangement or understanding (including any short
position or any borrowing or lending of shares), the effect or intent of which is to mitigate loss
to, or to manage the risk or benefit of share price changes for, or to increase or decrease the
voting power of the nominee; (E) a description of all arrangements or understandings between or
among the stockholder, any nominee or any other person or persons (naming such person or
persons) pursuant to which the nominations are to be made by the stockholder, including a
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description of any compensatory, payment or other financial agreement, arrangement or
understanding involving the nominee and of any compensation or other payment received by or
on behalf of the nominee, in each case in connection with candidacy or service as a director of
the corporation; (F) a representation and undertaking from the nominee that he or she intends to
serve a full term on the Board of Directors if elected; (G) a completed and duly executed written
questionnaire with respect to the background and qualification of the nominee (which
questionnaire shall be provided by the Secretary promptly upon written request); and (H) any
other information relating to the nominee that would be required to be disclosed about such
nominee if proxies were being solicited for the election of the nominee as a director, or that is
otherwise required, in each case pursuant to Regulation 14A under the 1934 Act (including,
without limitation, the nominee’s written consent to being named as a nominee and to serving as
a director if elected); and
(2)
as to such stockholder giving notice, (A) the information
required to be provided pursuant to clauses (2) through (7) of Section 1.4(1)(ii) above (except
that the references to “business” in such clauses shall instead refer to nominations of directors for
purposes of this paragraph) and (B) a representation and undertaking that such stockholder or
Stockholder Associated Person will deliver a proxy statement and form of proxy to holders of a
number of the corporation’s voting shares reasonably believed by such stockholder or
Stockholder Associated Person to be necessary to elect such nominee(s) (such information
provided and statements made as required by clauses (A) and (B) above, a “Nominee
Solicitation Statement”). In addition, to be in proper written form, a Nominee Solicitation
Statement must be supplemented, if necessary, not later than ten days following the record date
for the determination of stockholders entitled to notice of the meeting so that the information
contained in such Nominee Solicitation Statement is true and correct as of such record date.
(iii) At the request of the Board of Directors, any person nominated by
a stockholder for election as a director must furnish to the Secretary (1) that information required
to be set forth in the Nominee Solicitation Statement in respect of such person as of such record
date and (2) such other information as may reasonably be required by the corporation to
determine the eligibility of such proposed nominee to serve as an independent director of the
corporation or that could be material to a reasonable stockholder’s understanding of the
independence, or lack thereof, of such nominee. In the absence of the furnishing of such
information if requested, such stockholder’s nomination shall not be considered in proper form
pursuant to this Section 1.4(2).
(iv) Without exception, no person shall be eligible for election as a
director of the corporation at an annual meeting of stockholders unless nominated in accordance
with the provisions set forth in this Section 1.4(2). In addition, a nominee shall not be eligible for
election if the nominee or a stockholder or Stockholder Associated Person, as applicable, takes
action contrary to the representations and undertakings made in the Nominee Solicitation
Statement applicable to such nominee or in any other notice to the corporation or if the Nominee
Solicitation Statement applicable to such nominee or any other relevant notice contains an untrue
statement of a material fact or omits to state a material fact necessary to make the statements
therein not misleading. The chairperson of the annual meeting shall, if the facts warrant,
determine and declare at the annual meeting that a nomination was not made in accordance with
the provisions prescribed by these bylaws, and if the chairperson should so determine, he or she
shall so declare at the annual meeting, and the defective nomination shall be disregarded.
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(3)
Advance Notice of Director Nominations for Special Meetings.
(i)
For a special meeting of stockholders at which directors are to be
elected pursuant to Section 1.2, nominations of persons for election to the Board of Directors
shall be made only (1) by or at the direction of the Board of Directors or (2) by any stockholder
of the corporation who (A) is a stockholder of record at the time of the giving of the notice
required by this Section 1.4(3), on the record date for the determination of stockholders entitled
to notice of the special meeting and on the record date for the determination of stockholders
entitled to vote at the special meeting and (B) delivers a timely written notice of the nomination
to the Secretary that includes the information set forth in Sections 1.4(2)(ii) and 1.4(2)(iii) above.
To be timely, such notice must be received by the Secretary at the principal executive offices of
the corporation not later than the close of business on the tenth day following the day on which
Public Announcement is first made of the date of the special meeting. In no event shall any
adjournment, rescheduling or postponement of a special meeting or the announcement thereof
commence a new time period for the giving of a stockholder’s notice. A person shall not be
eligible for election as a director at a special meeting unless the person is nominated (i) by or at
the direction of the Board of Directors or (ii) by a stockholder in accordance with the notice
procedures set forth in this Section 1.4(3). In addition, a nominee shall not be eligible for
election if the nominee or a stockholder or Stockholder Associated Person, as applicable, takes
action contrary to the representations and undertakings made in the Nominee Solicitation
Statement applicable to such nominee or in any other notice to the corporation or if the Nominee
Solicitation Statement applicable to such nominee or any other relevant notice contains an untrue
statement of a material fact or omits to state a material fact necessary to make the statements
therein not misleading.
(ii)
The chairperson of the special meeting shall, if the facts warrant,
determine and declare at the meeting that a nomination or business was not made in accordance
with the procedures prescribed by these bylaws, and if the chairperson should so determine, he or
she shall so declare at the meeting, and the defective nomination or business shall be
disregarded.
(4)
Rule 14a-8. Nothing in this Section 1.4 shall be deemed to affect any
rights of stockholders to request inclusion of proposals in the corporation’s proxy statement
pursuant to Rule 14a-8 under the 1934 Act (or any successor provision of law).
1.5
ADJOURNMENTS
Any meeting of stockholders, annual or special, may adjourn from time to time to
reconvene at the same or some other place (if any), and notice need not be given of any such
adjourned meeting if the time, place (if any) thereof, and the means of remote communications,
if any, by which stockholders and proxy holders may be deemed to be present in person and vote
at such adjourned meeting are announced at the meeting at which the adjournment is taken. At
the adjourned meeting the corporation may transact any business which might have been
transacted at the original meeting. If the adjournment is for more than thirty days, or if after the
adjournment a new record date for stockholders entitled to vote is fixed for the adjourned
meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled
to vote at the meeting as of the record date fixed for notice of such adjourned meeting.
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1.6
QUORUM
Except as otherwise provided by law, the certificate of incorporation or these bylaws, at
each meeting of stockholders the presence in person or by proxy of the holders of shares of stock
having a majority of the votes which could be cast by the holders of all outstanding shares of
stock entitled to vote at the meeting shall be necessary and sufficient to constitute a quorum.
Where a separate vote by a class or series or classes or series is required, a majority of the
outstanding shares of such class or series or classes or series, present in person or represented by
proxy, shall constitute a quorum entitled to take action with respect to that vote on that matter,
expect as otherwise provided by law, the certificate of incorporation or these bylaws. In the
absence of a quorum, then either (i) the chairperson of the meeting or (ii) the stockholders so
present and entitled to vote at the meeting may, by majority vote, adjourn the meeting from time
to time in the manner provided in Section 1.5 of these bylaws until a quorum shall attend. Shares
of its own stock belonging to the corporation or to another corporation, if a majority of the shares
entitled to vote in the election of directors of such other corporation is held, directly or indirectly,
by the corporation, shall neither be entitled to vote nor be counted for quorum purposes;
provided, however, that the foregoing shall not limit the right of the corporation to vote stock,
including but not limited to its own stock, held by it in a fiduciary capacity.
1.7
ORGANIZATION
The chairperson of any meeting of stockholders shall determine the order of business and
the procedure at the meeting, including such regulation of the manner of voting and the conduct
of business and discussion as seem to the chairperson in order. The chairperson of any meeting
of stockholders shall have the power to adjourn the meeting to another place (if any), date or
time, whether or not a quorum is present. The chairperson of any meeting of stockholders shall
be designated by the Board of Directors; in the absence of such designation, the Chairman of the
Board, if any, or the chief executive officer (in the absence of the Chairman of the Board), or the
President (in the absence of the Chairman of the Board and the chief executive officer), or in
their absence any other executive officer of the corporation, shall serve as chairperson of the
stockholder meeting. The Secretary shall act as secretary of the meeting, but in his absence the
chairman of the meeting may appoint any person to act as secretary of the meeting.
1.8
VOTING; PROXIES
Except as otherwise provided by the certificate of incorporation, each stockholder entitled
to vote at any meeting of stockholders shall be entitled to one vote for each share of stock held
by him which has voting power upon the matter in question. Each stockholder entitled to vote at
a meeting of stockholders may authorize another person or persons to act for him by proxy
authorized by an instrument in writing or by a transmission permitted by law filed in accordance
with the procedure established for the meeting, but no such proxy shall be voted or acted upon
after three years from its date, unless the proxy provides for a longer period. A written proxy
may be in the form of a telegram, cablegram or other means of electronic transmission which
sets forth or is submitted with information from which it can be determined that the telegram,
cablegram or other means of electronic transmission was authorized by the person. The
revocability of a proxy that states on its face that it is irrevocable shall be governed by the
provisions of Section 212 of the DGCL. A stockholder may revoke any proxy that is not
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irrevocable by attending the meeting and voting in person or by filing an instrument in writing
revoking the proxy or another duly executed proxy bearing a later date with the Secretary.
Voting at meetings of stockholders need not be by written ballot unless so determined by the
holders of shares of stock having a majority of the votes which could be cast by the holders of all
outstanding shares of stock entitled to vote thereon which are present in person or by proxy at
such meeting. At all meetings of stockholders for the election of directors a plurality of the votes
cast shall be sufficient to elect. All other elections and questions shall, unless otherwise provided
by law, the certificate of incorporation, these bylaws or the rules of any applicable stock
exchange, be decided by the affirmative vote of a majority of the voting power of the shares
present in person or represented by proxy at the meeting and entitled to vote on the subject
matter. Where a separate vote by a class or series or classes or series is required, in all matters
other than the election of directors, the affirmative vote of the majority of the shares of such class
or series or classes or series present in person or represented by proxy at the meeting and entitled
to vote on the subject matter shall be the act of such class or series or classes or series, except as
otherwise provided by law, the certificate of incorporation, these bylaws or the rules of any
applicable stock exchange.
1.9
FIXING DATE FOR DETERMINATION OF STOCKHOLDERS OF RECORD
(1)
In order that the corporation may determine the stockholders entitled to
notice of any meeting of stockholders or any adjournment thereof, the Board of Directors may
fix a record date, which record date shall not precede the date upon which the resolution fixing
the record date is adopted by the Board of Directors and which record date shall not be more than
sixty nor less than ten days before the date of such meeting. If the Board of Directors so fixes a
date, such date shall also be the record date for determining the stockholders entitled to vote at
such meeting unless the Board of Directors determines, at the time it fixes such record date, that
a later date on or before the date of the meeting shall be the date for making such determination.
If no record date is fixed by the Board of Directors, the record date for determining
stockholders entitled to notice of and to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which notice is given, or, if notice is waived, at
the close of business on the day next preceding the day on which the meeting is held.
A determination of stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of
Directors may fix a new record date for determination of stockholders entitled to vote at the
adjourned meeting, and in such case shall also fix as the record date for stockholders entitled to
notice of such adjourned meeting the same or an earlier date as that fixed for determination of
stockholders entitled to vote in accordance with the provisions of Section 213 of the DGCL and
this Section 1.9 at the adjourned meeting.
(2)
In order that the corporation may determine the stockholders entitled to
consent to corporate action in writing without a meeting, the Board of Directors may fix a record
date, which record date shall not precede the date upon which the resolution fixing the record
date is adopted by the Board of Directors, and which date shall not be more than ten days after
the date upon which the resolution fixing the record date is adopted by the Board of Directors.
Any stockholder of record seeking to have the stockholders authorize or take corporate action by
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written consent shall, by written notice to the Secretary and in conformity with the requirements
of these bylaws, including Section 1.11, request the Board of Directors to fix a record date. The
Board of Directors shall promptly, but in all events within ten days after the date on which such a
request is received, adopt a resolution fixing the record date. If no record date has been fixed by
the Board of Directors within such ten-day period, the record date for determining stockholders
entitled to consent to corporate action in writing without a meeting, when no prior action by the
Board of Directors is required by applicable law, shall be the first date on which a signed written
consent setting forth the action taken or proposed to be taken is delivered to the corporation in
the manner permitted by Section 228 of the DGCL. If no record date has been fixed by the Board
of Directors and prior action by the Board of Directors is required by law, the record date for
determining stockholders entitled to consent to corporate action in writing without a meeting
shall be at the close of business on the day on which the Board of Directors adopts the resolution
taking such prior action.
(3)
In order that the corporation may determine the stockholders entitled to
receive payment of any dividend or other distribution or allotment of any rights or the
stockholders entitled to exercise any rights in respect of any change, conversion or exchange of
stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date,
which record date shall not precede the date upon which the resolution fixing the record date is
adopted, and which record date shall be not more than sixty days prior to such action. If no
record date is fixed, the record date for determining stockholders for any such purpose shall be at
the close of business on the day on which the Board of Directors adopts the resolution relating
thereto.
1.10 LIST OF STOCKHOLDERS ENTITLED TO VOTE
The corporation shall prepare, at least ten days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, provided, however, if the record
date for determining the stockholders entitled to vote is less than ten days before the meeting
date, the list shall reflect the stockholders entitled to vote as of the tenth day before the meeting
date, arranged in alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. The corporation shall not be required to
include electronic mail addresses or other electronic contact information on such list. Such list
shall be open to the examination of any stockholder, for any purpose germane to the meeting for
a period of at least ten days prior to the meeting, (i) on a reasonably accessible electronic
network (so long as the information required to gain access to such list is provided with the
notice of the meeting), or (ii) during ordinary business hours, at the corporation’s principal place
of business. In the event that the corporation determines to make the list available on an
electronic network, the corporation may take reasonable steps to ensure that such information is
available only to stockholders of the corporation. If the meeting is to be held at a place, then a
list of stockholders entitled to vote at the meeting shall be produced and kept at the time and
place of the meeting during the whole time thereof and may be examined by any stockholder
who is present. If the meeting is to be held solely by means of remote communication, then such
list shall also be open to the examination of any stockholder during the whole time of the
meeting on a reasonably accessible electronic network, and the information required to access
such list shall be provided with the notice of the meeting.
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1.11 ACTION BY CONSENT OF STOCKHOLDERS
(1)
The stockholders of the corporation may take action by written consent in
lieu of a meeting of stockholders if, in accordance with and subject to the conditions and
restrictions set forth in the certificate of incorporation or these bylaws (as amended from time to
time), (i) record holders of at least 25% of the voting power of the outstanding capital stock of
the corporation (the “Soliciting Stockholders”) have submitted one or more written requests to
the Secretary asking that the Board of Directors fix a record date to determine the stockholders
entitled to deliver written consents for the action or actions proposed to be taken; (ii) such
written requests include all of the information contemplated by Section 1.11(3) with respect to
such action or actions and with respect to such Soliciting Stockholder(s) and the beneficial
owners (if any) on whose behalf such written requests are made; (iii) the Board of Directors fixes
such a record date or has failed to do so within ten days after the Secretary certifies to the Board
of Directors that he or she has received written requests from the requisite holders of capital
stock; and (iv) written consents setting forth the action or actions to be taken are signed by the
holders of outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon
were present and voted and are delivered to the corporation in the manner required by Section
228 of the DGCL. The Board of Directors may fix a record date to determine the stockholders
entitled to deliver written requests, whether or not the corporation has already received one or
more written requests pursuant to this Section 1.11(1). A written request pursuant to this Section
1.11(1) may be revoked prior to the receipt of written requests from the holders of 25% of the
voting power of the outstanding capital stock of the corporation.
