##### Table of Contents



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 30, 2007
 Or
 o
    
    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
(State or other jurisdiction of 
incorporation or organization)
    
    77-0210467
(I.R.S. Employer
Identification Number)1212 Terra Bella Avenue 
Mountain View, California
(Address of principal executive offices)
    
    94043-1824
(Zip Code)
 Registrants telephone number, including area code: (650) 940-4700
 o þ
  o o þ
 o þ




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##### 



TABLE OF CONTENTS
 Items
    
    PagePART I FINANCIAL INFORMATIONItem 1. Condensed Consolidated Financial Statements (unaudited)
    
    
    1Condensed Consolidated Balance Sheets
    
    
    1Condensed Consolidated Statements of Operations
    
    
    2Condensed Consolidated Statements of Cash Flows
    
    
    3Condensed Consolidated Statements of Comprehensive Loss
    
    
    4Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    24Item 4T. Controls and Procedures
    
    
    24PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    27Item 1A. Risk Factors
    
    
    27Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    48Item 3. Defaults Upon Senior Securities
    
    
    48Item 4.
Submission of Matters to a Vote Security Holder
    
    
    48Item 5. Other Information
    
    
    49Item 6. Exhibits
    
    
    49SignatureEXHIBIT 10.1EXHIBIT 10.7EXHIBIT 10.8EXHIBIT 31.1EXHIBIT 32.1




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##### Table of Contents



PART I FINANCIAL INFORMATION
 
 Item 1. Condensed Consolidated Financial Statements (unaudited)
 IRIDEX
Corporation
 
 Condensed Consolidated Balance Sheets
(in thousands)
 June 30,
    
    
    December 30,2007 (1)
    
    

2006 (2)AssetsCurrent assets:Cash and cash equivalents
    
    $
    3,551
    
    
    $
    21,051Restricted cash
    
    
    3,800
    
    
    
    Accounts receivable, net
    
    
    10,208
    
    
    
    6,052Inventories
    
    
    13,973
    
    
    
    9,499Prepaids and other current assets
    
    
    4,152
    
    
    
    1,264Total current assets
    
    $
    35,684
    
    
    $
    37,866Property and equipment, net
    
    
    1,836
    
    
    
    1,087Goodwill
    
    
    9,903
    
    
    
    Other intangible assets, net
    
    
    15,250
    
    
    
    Other long term assets
    
    
    294
    
    
    
    1,224Total assets
    
    $
    62,967
    
    
    $
    40,177Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    6,075
    
    
    $
    1,830Short term debt
    
    
    3,863
    
    
    
    Accrued compensation
    
    
    2,244
    
    
    
    1,517Accrued expenses
    
    
    8,251
    
    
    
    2,392Accrued warranty
    
    
    2,335
    
    
    
    866Deferred revenue
    
    
    4,239
    
    
    
    1,415Current portion of long term debt
    
    
    5,508
    
    
    
    Total current liabilities
    
    $
    32,515
    
    
    $
    8,020Commitments and contingenciesStockholders equity:Common stock
    
    
    83
    
    
    
    79Additional paid-in capital
    
    
    33,273
    
    
    
    29,697Accumulated other comprehensive loss
    
    
    (22
    )
    
    
    Treasury stock
    
    
    (430
    )
    
    
    (430
    )(Accumulated deficit) retained earnings
    
    
    (2,452
    )
    
    
    2,811Total stockholders equity
    
    
    30,452
    
    
    
    32,157Total liabilities and stockholders equity
    
    $
    62,967
    
    
    $
    40,177
 
 (1)
    
    Unaudited(2)
    
    Derived from the consolidated audited financial statements included in our report filed on
Form 10-K with the SEC for the year ended December 30, 2006.  -1-




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IRIDEX Corporation
 
 Condensed Consolidated Statements of Operations
(Unaudited, in thousands except per share data)
 Three Months Ended
    
    
    Six months endedJune 30,
    
    
    July 1,
    
    
    June 30,
    
    
    July 1,2007
    
    
    2006
    
    
    2007
    
    
    2006Sales
    
    $
    15,249
    
    
    $
    8,804
    
    
    $
    27,815
    
    
    $
    17,647Cost of sales
    
    
    8,665
    
    
    
    4,145
    
    
    
    16,023
    
    
    
    8,726Gross profit
    
    
    6,584
    
    
    
    4,659
    
    
    
    11,792
    
    
    
