UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

      

FORM 10-Q

      

(Mark One)

 

þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 29, 2013

Or

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission file number: 0-27598

      

IRIDEX CORPORATION

(Exact name of registrant as specified in its charter)

      

   

 

Delaware

   

77-0210467

(State or other jurisdiction of

incorporation or organization)

   

(I.R.S. Employer

Identification Number)

   

   

   

1212 Terra Bella Avenue

Mountain View, California

   

94043-1824

(Address of principal executive offices)

   

(Zip Code)

Registrant’s telephone number, including area code: (650) 940-4700

      

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  þ   No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes   þ   No  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

   

 

Large accelerated filer  ¨

Accelerated filer  ¨

Non-accelerated filer  ¨

Smaller reporting company  þ

   

   

   

   

   

   

   

   

   

   

   

(Do not check if a smaller

    reporting company)

   

   

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes  ¨   No  þ

The number of shares of common stock, $.01 par value, issued and outstanding as of July 19, 2013 was 9,774,512.

      

   

   

   

   

   

   


TABLE OF CONTENTS

      

   

 

Items

   

   

   

Page

   

PART I. FINANCIAL INFORMATION  

   

   

   

   

   

   

   

Item 1.

   

Condensed Consolidated Financial Statements  

   

 

 3

   

   

   

   

   

   

   

   

   

Unaudited Condensed Consolidated Balance Sheets as of June 29, 2013 and December 29, 2012  

   

 

 3

   

   

   

Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June 29, 2013 and June 30, 2012  

   

 

 4

   

   

   

Unaudited Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 29, 2013 and June 30, 2012  

   

 

 5

   

   

   

Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 29, 2013 and June 30, 2012  

   

 

 6

   

   

   

Notes to Unaudited Condensed Consolidated Financial Statements  

   

 

 7

   

   

   

   

   

   

   

Item 2.

   

Management’s Discussion and Analysis of Financial Condition and Results of Operations  

   

 

 16

   

   

   

   

   

   

   

Item 3.

   

Quantitative and Qualitative Disclosures about Market Risk  

   

 

 20

   

   

   

   

   

   

   

Item 4.

   

Controls and Procedures  

   

 

 20

   

   

   

   

   

   

   

PART II. OTHER INFORMATION  

   

   

   

   

   

   

   

Item 1.

   

Legal Proceedings  

   

 

 20

   

   

   

   

   

   

   

Item 1A.

   

Risk Factors  

   

21

   

   

   

   

   

   

   

Item 2.

   

Unregistered Sales of Equity Securities and Use of Proceeds  

   

 

 30

   

   

   

   

   

   

   

Item 3.

   

Defaults Upon Senior Securities  

   

 

 30

   

   

   

   

   

   

   

Item 4.

   

Mine Safety Disclosures  

   

 

 30

   

   

   

   

   

   

   

Item 5.

   

Other Information  

   

 

 30

   

   

   

   

   

   

   

Item 6.

   

Exhibits  

   

 

 31

   

   

   

   

   

   

   

Signature  

   

 

 32

   

   

   

   

   

   

   

Exhibit Index  

   

 

 33

   

   

   

   

   

 

 

 2 

   


PART I. FINANCIAL INFORMATION

   

Item 1. Condensed Consolidated Financial Statements (unaudited)

IRIDEX Corporation

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands except share and per share data)

   

 

   

June 29,

2013

   

   

December 29,

2012 (1)

   

ASSETS

   

   

   

   

   

   

   

Current assets:

   

   

   

      

   

   

   

Cash and cash equivalents

$

13,505

   

      

$

11,901

      

Accounts receivable, net of allowance for doubtful accounts of $ 206 at June 29, 2013 and $146 at December 29, 2012

   

6,148

   

      

   

5,480

      

Inventories

   

8,940

   

      

   

8,035

      

Prepaid expenses and other current assets

   

1,095

   

      

   

1,129

      

Current assets of discontinued operations

      

0

   

      

   

510

      

Total current assets

   

29,688

   

      

   

27,055

      

Property and equipment, net

   

432

   

      

   

483

      

Intangible assets, net

   

437

   

      

   

554

      

Goodwill

   

533

   

      

   

533

      

Other long-term assets

      

280

   

      

   

287

      

Total assets

$

31,370

   

      

$

28,912

      

LIABILITIES AND STOCKHOLDERS’ EQUITY

   

   

   

   

   

   

   

Current liabilities:

   

   

   

      

   

   

   

Accounts payable

$

2,573

   

      

$

2,105

      

Accrued compensation

   

1,533

   

      

   

1,563

      

Accrued expenses

   

1,102

   

      

   

1,242

      

Accrued warranty

   

457

   

      

   

453

      

Deferred revenue

      

1,018

   

      

   

1,004

      

Total current liabilities

   

6,683

   

      

   

6,367

      

Long-term liabilities:

   

   

   

      

   

   

   

Other long-term liabilities

      

461

   

      

   

640

      

Total liabilities

      

7,144

   

      

   

7,007

      

Stockholders’ equity:

   

   

   

      

   

   

   

Convertible preferred stock, $0.01 par value:

   

   

   

      

   

   

   

Authorized: 2,000,000 shares;

   

   

   

      

   

   

   

Issued and outstanding: 0 and 500,000 shares at June 29, 2013 and at December 29, 2012, respectively

   

0

   

      

   

5

      

Common stock, $0.01 par value:

   

   

   

      

   

   

   

Authorized: 30,000,000 shares;

   

   

   

      

   

   

   

Issued and outstanding 9,729,333 and 8,452,971 shares at June 29, 2013 and at December 29, 2012, respectively

   

102

   

      

   

94

      

Additional paid-in capital

   

39,987

   

      

   

38,958

      

Accumulated deficit

      

(15,863

)

      

   

(17,152

Total stockholders’ equity

      

24,226

   

      

   

21,905

      

Total liabilities and stockholders’ equity

$

31,370

   

      

$

28,912

      

 

(1)

Derived from the audited consolidated financial statements included in the annual report filed on Form 10-K with the SEC for the year ended December 29, 2012.