(2)
Subject to the rights of the holders of the shares of any series of Preferred
Stock or any other class of stock or series thereof having a preference over the Common Stock as
dividend or upon liquidation, any action required or permitted to be taken by the stockholders of
the corporation must be effected at a duly called annual or special meeting of stockholders of the
corporation and may not be effected by any consent in writing by such stockholders, except (i) in
accordance with the first sentence of Section 1.11(1) or (ii) pursuant to a resolution adopted by
the Board of Directors authorizing one or more actions to be taken by written consent. Any
written consent to take action in lieu of a meeting of stockholders may be revoked prior to the
effectiveness of the stockholder action or actions set forth in such written consent. References in
these bylaws to a written consent shall be deemed to include a telegram, cablegram or other
electronic transmission consenting to an action to be taken if such transmission complies with
Section 228(d) of the DGCL.
(3)
Each written request asking that the Board of Directors fix a record date to
determine the stockholders entitled to deliver written consents shall include the following: (a) the
signature of the Soliciting Stockholder signing such written request and the date that such written
request was signed; (b) the action or actions proposed to be taken by written consent, the text of
the proposed action (including the text of any resolutions proposed for consideration), if
applicable, and the reasons for seeking stockholder approval of such actions; and (c) the
following information:
of such Soliciting Stockholder and any Stockholder Associated Person;
(i)
the name and address, as they appear on the corporation’s books,
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(ii)
the class and number of shares of the corporation that are held of
record or are owned beneficially by such Soliciting Stockholder or any Stockholder Associated
Person and any derivative positions held or beneficially held by such Soliciting Stockholder or
any Stockholder Associated Person;
(iii) whether and the extent to which any hedging or other transaction
or series of transactions has been entered into by or on behalf of such Soliciting Stockholder or
any Stockholder Associated Person with respect to any securities of the corporation, and a
description of any other agreement, arrangement or understanding (including any short position
or any borrowing or lending of shares), the effect or intent of which is to mitigate loss to, or to
manage the risk or benefit from share price changes for, or to increase or decrease the voting
power of, such Soliciting Stockholder or any Stockholder Associated Person with respect to any
securities of the corporation ;
Stockholder Associated Person in any of the actions to be taken by written consent;
(iv)
any material interest of such Soliciting Stockholder or any
a completed and duly executed written questionnaire with respect
to the background of such Soliciting Stockholder or any Stockholder Associated Person (which
questionnaire shall be provided by the Secretary promptly upon written request);
(v)
(vi)
any other information relating to such Soliciting Stockholder or
any Stockholder Associated Person that would be required to be disclosed in a proxy statement
or other filings required to be made in connection with solicitations of proxies for the action
proposed by to taken by written consent pursuant to Regulation 14A under the 1934 Act;
(vii)
to enable them to be considered consistent with requirements
applicable to all nominees, if directors are to be elected by written consent, with respect to each
person proposed by a stockholder to be elected by written consent, all such information,
materials, statements, consents and representations (including all fully completed questionnaires
and other forms) required to be submitted with respect to nominees for director election at an
annual meeting of stockholders as specified in Section 1.4; and
(viii) a representation and undertaking that such Soliciting Stockholder
or any Stockholder Associated Person will use reasonable efforts to deliver a proxy statement
and form of proxy to all stockholders entitled to deliver a written consent.
Each such written request must be supplemented, if necessary, not later than ten days
following the record date for determining the stockholders entitled to act by written consent so
that the information contained in such written request is true and correct as of such record date.
(4)
The Secretary shall not accept, and shall consider ineffective, a written
request pursuant to Section 1.11(1) asking that the Board of Directors fix a record date (i) that
does not comply with the provisions of these bylaws; (ii) that relates to an item of business that is
not a proper subject for stockholder action under applicable law; (iii) if such written request is
delivered between the time beginning on the 31st day after the earliest date of signature on a
written request that has been delivered to the Secretary relating to an identical or substantially
similar item (hereinafter for purposes of this Section 1.11, a “Similar Item”) and ending on the
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one-year anniversary of such earliest date; (iv) if a Similar Item will be submitted for stockholder
approval at any stockholder meeting to be held on or before the 120th day after the Secretary
receives such written request; or (v) if a Similar Item has been presented at the most recent
annual meeting or at any special meeting held within one year prior to the receipt by the
Secretary of such written request.
(5)
In the event of the delivery, in the manner provided by Section 228 of the
DGCL, to the corporation of the requisite written consent or consents to take corporate action
after giving effect to any related revocation or revocations, the corporation shall engage an
independent inspector or inspectors of elections for the purpose of promptly performing a
ministerial review of the validity of the consents and revocations. For the purpose of permitting
the inspector or inspectors to perform such review, no action by written consent without a
meeting shall be effective until such date as the independent inspector or inspectors certify to the
corporation that the consents delivered to the corporation in accordance with applicable law
represent at least the minimum number of votes that would be necessary to take the corporate
action. To the fullest extent permitted by Delaware law, the action by written consent will take
effect as of the date and time of the certification of the written consents and will not relate back
to the date that the written consents were delivered to the corporation. In conducting the review
required by this Section 1.11(5), the independent inspector or inspectors may, at the expense of
the corporation, retain legal counsel and any other necessary or appropriate professional advisors
and such other personnel as they may deem necessary or appropriate to assist them and shall be
fully protected in relying in good faith upon the opinion of such counsel or advisors. Nothing
contained in this Section 1.11(5) shall in any way be construed to suggest or imply that the Board
of Directors or any stockholder shall not be entitled to contest the validity of any consent or
revocation thereof, whether before or after such certification by the independent inspector or
inspectors, or to take any other action (including, without limitation, the commencement,
prosecution or defense of any litigation with respect thereto, and the seeking of injunctive relief
in such litigation). If after such review the independent inspector or inspectors shall determine
that the written consent or consents are valid and that the action specified therein has been
validly authorized, that fact shall forthwith be certified on the records of the corporation kept for
the purpose of recording the proceedings of meetings of stockholders, and the written consent or
consents shall be filed in such records.
(6)
Prompt notice of the taking of corporate action without a meeting by less
than unanimous written consent shall be given to those stockholders entitled thereto in
accordance with Section 228(e) of the DGCL and other applicable law.
(7)
Any person executing a consent may provide, whether through instruction
to an agent or otherwise, that such a consent will be effective at a future time (including a time
determined upon the happening of an event), no later than sixty days after such instruction is
given or provision is made, if evidence of such instruction or provision is provided to the
corporation. Unless otherwise provided, any consent shall be revocable prior to its becoming
effective.
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(8)
The Board of Directors shall determine in good faith whether the
requirements set forth in the certificate of incorporation or these bylaws have been satisfied. If
the Board of Directors shall determine that any written request asking the Board of Directors to
fix a record date to take action by written consent was not properly made in accordance with
applicable law, the certificate of incorporation or these bylaws, or if the Board of Directors shall
determine that the stockholder or stockholders seeking to take such action do not otherwise
comply with applicable law, the certificate of incorporation or these bylaws, then the Board of
Directors shall not be required to fix a record date and any such purported action by written
consent shall be null and void to the fullest extent permitted by applicable law. In addition to the
requirements of the certificate of incorporation or these bylaws with respect to stockholders
seeking to take an action by written consent, any stockholder of record seeking to have the
stockholders authorize or take corporate action by written consent shall comply with all
requirements of applicable law, including all requirements of the 1934 Act, with respect to such
action.
ARTICLE II
BOARD OF DIRECTORS
2.1
NUMBER; QUALIFICATIONS
The Board of Directors shall consist of one or more members, the number thereof to be
determined from time to time by resolution of the Board of Directors. Directors need not be
stockholders.
2.2
ELECTION; RESIGNATION; REMOVAL; VACANCIES
The Board of Directors shall initially consist of the persons named as directors in the
certificate of incorporation, and each director so elected shall hold office until the first annual
meeting of stockholders or until his successor is elected and qualified. At the first annual meeting
of stockholders and at each annual meeting thereafter, the stockholders shall elect directors each
of whom shall hold office for a term of one year and until his or her successor is elected and
qualified or until such director’s earlier death, resignation or removal. Any director may resign at
any time upon notice given in writing or by electronic transmission to the corporation. Any
newly created directorship or any vacancy occurring in the Board of Directors for any cause may
be filled only by a majority of the remaining members of the Board of Directors, although such
majority is less than a quorum, and not by stockholders, and each director so elected shall hold
office until the expiration of the term of office of the director whom he or she has replaced and
until his or her successor is elected and qualified. No reduction of the authorized number of
directors shall have the effect of removing any director before that director’s term of office
expires.
2.3
REGULAR MEETINGS
Regular meetings of the Board of Directors may be held at such places within or without
the State of Delaware and at such times as the Board of Directors may from time to time
determine, and if so determined notices thereof need not be given.
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2.4
SPECIAL MEETINGS
Special meetings of the Board of Directors may be held at any time or place within or
without the State of Delaware whenever called by the Chairman of the Board, the chief executive
officer, the President, or at least three members of the Board of Directors.
Notice of the time and place of special meetings shall be:
(i) delivered personally by hand, by courier or by telephone;
(ii) sent by United States first-class mail, postage prepaid;
(iii) sent by facsimile;
(iv) sent by electronic mail; or
(v) otherwise given by electronic transmission (as defined below),
directed to each director at that director’s address, telephone number, facsimile number,
electronic mail address or other contact for notice by electronic transmission, as the case may be,
as shown on the corporation’s records.
If the notice is (i) delivered personally by hand, by courier or by telephone, (ii) sent by
facsimile, (iii) sent by electronic mail or (iv) otherwise given by electronic transmission, it shall
be delivered, sent or otherwise directed to each director, as applicable, at least 24 hours before
the time of the holding of the meeting. If the notice is sent by United States mail, it shall be
deposited in the United States mail at least four days before the time of the holding of the
meeting. Any oral notice may be communicated to the director. The notice need not specify the
place of the meeting (if the meeting is to be held at the corporation’s principal executive office)
nor the purpose of the meeting, unless required by statute.
2.5
TELEPHONIC MEETINGS PERMITTED
Members of the Board of Directors, or any committee designated by the Board of
Directors, may participate in a meeting thereof by means of conference telephone or other
communications equipment by means of which all persons participating in the meeting can hear
each other, and participation in a meeting pursuant to this bylaw shall constitute presence in
person at such meeting.
2.6
QUORUM; VOTE REQUIRED FOR ACTION
At all meetings of the Board of Directors a majority of the total authorized number of
directors shall constitute a quorum for the transaction of business. If a quorum is not present at
any meeting of the Board of Directors, then the directors present thereat may adjourn the meeting
from time to time, without notice other than announcement at the meeting, until a quorum is
present. Except in cases in which the certificate of incorporation or these bylaws otherwise
provide, the affirmative vote of a majority of the directors present at a meeting at which a
quorum is present shall be the act of the Board of Directors.
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2.7
ORGANIZATION
Meetings of the Board of Directors shall be presided over by the Chairman of the Board,
if any, or in his absence by the Vice Chairman of the Board, if any, or in his absence by the
President, or in their absence by a chairman chosen at the meeting. The Secretary shall act as
secretary of the meeting, but in his absence the chairman of the meeting may appoint any person
to act as secretary of the meeting.
2.8
BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Unless otherwise restricted by the certificate of incorporation or these bylaws, any action
required or permitted to be taken at any meeting of the Board of Directors, or of any committee
thereof, may be taken without a meeting if all members of the Board of Directors or such
committee, as the case may be, consent thereto in writing or by electronic transmission, and the
writing or writings or electronic transmission or transmissions are filed with the minutes of
proceedings of the Board of Directors or such committee. Such filing shall be in paper form if
the minutes are maintained in paper form and shall be in electronic form if the minutes are
maintained in electronic form. Any person (whether or not then a director) may provide, whether
through instruction to an agent or otherwise, that a consent to action will be effective at a future
time (including a time determined upon the happening of an event), no later than sixty days after
such instruction is given or such provision is made and such consent shall be deemed to have
been given for purposes of this Section 2.8 at such effective time so long as such person is then a
director and did not revoke the consent prior to such time. Any such consent shall be revocable
prior to its becoming effective.
ARTICLE III
COMMITTEES
3.1
COMMITTEES
The Board of Directors may, by resolution passed by a majority of the whole Board of
Directors, designate one or more committees, each committee to consist of one or more of the
directors of the corporation. The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified member at any
meeting of the committee. In the absence or disqualification of a member of a committee, the
member or members thereof present at any meeting and not disqualified from voting, whether or
not he or they constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in place of any such absent or disqualified member. Any such
committee, to the extent permitted by Section 141(c)(2) of the DGCL and to the extent provided
in the resolution of the Board of Directors, or in these bylaws, shall have and may exercise all the
powers and authority of the Board of Directors in the management of the business and affairs of
the corporation, and may authorize the seal of the corporation to be affixed to all papers which
may require it. No such committee shall have the power or authority to (i) approve or adopt, or
recommend to the stockholders, any action or matter (other than the election or removal of
directors) expressly required by the DGCL to be submitted to stockholders for approval, or (ii)
adopt, amend or repeal any bylaw of the corporation.
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3.2
COMMITTEE RULES
Unless the Board of Directors otherwise provides, and subject to applicable law, each
committee designated by the Board of Directors may make, alter and repeal rules for the conduct
of its business. In the absence of such rules each committee shall conduct its business in the same
manner as the Board of Directors conducts its business pursuant to Article III of these bylaws.
ARTICLE IV
OFFICERS
4.1
EXECUTIVE OFFICERS; ELECTION; QUALIFICATIONS; TERM OF
OFFICE; RESIGNATION; REMOVAL; VACANCIES
The Board of Directors shall elect a President and Secretary, and it may, if it so
determines, choose a Chairman of the Board and a Vice Chairman of the Board from among its
members. The Board of Directors may also choose one or more Vice Presidents, one or more
Assistant Secretaries, a Treasurer, one or more Assistant Treasurers and any such other officers
as the Board of Directors deems appropriate. Each such officer shall hold office until the first
meeting of the Board of Directors after the annual meeting of stockholders next succeeding his
election, and until his successor is elected and qualified or until his earlier resignation or
removal. Any officer may resign at any time upon written notice to the corporation. The Board of
Directors may remove any officer with or without cause at any time, but such removal shall be
without prejudice to the contractual rights of such officer, if any, with the corporation. Any
number of offices may be held by the same person. Any vacancy occurring in any office of the
corporation by death, resignation, removal or otherwise may be filled for the unexpired portion
of the term by the Board of Directors at any regular or special meeting.
4.2
POWERS AND DUTIES OF EXECUTIVE OFFICERS
The officers of the corporation shall have such powers and duties in the management of
the corporation as may be prescribed by the Board of Directors and, to the extent not so
provided, as generally pertain to their respective offices, subject to the control of the Board of
Directors. The Board of Directors may require any officer, agent or employee to give security for
the faithful performance of his duties. The Chairman of the Board, the Vice Chairman of the
Board, the chief executive officer, the President, any Vice President, the Treasurer or any
Assistant Treasurer, the Secretary or any Assistant Secretary, or any other person authorized by
the Board of Directors or the chief executive officer, the President or a Vice President, is
authorized to vote, represent, and exercise on behalf of this corporation all rights incident to any
and all securities of any other entity or entities standing in the name of this corporation,
including the right to act by written consent. The authority granted herein may be exercised
either by such person directly or by any other person authorized to do so by proxy or power of
attorney duly executed by such person having the authority.
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ARTICLE V
STOCK
5.1
STOCK CERTIFICATES
The shares of the corporation shall be represented by certificates, provided that the Board
of Directors may provide by resolution or resolutions that some or all of any or all classes or
series of the corporation’s stock shall be uncertificated shares. Any such resolution shall not
apply to shares represented by a certificate until such certificate is surrendered to the corporation.
Every holder of stock of the corporation represented by certificates shall be entitled to have a
certificate signed by, or in the name of, the corporation by any two officers of the corporation
representing the number of shares registered in certificate form. Any or all of the signatures on
the certificate may be by a facsimile. In case any officer, transfer agent or registrar who has
signed or whose facsimile signature has been placed upon a certificate shall have ceased to be
such officer, transfer agent or registrar before such certificate is issued, it may be issued by the
corporation with the same effect as if such person were such officer, transfer agent or registrar at
the date of issue. The corporation shall not have power to issue a certificate in bearer form.