    8,921Operating expenses:Research and development
    
    
    1,588
    
    
    
    1,328
    
    
    
    3,317
    
    
    
    2,449Selling, general and administrative
    
    
    7,546
    
    
    
    3,864
    
    
    
    15,820
    
    
    
    7,796Total operating expenses
    
    
    9,134
    
    
    
    5,192
    
    
    
    19,137
    
    
    
    10,245Loss from operations
    
    
    (2,550
    )
    
    
    (533
    )
    
    
    (7,345
    )
    
    
    (1,324
    )Legal settlement
    
    
    2,500
    
    
    
    
    
    
    
    2,500
    
    
    
    Interest and other (expense) income, net
    
    
    (293
    )
    
    
    177
    
    
    
    (418
    )
    
    
    356Loss before income taxes
    
    
    (343
    )
    
    
    (356
    )
    
    
    (5,263
    )
    
    
    (968
    )Provision for (benefit from) income taxes
    
    
    
    
    
    
    (178
    )
    
    
    
    
    
    
    131Net loss
    
    $
    (343
    )
    
    $
    (534
    )
    
    $
    (5,263
    )
    
    $
    (837
    )Net loss per share  basic and diluted
    
    $
    (0.04
    )
    
    $
    (0.07
    )
    
    $
    (0.65
    )
    
    $
    (0.11
    )Shares used in computing net loss per share  basic and diluted
    
    
    8,196
    
    
    
    7,694
    
    
    
    8,138
    
    
    
    7,641
  -2-




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IRIDEX Corporation
 
 Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)
 Six months endedJune 30,
    
    
    July 1,2007
    
    
    2006Cash flows from operating activities:Net loss
    
    $
    (5,263
    )
    
    $
    (837
    )Adjustments to reconcile net loss to net cash (used
in) provided by operating activities:Depreciation and amortization
    
    
    1,803
    
    
    
    251Non-cash stock-based compensation
    
    
    740
    
    
    
    935Provision for doubtful accounts
    
    
    42
    
    
    
    68Provision for inventories
    
    
    432
    
    
    
    16Changes in operating assets and liabilities, net
of assets and liabilities acquired:Accounts receivable
    
    
    1,147
    
    
    
    486Inventories
    
    
    (2,169
    )
    
    
    (299
    )Prepaids and other current assets
    
    
    224
    
    
    
    108Other long term assets
    
    
    (41
    )
    
    
    (26
    )Accounts payable
    
    
    4,243
    
    
    
    262Accrued warranty
    
    
    (302
    )
    
    
    Accrued expenses
    
    
    (813
    )
    
    
    (1,115
    )Deferred revenue
    
    
    938
    
    
    
    152Net cash provided by operating activities
    
    $
    981
    
    
    $
    1Cash flows from investing activities:Purchases of available-for-sale securities
    
    $
    
    
    
    $
    (18,519
    )Proceeds from maturity of available-for-sale securities
    
    
    
    
    
    
    8,778Purchases of property and equipment
    
    
    (502
    )
    
    
    (185
    )Purchases of intangible
    
    
    (170
    )
    
    
    Restricted cash
    
    
    (3,800
    )
    
    
    Cash from acquisition owing to seller
    
    
    4,021
    
    
    
    Acquisition of business
    
    
    (28,152
    )
    
    
    Net cash used in investing activities
    
    $
    (28,603
    )
    
 $
    (9,926
    )Cash flows from financing activities:Proceeds from issuance of common stock
    
    $
    827
    
    
    $
    1,008Proceeds of credit facility, net of issuance costs
    
    
    11,900
    
    
    
    Repayment of credit facility
    
    
    (2,629
    )
    
    
    Net cash provided by financing activities
    
    $
    10,098
    
    
    $
    1,008Effect of foreign exchange rate changes
    
    $
    24
    
    
    $
    Net decrease in cash and cash equivalents
    
    
    (17,500
    )
    
    
    (8,917
    )Cash and cash equivalents at beginning of period
    
    $
    21,051
    
    
    $
    12,655Cash and cash equivalents at end of period
    
    $
    3,551
    
    
    $
    3,738
  -3-




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IRIDEX Corporation
 
 Condensed Consolidated Statements of Comprehensive Loss
(Unaudited, in thousands)
 Three months ended
    