   

The accompanying notes are an integral part of these condensed consolidated financial statements.

   

 

 

 3 

   


IRIDEX Corporation

Condensed Consolidated Statements of Operations

(Unaudited, in thousands except per share data)

   

 

   

Three Months Ended

   

   

Six Months Ended

   

   

June 29,

2013

   

   

June 30,

2012

   

   

June 29,

2013

   

      

June 30,

2012

   

Total revenues

$

9,210

   

      

$

8,445

      

   

$

18,149

      

      

$

16,750

      

Cost of revenues

      

4,728

   

      

   

4,334

      

   

      

9,436

      

      

   

8,653

      

Gross profit

      

4,482

   

      

   

4,111

      

   

      

8,713

      

      

   

8,097

      

Operating expenses:

   

   

   

      

   

   

   

   

   

   

   

      

   

   

   

Research and development

   

884

   

      

   

1,106

      

   

   

1,880

   

      

   

2,288

      

Sales and marketing

   

1,846

   

      

   

2,122

      

   

   

3,471

   

      

   

3,986

      

General and administrative

   

1,237

   

      

   

1,233

      

   

   

2,423

   

      

   

2,409

      

Proceeds from demutualization of insurance carrier

      

0

   

      

   

0

      

   

      

(473

)  

      

   

0

      

Total operating expenses

      

3,967

   

      

   

4,461

      

   

      

7,301

      

      

   

8,683

      

Income (loss) from continuing operations

   

515

   

      

   

(350

   

   

1,412

   

      

   

(586

Legal settlement

   

0

   

      

   

800

      

   

   

0

   

      

   

800

      

Interest and other expense, net

      

97

   

      

   

48

      

   

      

115

      

      

   

75

      

Income from continuing operations before provision for income taxes

   

418

   

      

   

402

      

   

   

1,297

   

      

   

139

      

Provision for income taxes

      

3

   

      

   

5

      

   

      

8

      

      

   

7

      

Income from continuing operations

      

415

   

      

   

397

      

   

      

1,289

      

      

   

132

      

Loss from discontinued operations, net of tax

   

0

   

      

   

(61

   

   

0

   

      

   

(223

Gain on sale of discontinued operations, net of tax

      

0

   

      

   

0

      

   

      

0

      

      

   

2,032

      

Income (loss) from discontinued operations, net of tax

      

0

   

      

   

(61

   

      

0

      

      

   

1,809

      

Net income

$

415

   

      

$

336

      

   

$

1,289

      

      

$

1,941

      

Net income (loss) per share:

   

   

   

      

   

   

   

   

   

   

   

      

   

   

   

Basic

   

   

   

      

   

   

   

   

   

   

   

      

   

   

   

Continuing operations

$

0.05

   

      

$

0.04

      

   

$

0.15

      

      

$

0.01

      

Discontinued operations

      

0.00

   

      

   

0.00

      

   

      

0.00

      

      

   

0.21

      

Net income

$

0.05

   

      

$

0.04

      

   

$

0.15

      

      

$

0.22

      

Diluted

   

   

   

      

   

   

   

   

   

   

   

      

   

   

   

Continuing operations

$

0.04

   

      

$

0.04

      

   

$

0.13

      

      

$

0.01

      

Discontinued operations

      

0.00

   

      

   

(0.01

   

      

0.00

      

      

   

0.18

      

Net income

$

0.04

   

      

$

0.03

      

   

$

0.13

      

      

$

0.19

      

Weighted average shares used in computing net income per common share

   

   

   

      

   

   

   

   

   

   

   

      

   

   

   

Basic

      

8,824

   

      

   

8,983

      

   

      

8,668

      

      

   

8,958

      

Diluted

      

10,005

   

      

   

10,286

      

   

      

9,903

      

      

   

10,270

      

   

   

   

   

   

   

   

   

   

   

   

   

   

   

The accompanying notes are an integral part of these condensed consolidated financial statements.

   

   

 

 

 4 

   


IRIDEX Corporation

Condensed Consolidated Statements of Comprehensive Income

(Unaudited, in thousands)

   

 

   

Three Months Ended

   

   

Six Months Ended

   

   

June 29,

2013

   

   

June 30,

2012

   

      

June 29,

2013

   

      

June 30,

2012

   

Net income

$

415

   

   

$

336

      

      

$

1,289

      

      

$

1,941

      

Recognition of accumulated foreign currency translation loss related to sale of foreign operations

   

0

   

   

   

0

      

      

      

0

      

      

   

35

      

Comprehensive income

$

415

   

   

$

336

      

      

$

1,289

      

      

$

1,976

      

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

The accompanying notes are an integral part of these condensed consolidated financial statements.