5.2
LOST, STOLEN OR DESTROYED STOCK CERTIFICATES; ISSUANCE OF
NEW CERTIFICATES
The corporation may issue a new certificate of stock or uncertificated shares in the place
of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the
corporation may require the owner of the lost, stolen or destroyed certificate, or his legal
representative, to give the corporation a bond sufficient to indemnify it against any claim that
may be made against it on account of the alleged loss, theft or destruction of any such certificate
or the issuance of such new certificate or uncertificated shares.
5.3
TRANSFERS
Stock of the corporation shall be transferable in the manner prescribed by law and in
these bylaws. Transfers of stock shall be made on the books of the corporation only by the record
holder of such stock or by his or her attorney lawfully constituted in writing and, if such stock is
certificated, upon the surrender of the certificate therefor, properly endorsed or accompanied by
proper evidence of succession, assignation or authority to transfer, which such certificate shall be
canceled before a new certificate shall be issued. The corporation shall have power to enter into
and perform any agreement with any number of stockholders of any one or more classes of stock
of the corporation to restrict the transfer of shares of stock of the corporation of any one or more
classes owned by such stockholders in any manner not prohibited by the DGCL.
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5.4
REGISTERED STOCKHOLDERS
The corporation:
(i) shall be entitled to treat the person registered on its books as the owner of
any share or shares as the person exclusively entitled to receive dividends, vote, receive
notifications and otherwise exercise all the rights and powers of an owner of such share or
shares; and
(ii) shall not be bound to recognize any equitable or other claim to or interest
in such share or shares on the part of another person, whether or not it shall have express or other
notice thereof, except as otherwise provided by the laws of Delaware.
ARTICLE VI
INDEMNIFICATION
6.1
THIRD PARTY ACTIONS
The corporation shall indemnify, to the fullest extent permitted by the DGCL, as now or
hereinafter in effect, any person who was or is a party or is threatened to be made a party to any
threatened, pending, or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director or officer of the corporation or that such director or
officer is or was serving at the request of the corporation as a director, officer, employee or agent
of another corporation, partnership, joint venture trust or other enterprise (collectively, an
“Agent”) against expenses (including attorneys’ fees), judgments, fines and amounts paid in
settlement (if such settlement is approved in advance by the corporation, which approval shall
not be unreasonably withheld) actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be
in or not opposed to the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of
any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a presumption that the person did not act
in good faith and in a manner which he reasonably believed to be in or not opposed to the best
interest of the corporation, and, with respect to any criminal action or proceeding, had reasonable
cause to believe that his conduct was unlawful.
6.2
ACTIONS BY OR IN THE RIGHT OF THE CORPORATION
The corporation shall indemnify, to the fullest extent permitted by the DGCL, as now or
hereinafter in effect, any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he is or was an Agent (as defined in Section 6.1)
against expenses (including attorneys’ fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of the corporation and
except that no indemnification shall be made in respect of any claim, issue or matter as to which
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such person shall have been adjudged to be liable to the corporation unless and only to the extent
that the Delaware Court of Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Delaware Court of Chancery or such other court shall deem proper.
6.3
SUCCESSFUL DEFENSE
To the extent that an Agent of the corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in Sections 6.1 and 6.2, or in
defense of any claim, issue or matter therein, he shall be indemnified against expenses (including
attorneys’ fees) actually and reasonably incurred by him in connection therewith.
6.4
DETERMINATION OF CONDUCT
Any indemnification under Sections 6.1 and 6.2 (unless ordered by a court) shall be made
by the corporation only as authorized in the specific case upon a determination that the
indemnification of the Agent is proper in the circumstances because he has met the applicable
standard of conduct set forth in Sections 6.1 and 6.2. Such determination shall be made (1) by the
Board of Directors or an executive committee by a majority vote of a quorum consisting of
directors who were not parties to such action, suit or proceeding, or (2) or if such quorum is not
obtainable or, even if obtainable, a quorum of disinterested directors so directs, by independent
legal counsel in a written opinion, or (3) by the stockholders.
6.5
PAYMENT OF EXPENSES IN ADVANCE
Expenses (including attorneys’ fees) actually and reasonably incurred by an Agent in
defending a civil or criminal action, suit or proceeding shall be paid by the corporation in
advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking
by or on behalf of the director, officer, employee or agent to repay such amount if it shall
ultimately be determined that he is not entitled to be indemnified by the corporation as
authorized in this Article VI. The right to advancement of expenses shall not apply to any claim
for which indemnity is excluded pursuant to these bylaws, but shall apply to any proceeding
referenced in Section 6.6(2) or 6.6(3) prior to a determination that the person is not entitled to be
indemnified by the corporation.
6.6
LIMITATION ON INDEMNIFICATION
Subject to the requirements in Section 6.3 and the DGCL, the corporation shall not be
obligated to indemnify any person pursuant to this Article VI in connection with a civil or
criminal action, suit or proceeding (or any part thereof):
(1)
for which payment has actually been made to or on behalf of such person
under any statute, insurance policy, indemnity provision, vote or otherwise, except with respect
to any excess beyond the amount paid;
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(2)
for an accounting or disgorgement of profits pursuant to Section 16(b) of
the 1934 Act, or similar provisions of federal, state or local statutory law or common law, if such
person is held liable therefor (including pursuant to any settlement arrangements);
(3)
for any reimbursement of the corporation by such person of any bonus or
other incentive-based or equity-based compensation or of any profits realized by such person
from the sale of securities of the corporation, as required in each case under the 1934 Act
(including any such reimbursements that arise from an accounting restatement of the corporation
pursuant to Section 304 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), or the
payment to the corporation of profits arising from the purchase and sale by such person of
securities in violation of Section 306 of the Sarbanes-Oxley Act), if such person is held liable
therefor (including pursuant to any settlement arrangements);
(4)
initiated by such person, including a civil or criminal action, suit or
proceeding (or any part thereof) initiated by such person against the corporation or its directors,
officers, employees, agents or other indemnitees, unless (a) the Board of Directors authorized the
action, suit or proceeding (or the relevant part thereof) prior to its initiation, (b) the corporation
provides the indemnification, in its sole discretion, pursuant to the powers vested in the
corporation under applicable law, (c) otherwise required to be made under Section 6.7 or
(d) otherwise required by applicable law; or
(5)
if prohibited by applicable law.
6.7
DETERMINATION; CLAIM
If a claim for indemnification or advancement of expenses under this Article VI is not
paid in full within 90 days after receipt by the corporation of the written request therefor, the
claimant shall be entitled to an adjudication by a court of competent jurisdiction of his
entitlement to such indemnification or advancement of expenses. The corporation shall
indemnify such person against any and all expenses that are actually and reasonably incurred by
such person in connection with any action for indemnification or advancement of expenses from
the corporation under this Article VI, to the extent such person is successful in such action, and
to the extent not prohibited by law. In any such suit, the corporation shall, to the fullest extent
not prohibited by law, have the burden of proving that the claimant is not entitled to the
requested indemnification or advancement of expenses.
6.8
INDEMNITY NOT EXCLUSIVE
The indemnification and advancement of expenses provided or granted pursuant to this
Article VI shall not be deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under the certificate of
incorporation or any statute, bylaw, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in his official capacity and as to action in another capacity while
holding such office. The corporation is specifically authorized to enter into individual contracts
with any or all of its directors, officers, employees or agents respecting indemnification and
advancement of expenses, to the fullest extent not prohibited by the DGCL or other applicable
law.
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6.9
INSURANCE
The corporation shall have the power to purchase and maintain insurance on behalf of
any person who is or was an Agent of the corporation, or is or was serving at the request of the
corporation, as a director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him and incurred by him in
any such capacity, or arising out of his status as such, whether or not the corporation would have
the power to indemnify him against such liability under the provisions of this Article VI or the
DGCL.
6.10 THE CORPORATION
For purposes of this Article VI, references to “the corporation” shall include, in addition
to the resulting corporation, any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate existence had continued,
would have had power and authority to indemnify its directors, officers, employees or agents, so
that any person who is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture, trust or other
enterprise, shall stand in the same position under and subject to the provisions of this Article VI
(including, without limitation the provisions of Section 6.4) with respect to the resulting or
surviving corporation as he would have with respect to such constituent corporation if its
separate existence had continued.
6.11 EMPLOYEE BENEFIT PLANS
For purposes of this Article VI, references to “other enterprises” shall include employee
benefit plans; references to “fines” shall include any excise taxes assessed on a person with
respect to an employee benefit plan; and references to “serving at the request of the corporation”
shall include any service as a director, officer, employee or agent of the corporation which
imposes duties on, or involves services by, such director, officer, employee, or agent with respect
to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good
faith and in a manner he reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a manner “not
opposed to the best interests of the corporation” as referred to in this Article VI.
6.12
INDEMNITY FUND
Upon resolution passed by the Board of Directors, the corporation may establish a trust or
other designated account, grant a security interest or use other means (including, without
limitation, a letter of credit), to ensure the payment of certain of its obligations arising under this
Article VI and/or agreements which may be entered into between the corporation and its officers
and directors from time to time.
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6.13
INDEMNIFICATION OF OTHER PERSONS
The provisions of this Article VI shall not be deemed to preclude the indemnification of
any person who is not an Agent (as defined in Section 6.1), but whom the corporation has the
power or obligation to indemnify under the provisions of the DGCL or otherwise. The
corporation may, in its sole discretion, indemnify an employee, trustee or other agent as
permitted by the DGCL. The corporation shall indemnify an employee, trustee or other agent
where required by law.
6.14 SAVINGS CLAUSE
If this Article or any portion thereof shall be invalidated on any ground by any court of
competent jurisdiction, then the corporation shall nevertheless indemnify each Agent against
expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement with
respect to any action, suit, proceeding or investigation, whether civil, criminal or administrative,
and whether internal or external, including a grand jury proceeding and an action or suit brought
by or in the right of the corporation, to the full extent permitted by any applicable portion of this
Article that shall not have been invalidated, or by any other applicable law.
6.15 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF
EXPENSES
The indemnification and advancement of expenses provided by, or granted pursuant to,
this Article VI shall, unless otherwise provided when authorized or ratified, continue as to a
person who has ceased to be a director, officer, employee or agent and shall inure to the benefit
of the heirs, executors and administrators of such a person.
ARTICLE VII
MISCELLANEOUS
7.1
FISCAL YEAR
The fiscal year of the corporation shall be determined by resolution of the Board of
Directors.
7.2
SEAL
The corporate seal shall have the name of the corporation inscribed thereon and shall be
in such form as may be approved from time to time by the Board of Directors.
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7.3 WAIVER OF NOTICE OF MEETINGS OF STOCKHOLDERS, DIRECTORS
AND COMMITTEES
Any written waiver of notice, signed by the person entitled to notice, or a waiver by
electronic transmission by the person entitled to notice, whether before or after the time stated
therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall
constitute a waiver of notice of such meeting, except when the person attends a meeting for the
express purpose of objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened. Neither the business to be transacted at,
nor the purpose of any regular or special meeting of the stockholders, directors, or members of a
committee of directors need be specified in any written waiver of notice or any waiver by
electronic transmission unless so required by the certificate of incorporation or these bylaws.
7.4
NOTICE BY ELECTRONIC TRANSMISSION
Without limiting the manner by which notice otherwise may be given effectively to
stockholders pursuant to the DGCL, the certificate of incorporation or these bylaws, any notice
to stockholders given by the corporation under any provision of the DGCL, the certificate of
incorporation or these bylaws shall be effective if given by a form of electronic transmission
consented to by the stockholder to whom the notice is given. Any such consent shall be
revocable by the stockholder by written notice to the corporation. Any such consent shall be
deemed revoked if:
consecutive notices given by the corporation in accordance with such consent; and
(i)
the corporation is unable to deliver by electronic transmission two
to the transfer agent, or other person responsible for the giving of notice.
(ii) such inability becomes known to the Secretary or an Assistant Secretary or
However, the inadvertent failure to treat such inability as a revocation shall not invalidate any
meeting or other action.
Any notice given pursuant to the preceding paragraph shall be deemed given:
stockholder has consented to receive notice;
(i)
if by facsimile telecommunication, when directed to a number at which the
the stockholder has consented to receive notice;
(ii) if by electronic mail, when directed to an electronic mail address at which
(iii) if by a posting on an electronic network together with separate notice to
the stockholder of such specific posting, upon the later of (A) such posting and (B) the giving of
such separate notice; and
stockholder.
(iv) if by any other form of electronic transmission, when directed to the
An affidavit of the Secretary or an Assistant Secretary or of the transfer agent or other
agent of the corporation that the notice has been given by a form of electronic transmission shall,
in the absence of fraud, be prima facie evidence of the facts stated therein.
-23-
An “electronic transmission” means any form of communication, not directly involving
the physical transmission of paper, including the use of, or participation in, one or more
electronic networks or databases (including one or more distributed electronic networks or
databases), that creates a record that may be retained, retrieved, and reviewed by a recipient
thereof, and that may be directly reproduced in paper form by such a recipient through an
automated process.
Notice by a form of electronic transmission shall not apply to Sections 164, 296, 311, 312
or 324 of the DGCL.
7.5
NOTICE TO STOCKHOLDERS SHARING AN ADDRESS
Except as otherwise prohibited under the DGCL, without limiting the manner by which
notice otherwise may be given effectively to stockholders, any notice to stockholders given by
the corporation under the provisions of the DGCL, the certificate of incorporation or these
bylaws shall be effective if given by a single written notice to stockholders who share an address
if consented to by the stockholders at that address to whom such notice is given. Any such
consent shall be revocable by the stockholder by written notice to the corporation. Any
stockholder who fails to object in writing to the corporation, within sixty days of having been
given written notice by the corporation of its intention to send the single notice, shall be deemed
to have consented to receiving such single written notice.
7.6
INTERESTED DIRECTORS; QUORUM
No contract or transaction between the corporation and one or more of its directors or
officers, or between the corporation and any other corporation, partnership, association, or other
organization in which one or more of its directors or officers are directors or officers, or have a
financial interest, shall be void or voidable solely for this reason, or solely because the director or
officer is present at or participates in the meeting of the Board of Directors or committee thereof
which authorizes the contract or transaction, or solely because his or their votes are counted for
such purpose, if: (1) the material facts as to his relationship or interest and as to the contract or
transaction are disclosed or are known to the Board of Directors or the committee, and the Board
of Directors or committee in good faith authorizes the contract or transaction by the affirmative
votes of a majority of the disinterested directors, even though the disinterested directors be less
than a quorum: or (2) the material facts as to his relationship or interest and as to the contract or
transaction are disclosed or are known to the stockholders entitled to vote thereon, and the
contract or transaction is specifically approved in good faith by vote of the stockholders; or (3)
the contract or transaction is fair as to the corporation as of the time it is authorized, approved or
ratified, by the Board of Directors, a committee thereof, or the stockholders. Common or
interested directors may be counted in determining the presence of a quorum at a meeting of the
Board of Directors or of a committee which authorizes the contract or transaction.
7.7
AMENDMENT OF BYLAWS
These bylaws may be altered or repealed, and new bylaws made, by the Board of
Directors, but the stockholders may make additional bylaws and may alter or repeal any bylaws
whether adopted by them or otherwise.
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CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 29, 2019 relating to the consolidated financial
statements of IRIDEX Corporation, which appear in this Annual Report on Form 10-K.