    
    Six months endedJune 30,
    
    
    July 1,
    
    
    June 30,
    
    
    July 1,2007
    
    
    2006
    
    
    2007
    
    
    2006Net loss
    
    $
    (343
    )
    
    $
    (534
    )
    
    $
    (5,263
    )
    
    $
    (837
    )Other comprehensive loss:Change in unrealized loss on available for sale securities, net of tax
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    14Foreign currency translation adjustments
    
    
    (13
    )
    
    
    
    
    
    
    (22
    )
    
    
    Comprehensive loss
    
    $
    (356
    )
    
    $
    (529
    )
    
    $
    (5,285
    )
    
    $
    (823
    )
  -4-




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IRIDEX Corporation
 
 Notes to Unaudited Condensed Consolidated Financial Statements
 1.
    
    Basis of Presentation
    -5-




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2.
    
    Summary of Significant Accounting Policies
  Revenue Recognition
   Valuation of Goodwill and Intangible Assets
   -6-




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Deferred Revenue
  Six Months EndedJune 30,
    
    
    July 1,(in thousands)
    
    2007
    
    
    2006Balance, beginning of period
    
    $
    1,415
    
    
    $
    1,072Additions to deferral through acquisition
    
    
    1,870
    
    
    
    Additions to deferral
    
    
    4,153
    
    
    
    822Revenue recognized
    
    
    (3,199
    )
    
    
    (670
    )Balance, end of period
    
    $
    4,239
    
    
    $
    1,224
 Warranty
  Six Months EndedJune 30,
    
    
    July 1,(in thousands)
    
    2007
    
    
    2006Balance, beginning of period
    
    $
    866
    
    
    $
    1,128Warranty accrual acquired through acquisition
    
    
    1,771
    
    
    
    Accruals for warranties issued during the period
    
    
    497
    
    
    
    335Settlements made in kind during the period
    
    
    (799
    )
    
    
    (534
    )Balance, end of period
    
    $
    2,335
    
    
    $
    929
 -7-




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Accounting for Uncertainty in Income Taxes
  3.
    
    Business Combination
   (in thousands)Cash paid on closing
    
    $
    26,000Issuance of common stock
    
    
    2,014Post closing adjustment to purchase price
    
    
    (2,766
    )Acquisition costs
    
    
    3,219Total purchase price
    
    $
    28,467
   -8-




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(in thousands)Accounts Receivable
    
    $
    5,309Finished Goods Inventory
    
    $
    2,691Other current assets
    
    $
    311Property and equipment
    
    $
    681Intangible assets
    
    $
    16,447Deferred Revenue
    
    $
    (1,870
    )Accrued Warranty
    
    $
    (1,771
    )Accrued Liabilities
    
    $
    (3,234
    )Fair value of net assets acquired
    
    $
    18,564Goodwill
    
    $
    9,903Total purchase price
    
    $
    28,467
   Gross
    
    
    
    
    
    
    Net,Useful
    
    
    Annual
    
    
    Carrying
    
    
    Accumulated
    
    
    CarryingIntangible Asset Acquired
    
    Lives
    
    
    Amortization
    
    
    Value
    
    
    Amortization
    
    
    ValueGemini Handset  Core Technology
    
    10 Years
    
    $
    299
    
    
    $
    2,995
    
    
    $
    136
    
    
    $
    2,859Gemini  Current Technology
    
    4 Years
    
    
    1,282
    
    
    
    5,129
    
    
    
    581
    
    
    
    4,548Other Products  Current
Technology
    
    1 Year
    
    
    341
    
    
    
    341
    
    
    
    154
    
    
    
    187Accessories  Current Technology
    
    4 Years
    
    
    15
    
    
    
    62
    
    
    
    7
    
    
    
    55Services  Contractual Customer
Relationships
    
    10 Years
    
    
    532
    
    
    
    5,318
    
    
    
    241
    
    
    
    5,077Contractual Distribution
Agreement
    
    5 Years
    
    
    370
    
    
    
    1,848
    
    
    
    167
    
    
    
    1,681Trade Name
    
    5 Years
    
    
    151
    
    
    
    754
    
    
    
    68
    
    
    
    686Other
    
    3  Years
    
    
    57
    
    
    
    170
    
    
    
    13
    
    
    
    157$
    3,047
    
    
    $
    16,617
    
    
    $
    1,367
    
    
    $
    15,250
 -9-




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(in thousands)2007
    
    $
    2,8932008
    
    $
    2,7232009
    
    $
    2,7062010
    
    $
    2,6622011
    
    $
    1,413Thereafter
    
    $
    4,221Total
    
    $
    16,617
   4.
    