   

   

 

 

 5 

   


IRIDEX Corporation

Condensed Consolidated Statements of Cash Flows

(Unaudited, in thousands)

   

 

   

Six Months Ended

   

   

June 29,

2013

   

   

June 30,

2012

   

Operating activities:

   

   

   

   

   

   

   

Net income

$

1,289

   

   

$

1,941

      

Less income from discontinued operations

      

0

   

   

   

1,809

      

Income from continuing operations

   

1,289

   

   

   

132

      

Adjustments to reconcile net income from continuing operations to net cash provided by (used in) operating activities:

   

   

   

   

   

   

   

Depreciation and amortization

   

240

   

   

   

203

      

Change in fair value of earn-out liability

   

91

   

   

   

78

      

Stock compensation expense

   

334

   

   

   

297

      

Provision for doubtful accounts

   

60

   

   

   

(23

Changes in operating assets and liabilities, net of assets and liabilities acquired:

   

   

   

   

   

   

   

Accounts receivable

   

(728

   

   

(350

Inventories

   

(905

)

   

   

(880

Prepaid expenses and other current assets

   

34

   

   

   

(764

Other long-term assets

   

7

   

   

   

29

      

Accounts payable

   

468

   

   

   

559

      

Accrued compensation

   

(30

   

   

116

      

Accrued expenses

   

(212

   

   

(883

Accrued warranty

   

4

   

   

   

(31

Deferred revenue

   

14

   

   

   

(214

Other long-term liabilities

      

0

   

   

   

(77

Net cash provided by (used in) operating activities

      

666

   

   

   

(1,808

   

   

   

   

   

   

   

   

Investing activities:

   

   

   

   

   

   

   

Acquisition of property and equipment

   

(72

)

   

   

(174

Payment on earn-out liability

      

(198

   

   

(162

)  

Net cash used in investing activities

      

(270

   

   

(336

   

   

   

   

   

   

   

   

Financing activities:

   

   

   

   

   

   

   

Proceeds from stock option exercises

   

814

   

   

   

364

      

Repurchase of common stock

      

(76

   

   

(296

Payment of legal costs in connection with tender offer

      

(40

   

   

0

      

Net cash provided by financing activities

      

698

   

   

   

68

      

   

   

   

   

   

   

   

   

Net cash provided by operating activities from discontinued operations

   

0

   

   

   

405

      

Net cash provided by investing activities from discontinued operations

   

510

   

   

   

4,632

      

Effect of foreign exchange rate changes from discontinued operations

      

0

   

   

   

35

      

Net cash provided by discontinued operations

      

510

   

   

   

5,072

      

   

   

   

   

   

   

   

   

Net increase in cash and cash equivalents

   

1,604

   

   

   

2,996

      

Cash and cash equivalents, beginning of period

      

11,901

   

   

   

10,789

      

Cash and cash equivalents, end of period

$

13,505

   

   

$

13,785

      

   

   

   

   

   

   

   

   

Supplemental disclosure of cash flow information:

   

   

   

   

   

   

   

Cash paid during the period for:

   

   

   

   

   

   

   

Income taxes

$

1

   

   

$

16

      

   

   

   

   

   

   

   

   

Non-cash financing transaction:

   

   

   

   

   

   

   

Preferred stock conversion into common stock

$

5

   

   

$

0

      

   

The accompanying notes are an integral part of these condensed consolidated financial statements.

   

   

 

 

 6 

   


IRIDEX Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

   

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of IRIDEX Corporation (“IRIDEX”, the “Company”, “we”, “our”, or “us”) have been prepared in accordance with generally accepted accounting principles in the United States (“US GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the financial statements have been included.

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto, together with management’s discussion and analysis of the Company’s financial condition and results of operations, contained in our Annual Report on Form 10-K for the fiscal year ended December 29, 2012, which was filed with the Securities and Exchange Commission (“SEC”) on March 28, 2013. The results of operations for the three and six months ended June 29, 2013 are not necessarily indicative of the results for the year ending December 28, 2013 or any future interim period.

   

2. Summary of Significant Accounting Policies

The Company’s significant accounting policies are disclosed in our Annual Report on Form 10-K for the year ended December 29, 2012, which was filed with the SEC on March 28, 2013.

Financial Statement Presentation.

The consolidated financial statements include the accounts of the Company and our wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates.

The preparation of consolidated financial statements in conformity with US 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.

Discontinued Operations.

Discontinued operations are presented and accounted for in accordance with Accounting Standards Codification (“ASC”) 360, “Impairment or Disposal of Long-Lived Assets”, (“ASC 360”). When a qualifying component of the Company is disposed of or has been classified as held for sale, the operating results of that component are removed from continuing operations for all periods presented and displayed as discontinued operations if: (a) elimination of the component’s operations and cash flows from the Company’s ongoing operations has occurred (or will occur) and (b) significant continuing involvement by the Company in the component’s operations does not exist after the disposal transaction.

On December 30, 2011, we entered into an agreement to sell our aesthetics business to Cutera, Inc. The sale of the aesthetics business was completed on February 2, 2012. 

 

 

 7 

   


The operating results of our aesthetics business were therefore classified as discontinued operations, and the associated assets and liabilities were classified as discontinued operations for all periods presented under the requirements of ASC 360.

   

 

   

Three Months Ended

   

   

Six Months Ended

   

(in thousands)

June 29,
2013

   

   

June 30,
2012

   

   

June 29,
2013

   

   

June 30,
2012

   

Total revenues

$

0

   

   

$

299

   

   

$

0

   

   

$

1,228

   

Income (loss) from discontinued operations

$

0

   

   

   

(61

   

$

0

   

   

   

(223

Gain on sales of aesthetics business, net

$

0

   

   

   

0

   

   

$

0

   

   

   

1,149

   

Income (loss) before income taxes

$

0

   

   

   

(61

   

$

0

   

   

   

926

   

Income tax benefit

$

0

   

   

   

0

   

   

$

0

   

   

   

883

   

Income (loss) from discontinued operations, net of tax

$

0

   

   

   

(61

   

$

0

   

   

   

1,809

   

Current assets of discontinued operations as of December 29, 2012 comprised of restricted cash in the amount of $510 thousand. In accordance with the terms of the sale of the aesthetics segment to Cutera, Inc., 10% of the total purchase price had to be deposited and held in an escrow account for a period of twelve months from the date of closing and was used to resolve certain claims by Cutera, Inc., if any, which the Company has indemnified. There had been no claims made by Cutera, Inc. and in May 2013, the cash held in the escrow account was released to the Company.