Exhibit 23.1
/s/ BPM LLP
San Jose, California
March 29, 2019
CERTIFICATION OF PRINCIPAL EXECUTIVE AND 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, 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 29, 2019
By: /s/ WILLIAM M. MOORE
Name: William M. Moore
Title: President and Chief Executive Officer
(Principal Executive and Financial Officer)
CERTIFICATION OF PRINCIPAL ACCOUNTING 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, Romeo R. Dizon, 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 29, 2019
By: /s/ ROMEO R. DIZON
Name: Romeo R. Dizon
Title: Vice President and Controller
(Principal Accounting Officer)
CERTIFICATION OF PRINCIPAL EXECUTIVE AND FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.1
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 29, 2018 (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 29, 2019
By: /s/ WILLIAM M. MOORE
Name: William M. Moore
Title: President and Chief Executive Officer
(Principal Executive and Financial Officer)
CERTIFICATION OF PRINCIPAL ACCOUNTING 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, Romeo R. Dizon, 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 29, 2018 (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 29, 2019
By: /s/ ROMEO R. DIZON
Name: Romeo R. Dizon
Title: Vice President and Controller
(Principal Accounting Officer)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K/A
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITY EXCHANGE ACT OF 1934
For the fiscal year ended December 29, 2018
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 every Interactive Data File required to be submitted 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 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, a non-accelerated filer, a smaller reporting company or an
emerging growth company. See the definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule
12b-2 of the Exchange Act.:
Large accelerated filer
Non-accelerated filer
Emerging growth company
Accelerated filer
Smaller reporting company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
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 $40,449,599 as of June 29, 2018, 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 April 25, 2019, Registrant had 13,634,312 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
EXPLANATORY NOTE
This Amendment No. 1 (this “Amendment”) on Form 10-K/A amends the Registrant’s Annual Report on Form 10-K
for the year ended December 29, 2018 filed with the Securities and Exchange Commission (the “SEC”) on March 29, 2019
(the “Original 10-K”), to include the information required by Items 10 through 14 of Part III of the Original 10-K. This
information was previously omitted from the Original 10-K in reliance on General Instruction G(3) to Form 10-K, which
permits the information in the above referenced items to be incorporated in the Form 10-K by reference to our definitive
proxy statement if such statement is filed no later than 120 days after our fiscal year-end. We are filing this Amendment to
provide the information required in Part III of Form 10-K because a definitive proxy statement containing such information
will not be filed by the Registrant within 120 days after our year ended December 29, 2018.
Items 10 through 14 of Item III in Form 10-K is more limited than what is required to be included in the definitive
proxy statement to be filed in connection with our 2019 Annual Meeting of Stockholders. Accordingly, the definitive proxy
statement to be filed at a later date will include additional information related to the topics herein and additional information
not required by Part III, Items 10 through 14 of Form 10-K.
Pursuant to the SEC rules, Part IV, Item 15 has also been amended to contain the currently dated certificates from the
Company’s principal executive and financial officer and principal accounting officer pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002. The certificates of the Company’s principal executive and financial officer and principal accounting
officer are attached to this Amendment as Exhibits 31.3 and 31.4. Because no financial statements have been included in this
Amendment and this Amendment does not contain or amend any disclosure with respect to Items 307 and 308 of Regulation
S-K, paragraphs 3, 4 and 5 of the certifications have been omitted. Additionally, we are not including the certificate under
Section 906 of the Sarbanes-Oxley Act of 2002 as no financial statements are being filed with this Amendment.
Except for the information described above, the Company has not modified or updated disclosures provided in the
Original 10-K in this Amendment. Accordingly, this Amendment does not reflect events occurring after the filing of the
Original 10-K or modify or update those disclosures affected by subsequent events. Information not affected by this
Amendment is unchanged and reflects the disclosures made at the time the Original 10-K was filed.
2
Page No.
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Table of Contents
Explanatory Note
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 Matters .
Item 13. Certain Relationships and Related Transactions, and Director Independence .........................................
Item 14. Principal Accountant Fees and Services ...................................................................................................
Part IV
Item 15. Exhibits and Financial Statement Schedules ...........................................................................................
Signatures ........................................................................................................................................................................
24
3
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The names of, and certain information regarding, our directors, as of April 25, 2019 are set forth below.
William M. Moore
Name of Nominee
Age
70 Chairman of the Board; President and Chief
Principal Position at Company
Executive Officer
David I. Bruce(1)(2)(4)
Ruediger Naumann-Etienne, Ph.D.(1)(2)(5)(6)
Sanford Fitch(1)(2)(3)(5)
Robert Grove (1)(4)(5)
Kenneth E. Ludlum (1)
Maria Sainz(1)(4)
Scott Shuda(1)
59 Director
72 Director
78 Director
70 Director
65 Director
53 Director
53 Director
Director
Since
2007
2018
2009
2004
2018
2019
2018
2019
(1) The board of directors of the Company (the “Board”) has made the affirmative determination that such nominee is
independent as defined under the listing standards of The Nasdaq Stock Market.
(2) Member of the audit committee of the Board (the “Audit Committee”).
(3) Audit Committee financial expert as defined in the rules of the SEC.
(4) Member of the compensation committee of the Board (the “Compensation Committee”).
(5) Member of the nominating and governance committee of the Board (the “Nominating and Governance Committee”).
(6) Lead Independent Director.
William M. Moore. Mr. Moore currently serves as the Chairman of the Board (“Chairman”) and as the President and
Chief Executive Officer of the Company. He has served as a director of the Company since September 2007, as Chairman
since September 2010, and as the President and Chief Executive Officer of the Company since August 2012. Mr. Moore
served as a member of the Company’s Compensation Committee from September 2007 to July 2010, and as the Chairman of
the Company’s Nominating and Governance Committee from February 2009 to October 2012. Mr. Moore holds a B.S.
degree in Business from the University of Utah.
Mr. Moore also served on the board of directors of Natus Medical Incorporated (“Natus”), a public company he co-
founded in 1990 and for which he served as CEO until 1993, from 1990 until June 2018. Natus is a provider of healthcare
products used for the screening, detection, treatment, monitoring and tracking of common medical ailments such as hearing
impairment, neurological dysfunction, epilepsy, sleep disorders, and certain newborn conditions. Mr. Moore brings to the
Board current operational experience, along with over twenty five years of experience in the healthcare industry. Mr. Moore
firmly understands the Company’s business and technology. Mr. Moore’s past service on the boards of directors of other
public companies, including his service on audit, compensation and nominating and governance committees, as well as his
prior experience as an investor, provides him the strong background necessary to serve as our Chairman and President and
Chief Executive Officer.
David I. Bruce. Mr. Bruce has served as a director of the Company since April 2018. Mr. Bruce served as the Chief
Operating Officer of Catheter Robotics, Inc., a private company focused on developing and manufacturing remote catheter
systems from August 2014 to May 2016. From November 2011 to May 2014, Mr. Bruce served as President, Chief
Executive Officer and director of Arstasis, Inc., a private company that manufactures and distributes vascular closure devices
for arterial closure in catheterization procedures. Prior to that, Mr. Bruce served as CEO of EP MedSystems, a public medical
device company specializing in electrophysiology systems and catheters, and led the company to 30% annual growth over two
years culminating in its acquisition by St. Jude Medical. Mr. Bruce holds a B.S. in Mechanical Engineering from the
University of California, Berkeley, and an MBA degree from the Wharton School at the University of Pennsylvania.
Mr. Bruce is independent and has extensive experience in the medical device industry. Mr. Bruce’s executive
management and his past board service and consulting experience for the boards of directors of emerging medical device
companies on market penetration strategy and execution, provide him with the necessary skills and a functional
understanding of the role of the Board and as the chairman of our Compensation Committee and member of our Audit
Committee.
4
Ruediger Naumann-Etienne, Ph.D. Dr. Naumann-Etienne has served as a director of the Company since
December 2009. Dr. Naumann-Etienne has been the owner and Managing Director of Intertec Group, an investment
company specializing in the medical device field, since 1989. Dr. Naumann-Etienne has served as the Chairman of the board
of directors of Varex Imaging Corporation since January 2017. Dr. Naumann-Etienne served on the board of directors of
Varian Medical Systems, Inc., a public medical device company, from 2003 until 2017, and Encision Inc., a public medical
device company, from 2003 until 2016. Dr. Naumann-Etienne holds a Ph.D. in International Finance from the University of
Michigan. He holds a Master’s Degree in Industrial Management from the Georgia Institute of Technology and holds an
undergraduate degree in Business Administration from the Technical University Berlin, Germany.
Dr. Naumann-Etienne is independent and his experience as a director of multiple medical device companies has
provided Dr. Naumann-Etienne with an understanding of the operation and management of a global medical device company,
and with the business and technology of IRIDEX. His service on the boards of directors of several public companies has
provided Dr. Naumann-Etienne with consensus-building skills and a functional understanding of the role of the Board. His
education and his experience have provided Dr. Naumann-Etienne the financial acumen and executive compensation
experience necessary to serve as chairman of our Nominating and Governance Committee and on our Audit Committee.
Sanford Fitch. Mr. Fitch has served as a director of the Company since 2004. Mr. Fitch has served as a director and
audit committee chairman of Masimo Corp, a public company that designs, develops, manufactures and sells medical devices,
since November 2006. Mr. Fitch served as a director and audit committee chairman of Foxhollow Technologies, Inc., a
public company that designed, developed, manufactured and sold medical devices, from June 2004 until October 2007. He
also served as a director and audit committee chairman of Conceptus Inc., a public medical device company, from December
1994 until April 2004. Mr. Fitch was Chief Financial Officer and Senior Vice President of Operations of Conceptus from
December 1994 through October 1998 and took the company public in 1996. Mr. Fitch holds a B.S. in Chemistry and an
M.B.A. from Stanford University.
Mr. Fitch is independent and has extensive experience in the medical device industry. Mr. Fitch’s executive
management and past board service have provided him with leadership and technical skills to firmly understand our business.
His background in finance, years of service on audit committees, and track record as an accomplished financial executive
have provided Mr. Fitch with the financial acumen and skills necessary to serve as our Audit Committee financial expert and
as chairman of our Audit Committee and the executive compensation experience necessary to serve on our Nominating and
Corporate Governance Committee.
Robert Grove. Dr. Grove has served as a director of the Company since October 2018. Dr. Grove currently sits on the
Nominating Committee of the American Society for Laser Medicine and Surgery and on the Scientific Advisory Board of
Arbonne International. Most recently he served as Executive Chairman for the start-up ON Light Sciences, a manufacturer of
transparent gel patches for accelerated tattoo removal that was acquired by Merz North America in 2016. He was a founder
and President and CEO of Intellectual Light, Inc. and Once Again Me, Inc., two startups focused on laser diode technology.
Dr. Grove holds a Ph.D. in Instrumentation in the field of laser applications and an M.S. degree in Aeronautics and
Astronautics from MIT, as well as a B.S. degree in Engineering Physics from Cornell University.
Dr. Grove is independent and has extensive experience in the field of laser technology. His education and experience
have provided him with the experience necessary to serve on our Compensation Committee and Nominating and Governance
Committee.
Kenneth E. Ludlum. Mr. Ludlum has served as a director of the Company since April 2019. Mr. Ludlum is a
professional board member with medical technology and biotechnology companies. Since 2002, Mr. Ludlum has served on
the board of directors and as chairman of the audit committee at Natus, and as chairman of the compensation committee since
June 2018 and on the board of directors and as chairman of the audit committee of Dermavant Sciences Limited, a United
Kingdom company since 2019. Mr. Ludlum has also been on the board of directors and is chairman of the audit committee
of Personalis Inc., a gene sequencing company since 2015. From February 2014 to April 2016 Mr. Ludlum served as Chief
Financial Officer at CareDx, a molecular diagnostics company, and prior to that has served as Chief Financial Officer for
other publicly traded companies. Mr. Ludlum has worked for or with health care, medical device, biotechnology or
diagnostic companies since 1985. Mr. Ludlum holds a B.S. degree in Business Administration from Lehigh University and a
M.B.A. degree from Columbia University Graduate School of Business.
Mr. Ludlum is independent and his executive management experience and past board services at several public
companies has provided him with extensive financial and accounting experience, and knowledge of accounting principles,
financial reporting rules, and regulations. Mr. Ludlum also has a background in investment banking, which, coupled with his
experience in finance, board service and financial leadership, provides him with the necessary skills and functional
understanding to serve effectively on our Board.
Maria Sainz. Ms. Sainz has served as a director of the Company since April 2018. Since May 2018, she is serving as
President and CEO of Aegea Medical, a medtech company in the women’s health space. Ms. Sainz had previously served as
the President, Chief Executive Officer, and Director of CardioKinetix Inc., a private company that developed transcatheter
implants from May 2012 to July 2017. Prior to joining Cardiokinetix, Ms. Sainz served as the President of the Cardiac
Surgery division of Guidant Corporation/Boston Scientific. Ms. Sainz currently serves on the board of directors of Orthofix
International NV and Avanos Medical, Inc. Ms. Sainz holds a M.A. degree in Languages from the University Complutense
5
in Madrid, Spain and a master’s degree in International Management from the American Graduate School of International
Management.
Ms. Sainz is independent and has extensive experience in the medical device industry. Ms. Sainz brings to the Board a
functional understanding of the role of the Board through her service in various successful leadership roles. Ms. Sainz
education and experience has provided her the financial acumen and skills necessary to serve as a member of our
Compensation Committee.
Scott Shuda. Mr. Shuda has been a member of the board of directors of InfuSystem Holdings, Inc. (“InfuSystem”), a
provider of ambulatory infusion pumps, since September 2016, and was elected chairman on the board of InfuSystem in
December 2018. Mr. Shuda is a Managing Director and Co-founder of Meridian OHC Partners, LP (“Meridian”) and
BlueLine Partners, LLC (“BlueLine”), investment firms that focus on publicly listed technology and healthcare companies.
Mr. Shuda previously served on our Board, from December 2012 to April 2017. Mr. Shuda holds both a Juris Doctor degree
and a Masters of Business administration degree from Georgetown University.
Mr. Shuda has extensive experience with the medical devices industry. He brings more than 20 years of professional
experience in law, technology and entrepreneurial endeavors in the industry, including transactions that range from initial
public offerings and venture financings to mergers and acquisitions
The following table sets forth certain information with respect to the Company’s executive officers during fiscal 2018
EXECUTIVE OFFICERS
as of April 25, 2019.
William M. Moore
Atabak Mokari(1)
Name
Age
70 President and Chief Executive Officer, Chairman of the
Position
Board of Directors
42 Former Chief Financial Officer and Vice President of
Corporate Development
(1) Effective December 18, 2018, Mr. Mokari resigned as Chief Financial Officer and Vice President of Corporate Development.
William M. Moore. See Mr. Moore’s biography under “Item 10. Directors, Executive Officers and Corporate
Governance” — Directors.
Atabak Mokari. Mr. Mokari served as our Chief Financial Officer and Vice President of Corporate Development from
July 2016 to December 2018. Prior to joining the Company, Mr. Mokari was a senior investment banker at Wells Fargo
Securities from September 2013 to July 2016, at UBS from September 2009 to July 2013, and at Credit Suisse from
July 2005 to February 2009. Mr. Mokari also held positions at Olympus Partners, and Bowles Hollowell Conner.
Mr. Mokari earned his MBA from The Tuck School of Business at Dartmouth and BS in Chemistry and Biology from Duke
University.
Independence of the Board of Directors
The Board has determined that, with the exception of Mr. Moore, who is the President and Chief Executive Officer of
the Company, all of its members are “independent directors” as defined in the listing standards of The Nasdaq Stock Market.
Board Leadership Structure and Oversight of Risk Management
In August 2012, the Board determined that Mr. Moore, our Chairman, should also serve as our President and Chief
Executive Officer. We believe that Mr. Moore’s service as both Chairman and Chief Executive Officer puts him in the best
position to execute our business strategy and business plans to maximize stockholder value. Our bylaws and corporate
governance guidelines do not require that our chairman and chief executive officer positions be separate and the Board
believes that combining the positions is the appropriate leadership structure for the Company at this time. Our Chief
Executive Officer and Chairman of the Board is responsible for (i) setting the strategic direction for the Company and the day
to day leadership and performance of the Company, (ii) leading the Board in its fundamental role of providing advice to and
oversight of management, (iii) setting the agenda for Board meetings and (iv) presiding over meetings of the full Board.