    Bank Borrowings
  -10-




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5.
    
    Inventories
  -11-




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June 30,
    
    
    December(in thousands)
    
    2007
    
    
    30, 2006Raw materials and work in progress
    
    $
    6,244
    
    
    $
    4,000Finished goods
    
    
    7,729
    
    
    
    5,499Total inventories
    
    $
    13,973
    
    
    $
    9,499
 6.
    
    Contingencies
    7.
    
    Computations of Net Loss Per Common Share
  -12-




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8. Business Segments
   Three Months Ended June 30, 2007
    
    Three Months Ended July 1, 2006Ophthalmology
    
    Aesthetics
    
    
    
    
    
    Ophthalmology
    
    AestheticsMedical
    
    Medical
    
    
    
    
    
    Medical
    
    Medical(in thousands)
    
    Devices
    
    Devices
    
    Total
    
    Devices
    
    Devices
    
    TotalSales
    
    $
    8,389
    
    
    $
    6,860
    
    
    $
    15,249
    
    
    $
    7,681
    
    
    $
    1,123
    
    
    $
    8,804Direct cost of goods sold
    
    
    2,365
    
    
    
    3,876
    
    
    
    6,241
    
    
    
    2,213
    
    
    
    475
    
    
    
    2,688Direct gross margin
    
    
    6,024
    
    
    
    2,984
    
    
    
    9,008
    
    
    
    5,468
    
    
    
    648
    
    
    
    6,116Total unallocated
indirect costs
    
    
    
    
    
    
    
    
    
    
    (9,351
    )
    
    
    
    
    
    
    
    
    
    
    (6,472
    )Pre-tax income (loss)
    
    
    
    
    
    
    
    
    
    $
    (343
    )
    
    
    
    
    
    
    
    
    
    $
    (356
    )
 Six Months Ended June 30, 2007
    
    Six Months Ended July 1, 2006Ophthalmology
    
    Aesthetics
    
    
    
    
    
    Ophthalmology
    
    AestheticsMedical
    
    Medical
    
    
    
    
    
    Medical
    
    MedicalDevices
    
    Devices
    
    Total
    
    Devices
    
    Devices
    
    TotalSales
    
    $
    15,578
    
    
    $
    12,237
    
    
    $
    27,815
    
    
    $
    15,221
    
    
    $
    2,426
    
    
    $
    17,647Direct cost of goods sold
    
    
    4,509
    
    
    
    6,749
    
    
    
    11,258
    
    
    
    4,742
    
    
    
    1,158
    
    
    
    5,900Direct gross margin
    
    
    11,069
    
    
    
    5,488
    
    
    
    16,557
    
    
    
    10,479
    
    
    
    1,268
    
    
    
    11,747Total unallocated
indirect costs
    
    
    
    
    
    
    
    
    
    
    (21,820
    )
    
    
    
    
    
    
    
    
    
    
    (12,715
    )Pre-tax income (loss)
    
    
    
    
    
    
    
    
    
    $
    (5,263
    )
    
    
    
    
    
    
    
    
    
    $
    (968
    )
 -13-




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9.
    
    Stock-based Compensation
 Stand-Alone Options
   Three months ended
    
    
    Six months endedJune 30,
    
    
    July 1,
    
    
    June 30,
    
    
    July 1,(in thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Cost of sales
    
    $
    44
    
    
    $
    31
    
    
    $
    70
    
    
    $
    67Research and development
    
    
    50
    
    
    
    73
    
    
    
    112
    
    
    
    121Sales, general and administrative
    
    
    290
    
    
    
    374
    
    
    
    558
    
    
    
    747$
    384
    
    
    $
    478
    
    
    $
    740
    
    
    $
    935
 10.
    
    Subsequent Events
 AMS Settlement
   -14-




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11.
    