Revenue Recognition.

Our revenues arise from the sale of laser consoles, delivery devices, consumables and service and support activities. Revenue from product sales is recognized upon receipt of a purchase order and product shipment provided that no significant obligations remain and collection of the receivables is reasonably assured. Shipments are generally made with Free-On-Board (“FOB”) shipping point terms, whereby title passes upon shipment from our dock. Any shipments with FOB receiving point terms are recorded as revenue when the shipment arrives at the receiving point. Cost is recognized as product sales revenue is recognized. The Company’s sales may include post-sales obligations for training or other deliverables. For revenue arrangements such as these, we recognize revenue in accordance with ASC 605, Revenue Recognition, Multiple-Element Arrangements. The Company allocates revenue among deliverables in multiple-element arrangements using the relative selling price method. Revenue allocated to each element is recognized when the basic revenue recognition criteria is met for each element. The Company is required to apply a hierarchy to determine the selling price to be used for allocating revenue to deliverables: (i) vendor-specific objective evidence of selling price (“VSOE”), (ii) third-party evidence of selling price (“TPE”) and (iii) best estimate of the selling price (“ESP”). In general, the Company is unable to establish VSOE or TPE for all of the elements in the arrangement; therefore, revenue is allocated to these elements based on the Company’s ESP, which the Company determines after considering multiple factors such as management approved pricing guidelines, geographic differences, market conditions, competitor pricing strategies, internal costs and gross margin objectives. These factors may vary over time depending upon the unique facts and circumstances related to each deliverable. As a result, the Company’s ESP for products and services could change. Revenues for post-sales obligations are recognized as the obligations are fulfilled.

In international regions, we utilize distributors to market and sell our products. We recognize revenue upon shipment for sales to these independent, third party distributors as we have no continuing obligations subsequent to shipment. Generally our distributors are responsible for all marketing, sales, installation, training and warranty labor coverage for our products. Our standard terms and conditions do not provide price protection or stock retention rights to any of our distributors.

Royalty revenues are typically based on licensees’ net sales of products that utilize our technology and are recognized as earned in accordance with the contract terms when royalties from licensees can be reliably measured and collectibility is reasonably assured, such as upon the earlier of the receipt of a royalty statement from the licensee or upon payment by the licensee.

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.

Shipping and Handling Costs.

Our shipping and handling costs billed to customers are included in revenues and the associated expense is recorded in cost of revenues for all periods presented.

Deferred Revenue.

Revenue related to extended service contracts is deferred and recognized on a straight line basis over the period of the applicable service contract. Costs associated with these service arrangements are recognized as incurred.

 

 

 8 

   


A reconciliation of the changes in the Company’s deferred revenue balance for the six months ended June 29, 2013 and June 30, 2012 is as follows:

   

 

   

Six Months Ended

   

(in thousands)

June 29,

2013

   

   

June 30,

2012

   

Balance, beginning of period

$

1,004

   

   

$

1,014

      

Additions to deferral

   

646

   

   

   

339

      

Revenue recognized

   

(632

)

   

   

(553

Balance, end of period

$

1,018

   

   

$

800

      

Warranty.

The Company accrues for estimated warranty cost upon shipment of products. 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. Warranty costs are reflected in the statement of operations as cost of revenues.

A reconciliation of the changes in the Company’s warranty liability for the six months ended June 29, 2013 and June 30, 2012 is as follows:

   

 

   

Six Months Ended

   

(in thousands)

June 29,

2013

   

   

June 30,

2012

   

Balance, beginning of period

$

453

   

   

$

556

      

Accruals for product warranties

   

114

   

   

   

85

   

Cost of warranty claims and adjustments

   

(110

   

   

(116

Balance, end of period

$

457

   

   

$

525

      

Recently Issued and Adopted Accounting Standards.

In February 2013, the Financial Accounting Standards Board issued Accounting Standards Update 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“AOCI”), which aims to improve the reporting of reclassifications out of AOCI. This update requires an entity to report the effect of significant reclassifications out of AOCI on the respective line items in net income if the amount being reclassified is required under US GAAP to be reclassified in its entirety to net income. For other amounts that are not required under US GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under US GAAP that provide additional detail about those amounts. The amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. For public entities, the amendments are effective prospectively for reporting periods beginning after December 15, 2012. The Company adopted this standard in the first quarter of fiscal year 2013. The adoption of this standard did not have a material effect on our consolidated financial position, results of operations, or cash flows.

   

3. Inventories, net

The components of the Company’s inventories as of June 29, 2013 and December 29, 2012 are as follows:

   

 

(in thousands)

June 29,

2013

   

   

December 29,

2012

Raw materials and work in process

$

5,720

   

   

$

5,357

      

Finished goods

      

3,220

   

   

   

2,678

      

Total inventories

$

8,940

   

   

$

8,035

      

   

   

 

 

 9 

   


4. Goodwill and Intangible Assets

Goodwill.

The carrying amount of goodwill and the changes in those balances are as follows:

   

 (in thousands)

 

Balance, December 29, 2012

$

533

      

Additions as a result of acquisitions

   

0

      

Balance, June 29, 2013

$

533

      

   

Intangible Assets.