The Board has appointed Ruediger Naumann-Etienne, Ph.D. as Lead Independent Director of the Board (the “Lead
Independent Director”). The Board believes that maintaining a Lead Independent Director position held by an independent
director ensures that our outside directors remain independent of management and provide objective oversight of our business
and strategy. The Lead Independent Director chairs Board meetings during any sessions conducted as executive sessions
without employee directors or other employees being present, and also consults with the Chairman and Chief Executive
Officer and the Chief Financial Officer on business issues. Other responsibilities of the Lead Independent Director include:
preside at all Board meetings at which the Chairman is not present; provide input to the Chairman, as is necessary or
appropriate, with respect to the agendas for meetings of the Board and its committees; call meetings of independent directors,
6
as necessary; preside at executive sessions of independent directors; communicate feedback from executive sessions of
independent directors to management and/or the Chairman; advise the Chairman with respect to the quality, quantity and
timeliness of the flow of information from Company management to the independent directors as is necessary or appropriate
for the independent directors to effectively and responsibly perform their duties; advise the Chairman on the retention of
advisors and consultants who report directly to the Board; be available for consultation and communication with significant
stockholders, as reasonably requested; with the Chairman, coordinate the assessment of Board Committee structure,
organization, and charters, and evaluate the need for any changes; coordinate, with the Compensation Committee, the
performance evaluation of the Chairman; receive messages from stockholders wishing to communicate directly with the non-
management directors and facilitate an appropriate response; participate in Board candidate interviews, as appropriate;
facilitate discussions among independent directors on key issues and concerns outside of Board meetings; and have such
other duties as the Board may delegate to assist in meeting its responsibilities.
Our Board oversees an enterprise-wide approach to risk management, designed to support the achievement of
organizational objectives, including strategic objectives, to improve long-term organizational performance and enhance
stockholder value. A fundamental part of risk management is not only understanding the risks a company faces and what
steps management is taking to manage those risks, but also understanding what level of risk is appropriate for the Company.
The involvement of the full Board in setting the Company’s business strategy is a key part of its assessment of management’s
appetite for risk and also a determination of what constitutes an appropriate level of risk for the Company.
While the Board has the ultimate oversight responsibility for the risk management process, various committees of the
Board also have responsibility for risk management. In particular, the Audit Committee focuses on financial risk, including
internal controls. The Compensation Committee strives to create incentives that encourage a level of risk-taking behavior
consistent with the Company’s business strategy. The Nominating and Governance Committee oversees risks relating to our
Board composition.
Board Meetings and Committees
The Board held a total of five meetings during fiscal year 2018 ended December 29, 2018. Other than as described
below, no directors serving during fiscal 2018 attended fewer than 75% of the aggregate of all meetings of the Board and
committees of the Board upon which such director served.
Board Committees
During fiscal year 2018, the Board had three standing committees: the Audit Committee, the Compensation Committee
and the Nominating and Governance Committee.
Audit Committee. The Audit Committee of the Board consists of Mr. Fitch, Dr. Naumann-Etienne and Mr. Bruce.
Mr. Fitch served as the Chairman of the Audit Committee and will serve until his resignation from our Board at the
expiration of his current term immediately before the 2019 Annual Meeting of Stockholders. It is expected that Mr. Ludlum
will be appointed to serve as the Chairman of the Audit Committee effective as of the 2019 Annual Meeting of Stockholders.
Mr. Bruce joined the Audit Committee in June 2018. Ms. Rhoads resigned from our Audit Committee in October 2018,
following her resignation from our Board, and Mr. Grove was appointed to replace her in October 2018.
The Audit Committee held five meetings during the last fiscal year. The Board has determined that each member of the
Audit Committee is independent as defined under the listing standards of The Nasdaq Stock Market and that Mr. Fitch is an
“audit committee financial expert” as defined in rules of the SEC. Among other things, the Audit Committee reviews and
advises the Board regarding the Company’s accounting matters and is responsible for appointing and overseeing the work of
the independent registered public accounting firm, pre-approving audit and non-audit services to be provided by the
independent registered public accounting firm, and reviewing the Company’s financial statements. The Audit Committee has
adopted a written charter approved by the Board, which was amended in April 2009, a copy of which is available on our
website at www.iridex.com.
Compensation Committee. The Compensation Committee of the Board consists of Mr. Bruce, Mr. Grove and Ms.
Sainz. Mr. Bruce has served as the Chairman of the Compensation Committee. Ms. Rhoads resigned from our
Compensation Committee in October 2018, following her resignation from our Board. The Compensation Committee held
two meetings during the last fiscal year. The Board has determined that each member of the Compensation Committee is
independent as defined under the listing standards of The Nasdaq Stock Market. Among other things, the Compensation
Committee reviews and advises the Board regarding all forms of compensation to be provided to the officers, employees,
directors and consultants of the Company. The Compensation Committee has adopted a written charter approved by the
Board, which was amended in February 2014, a copy of which is available on our website at www.iridex.com.
Nominating and Governance Committee. The Nominating and Governance Committee of the Board consists of
Dr. Naumann-Etienne and Mr. Grove. Dr. Naumann-Etienne has served as the Chairman of the Nominating and Governance
7
Committee. Mr. Grove joined our Nominating and Governance Committee in October 2018. The Nominating and
Governance Committee held one meeting during the last fiscal year. The Board has determined that each member of the
Nominating and Governance Committee is independent as defined under the listing standards of The Nasdaq Stock Market.
Among other things, the Nominating and Governance Committee develops general criteria regarding the qualifications and
election of Board members. Our Board and Nominating and Governance Committee discuss possible candidates for election.
Following such discussions the Nominating and Governance Committee considers and recommends candidates for election to
the Board. It is the policy of the Nominating and Governance Committee to consider nominees for the Board submitted by
the stockholders of the Company. For more information regarding the submission of nominees for the Board, see the
discussion in “Corporate Governance Matters—Process for Recommending Candidates for Election to the Board of Directors”
below. The Nominating and Governance Committee has adopted a written charter approved by the Board, which was
amended in April 2017, a copy of which is available on our website at www.iridex.com.
On March 27, 2019, the Board amended and restated the Company’s bylaws (as so amended and restated, the
“Bylaws”). Among other things, the amendments to the Bylaws clarified the requirements for stockholders to nominate
directors or bring other business before an annual or special meeting of stockholders, including adjusting the dates on which
director nominations or proposals of other business must be received by the Company in order to be in compliance with the
Bylaws.
The Bylaws require that proposals of stockholders made outside of Rule 14a-8 under the Exchange Act must be
submitted, in accordance with the requirements of the Bylaws, not later than 90 days and not earlier than 120 days from the
date of the previous annual meeting of stockholders.
Attendance at Annual Stockholder Meetings by the Board of Directors
The Company has adopted a formal policy regarding attendance by members of the Board at the Company’s annual
meeting of stockholders. The Company’s policy is that it encourages, but does not require, directors to attend the Company’s
annual meeting of stockholders. Only Mr. Moore attended the Company’s 2018 Annual Meeting of Stockholders.
Process for Recommending Candidates for Election to the Board of Directors
The Nominating and Governance Committee is responsible for, among other things, determining the criteria for
membership to the Board and recommending candidates for election to the Board.
The Company seeks independent directors who represent a mix of backgrounds and experiences that will enhance the
quality of the Board’s deliberations and decisions. Candidates should have substantial experience with one or more publicly
traded national or multinational companies and should have achieved a high level of distinction in their fields. The
Nominating and Governance Committee’s general criteria and process for evaluating and identifying the candidates that it
recommends to the full Board for selection as director nominees are as follows:
•
In its evaluation of director candidates, including the members of the Board eligible for re-election, the
Nominating and Governance Committee seeks to achieve a balance of knowledge, experience and capability on
the Board and considers (1) the current size and composition of the Board and the needs of the Board and the
respective committees of the Board, (2) such factors as character, integrity, judgment, diversity, age,
independence, skills, education, expertise, business acumen, business experience, length of service,
understanding of the Company’s business, other commitments and the like, and (3) such other factors as the
Nominating and Governance Committee may consider appropriate.
• While the Nominating and Governance Committee has not established specific minimum qualifications for
director candidates, the Nominating and Governance Committee believes that candidates and nominees must
reflect a Board that is comprised of directors who (1) are predominantly independent, (2) are of high integrity,
(3) have qualifications that will increase overall Board effectiveness and (4) meet other requirements as may be
required by applicable rules, such as financial literacy or financial expertise with respect to audit committee
members.
•
In evaluating and identifying candidates, the Nominating and Governance Committee has the authority to retain
and terminate any third-party search firm that is used to identify director candidates, and has the authority to
approve the fees and retention terms of any such firm.
• With regard to candidates who are properly recommended by stockholders or by other means, the Nominating
and Governance Committee may do any of the following when considering a candidate for the Board: review
the qualifications of any such candidate, which review may, in the Nominating and Governance Committee’s
discretion, include interviewing references for the candidate, direct interviews with the candidate, or other
actions that the Nominating and Governance Committee deems necessary or proper.
8
• The Nominating and Governance Committee will apply these same principles when evaluating director
candidates who may be elected initially by the full Board to fill vacancies or newly created directorships prior to
the next annual meeting of stockholders at which directors are elected.
• After such review and consideration, the Nominating and Governance Committee selects, or recommends that
the Board select, the slate of director nominees, either at a meeting of the Nominating and Governance
Committee at which a quorum is present or by unanimous written consent of the Nominating and Governance
Committee.
Consistent with past practice, the Nominating and Governance Committee and the Board will continue to monitor and
assess the size and composition of the Board and will consider the appointment of additional directors from time to time as
appropriate to serve the best interests of the Company and its stockholders.
Contacting the Board of Directors
Any stockholder who desires to contact our Chairman or the other members of our Board may do so electronically by
sending an email to the following address: BOD@iridex.com. Alternatively, a stockholder can contact our Chairman or the
other members of the Board by writing to: Board of Directors, c/o Chairman of the Board, IRIDEX Corporation, 1212 Terra
Bella Avenue, Mountain View, CA 94043. Communications received electronically or in writing will be distributed to the
Chairman of the Board or the other members of the Board as appropriate depending on the facts and circumstances outlined
in the communication received.
Code of Business Conduct and Ethics
The Company’s policy is to conduct its operations in compliance with all applicable laws and regulations and to operate
its business under the fundamental principles of honesty, integrity and ethical behavior. This policy can be found in the
Company’s Code of Business Conduct and Ethics, which is applicable to all of our directors, officers and employees. Such
Code of Business Conduct and Ethics incorporates the Code of Ethics required by Section 406 of the Sarbanes-Oxley Act of
2002 and Item 406 of Regulation S-K. The Code of Business Conduct and Ethics also complies with the listing standards of
The Nasdaq Stock Market.
The Code of Business Conduct and Ethics is designed to promote honest and ethical conduct, the compliance with all
applicable laws, rules and regulations and to deter wrongdoing. The Code of Business Conduct and Ethics is also aimed at
ensuring that information we provide to the public (including our filings with and submissions to the SEC) is accurate,
complete, fair, relevant, timely and understandable. A copy of the formally adopted Code of Business Conduct and Ethics is
available on our website at www.iridex.com. We intend to disclose future amendments to certain provisions of the Code of
Business Conduct and Ethics, or waivers of such provisions granted to directors and executive officers, on our web site at
www.iridex.com pursuant to applicable requirements of the SEC and The Nasdaq Stock Market.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company’s executive officers and directors, and persons who own more
than 10% of a registered class of the Company’s equity securities to file reports of ownership and changes in ownership with
the SEC. Such executive officers, directors and greater than 10% stockholders are also required by SEC rules to furnish the
Company with copies of all forms that they file pursuant to Section 16(a). Specific due dates have been established by the
SEC, and the Company is required to disclose in this Proxy Statement any failure to file by those dates.
Based solely on its review of the copies of such forms received by it, and written representations from certain reporting
persons, the Company is not aware of any late Section 16(a) filings during fiscal year 2018, other than one late Form 4 filed
on December 12, 2018 for Mr. Moore reflecting shares withheld to satisfy tax obligations upon the net settlement of certain
RSUs and PRSUs.
Item 11. Executive Compensation
Executive Compensation Program Philosophy and Process
IRIDEX believes that the skill, talent, judgment and dedication of its executive officers are critical factors affecting the
long-term value of our Company. Therefore, the goal for our executive compensation program is to fairly compensate our
executives, attract and retain qualified executives who are able to contribute to our long-term success, induce performance
consistent with clearly defined corporate goals, and align our executives’ long-term interests with those of our stockholders.
The Company believes that its executive compensation program satisfies this goal and is strongly aligned with the long-term
interests of our stockholders. Moreover, we believe that the structure of our executive compensation program, in rewarding
the achievement of annual operating goals and emphasizing long-term stockholder value creation over short-term operating
results, has benefited our Company and our stockholders by focusing on growing our core business.
9
Compensation Objectives and Philosophy
The Company’s compensation philosophy is designed to attract, retain, motivate and reward high qualified executives
who contribute to the success of the Company and its stockholders. To achieve these goals, the Company strives to provide a
comprehensive compensation package for each of our named executive officers that is competitive with those offered by
companies of similar type and size, in the same geographical area and whose executives perform functions similar to those
performed by the executives of the Company. The Company also incorporates equity-based incentives into its overall
compensation strategy to align the financial interests of our executives with those of our stockholders.
Role and Authority of the Compensation Committee
The Compensation Committee of the Board establishes the overall executive compensation strategies of the Company
and approves compensation elements for the Company’s Chief Executive Officer and other executive officers. Among other
things, the Compensation Committee reviews and advises the Board regarding all forms of compensation to be provided to
the officers, employees, directors and consultants of the Company. In addition, each named executive officer’s individual
compensation and eligibility for participation in the Company’s annual cash bonus incentive program is reviewed by the
Compensation Committee and adjustments are made based upon an assessment of individual performance and potential to
enhance long term stockholder value.
The Compensation Committee consists of Mr. Bruce, Mr. Grove and Ms. Sainz. Mr. Bruce serves as the Chairman of
the Compensation Committee. Each member of the Compensation Committee is an independent member of the Board, and
no members have interlocking relationships as defined by the SEC.
The Compensation Committee has available to it such external compensation advice and data as the Compensation
Committee deems appropriate to obtain. The Compensation Committee may delegate any of its responsibilities to one or
more of its members or to the Company’s directors or to members of management, to the extent permitted by applicable law
and subject to such reporting to or ratification by the Compensation Committee as the Compensation Committee deems
necessary or appropriate.
Executive Officer Compensation
The objectives of our executive officer compensation program are to attract, retain, motivate and reward key personnel
who possess the necessary leadership and management skills through competitive base salary, annual cash bonus incentives,
long-term equity incentive compensation, and various benefits generally available to employees of the Company.
Our named executive officers for fiscal 2018, which consist of our principal executive officer and one former executive
officer who was not serving as an executive officer at the end of fiscal 2018, are:
• William M. Moore, our Chief Executive Officer; and
• Atabak Mokari, our former Chief Financial Officer and Vice President of Corporate Development. (1)
(1) Effective December 18, 2018, Mr. Mokari resigned as Chief Financial Officer and Vice President of Corporate
Development.
Base Salary
Base salary levels for the Company’s executive officers are generally targeted to be competitive with companies in the
same stage of development and in the same industry and geographic area. In determining salaries, the Compensation
Committee also takes into account the Chief Executive Officer’s recommendations, individual experience, contributions to
corporate goals and the Company’s performance.
Incentive Bonuses
The Compensation Committee believes that a cash incentive bonus plan can serve to motivate the Company’s executive
officers and management to achieve annual performance goals supporting the creation of stockholder value, using more
immediate measures for performance than those reflected in the appreciation in value of stock options.
2018 Short-Term Incentive Plan
On December 15, 2017, the Board approved the Company’s 2018 Short-Term Incentive Plan (the “STI Plan”). Messrs.