    Recent Accounting Pronouncements
  -15-




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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 operating results; broadening our product line through product innovation;: market
acceptance of our products; expectations for future sales growth, generally, including expectations
of additional sales from our new products and new applications of our existing products; our
ability to integrate the newly acquired aesthetics business into our core business successfully and
in a timely manner; the potential for production cost decreases and higher gross margins; our
ability to develop and introduce new products through strategic alliances; our ability to reduce
spending, including a reduction in the use of contractors and consultants ; levels of interest
income and expense; general economic conditions; levels of international sales and our current
liquidity, ability to obtain additional financing and impact of concern regarding our ability to
continue as a going concern; the potential to record an impairment charge to goodwill and
intangible assets and effects of recent accounting pronouncements on our financial position. 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 30, 2007 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
    -16-




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Resignation of CFO
  Results of Operations
  Three Months Ended
    
    
    Six Months endedJune 30,
    
    
    July 1,
    
    
    June 30,
    
    
    July 1,2007
    
    
    2006
    
    
    2007
    
    
    2006Sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    56.8
    %
    
    
    47.1
    %
    
    
    57.6
    %
    
    
    49.4
    %Gross profit
    
    
    43.2
    %
    
    
    52.9
    %
    
    
    42.4
    %
    
    
    50.6
    %Operating expenses:Research and development
    
    
    10.4
    %
    
    
    15.1
    %
    
    
    11.9
    %
    
    
    13.9
    %Sales, general and administrative
    
    
    49.5
    %
    
    
    43.9
    %
    
    
    56.9
    %
    
    
    44.2
    %Total operating expenses
    
    
    59.9
    %
    
    
    59.0
    %
    
    
    68.8
    %
    
    
    58.1
    %Loss from operations
    
    
    (16.7
    )%
    
    
    (6.1
    )%
    
    
    (26.4
    )%
    
    
    (7.5
    )%Interest and other expense, net
    
    
    14.4
    %
    
    
    2.0
    %
    
    
    7.5
    %
    
    
    2.0
    %Loss before income taxes
    
    
    (2.3
    )%
    
    
    (4.1
    )%
    
    
    (18.9
    )%
    
    
    (5.5
    )%Benefit from income taxes
    
    
    0.0
    %
    
    
    (2.0
    )%
    
    
    0.0
    %
    
    
    0.8
    %Net loss
    
    
    (2.3
    )%
    
    
    (6.1
    )%
    
    
    (18.9
    )%
    
    
    (4.7
    )%
  Three Months Ended
    
    
    Six Months EndedJune 30, 2007
    
    
    July 1, 2006
    
    
    June 30, 2007
    
    
    July 1, 2006Percentage
    
    
    
    
    
    
    Percentage
    
    
    
    
    
    
    Percentage
    
    
    
    
    
    
    Percentageof total
    
    
    
    
    
    
    of total
    
    
    
    
    
    
    of total
    
    
    
    
    
    
    of total(dollars in thousands)
    
    Amount
    
    
    sales
    
    
    Amount
    
    
    sales
    
    
    Amount
    
    
    sales
    
    
    Amount
    
    
    salesDomestic
    
    $
    8,381
    
    
    
    55.0
    %
    
    $
    5,296
    
    
    
    60.2
    %
    
    $
    15,056
    
    
    
    54.1
    %
    
    $
    10,426
    
    
    
    59.1
    %International
    
    
    6,868
    
    
    
    45.0
    %
    
    
    3,508
    
    
    
    39.8
    %
    
    
    12,759
    
    
    
    45.9
    %
    
    
    7,221
    
    
    
    40.9
    %Total
    
    
    15,249
    
    
    
    100.0
    %
    
    
    8,804
    
    
    
    100.0
    %
    
    
    27,815
    
    
    
    100.0
    %
    
    
    17,647
    
    
    
    100.0
    %
 -17-




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Three Months Ended
    
    
    Six Months EndedJune 30, 2007
    
    
    July 1, 2006
    
    
    June 30, 2007
    
    
    July 1, 2006Percentage
    
    
    
    
    
    
    Percentage
    
    
    
    
    
    
    Percentage
    
    
    
    
    
    
    Percentageof total
    
    
    
    
    
    
    of total
    
    
    
    
    
    
    of total
    
    
    
    
    
    
    of total(dollars in thousands)
    
    Amount
    
    
    sales
    
    
    Amount
    
    
    sales
    
    
    Amount
    
    
    sales
    
    
    Amount
    
    
    salesOphthalmology:Domestic
    
    
    4,961
    
    
    
    32.5
    %
    
    
    4,544
    
    
    
    51.6
    %
    
    
    8,968
    
    
    
    32.2
    %
    
    
    8,637
    
    
    
    49.0
    %International
    
    
    3,428
    
    
    