The following table summarizes the components of gross and net intangible asset balances:

   

 

   

June 29, 2013

   

December 29, 2012

   

   

(in thousands)

Gross
Carrying
Amount

   

   

Accumulated
Amortization

   

   

Net
Carrying
Amount

   

   

Gross
Carrying
Amount

   

   

Accumulated
Amortization

   

   

Net
Carrying
Amount

   

   

Amortization
Life

Patents

$

720

   

   

$

471

   

   

$

249

   

   

$

720

   

   

$

362

   

   

$

358

   

   

Varies

Customer Relations

   

240

   

   

$

52

   

   

   

188

   

   

   

240

   

   

   

44

   

   

   

196

   

   

11.75 years

   

$

960

   

   

$

523

   

   

$

437

   

   

$

960

   

   

$

406

   

   

$

554

   

   

   

   

Amortization expense totaled $117 thousand and $92 thousand for the six months ended June 29, 2013 and June 30, 2012, respectively.

The amortization of Customer Relations was charged to sales and marketing expense and the amortization of Patents was charged to cost of revenues.

   

 

Future estimated amortization expense (in thousands):

   

   

   

2013 (six months)

$

137

      

2014

   

30

      

2015

   

52

      

2016

   

86

      

2017

   

16

      

Thereafter

   

116

      

Total

$

437

      

   

   

5. 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.

 

 

 10 

   


In determining fair value, the Company utilizes 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 its assessment of fair value.

The carrying amounts of the Company’s financial assets and liabilities, including cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses at June 29, 2013 and December 29, 2012, approximate fair value because of the short maturity of these instruments.

As of June 29, 2013 and December 29, 2012, 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:

   

 

   

June 29, 2013

   

   

December 29, 2012

   

   

Fair Value Measurements

   

   

Fair Value Measurements

   

(in thousands)

Level 1

   

   

Level 2

   

   

Level 3

   

   

Total

   

   

Level 1

   

   

Level 2

   

   

Level 3

   

   

Total

   

Assets:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Money market funds

$

12,040

   

   

   

   

   

   

   

   

   

   

$

12,040

   

   

$

10,839

   

   

   

   

   

   

   

   

   

   

$

10,839

   

Liabilities:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Earn-out liability

   

   

   

   

   

   

   

   

$

545

   

   

$

545

   

   

   

   

   

   

   

   

   

   

$

652

   

   

$

652

   

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 acquisitions of RetinaLabs and Ocunetics is classified within Level 3 of the fair value hierarchy since it is based on significant unobservable inputs. The significant unobservable inputs include projected royalties and discount rates to present value the payments. A significant increase (decrease) in the projected royalty payments in isolation could result in a significantly higher (lower) fair value measurement and a significant increase (decrease) in the discount rate in isolation could result in a significantly lower (higher) fair value measurement. The fair value of the earn-out liability is calculated on a quarterly basis by the Company based on a collaborative effort of the Company’s operations, finance and accounting groups based on additional information as it becomes available. Any change in the fair value adjustment is recorded in the statement of operations of that period.

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 June 29, 2013.

   

 

As of June 29, 2013

Fair Value
(in thousands)

      

Valuation
Technique

      

Significant
Unobservable
Input

      

Weighted
Average
(range)

Earn-out liability

$545

      

Discounted cash flow

      

Projected royalties
(in thousands)

      

$1,513
($414 – $1,775)

      

      

      

      

      

Discount rate

      

21.91%
(20.69% - 27.00%)

A reconciliation of the changes in the Company’s contingent consideration – cash (Level 3 liabilities) for the six months ended June 29, 2013 and June 30, 2012 is as follows:

   

 

   

Six Months Ended

   

(in thousands)

June 29
2013,

   

   

June 30,
2012

   

Balance at the beginning of the period

$

652

   

   

$

765

      

Payments against earn-out

   

(198

   

   

(162

Change in fair value of earn-out liability

      

91

   

   

   

78

      

Balance at the end of the period

$

545

   

   

$

681

      

The earn-out liability is included in accrued expenses and other long-term liabilities in the condensed consolidated balance sheets.

   

6. Stock Based Compensation

2008 Equity Incentive Plan

For the six months ended June 29, 2013, the only active share-based compensation plan was the 2008 Equity Incentive Plan (the “Incentive Plan”). The terms of awards granted during the six months ended June 29, 2013 were consistent with those described in the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 29, 2012.

 

 

 11 

   


Summary of Stock Options

The following table summarizes information regarding activity in our stock option plan during the six months ended June 29, 2013:

   

 

   

   

Number of Shares

   

      

Weighted

Average

Exercise Price

Per Share

   

      

Aggregate Intrinsic Value (thousands)

   

Outstanding at December 29, 2012

   

1,570,543

      

      

$

3.64 

      

      

   

   

   

Granted

   

48,200

   

      

$

4.74 

      

      

   

   

   

Exercised

   

(292,016

)

      

$

2.79 

      

      

   

   

   

Canceled or forfeited

   

(83,868

)

      

$

4.41 

      

      

   

   

   

Outstanding at June 29, 2013

   

1,242,859

   

      

$

3.83 

      

      

$

2,736

      

The weighted-average grant date fair value of the options granted under the Company’s stock plans as calculated using the Black-Scholes option-pricing model was $2.89 and $2.75 per share for the three months ended June 29, 2013 and June 30, 2012, respectively. The weighted-average grant date fair value of the options granted under the Company’s stock plans as calculated using the Black-Scholes option-pricing model was $3.00 and $2.77 per share for the six months ended June 29, 2013 and June 30, 2012, respectively.

The Company uses the Black-Scholes option-pricing model to estimate fair value of stock-based awards (options) with the following weighted average assumptions:

   

 

   

Three Months Ended

   

   

Six Months Ended

   

   

June 29,

2013

   

   

June 30,

2012

   

   

June 29,

2013

   

   

June 30,

2012

   

Average risk free interest rate

   

1.31

%

   

   

0.68

   

   

0.83

%

   

   

0.70

Expected life (in years)

   

4.50 years

   

   

   

4.55 years

      

   

   

4.50 years

   

   

   

4.55 years

      

Dividend yield

   

0

   

   

0

   

   

0

   

   

0

Average volatility

   

79

   

   

91

   

   

84

   

   

91

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 the Company’s stock price history over a period commensurate with the expected term of the options, trading volume of the Company’s 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 by the Company, 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 the Company has not issued any dividends and does not anticipate issuing any dividends in the future.