Moore and Mokari participated in the STI Plan. Mr. Moore’s maximum amount payable under the STI Plan was $382,388
and Mr. Mokari’s maximum amount payable under the STI Plan was $213,500. Awards under the STI Plan were based upon
the achievement of management by objectives (“MBOs”) consisting of certain corporate objectives that apply to all STI Plan
participants and certain individual MBOs specific to each STI Plan participant. Mr. Moore’s award under the STI Plan is
subject to the Company’s achievement of certain sales targets, as well as certain other financial and operations-related
10
performance goals specific to Mr. Moore. Mr. Mokari’s award under the STI Plan is subject to the Company’s achievement
of certain sales targets, as well as certain other financial and operations-related performance goals specific to Mr. Mokari.
2018 MBOs
The following table shows the target bonus opportunities under the MBOs for our named executive officers under the
STI Plan:
William M. Moore
Atabak Mokari
Named Executive Officer
Target Bonus
$
$
278,100
155,273
FY 2018
Target Bonus
as Percentage
of Base Salary
60 %
45 %
The corporate MBOs, weighted at 75% of the named executive officer’s bonus opportunity, related to achievement of
specified levels of sales based on number of units of G6 systems (weighted at 30% of the target bonus opportunity) and G6
probes (weighted at 70% of the target bonus opportunity) sold in 2018. The payout at the targeted sales levels of G6 systems
units and G6 probes would be at 100%. The payout upon achievement of these corporate MBOs ranged from 60% at
minimum achievement and to 150% at maximum achievement. Each of the named executive officers also had two individual
MBOs relating to an operational goal (weighted at 10% of the target bonus opportunity) and a financial goal (weighted at 15%
of the target bonus opportunity). The individual MBO-based portion of the bonus became payable if the applicable
individual MBO was achieved. In the event the named executive officer did not meet or partially meets his individual MBOs,
the individual performance component amount would be reduced, as determined by the Compensation Committee. Amounts
payable under the individual MBO-based component of the STI Plan were capped at 100%.
Following assessment of performance for 2018, the Compensation Committee approved (or for Mr. Moore, the Board
approved) a bonus of $257,243 for Mr. Moore. Due to the termination of Mr. Mokari’s employment in December 2018, Mr.
Mokari did not receive a bonus under the STI Plan for 2018.
2019 Management By Objectives Plan
On January 24, 2019, the Compensation Committee approved the Company’s 2019 “Management By Objectives” Plan
(the “2019 MBO Plan”). Our CEO and all vice presidents, corporate officers and other specified senior employees, in good
standing, are eligible to participate in the 2019 MBO Plan. The maximum amount of Mr. Moore’s award under the 2019
MBO Plan is $335,806. Awards under the 2019 MBO Plan are based upon the achievement of certain corporate objectives
that apply to all STI Plan participants and certain individual objectives specific to each 2019 MBO Plan participant.
Mr. Moore’s award under the 2019 MBO Plan is subject to the Company’s achievement of certain revenue and earnings
targets, as well as certain other financial and operations-related performance goals specific to Mr. Moore. The Compensation
Committee will approve any bonus distributions under the 2019 MBO Plan, other than with respect to the CEO, which the
Board will approve.
Stock Grants/Awards
We provide long-term incentives to executives through a value-based grant of equity awards under the Company’s 2008
Equity Incentive Plan, as amended and restated. The Compensation Committee (or in the case of our CEO, the Board)
determines the value of these equity awards after considering a number of factors, including for example corporate
performance, individual criticality, competitive market data, the number of unvested shares held at the time of grant, the fixed
total value for each executive, the available share reserve, and any other factors that the Compensation Committee (or Board,
as applicable) may deem relevant.
Stock options or other stock grants are granted to executive officers and other employees under the 2008 EIP. These
stock options, restricted stock units (“RSUs”) or other stock grants are intended to focus the recipient on the Company’s
long-term performance to improve stockholder value and to retain the services of executive officers in a competitive job
market by providing significant long-term earning potential. To this end, stock options, RSUs and stock grants generally vest
over a four-year period, based on continued employment. Factors considered in granting stock options, RSUs and stock
grants to executive officers of the Company are the duties and responsibilities of each individual, such individual’s
contributions to the success of the Company and other relevant factors. The Company views stock options, RSUs and stock
grants as an important component of long-term compensation for executive officers because the Compensation Committee
believes that these awards motivate executive officers to manage the Company in a manner that is consistent with the
interests of stockholders.
11
2018 Awards
For 2018, the Board approved the grant to Mr. Moore of an award of RSUs covering 40,000 shares of our Common
Stock and an award of performance-based restricted stock units (“PRSUs”) covering a target of 60,000 shares of our
Common Stock effective July 28, 2018. The Board also approved the grant to Mr. Mokari of an award of RSUs covering
16,800 shares of our Common Stock and an award of PRSUs covering a target of 25,200 shares of our Common Stock
effective July 28, 2018.
Additional information regarding Mr. Moore’s RSU and PRSU awards is set forth in the table below titled
“Outstanding Equity Awards at Fiscal Year-End.” Mr. Mokari’s RSU award was subject to the same vesting criteria as the
RSU award granted to Mr. Moore on the same date. Mr. Mokari’s PRSU award was subject to the same vesting criteria as
the PRSU award granted to Mr. Moore on the same date. Further information regarding Mr. Mokari’s PRSU award is set
forth in the table below titled “Summary Compensation Table.” In connection with the termination of Mr. Mokari’s
employment with the Company on December 18, 2018, Mr. Mokari’s 2018 RSUs and PRSUs were forfeited in full without
having vested.
2008 Equity Incentive Plan, as Amended and Restated
We maintain the 2008 EIP, which provides for the grant of the following types of equity awards: (i) stock options; (ii)
restricted stock; (iii) RSUs; (iv) performance shares; (v) performance units; (vi) stock appreciation rights; and (vii) other
stock or cash awards. Our 2008 EIP most recently was amended by our Board and approved by our stockholders in 2018.
The Board, or our Compensation Committee, or a committee of directors or of other individuals satisfying applicable laws
and appointed by the Board may administer 2008 EIP.
The exercise price of stock options and stock appreciation rights granted under the 2008 EIP must be equal to at least
the fair market value of the underlying 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 stock purchase right
granted must be at least equal to 110% of the fair market value at the time of grant. Options granted under the 2008 EIP are
exercisable at such times and under such conditions as determined by the administrator of the plan; generally over a four-year
period. The maximum term of 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. RSUs granted under the 2008 EIP generally will result in payment to
the recipient if the vesting criteria are satisfied. RSUs may be granted with vest criteria that are based on achievement of
specified performance goals (including without limitation continued employment or other service). The Board or
Compensation Committee administering the 2008 EIP may determine that earned RSUs will be paid in cash, shares, or a
combination of both. On the date set forth in the applicable award agreement, unearned RSUs will be forfeited to the
Company.
In the event of a merger or change in control of the Company, each outstanding award granted under the 2008 EIP will
be treated as the administrator of the plan determines, including that each award will be assumed or an equivalent option or
right substituted by the successor corporation or a parent or subsidiary of the successor corporation. In the event that the
successor corporation, or the parent or subsidiary of the successor corporation, does not assume or substitute for the award,
the participant will fully vest in and have the right to exercise all of his or her outstanding options or stock appreciation rights,
including shares as to which such awards would not otherwise be vested or exercisable, all restrictions on restricted stock will
lapse, and, with respect to RSUs, performance shares and performance units, all performance goals or other vesting criteria
will be deemed achieved at target levels and all other terms and conditions met. In addition, if an option or stock appreciation
right becomes fully vested and exercisable in lieu of assumption or substitution in the event of a change in control, the
administrator will notify the participant in writing or electronically that the option or stock appreciation right will be fully
vested and exercisable for a period of time determined by the administrator in its sole discretion, and the option or stock
appreciation right will terminate upon the expiration of such period.
Other Benefits
Our named executive officers are eligible to participate in our employee benefit plans generally available to our
employees, such as medical, dental, vision, group life, disability, and accidental death and dismemberment insurance, and our
401(k) plan, in each case on the same basis as other employees, subject to the terms of the plan and any applicable law. We
also provide vacation and other paid holidays to all employees, including our named executive officers, which we intend to
be comparable to those provided at peer companies. Beginning in early 2017, the Compensation Committee approved the
transition of our named executive officers to a vacation policy that eliminates the accrual of earned vacation. Instead, named
executive officers may take vacation based on a discretionary basis and without any particular preset limits, as their work
allows. As a result of this transition, each of Mr. Moore and Mr. Mokari received a payout with regard to their earned but
unused vacation time during 2017. In addition, in 2016, the Compensation Committee approved reimbursements for
12
Mr. Moore for the reasonable cost of international and domestic travel for his spouse to accompany him on extended
international and domestic travel on behalf of the Company, due to certain dependent medical care reasons. The
reimbursement benefits were approved for travel expenses incurred through early 2018. The Compensation Committee
approved this reimbursement benefit as it determined that the related expenses were not expected to be excessive, given the
special, limited circumstances and in light of the amount of Mr. Moore’s required travel for work. In fiscal year 2017,
Mr. Moore’s spouse accompanied him on some, but not all of his business-related travel.
401(k) Plan
The Company sponsors a 401(k) Plan under which eligible employees may contribute, on a pre-tax basis, up to 15% of
the employee’s total annual income from the Company, excluding bonuses, subject to certain IRS limitations. The Company
maintains a Company match in the amount of $3,000 per year. All full-time employees who have attained age 18 are eligible
to participate in the 401(k) plan. All contributions are allocated to the employee’s individual account and, at the employee’s
election, are invested in one or more investment funds available under the 401(k) plan. Contributions are fully vested and not
forfeitable.
Summary Compensation Table
The following table presents information concerning the total compensation of our named executive officers, for
services rendered to us in all capacities during fiscal years ended 2018 and 2017.
Name and Principal Position
William M. Moore
President and Chief
Executive Officer
Atabak Mokari
Chief Financial Officer and
Vice President of
Corporate Development
Salary
($)
Bonus
($)
463,500 (4) — 793,740 (6)
Stock
Awards
($)(1)
Option
Awards
($)(1)
Year
2018
Nonequity
Incentive
Plan
Compensation
($)(2)
257,243
All Other
Compensation
($)(3)
Total ($)
1,545,354
30,871
(5)
2017
501,347
— 143,100
1,497,780
67,500
54,995
2,264,722
2018
334,037
— 333,371 (7)
—
47,792 (8) 715,200
2017
336,132
(9) — 57,240
601,020
53,560
2,714
1,050,666
(1) Reflects the aggregate grant date fair value of awards computed in accordance with FASB ASC Topic 718. We discuss the assumptions that
we used to calculate these amounts in Note 10 to our consolidated financial statements included in our Annual Report on Form 10-K for the
fiscal year ended December 29, 2018, and incorporated by reference herein. As required by SEC rules, the amounts shown exclude the impact
of estimated forfeitures related to service-based vesting conditions. The value at the grant date of the PRSU award covering 60,000 shares of
Common Stock (at target) granted to Mr. Moore, assuming maximum achievement of the applicable performance criteria, is $545,783 (or a
total of 68,850 shares). The value at the grant date of the PRSU award covering 25,200 shares of Common Stock (at target) granted to
Mr. Mokari, assuming maximum achievement of the applicable performance criteria, is $229,229 (or a total of 28,917 shares).
(2) Represents payments calculated in accordance with the terms of our 2018 Management By Objectives Plan, as described under “Executive
Compensation—2018 Short-Term Incentive Plan and – 2018 MBOs.” Profit sharing bonuses earned in 2017 were paid in 2018. Profit
sharing bonuses earned in 2018 were paid in 2019.
(3) Unless otherwise indicated, “All Other Compensation” consists solely of the value of life insurance premiums paid and 401(k) matching
payments made paid by the Company. In 2017, Mr. Moore’s all other compensation consisted of $48,136 of reimbursement of his spouse’s
travel related expenses and $6,858 life insurance premiums. In 2018, Mr. Moore’s all other compensation consisted of $24,013 of
reimbursement of his spouse’s travel related expenses and $6,858 of life insurance premiums.
In 2018, Mr. Moore’s salary included $17,827 in salary earned in 2018 but paid in 2019.
In 2017, Mr. Moore’s salary included $1,154 of retroactive pay and $51,924 in cash in lieu of accrued vacation.
(4)
(5)
(6) On July 28, 2018, Mr. Moore was granted 40,000 RSUs and PRSU award as described in footnote (1) above.
(7) On July 28, 2018, Mr. Mokari was granted 16,800 RSUs and a PRSU award as described in footnote (1) above.
(8) Includes the value of 10,000 shares subject to the PRSU award granted to Mr. Mokari on July 27, 2016, that accelerated vesting pursuant to
the terms of his separation agreement and release.
(9) In 2017, Mr. Mokari’s salary included $750 of retroactive pay and $1,757 in cash in lieu of accrued vacation.
13
Outstanding Equity Awards at 2018 Fiscal Year-End
The following table shows, with respect to each of our named executive officers, the number of options exercisable and
unexercisable and the number of shares of RSU and PRSU awards that have not vested as of the end of fiscal 2018.
Option Awards
Stock Awards
Number of
Securities
Underlying
Unexercised
Options
Exercisable
(#)
Number of
Securities
Underlying
Unexercised
Options
Unexercisable
Option
Exercise
Price
($)(1)
— —
— —
— —
Option
Expiration
Date (2)
—
—
—
101,396 9.54 7/24/24 (9 )
Market
Value of
Shares or
Units of
Stock that
have not
Vested
($)(3)
Number of
Shares or
Units of
Stock that
have not
Vested
—
—
9,687 (6 ) 43,107
—
— 40,000 (7 ) 178,000
— —
—
— —
— —
—
— 9.54 7/24/24 (9 )
—
—
—
—
Grant
Date
1/9/15
3/1/16
7/24/17
7/24/17
7/28/18
7/28/18
7/17/16
7/24/17
—
—
—
55,604
—
—
—
21,000
Equity
Incentive
Plan
awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
other
Rights that
have not
Vested
($)(3)
Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares,
Units or
Other
Rights That
Have
Not Vested
(#)
50000 (4) 222500
—
— 25,000 (5) 111,250
—
—
—
— 60,000 (8) 267,000
— 10,000 (11) 44,500
—
—
—
—
—
—
Name
William M. Moore
Atabak Mokari (10)
(1) Options were granted at an exercise price per share equal to the fair market value of a share of Common Stock, as determined by reference to
the closing price reported on The Nasdaq Global Market on the date of grant.
(2) Options held by our named executive officers may terminate before their expiration dates if the optionee’s status as a service provider is
terminated, including in connection with the optionee’s death or disability.
(3) This amount reflects the fair market value of our common stock of $4.45 per share as of December 28, 2018, multiplied by the amount shown
in the column for the Number of Shares or Units of Stock that have not vested.
(4) These PRSU awards represent a contingent right to receive shares of Common Stock. The PRSUs shall vest, subject to Mr. Moore’s continued
service through March 10, 2019, as follows: (i) 10,000 shares subject to the RSU award will vest if the average closing price of Common
Stock during such 60 consecutive day period ending with (and inclusive of) March 10, 2019, equals or exceeds 100% of the target closing
price under such award, (ii) 10,000 shares subject to the PRSU will vest if the average closing price of Common Stock during such 60 day
period equals or exceeds 115% of the target average closing price under the award, (iii) 10,000 shares subject to the PRSU award will vest if
the average closing price of Common Stock during such 60 day period equals or exceeds 130% of the target average closing price under the
award and (iv) 20,000 shares subject to the PRSU award will vest if the average closing price of Common Stock during such 60 day period
equals or exceeds 150% of the target average closing price under the award.
(5) The shares subject to this PRSU award will become eligible to vest (“vesting eligible PRSUs”) if the Company’s stock price (measured based
on the average, trailing, 60 day closing price of a share of Common Stock) achieves one or more of the four specified stock price performance
goals, measured during four performance periods covering each of the Company’s fiscal years 2016 through 2019. The achievement of each
performance goal results in 25% of the target number of PRSUs becoming vesting eligible PRSUs. Upon becoming vesting eligible PRSUs,
Mr. Moore’s continued service is required through specified dates in order for those vesting eligible PRSUs to vest. Any vesting eligible
PRSUs will be scheduled to vest on an annual basis on the last day of the performance period (provided that the first vesting date for any
PRSUs that become eligible to vest during a particular performance period will be delayed until the performance results are certified).