    22.5
    %
    
    
    3,137
    
    
    
    35.6
    %
    
    
    6,610
    
    
    
    23.8
    %
    
    
    6,584
    
    
    
    37.3
    %Total
    
    
    8,389
    
    
    
    55.0
    %
    
    
    7,681
    
    
    
    87.2
    %
    
    
    15,578
    
    
    
    56.0
    %
    
    
    15,221
    
    
    
    86.3
    %Aesthetics:Domestic
    
    
    3,420
    
    
    
    22.4
    %
    
    
    753
    
    
    
    8.6
    %
    
    
    6,088
    
    
    
    21.9
    %
    
    
    1,789
    
    
    
    10.1
    %International
    
    
    3,440
    
    
    
    22.6
    %
    
    
    370
    
    
    
    4.2
    %
    
    
    6,149
    
    
    
    22.1
    %
    
    
    637
    
    
    
    3.6
    %Total
    
    $
    6,860
    
    
    
    45.0
    %
    
    $
    1,123
    
    
    
    12.8
    %
    
    $
    12,237
    
    
    
    44.0
    %
    
    $
    2,246
    
    
    
    13.7
    %
 Ophthalmology and Aesthetics Sales Overview:
    Ophthalmology Sales
  -18-




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Aesthetic Sales
   Gross Margin
   -19-




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Research and Development
   Selling, General and Administrative
   -20-




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Amortization of Purchased Intangibles
   Interest and Other (Expense) Income, Net.
  Income Taxes
  Liquidity and Capital Resources
  -21-




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
    
    a $1.1 million decrease in accounts receivable;
    
    a $2.2 million increase in inventory;
    
    a $4.2 million increase in accounts payable, and
    
    a $0.8 million increase in accrued expenses.
    -22-




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Recent
Accounting Pronouncements
  -23-




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Item 3. Quantitative and Qualitative Disclosure about Market Risk
 Quantitative Disclosures
  Interest Rate Risk
  Qualitative Disclosures
 Interest Rate Risk.
  Currency Rate Risk.
  
 Item 4T. Controls and Procedures
    -24-




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Plan for Remediation of Material Weaknesses




The remediation plan addresses the following corrective actions: 
    
    implementation of additional controls over the preparation and review of key spreadsheets;
    
    implementation of automated general ledger reports to replace existing key
spreadsheets where possible;
    
    implementation of additional review procedures;
    
    enhancement of the current capabilities of the finance function; and
    
    implementation of standard control and review procedures over our foreign subsidiaries.
   -25-




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-26-




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PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
    
 Item 1A. Risk Factors
 Factors That May Affect Future Results
  We Do Not Believe
 that Our Current Liquidity and Capital Resources Will Be Sufficient to Meet
Our Currently Planned Operating Requirements, Except for the Near Term and for a Period
Substantially Less Than 12 Months, and We May Not Be Able to Comply with the Restrictive Covenants
Contained in Our Loan Agreements with Mid-Peninsula Bank, Part of Greater Bay Bank N.A., and the
Export-Import Bank, Despite Recent Amendments to Such Loan Agreements.
  -27-




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We Have More Indebtedness and Fewer Liquid Resources After the Acquisition of the Aesthetics
Business of Laserscope, Which Could Adversely Affect Our Cash Flows and Business.
  
    
    require us to dedicate a substantial portion of our cash flow from operations to
payments on our debt, thereby reducing funds available for working capital, capital
expenditures, acquisitions and other purposes;
    
    making it more difficult for us to meet our payment and other obligations under our
outstanding debt;
    
    increase our vulnerability to, and limit our flexibility in planning for, adverse
economic and industry conditions;
    
    increase our sensitivity to interest rate increases on our indebtedness with variable
interest rates;
    
    result in an event of default if we fail to comply with the financial and other
restrictive covenants contained in our debt agreements, which event of default could result
in all of our debt becoming immediately due and payable;
    
    affect our credit rating;
    
    limit our ability to obtain additional financing to fund future working capital, capital
expenditures, additional acquisitions and other general corporate requirements;
    
    create competitive disadvantages compared to other companies with less indebtedness; and
    
    limit our ability to apply proceeds from an offering or asset sale to purposes other
than the repayment of debt.
 -29-