The following table shows stock-based compensation expense included in the condensed consolidated statements of operations for the three months and six months ended June 29, 2013 and June 30, 2012:

   

 

   

Three Months Ended

   

   

Six Months Ended

   

(in thousands) 

June 29,

2013

   

   

June 30,

2012

   

   

June 29,

2013

   

   

June 30,

2012

   

Cost of revenues

$

29

   

   

$

16

   

   

$

51

   

   

$

34

      

Research and development

   

16

   

   

   

20

   

   

   

36

   

   

   

39

      

Sales and marketing

   

28

   

   

   

26

   

   

   

50

   

   

   

55

      

General and administrative

   

100

   

   

   

88

   

   

   

197

   

   

   

169

      

   

$

173

   

   

$

150

   

   

$

334

   

   

$

297

      

Approximately $11 thousand and $6 thousand of the stock-based compensation recognized was capitalized into inventory as a component of overhead for the quarters ended June 29, 2013 and June 30, 2012, respectively.

 

 

 12 

   


Information regarding stock options outstanding, exercisable and expected to vest at June 29, 2013 is summarized below:

   

 

   

Number of

Shares

   

   

Weighted Average

Exercise Price

   

   

Weighted Average

Remaining Contractual

Life (Years)

   

   

Aggregate

Intrinsic Value

(thousands)

   

Options outstanding

   

1,242,859

   

      

$

3.83

   

   

   

3.44

   

   

$

2,736

      

Options vested and expected to vest

   

1,183,162

   

      

$

3.83

   

   

   

3.31

   

   

$

2,619

      

Options exercisable

   

870,170

   

      

$

3.79

   

   

   

2.33

   

   

$

1,999

      

The aggregate intrinsic value in the table above represents the pre-tax intrinsic value, based on the Company’s closing price as of June 28, 2013, that would have been received by option holders had all option holders exercised their stock options as of that date. This amount changes based on the fair market value of the Company’s stock. The total intrinsic value of options exercised for the six months ended June 29, 2013 and June 30, 2012 were approximately $445 thousand and $198 thousand, respectively.

As of June 29, 2013, there was $869 thousand of total unrecognized compensation cost, net of expected forfeitures, 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 3.07 years.

Summary of Restricted Stock Units and Awards

Information regarding the restricted stock units activity for the six months ended June 29, 2013 is summarized below:

   

 

   

Number
of Shares

   

Outstanding at December 29, 2012

   

55,999

      

Restricted stock units granted

   

220,000

      

Restricted stock units released

   

(1,250

)  

Restricted stock units forfeited

   

0

      

Outstanding at June 29, 2013

   

274,749

      

The weighted grant date fair value for restricted stock units awarded during the period was $258 thousand. The stock price on the date of grant was $4.45 per share.

On March 25, 2013, the Company granted a restricted stock unit award for up to 220,000 shares of the Company’s common stock (the “Market Performance Award”) under the terms of the Company’s 2008 Equity Incentive Plan, as amended, to the Company’s President and Chief Executive Officer. The number of shares issuable pursuant to the Market Performance Award will be based upon the Company’s average stock price performance during the two months prior to and two months following the date the service condition is met, or the fair market value of the Company’s common stock in the event vesting is triggered by a change of control of the Company. The Market Performance Award is expected to vest on December 31, 2014, given that no other vesting triggers occur prior to that date. To the extent that the market condition is not met, the Market Performance Award will not vest and will be cancelled. Since the market conditions will affect the vesting of the Market Performance Award, the Company cannot use the Black-Scholes option-pricing model to value the award; instead, a binomial model must be used. The Company utilized the Monte Carlo simulation technique, which incorporated assumptions for the expected holding period, risk-free interest rate, stock price volatility and dividend yield. Compensation expense is recognized ratably until such time as the market condition is satisfied.

There were no restricted stock awards granted, vested and forfeited for the six months ended June 29, 2013.

Stock Repurchase Program

In May 2011, the Company approved a stock repurchase program authorizing the Company to purchase in open market or privately negotiated transactions, up to $2.0 million worth of our common stock, from time to time during the next 12 months. In February 2012, the Company approved an extension of its stock repurchase program authorizing the Company to purchase up to $4.0 million worth of our common stock, from time to time prior to March 2013. In February 2013, the Board of Directors approved a new one year $3.0 million stock repurchase program that replaced the prior two year $4.0 million stock repurchase program. For the six months ended June 29, 2013, the Company has purchased 16,904 shares at an average price of $4.50 per share. As of June 29, 2013, the Company still has the authorization to purchase up to $2.9 million in common shares under the stock repurchase program. See Item 2, Unregistered Sales of Equity Securities and Use of Proceeds in Part II, Other Information, for additional information.

   

 

 

 13 

   


Preferred Stock Conversion

On June 11, 2013, all outstanding shares of the Company’s Series A Preferred Stock automatically converted into 1,000,000 shares of common stock. The Series A Preferred shares were issued to BlueLine Capital Partners LP and affiliated entities as part of a private placement in 2007. The Certificate of Designation authorizing the Series A Preferred shares provided for their automatic conversion into common stock in the event that IRIDEX common stock traded above $5.00 per share for 30 consecutive trading days.