However, the maximum number of PRSUs that can vest (i) upon completion of each performance period will be 25% of the target number of
PRSUs and (ii) prior to the end of the last performance period will be 50% of the target number of PRSUs. The maximum number of PRSUs
that can vest under the PRSU award is 100% of the target number of PRSUs. In the event of a change in control of the Company, the
performance periods will end and a final measurement of the Company’s stock price will occur. For this final measurement, the Company’s
stock price will be determined based on the value of the consideration that common stockholders receive in the change in control. Upon the
final measurement, any vesting eligible PRSUs will vest in full, and any PRSUs that have not become eligible to vest will be scheduled to vest
based on continued service (but not subject to any further performance criteria), on the last day of the Company’s fiscal year 2019. If, on or
after the change in control, the executive’s employment is terminated without cause, a prorated number of the then unvested PRSUs will
accelerate vesting based on portion of the total post-change in control vesting period during which the executive provided services.
(6) Twenty-five percent (25%) of the shares subject to this RSU award vested on the one-year anniversary of the vesting commencement date
(July 27, 2017) and 1/48th of the shares subject to this RSU award will vest monthly thereafter on the same day of the month as the vesting
commencement date, subject to Mr. Moore’s continued service with us through each applicable vesting date.
(7) One-third (1/3) of the shares subject to this RSU award will vest on each of the one, two and three year anniversaries of the vesting
commencement date (July 27, 2018), subject to Mr. Moore’s continued service with us through each applicable vesting date.
14
(8) The shares subject to this PRSU award will vest subject to both the achievement of specified performance goals and Mr. Moore’s continued
service through certain dates. 40% of the shares subject to this PRSU award are subject to achieving specified levels of the Company’s
GAAP-based revenue relating to glaucoma related products per the Board-approved plan measured from the PRSU award’s grant date through
June 30, 2019. If the performance goal is achieved, the number of shares subject to this portion of the PRSU award that become vesting
eligible PRSUs will range from 50% (at 80% achievement of target under the plan) to a maximum of 115% (at and above 115% of the target
under the plan) of the shares allocated to this portion of the award, and 100% at target achievement. 25% of the shares subject to this PRSU
award are subject to an operational goal relating to product development during the performance period ending on 6/30/20. The last 35% of
the shares subject to this PRSU award are subject to achieving specified relative total stockholder return goals measured against the Russell
3000 index over a three-year period ending June 30, 2021. If the performance goal is achieved, the number of shares subject to this portion of
the PRSU award that become vesting eligible PRSUs will range from 25% to a maximum of 125% of the shares allocated to this portion of the
award, with 50% becoming vesting eligible PRSUs at target achievement. 50% of any vesting eligible PRSUs under the applicable portion of
the award will vest on the date that achievement is certified under the award, and the remaining 50% will vest on the one-year anniversary of
the last date of the applicable performance period, in each case subject to Mr. Moore’s continued service through the applicable vesting date.
The maximum number of shares subject to the PRSU award that may vest is 114.75% of the target number of shares subject to the award.
(9) Twenty-five percent (25%) of the shares subject to this award vested on the one-year anniversary of the vesting commencement date (July 24,
2018) and 1/48th of each month thereafter, subject to participant’s continued service with us through each applicable vesting date.
(10) Mr. Mokari’s employment with the Company terminated effective December 18, 2018. Any unvested RSU and PRSU awards held by
Mr. Mokari as of such employment termination date were forfeited to the Company as described in the separation agreement and release
entered into with the Company in connection with such termination, other than 10,000 shares subject to the PRSU award granted to
Mr. Mokari on July 27, 2016, that accelerated vesting pursuant to the terms of his separation agreement and release.
(11) The PRSU award was granted with vesting subject to the Company’s stock price (measured based on the average, trailing, 60 day closing
price of a share of Common Stock) achieving one or more of the four specified stock price performance goals, measured during four
performance periods covering each of the Company’s fiscal years 2016 through 2019. The achievement of each performance goal would have
resulted in 25% of the target number of PRSUs becoming vesting eligible PRSUs. Vesting eligible PRSUs would have vested subject to
Mr. Mokari’s continued service through December 28, 2019. The maximum number of PRSUs that could have vested under the PRSU award
was 100% of the target number of PRSUs. In accordance with the terms of the separation agreement and release entered into between
Mr. Mokari and the Company, a total of 10,000 shares subject to the PRSU award accelerated vesting in connection with the termination of
Mr. Mokari’s employment with the Company.
Change of Control Agreements with Messrs. Moore and Mokari
We entered into Change in Control Severance Agreements with Mr. Moore in 2015 and Mr. Mokari in 2016. It is
expected that from time to time the Company will consider the possibility of an acquisition by another company or other
change in control. We recognize that such consideration can be a distraction to our named executive officers and can cause
them to consider alternative employment opportunities. We believe that it is imperative to provide such individuals with
severance benefits upon their termination of employment following a change in control to secure their continued dedication
and objectivity, notwithstanding the possibility, threat or occurrence of a change in control, provide such individuals with an
incentive to continue employment and motivate them to maximize our value upon a change in control for the benefit of its
stockholders, and provide such individuals with enhanced financial security. The Change in Control Severance Agreements,
and the potential severance benefits payable thereunder to our named executive officers under specified circumstances, do not
affect the Compensation Committee’s decisions regarding other elements of compensation. The Change in Control Severance
Agreements for our named executive officers are described in further detail below. In connection with the termination of
Mr. Mokari’s employment with the Company in December 2018, Mr. Mokari no longer is eligible to receive any payments or
benefits under his Change in Control Severance Agreement.
Termination Within the Change of Control Context
If in the event that, within twelve months following a Change in Control (as defined in the 2008 EIP) or at any time
prior to a Change in Control if such termination is effected at the request of any successor to the Company (such time period,
the “Change of Control Period”), Mr. Moore terminates his employment with the Company for Good Reason (as defined
below), or the Company terminates Mr. Moore’s employment for a reason other than Cause (as defined below), death or
disability, and, in each case, Mr. Moore signs and does not revoke a standard release of claims with the Company, then Mr.
Moore will receive the following severance from the Company:
(i) Cash Severance Payment. A lump sum cash payment equal to 150% of his annual base salary.
(ii) Vesting Acceleration. Accelerated vesting as to 100% of the then unvested portion of Mr. Moore’s outstanding
Company equity awards, assuming, with respect to Company equity awards subject to performance criteria, the
performance criteria had been achieved at target levels.
(iii) Continued Employee Benefits. Reimbursement from the Company for a period of up to twelve months for the costs
and expenses incurred by himself and/or his eligible dependents for coverage under the Company’s benefit plans.
Definitions of “Cause” and “Good Reason”
For the purposes of the Change of Control Agreements, the following definitions will apply.
15
“Cause” generally means (i) an act of dishonesty made by Mr. Moore in connection with Mr. Moore’s responsibilities
as an employee; (ii) Mr. Moore’s conviction of, or plea of nolo contendere to, a felony or any crime involving fraud,
embezzlement or any other act of moral turpitude, or a material violation of federal or state law by Mr. Moore that the Board
reasonably believes has had or will have a detrimental effect on the Company’s reputation or business; (iii) Mr. Moore’s
gross misconduct; (iv) Mr. Moore’s unauthorized use or disclosure of any proprietary information or trade secrets of the
Company or any other party to whom Mr. Moore owes an obligation of nondisclosure as a result of Mr. Moore’s relationship
with the Company; (v) Mr. Moore’s willful breach of any obligations under any written agreement or covenant with the
Company; or (vi) Mr. Moore’s continued failure to perform his employment duties after Mr. Moore has received a written
demand of performance from the Company which specifically sets forth the factual basis for the Company’s belief that Mr.
Moore has not substantially performed his duties and has failed to cure such non-performance to the Company’s satisfaction
within ten business days after receiving such notice.
“Good Reason” generally means the occurrence of one or more of the following events effected without Mr. Moore’s
prior consent, provided that Mr. Moore’s employment terminates within 90 days following the expiration of the Company’s
Cure Period (defined below): (i) the assignment to Mr. Moore of any duties or the reduction of Mr. Moore’s duties, either of
which results in a material diminution in Mr. Moore’s position or responsibilities with the Company; provided that, it being
understood that the continuance of Mr. Moore’s duties and responsibilities at the subsidiary or divisional level following a
Change in Control, rather than at the parent, combined or surviving company level following such Change in Control shall
not be deemed Good Reason within the meaning of this clause (i); (ii) a reduction by the Company in the base salary of Mr.
Moore by 15% or more, unless similar such reductions occur concurrently with and apply to the Company’s senior
management; (iii) a material change in the geographic location at which Mr. Moore must perform services (for purposes of
the Change of Control Agreement, the relocation of Mr. Moore to a facility or a location less than 25 miles from Mr. Moore’s
then-present location shall not be considered a material change in geographic location); (iv) a material reduction of facilities,
perquisites or in the kind or level of employee benefits to which the Mr. Moore is entitled, unless similar such reductions
occur concurrently and apply to the Company’s senior management; or (v) any material breach by the Company of any
material provision of the Change of Control Agreement. Mr. Moore will not resign for Good Reason without first providing
the Company with written notice of the acts or omissions constituting the grounds for “Good Reason” within 90 days of the
initial existence of the grounds for “Good Reason” and a reasonable cure period of 30 days (“Cure Period”) following the
date of such notice.
Separation Agreement with Mr. Mokari
In connection with the termination of his employment with the Company in December 2018, Mr. Mokari entered into a
separation and release agreement with the Company (the “Transition Agreement”), pursuant to which Mr. Mokari received
vesting acceleration of the portion of his PRSU award (granted July 27, 2016) covering 10,000 shares of Company Common
Stock. Mr. Mokari forfeited all other then-unvested portions of his equity awards. Under his Transition Agreement,
Mr. Mokari also agreed to provide certain consulting services to the Company for a period of twelve months following
termination of his employment with the Company. The Transition Agreement further provides for Mr. Mokari’s release of
claims in favor of the Company, his agreement not to provide services to certain competitors of the Company while engaged
in providing his consulting transition services to the Company, and mutual nondisparagement obligations by both Mr. Mokari
and the Company.
Tax and Accounting Considerations
The Compensation Committee considers tax and accounting effects in administering the executive compensation
program and aims to maintain compensation expenses for our most senior executive team within reasonable levels based on
relevant factors such as the Company’s operations and financials and the prevailing market practices.
Prior to 2018, Internal Revenue Code Section 162(m) (“Section 162(m)”) generally limited the federal tax deductibility
of compensation paid to our Chief Executive Officers and certain other executive officers of the Company to $1 million
annually unless the compensation over $1 million qualified as “performance-based” within the meaning of Section 162(m).
As a result of the Tax Cuts and Jobs Act of 2017, the “performance-based” compensation exception under Section 162(m)
was eliminated and the “covered employees” to whom Section 162(m) would apply was expanded. Accordingly, for fiscal
year 2018, we generally are not able to take a deduction for any compensation paid to our named executive officers in excess
of $1 million unless the compensation qualifies for the limited transition relief applicable to certain arrangements in place on
November 2, 2017. The Company cannot guarantee that any compensation payable to our named executive officers will
qualify for the transition relief or that the compensation will be deductible, and the Company also may from time to time
provide compensation to our named executive officers that may not be deductible to the extent that the aggregate amount
exceeds $1 million. However, the Compensation Committee intends to maintain an approach to executive compensation that
strongly links pay to performance.
We account for equity-based awards in accordance with ASC Topic 718.
16
Director Compensation
We use a combination of cash and equity compensation to attract and retain qualified candidates to serve on our Board.
The following table provides information concerning the compensation paid by us to each of our non-employee
directors for fiscal 2018. Mr. Moore did not receive additional compensation for his services as a member of our Board. Mr.
Bruce, Ms. Sainz and Mr. Grove were first appointed as directors of the Company in 2018, and the following table reflects
their respective grant of stock option to purchase 15,000 shares of common stock, which is our standard equity award for new
directors. Additional information discussed below in the section titled “Equity Compensation.”
Director Compensation for 2018
Name
Sanford Fitch(3)
Ruediger Naumann-Etienne, Ph.D.
David Bruce
Maria Sainz
Ann Rhoads(4)
Robert Grove
Fees Earned or
Paid in Cash
($)
55,000
59,750
33,000
32,500
39,000
11,250
Stock Awards
($)(1)(2)
Option Awards
($)(1)(2)
40,001
54,061
40,001
40,001
40,001
19,992
—
—
31,650
31,650
—
28,650
Total
($)
95,001
113,811
104,651
104,151
79,001
39,900
(1) Reflects the aggregate grant date fair value of awards computed in accordance with FASB ASC Topic 718. We discuss the assumptions that
we used to calculate these amounts in Note 10 to our financial statements included in our Annual Report on Form 10-K for the fiscal year
ended December 29, 2018, and incorporated by reference herein. As required by SEC rules, the amounts shown exclude the impact of
estimated forfeitures related to service-based vesting conditions.
(2) As of December 29, 2018, the aggregate number of shares underlying options outstanding for each of our non-employee directors was:
Name
Sanford Fitch(3)
Ruediger Naumann-Etienne, Ph.D.
David Bruce
Maria Sainz
Ann Rhoads(4)
Robert Grove
Aggregate
Number of
Shares
Underlying
Outstanding
Options
Number of
Securities
Underlying
Unvested Stock
Awards
—
—
15,000
15,000
—
15,000
5,690
7,690
5,690
5,690
—
—
(3) Mr. Fitch is not standing for re-election at the 2019 Annual Meeting of Stockholders.
(4) Ms. Rhoads resigned in October 2018.
Cash Compensation
Pursuant to our non-employee director cash compensation policy, non-employee members of our Board, other than our
Chairman, received an annual retainer of $35,000. Each member of the Audit Committee (including its chairman) received an
annual retainer of $7,000, and each member of the Nominating and Governance Committee and the Compensation
Committee (including their respective chairman) received an annual retainer of $5,000. The chairman of the Audit
Committee received an additional annual retainer of $8,000, and the chairman of each of the Nominating and Governance
Committee and the Compensation Committee received an additional annual retainer of $4,000. The Lead Independent
Director received an additional annual retainer of $10,000. These annual retainers are paid in quarterly installments in arrears.
We reimburse members of the Board and Board committees for reasonable out-of-pocket expenses incurred by them in
attending such meetings.
Equity Compensation
Pursuant to our non-employee director equity compensation policy, each non-employee director automatically receives
an RSU grant equal to $40,000 worth of Common Stock (determined based upon the fair market value of the shares at the
time such RSU award was granted) under our 2008 EIP. Each RSU grant vests in full on the earlier of the one-year
anniversary of the date of grant or our next annual meeting of stockholders, subject to the non-employee director’s continued
service as a Board member through the vesting date. The Lead Independent Director received an additional annual retainer of
$10,000 worth of Common Stock.