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Our Loan Agreements Contain Covenant Restrictions that May Limit Our Ability to Operate Our
Business and To Service Our Indebtedness, We Will Require a Significant Amount of Cash. Our
Ability to Generate Cash Flow Depends on Many Factors Beyond Our Control.
  Although We Expect that Our Acquisition of the Aesthetics Business of Laserscope Will Result
in Benefits to the Company, the Company May Not Realize Those Benefits Because of Integration and
Other Challenges.
  
    
    coordinating marketing functions;
    
    transferring of the manufacturing of the Laserscope products to the Company;
    
    unanticipated issues in integrating information, communications and other systems;
    
    unanticipated incompatibility of purchasing, logistics, marketing and administration methods;
    
    greater than anticipated liabilities;
 -30-




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
    
    retaining key employees, including members of our aesthetics sales force;
    
    consolidating corporate and administrative infrastructures;
    
    the diversion of managements attention from ongoing business concerns;
    
    coordinating our current product and process development efforts with those of the
Aesthetics Business in a way which permits us to bring future new products to the market in
a timely and cost-effective manner; and
    
    coordinating geographically separate organizations.
   Failure to Remediate the Material Weaknesses in Our Disclosure Controls and Procedures in a
Timely Manner, or at All, Could Harm Our Operating Results or Cause Us to Fail to Meet Our
Regulatory or Reporting Obligations
    The Requirements of Complying with the Sarbanes-Oxley Act of 2002 Might Strain Our Resources,
Which May Adversely Affect Our Business and Financial Condition.
  -31-




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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.
  
    
    acceptance of product performance, features, ease of use, scalability and durability;
    
    acceptance of the companys new marketing programs;
    
    recommendations and opinions by ophthalmologists, dermatologists, plastic surgeons,
other clinicians and their associated opinion leaders;
    
    clinical study outcomes;
    
    price of our products and prices of competing products and technologies;
    
    availability of competing products, technologies and alternative treatments; and
    
    level of reimbursement for treatments administered with our products.
  -32-




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If There is Not Sufficient Demand for the Procedures Performed with Our Products, Practitioner
Demand for Our Products Could be Inhibited, Resulting in Unfavorable Operating Results and Reduced
Growth Potential.
  
    
    evolving customer needs;
    
    the introduction of new products and technologies;
    
    evolving surgical practices;
    
    evolving industry standards;
    
    the cost of procedures performed using our products;
    
    the cost, safety and effectiveness of alternative treatments, including treatments which
are not based upon laser- or other light-based technologies and treatments which use
pharmaceutical products;
    
    the success of our sales and marketing efforts; and
    
    consumer confidence, which may be impacted by economic and political conditions.
  Our Future Success Depends on Our Ability to Develop and Successfully Introduce New Products
and New Applications.
  -33-




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While We Devote Significant Resources to Research and Development, Our Research and
Development May Not Lead to New Products that Achieve Commercial Success.
  We Face Strong Competition in Our Markets and Expect the Level of Competition to Grow in the
Foreseeable Future.
  If We Cannot Increase Our Sales Volumes, Reduce Our Costs or Introduce Higher Margin Products
to Offset Anticipated Reductions in the Average Unit Price of Our Products, Our Operating Results
May Suffer.
  -34-




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We Depend on Sales of Our Ophthalmology Products for a Significant Portion of Our Operating
Results.
  We Depend on International Sales for a Significant Portion of Our Operating Results.
  
    
    differing local product preferences and product requirements;
    
    cultural differences;
    
    changes in foreign medical reimbursement and coverage policies and programs;
    
    political and economic instability;
    
    impact of recessions in economies outside of the United States;
    
    difficulty in staffing and managing foreign operations;
    
    performance of our international distribution channels;
    
    foreign certification requirements, including continued ability to use the CE mark in Europe;
    
    reduced or limited protections of intellectual property rights in jurisdictions outside
the United States;
    
    longer accounts receivable collection periods;
    
    fluctuations in foreign currency exchange rates;
    
    potentially adverse tax consequences; and
    
    multiple protectionist, adverse and changing foreign governmental laws and regulations.
   -35-




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We Are Exposed to Risks Associated With Worldwide Economic Slowdowns and Related
Uncertainties.
  We Rely on Our Direct Sales Force and Network of International Distributors to Sell Our
Products and any Failure to Maintain Our Direct Sales Force and Distributor Relationships Could
Harm Our Business.
   If We Lose Key Personnel or Fail to Integrate Replacement Personnel Successfully, Our Ability
to Manage Our Business Could Be Impaired.
  -36-