   

7. Income Taxes

Provision for Income Tax

The Company calculates its interim tax provision in accordance with the provisions of ASC topic–740-270, “Income Taxes; Interim Reporting”. For interim periods, the Company estimates its annual effective income tax rate and applies the estimated rate to the year-to-date income or loss before income taxes. The Company also computes the tax provision or benefit related to items reported separately and recognizes the items net of their related tax effect in the interim periods in which they occur. The Company also recognizes the effect of changes in enacted tax laws or rates in the interim periods in which the changes occur.  The Company recorded a provision for income tax of $8 thousand for the six months ended June 29, 2013 and $7 thousand for the six months ended June 30, 2012.    

Deferred Income Taxes

The Company accounts for income taxes in accordance with ASC topic 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. 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 assets will not be realized. As of December 29, 2012, the Company had a deferred tax asset of approximately $10.1 million which is fully offset by a valuation allowance.  If realized, the asset will be reflected on the Company’s balance sheet and the reversal of the corresponding valuation allowance will result in a tax benefit being recorded in the statement of operations in the respective period.

The American Taxpayer Relief Act of 2012 was enacted on January 2, 2012. The Act reinstated the research and development credit retroactively to January 1, 2012 and extended it through 2013.  

Uncertain Tax Positions

The Company accounts for its uncertain tax positions in accordance with ASC 740. As of December 29, 2012, the Company had $1.0 million of unrecognized tax benefits which would impact the income statement if recognized.   

The Company is not aware of any other uncertain tax positions that could result in significant additional payments, accruals, or other material deviation in this estimate during the fiscal year.   

The Company files U.S. federal and state returns, as well as foreign returns in France. The tax years 2007 to 2012 remain open in several jurisdictions, none of which have individual significance.

   

   

8. Computation of Basic and Diluted Net Income (Loss) Per Common Share

Basic net income per share is computed by dividing net income for the period by the weighted average number of shares outstanding during the period.

Diluted net income per share is computed as follows:

In periods of net income from continuing operations, diluted net income per share is computed by dividing net income for the period by the weighted average number of shares, plus the weighted average common stock equivalents outstanding during the period, which includes 1,000,000 shares of common stock issuable upon conversion of 500,000 shares of convertible Series A Preferred Stock. In June 2013, the Series A Preferred Stock was converted into 1,000,000 shares of common stock. The Company excludes options from the computation of diluted weighted average shares outstanding if the exercise price of the options is greater than the average market price of the shares because the inclusion of these options would be anti-dilutive to earnings per share. Accordingly, for the three months ended June 29, 2013 and June 30, 2012, respectively, stock options to purchase 539,230 and 921,241 shares were excluded from the computation of diluted weighted average shares outstanding. For the six months ended June 29, 2013 and June 30, 2012, respectively, stock options to purchase 574,656 and 880,371 shares were excluded from the computation of diluted weighted average shares outstanding.

In periods of net loss from continuing operations, the basic and diluted weighted average shares of common stock and common stock equivalents are the same because inclusion of common stock equivalents would be anti-dilutive.

 

 

 14 

   


A reconciliation of the numerator and denominator of basic and diluted net income (loss) per common share is provided as follows :

   

 

   

Three Months Ended

   

   

Six Months Ended

   

(in thousands, except per share amounts) 

June 29,
2013

   

      

June 30,
2012

   

   

June 29,
2013

   

      

June 30,
2012

   

Numerator:

   

   

   

      

   

   

   

   

   

   

   

      

   

   

   

Income from continuing operations

$

415

      

      

$

397

      

   

$

1,289

      

      

$

132

      

Income (loss) from discontinued operations

      

0

      

      

   

(61

   

      

0

      

      

   

1,809

      

Net income

$

415

      

      

$

336

      

   

$

1,289

      

      

$

1,941

      

   

   

   

   

      

   

   

   

   

   

   

   

      

   

   

   

Denominator:

   

   

   

      

   

   

   

   

   

   

   

      

   

   

   

Weighted average shares of common stock (basic)

   

8,824

   

      

   

8,983

      

   

   

8,668

   

      

   

8,958

      

Effect of dilutive preferred shares

   

792

   

      

   

1,000

      

   

   

895

   

      

   

1,000

      

Effect of dilutive stock options

   

273

   

      

   

262

      

   

   

267

   

      

   

277

      

Effect of dilutive contingent shares

      

116

      

      

   

41

      

   

      

73

      

      

   

35

      

Weighted average shares of common stock (diluted)

      

10,005

      

      

   

10,286

      

   

      

9,903

      

      

   

10,270

      

   

   

   

   

      

   

   

   

   

   

   

   

      

   

   

   

Per share data:

   

   

   

      

   

   

   

   

   

   

   

      

   

   

   

Basic income per share:

   

   

   

      

   

   

   

   

   

   

   

      

   

   

   

Income before discontinued operations

$

0.05

      

      

$

0.04

      

   

$

0.15

      

      

$

0.01

      

Discontinued operations

      

0.00

      

      

   

0.00

      

   

      

0.00

      

      

   

0.21

      

Net income

$

0.05

      

      

$

0.04

      

   

$

0.15

      

      

$

0.22

      

   

   

   

   

      

   

   

   

   

   

   

   

      

   

   

   

Diluted income (loss) per share:

   

   

   

      

   

   

   

   

   

   

   

      

   

   

   

Income before discontinued operations

   

0.04

   

      

   

0.04

      

   

   

0.13

   

      

   

0.01

      

Discontinued operations

      

0.00

      

      

   

(0.01

   

      

0.00

      

      

   

0.18

      

Net income

$

0.04

      

      

$

0.03

      

   

$

0.13

      

      

$

0.19

      

   

   

9. Business Segments

The Company operates in one segment, ophthalmology. The Company develops, manufactures and markets medical devices. Our revenues arise from the sale of consoles, delivery devices, consumables, service and support activities.