17
Information on Compensation Risk Assessment
Management periodically reviews our incentive compensation programs at all levels within the organization. Employee
cash bonuses are based on company-wide and individual performance, and management (with respect to our non-executive
employees), our Compensation Committee (with respect to our executive officers, other than our CEO), and the Board (with
respect to our CEO) have discretion to adjust bonus payouts. Equity awards for new hires are based on the employee’s
position, prior experience, qualifications, and the market for particular types of talent, and any additional grants are based on
employee performance and retention requirements. Equity awards have long-term vesting requirements to ensure that
recipients’ focus is on our long-term success.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth certain information known to the Company regarding the beneficial ownership of
Common Stock as of March 30, 2019, by (i) each person (or group of affiliated persons) who is the beneficial owner of more
than 5% of our Common Stock, (ii) each director and nominee for director, (iii) each of the Company’s executive officers
named in the Summary Compensation Table appearing herein and (iv) all of the Company’s directors and executive officers
as a group:
5% Stockholders, Directors and Officers (1)
Wasatch Advisors, Inc. (3)
Paragon Associates II Joint Venture (4)
Acuta Capital Partners LLC (5)
Stanley Manne Trust (6)
Entities Affiliated with the BlueLine Partners, L.L.C. (7)
Directors
William M. Moore (8)
David I. Bruce (9)
Sanford Fitch (10)
Ruediger Naumann-Etienne, Ph.D. (11)
Robert Grove (12)
Maria Sainz (13)
Executive Officers
Atabak Mokari(14)
All current directors and executive officers as a group (6 persons) (15)
Beneficial Ownership as of
March 30, 2019
Number of
Shares (2)
Percent of Total
(%) (2)
1,478,671
1,320,000
1,174,500
1,072,215
999,802
484,399
4,063
57,197
97,279
13,908
4,063
37,003
660,909
10.8 %
9.7 %
8.6 %
7.9 %
7.3 %
3.5 %
*
*
*
*
*
*
4.8 %
Represents less than 1% of the total.
*
(1) Unless otherwise indicated in the table, the address for each listed person is c/o IRIDEX Corporation, 1212 Terra Bella Avenue, Mountain
View, CA 94043.
(2) The number and percentage of shares beneficially owned is determined under rules of the SEC, and the information is not necessarily
indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares as to which the
individual has sole or shared voting power or investment power and also any shares which the individual has the right to acquire within 60
days of March 30, 2019, through the exercise of any stock option or other right. Unless otherwise indicated in the footnotes, each person has
sole voting and investment power (or shares such powers with his or her spouse) with respect to the shares shown as beneficially owned.
Percentage beneficially owned is based on 13,633,415 shares of Common Stock outstanding on March 30, 2019.
(3) Wasatch Advisors, Inc. is located at 505 Wakara Way, Salt Lake City, UT 84108. This information was obtained from a Schedule 13G/A filed
with the SEC on February 14, 2019.
(4) Represents 1,320,000 shares of Common Stock held of record by Paragon Associates and Paragon Associates II Joint Venture (“Paragon JV”).
Bradbury Dyer III, as the authorized agent of Paragon JV, has the power to direct the vote and disposition of the 1,320,000 shares of Common
Stock held by Paragon JV. Paragon Associates and Paragon JV are located at 500 Crescent Court, Suite 260, Dallas, Texas 75201. This
information was obtained from a Schedule 13D/A filed with the SEC on August 24, 2015, from Forms 4 filed with the SEC on September 4,
2015, September 11, 2015, September 25, 2015, and September 20, 2018, respectively, and from Form 13F filing dated February 13, 2019.
(5) Acuta Capital Partners, LLC is located at 1301 Shoreway Road, Suite 350, Belmont, CA, 94002. This information was obtained from a
Schedule 13G filed with the SEC on February 14, 2019.
(6) Stanley Manne Trust is located at 3737 North East 214th Street, Aventura, Florida 33180. This information was obtained from a
(7)
Schedule 13G/A filed with the SEC on February 14, 2018.
Includes shares of Common Stock owned by: BlueLine Capital Partners, L.P., BlueLine Capital Partners II, LP, BlueLine Capital Partners III,
LP, BlueLine Partners, LLC, Meridian OHC Partners, LP, TSV Investment Partners, LLC and Scott Shuda together (“BlueLine Partners”).
BlueLine Partners is located at 3480 Buskirk Ave., Suite 214, Pleasant Hill, CA 94523. This information was obtained from a Schedule 13D
filed with the SEC on February 14, 2019.
18
(8)
Includes (i) 256,085 shares of Common Stock held by William M. Moore Trust, William M. Moore, Trustee Under Agreement Dated
08/16/2016 & Patricia A. Moore Trust, Patricia A. Moore, Trustee Under Agreement Dated 08/17/2016 Tenants in Common, (ii) 64,900
shares of Common Stock held by Mr. Moore’s spouse, (iii) 71,958 shares of Common Stock subject to options exercisable within 60 days of
March 30, 2019, and (iv) 625 shares of Common Stock subject to restricted stock awards releasable within 60 days of March 30, 2019.
Mr. Moore is also the Chief Executive Officer and President of the Company.
Includes 4,063 shares of Common Stock subject to options exercisable within 60 days of March 30, 2019.
(9)
(10) Includes 57,197 shares of Common Stock held by Mr. Fitch.
(11) Includes 23,000 shares of Common Stock held by the Naumann-Etienne Foundation, over which Dr. Naumann-Etienne may be deemed to
share voting and dispositive power as a result of his position as president. Dr. Naumann-Etienne disclaims beneficial ownership of the shares
owned by the Naumann-Etienne Foundation.
(12) Includes (i) 11,720 shares of Common Stock held by Mr. Grove and (ii) 2,188 shares of Common Stock subject to options exercisable within
60 days of March 30, 2019.
(13) Includes 4,063 shares of Common Stock subject to options exercisable within 60 days of March 30, 2019.
(14) Includes 37,003 shares of Common Stock held by Mr. Mokari.
(15) Includes (i) 82,272 shares of Common Stock subject to options that are exercisable within 60 days of March 30, 2019 and (ii) 625 shares of
Common Stock issuable pursuant to RSUs that are subject to vesting conditions within 60 days of March 30, 2019.
Securities Authorized for Issuance under Equity Compensation Plans
As of December 29, 2018, we had one equity compensation plan under which securities are authorized for issuance.
This plan is the 2008 Equity Incentive Plan (“2008 EIP”), which has been approved by our stockholders. As of December 29,
2018, there were 844,898 Shares subject to stock options outstanding under the 2008 EIP and no Shares subject to stock
options outstanding under the 1998 Stock Plan. The weighted average exercise price for these shares is $8.84 per share and
the weighted average remaining contractual life is 4.61 years, also as of December 29, 2018. As of December 29, 2018,
597,121 Shares were subject to restricted stock units outstanding under the 2008 EIP, including 387,911 Shares subject to
outstanding performance-based restricted stock unit awards (assuming any outstanding performance-based criteria are
achieved at target levels). As of the same date, 700,962 Shares remained available for issuance under the 2008 EIP.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Other than the compensation arrangements with our directors and executive officers discussed under Item 11. Executive
Compensation, there were no transactions since the beginning of our last fiscal year or currently proposed transactions in
which we have been a participant and:
•
•
the amounts involved exceeded or will exceed $120,000; and
any of our directors, nominees for director, executive officers or holders of more than five percent of our
outstanding capital stock, or any immediate family member of, or person sharing the household with, any of
these individuals or entities, had or will have a direct or indirect material interest.
Indemnification Agreements
We have entered into agreements to indemnify our directors and executive officers. These agreements will, among
other things, require us to indemnify these individuals for certain expenses (including attorneys’ fees), judgments, fines and
settlement amounts reasonably incurred by such person in any action or proceeding, including any action by or in our right,
on account of any services undertaken by such person on behalf of our Company or that person’s status as a member of our
Board to the maximum extent allowed under Delaware law.
Policies and Procedures for Related Party Transactions
Our written policies and procedures adopted by the Board provide that, if any of our directors, officers or employees
has a significant direct or indirect financial interest in a transaction between us and a third party, subject to specified
exceptions and other than those that involve compensation, such interest must be disclosed to and approved by the Company.
Our Audit Committee has the principal responsibility for reviewing and approving in advance any proposed related party
transactions pursuant to these policies and procedures.
19
Item 14. Principal Accountant Fees and Services.
Fees Billed to the Company by the Company’s Principal Independent Registered Public Accounting Firm During the
Previous Two Fiscal Years
BPM LLP (“BPM”) served as the Company’s independent registered public accounting firm in 2018 and 2017.
The following table presents fees (in thousands) for professional audit services and other services rendered to the
Company by its principal independent registered public accounting firm for fiscal year 2018 ended December 29, 2018 and
fiscal year 2017 ended December 30, 2017.
Audit Fees(1)
Audit-Related Fees(2)
Tax Fees
All Other Fees
Total
Fiscal Year
2018
Fiscal Year
2017
$
$
$
573 $
18 $
—
—
591 $
591
18
—
—
609
(1) Audit Fees consisted of fees for professional services rendered for the audit of the Company’s annual consolidated financial statements
included in the Company’s Annual Reports on Form 10-K and for the review of the consolidated financial statements included in the
Company’s Quarterly Reports on Form 10-Q, as well as reviews of regulatory and statutory filings. Fees for 2018 also included fees billed for
professional services rendered in connection with our Form S-3 registration statement related to our follow-on offering.
(2) This category consists of assurance and related services by the Company’s independent registered public accounting firm that are reasonably
related to the performance of the audit or review of the Company’s consolidated financial statements and are not reported above under “Audit
Fees.” Audit-related fees include the audit of the IRIDEX Corporation Profit Sharing 401(k) Plan Trust.
Audit Committee Pre-Approval of Audit and Non-Audit Services
The Audit Committee has established a policy governing the Company’s use of its principal independent registered
public accounting firm for non-audit services. Under the policy, management may use its principal independent registered
public accounting firm for non-audit services that are permitted under SEC rules and regulations, provided that management
obtains the Audit Committee’s approval before such services are rendered. BPM did not provide any non-audit services for
the Company in fiscal years 2018 or 2017.
The Audit Committee pre-approved all of the services and fees identified in the table above in accordance with its
charter and applicable laws, rules and regulations.
20
Item 15. Exhibits and Financial Statement Schedules
(a) The following documents are filed in Part II of the Annual Report on the Original 10-K:
1. Financial Statements
PART IV
The Financial Statements required by this item are listed on the Index to Financial Statements in Part IV, Item 15(a)1 of
the Original 10-K.
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.
3. Exhibits
The exhibits listed below are filed or incorporated by reference as part of this report.
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) (P)
Amended and Restated Certificate of Incorporation of Registrant.
3.2(2)
Amended and Restated Bylaws of Registrant.
4.1(3)
Certificate of Designation, Preferences and Rights of Series A Preferred Stock.
4.2(3)
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)
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.
10.3.2(23)
Fourth Amendment to Lease Agreement dated January 31, 2016 by and between ZIC 12112 Terra Bella LLC
and the Registrant.
21
Exhibits
10.3.3(24)
Exhibit Title
Triple Net Lease dated April 26, 2017 by and between ZIC 12112 Terra Bella LLC and the Registrant.
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.
10.10(3)
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)*
Change in Control Severance Agreement dated as of December 6, 2017 by and between the Company and
George Marcellino
10.17(20)*
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) (P) Subsidiaries of Registrant
23.1(25)
Consent of BPM LLP, Independent Registered Public Accounting Firm.
24.1
Power of Attorney (included on signature page to the Original 10-K and incorporated herein by reference).
31.1(25)
Certification of Principal Executive and Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
31.2(25)
Certification of Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.3
Certification of Principal Executive and Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
31.4
Certification of Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1(25)
32.2(25)
Certification of Principal Executive and Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Certification of Principal Accounting Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
22
Exhibits
Exhibit Title
101.INS(25) XBRL Instance Document.
101.SCH(25) XBRL Taxonomy Extension Schema Document.
101.CAL(25) XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF(25) XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB(25) XBRL Taxonomy Extension Labels Linkbase Document.
101.PRE(25) XBRL Taxonomy Extension Presentation Linkbase Document.
Indicates a management contract or compensatory plan or arrangement.
*
(1) Incorporated by reference to the Exhibits filed with the Registration Statement on Form SB-2 (No. 333-00320-LA)
which was declared effective on February 15, 1996.
(2) Incorporated by reference to the Exhibits filed with the Registrant’s Report on Form 8-K on April 1, 2019.
(3) Incorporated by reference to the Exhibits filed with the Registrant’s Report on Form 8-K on September 7, 2007.
(4) Incorporated by reference to the Exhibits filed with the Registrant’s Report on Form 8-K on April 6, 2009.
(5) Incorporated by reference to the Exhibits filed with the Registrant’s Report on Form 10-K for the year ended January 3,
2009.
(8) 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.
(9) 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.
(10) Incorporated by reference to Exhibit 99.1 filed with Registrant’s Registration Statement on Form S-8 on November 21,
2008.
(11) Incorporated by reference to Exhibit 99.(d)(5) filed with the Registration Statement on Form SC TO-I July 30, 2009.
(12) Incorporated by reference to the Exhibits filed with the Registrant’s Report on Form 10-Q for the quarter ended July 2,
2011.
(13) Incorporated by reference to the Exhibit 10.1 filed with the Registrant’s Report on Form 8-K on March 27, 2013.
(14) Incorporated by reference to the Exhibit 2.1 filed with the Registrant’s Report on Form 8-K on January 4, 2012.
(15) Incorporated by reference to Exhibit 10.1 filed with the Registrant’s Report on Form 10-Q on November 3, 2014.
(16) Incorporated by reference to the Exhibit 10.1 filed with the Registrant’s Report on Form 8-K on January 9, 2014.
(17) Incorporated by reference to the Exhibits filed with the Registrant’s Report on Form 10-Q on May 12, 2015.
(18) Incorporated by reference to the Exhibit 10.1 filed with the Registrant’s Report on Form 10-K on March 31, 2016.
(19) Incorporated by reference to the Exhibit 10.1 filed with the Registrant’s Report on Form 8-K on December 6, 2017.
(20) Incorporated by reference to the Exhibits filed with the Registrant’s Report on Form 8-K on July 11, 2016,
(21) If applicable, to be filed by amendment to the S-3 (No. 333-213094) which was declared effective on August 26, 2016,
or as an exhibit to a report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and
incorporated by reference therein.
(22) Incorporated by reference to Exhibit 10.1 filed with the Registrant’s Report on Form 8-K on November 3, 2016.
(23) Incorporated by reference to Exhibit 10.1 filed with the Registrant’s Report on Form 10-K on March 31, 2016.
(24) Incorporated by reference to Exhibit 10.1 filed with the Registrant’s Report on Form 8-K on May 1, 2017.
(25) Incorporated by reference to the Exhibits filed with the Registrant’s Report on Form 10-K on March 29, 2019.
(P) Print filing.
23
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 29th day of April 2019.
SIGNATURES
IRIDEX CORPORATION
By: /s/ William M. Moore
William M. Moore
President and Chief Executive Officer
/s/ Romeo R. Dizon
Romeo R. Dizon
Vice President of Finance
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints William M. Moore, 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
Date
/s/ William M. Moore
(William M. Moore)
/s/ Romeo R. Dizon
(Romeo R. Dizon)
/s/ David I. Bruce
(David I. Bruce)
/s/ Sanford Fitch
(Sanford Fitch)
/s/ Robert E. Grove
(Robert E. Grove)
/s/ Kenneth E. Ludlum
(Kenneth E. Ludlum)
/s/ Ruediger Naumann-Etienne
(Ruediger Naumann-Etienne)
/s/ (Maria Sainz)
(Maria Sainz)
/s/ (Scott Shuda)
(Scott Shuda)
President, Chief Executive Officer, and Chairman of the Board April 29, 2019
(Principal Executive and Financial Officer)
April 29, 2019
April 29, 2019
April 29, 2019
April 29, 2019
April 29, 2019
April 29, 2019
April 29, 2019
April 29, 2019
Vice President of Finance
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
24
CERTIFICATION OF PRINCIPAL EXECUTIVE AND 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, William M. Moore, certify that:
EXHIBIT 31.3
1.
2.
3.
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;
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
4.
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: April 29, 2019
By: /s/ WILLIAM M. MOORE
Name: William M. Moore
Title: President and Chief Executive Officer
(Principal Executive and Financial Officer)
CERTIFICATION OF PRINCIPAL ACCOUNTING 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, Romeo R. Dizon, certify that:
EXHIBIT 31.4
1.
2.
3.
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;
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
4.
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: April 29, 2019
By: /s/ ROMEO R. DIZON
Name: Romeo R. Dizon
Title: Vice President of Finance
(Principal Accounting Officer)