Revenue information shown by geographic region, based on the location at which each sale originates, is as follows:

   

 

   

Three Months Ended

   

   

Six Months Ended

   

(in thousands)

June 29,

2013

   

   

June 30,

2012

   

   

June 29,

2013

   

   

June 30,

2012

   

United States

$

4,962

   

   

$

4,442

   

   

$

9,171

   

   

$

8,664

      

Europe

   

1,628

   

   

   

1,932

   

   

   

3,601

   

   

   

3,777

      

Rest of Americas

   

941

   

   

   

626

   

   

   

1,791

   

   

   

1,328

      

Asia/Pacific Rim

   

1,679

   

   

   

1,445

   

   

   

3,586

   

   

   

2,981

      

   

$

9,210

   

   

$

8,445

   

   

$

18,149

   

   

$

16,750

      

Revenues are attributed to countries based on location of end customers. No individual country accounted for more than 10% of the Company’s sales for the three and six month periods, except for the United States, which accounted for 53.9% and 52.6% of sales for the three month periods ended June 29, 2013 and June 30, 2012, respectively. For the six month periods ended June 29, 2013 and June 30, 2012, it accounted for 50.5% and 51.7% of sales, respectively.

No one customer accounted for more than 10% of total revenues for the three and six month periods ended June 29, 2013 and June 30, 2012, respectively.

   

10. Subsequent Events

The Company has evaluated subsequent events and has concluded that no additional subsequent events that require disclosure in the financial statements have occurred since the quarter ended June 29, 2013.

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q contains trend analysis and other forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, such as statements relating to levels of future sales and spending; long term growth; market acceptance and adoption of our products; operating results; license revenue; gross margins; managing cash flows; general economic conditions and levels of international sales; corporate strategy; effects of seasonality; FDA inspections; our current and future liquidity and capital requirements; and levels of future investment in research and development efforts. In some cases, forward-looking statements can be identified by terminology, such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential,” “continue,” or the negative of such terms or other comparable terminology. These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to differ materially from those expressed or implied by such forward-looking statements, including as a result of the factors set forth under “Factors That May Affect Future Operating Results” and other risks detailed in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 28, 2013 and detailed from time to time in our reports filed with the Securities and Exchange Commission. 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 quarterly report on Form 10-Q. We undertake no obligation to update such forward-looking statements to reflect events or circumstances occurring after the date of this report.

Overview

IRIDEX Corporation is a leading worldwide provider of therapeutic based laser systems, delivery devices and consumable instrumentation used to treat sight-threatening eye diseases in ophthalmology. Our ophthalmology products are sold in the United States predominantly through  direct and independent sales forces and internationally through approximately 70 independent distributors into over 100 countries.

We manage and evaluate our business in one segment—ophthalmology. We break down this segment by geography—Domestic (U.S.) and International (the rest of the world). In addition, we review trends by laser system sales (consoles and durable delivery devices) and recurring sales (single use consumable laser probes and other associated instrumentation (“consumables”), service and support).

Our ophthalmology revenues arise primarily from the sale of our IQ and OcuLight laser systems, consumables and service and support activities. Our current family of IQ products includes IQ 532, IQ 577 and IQ 810 laser photocoagulation systems and our OcuLight products include OcuLight TX, OcuLight Symphony (Laser Delivery System), OcuLight SL, OcuLight SLx, OcuLight GL and OcuLight GLx laser photocoagulation systems. Certain of our laser systems are capable of performing our patented Fovea-Friendly MicroPulse laser photocoagulation as well as conventional continuous wavelength photocoagulation. Towards the end of 2012, we introduced the TxCell Scanning Laser Delivery System which saves significant time in a variety of laser photocoagulation procedures by allowing physicians to deliver the laser in a multi-spot scanning mode, a more efficient method for these procedures than the traditional single spot mode. The majority of our recurring revenues come from the sale of laser probes and our current family of laser probes includes a wide variety of products in 20, 23 and 25 gauge for vitreoretinal surgery and glaucoma surgery.

In March 2013, the Company entered into a global distribution and supply agreement with Peregrine Surgical Ltd. (“Peregrine”) which commenced on April 1, 2013. Under the agreement, IRIDEX became a worldwide distributor for Peregrine labeled products and Peregrine became part of the IRIDEX supply chain. In addition, IRIDEX assumed responsibility for the independent sales force consisting of 10 representatives who sell the Peregrine products domestically. The Peregrine products consist of laser probes and other associated instrumentation and are a logical fit within our existing product portfolio. The ultimate objective is to have all of our channels both domestically and internationally sell both IRIDEX and Peregrine labeled consumable products.

Sales to international distributors are made on open credit terms or letters of credit and are currently denominated in U.S. dollars and accordingly, are not subject to risks associated with currency fluctuations.

Cost of revenues consists primarily of the cost of purchasing 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.

 

 

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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

The following table sets forth certain operating data as a percentage of revenues:

   

 

   

      

Three Months Ended

   

   

Six Months Ended

   

   

      

June 30,

2012

   

   

June 30,

2012

   

   

June 30,

2012

   

   

June 30,

2012

   

Revenues

      

   

100.0

   

   

100.0

   

   

100.0

   

   

100.0

Cost of revenues

      

   

51.3

   

   

51.3

   

   

52.0

   

   

51.7

Gross margin

      

   

48.7

   

   

48.7

   

   

48.0

   

   

48.3

Operating expenses:

      

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Research and development

      

   

9.6

   

   

13.1

   

   

10.4

   

   

13.6

Sales and marketing

      

   

20.1

   

   

25.1

   

   

19.1

   

   

23.8

General and administrative

      

   

13.4

   

   

14.6