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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 Depend on Sole Source or Limited Source Suppliers.
  
    
    unavailability of, shortages or limitations on the ability to obtain supplies of
components in the quantities that we require;
    
    delays in delivery or failure of suppliers to deliver critical components on the dates
we require;
 -37-




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
    
    failure of suppliers to manufacture components to our specifications, and potentially
reduced quality; and
    
    inability to obtain components at acceptable prices.
  We Face Risks Associated with our Collaborative and OEM Relationships.
  We Face Manufacturing Risks.
  -38-




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We Depend on Collaborative Relationships to Produce, Develop, Introduce and Market New
Products, Product Enhancements and New Applications.
  If We Fail to Maintain Our Relationships With Health Care Providers, Customers May Not Buy Our
Products and Our Revenue and Profitability May Decline.
  Our Operating Results May Fluctuate from Quarter to Quarter and Year to Year.
  
    
    general economic uncertainties and political concerns;
 -39-




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
    
    the timing of the introduction and market acceptance of new products, product
enhancements and new applications;
    
    changes in demand for our existing line of aesthetic and ophthalmic 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 between aesthetic and ophthalmic products and foreign
and domestic sales;
    
    our ability to address our current liquidity issues;
    
    the effect of regulatory approvals and changes in domestic and foreign regulatory requirements;
    
    introduction of new products, product enhancements and new applications by our
competitors, entry of new competitors into our markets, pricing pressures and other
competitive factors;
    
    our long and highly variable sales cycle;
    
    changes in the prices at which we can sell our products;
    
    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; and
    
    increased product innovation costs.
   -40-




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##### Table of Contents



Our Stock Price Has Been and May Continue to be Volatile and an Investment in Our Common Stock
Could Suffer a Decline in Value.
  Material Increases in Interest Rates May Harm Our Sales.
  We Are Subject To Government Regulation Which May Cause Us to Delay or Withdraw the
Introduction of New Products or New Applications for Our Products.
   -41-




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##### Table of Contents



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.
  If We Modify One of Our FDA Approved Devices, We May Need to Seek Reapproval, Which, if Not
Granted, Would Prevent Us from Selling Our Modified Products or Cause Us to Redesign Our Products.
  We Rely on Patents and Proprietary Rights to Protect our Intellectual Property and Business.
  -42-




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##### Table of Contents



Because We Do Not Require Training for Users of Our Products, and Sell Our Products to
Non-physicians, There Exists an Increased Potential for Misuse of Our Products, Which Could Harm
Our Reputation and Our Business.
  -43-




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##### Table of Contents



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.
   
    
    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.
  -44-




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##### Table of Contents



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.
  If We Fail to Manage Growth Effectively, Our Business Could Be Disrupted Which Could Harm Our
Operating Results.
  Our Manufacturing Capacity May Not Be Adequate to Meet the Demands of Our Business.
  If Product Liability Claims are Successfully Asserted Against Us, We may Incur Substantial
Liabilities That May Adversely Affect Our Business or Results of Operations.
  Our Operating Results May be Adversely Affected by Changes in Third Party Coverage and
Reimbursement Policies and any Uncertainty Regarding Healthcare Reform Measures.
  -45-




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The Successful Outcome of Clinical Trials and the Development of New Applications Using
Certain of Our Products will Accelerate Future Revenue Growth Rates.
  If Our Facilities Were To Experience Catastrophic Loss, Our Operations Would Be Seriously
Harmed.
  Our Business is Subject to Environmental Regulations.
   -46-




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Our Export Controls May Not be Adequate to Ensure Compliance With United States Export
Laws, Especially When We Sell Our Products to Distributors Over Which We Have Limited Control.
     -47-




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##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  FOR
    
    WITHHELDTheodore Boutacoff
    
    
    6,706,710
    
    
    
    560,791Barry Caldwell
    
    
    5,419,563
    
    
    
    1,847,938James Donovan
    
    
    6,490,260
    
    
    
    777,241Donald Hammond
    
    
    5,415,284
    
    
    
    1,852,217Garrett Garrettson
    
    
    6,154,814
    
    
    
    1,112,687Robert Anderson
    
    
    6,624,043
    
    
    
    643,458Sanford Fitch
    
    
    6,481,563
    
    
    
    786,326
  ABSTAIN
    
    FOR
    
    AGAINST
    
    NO-VOTE244,562
    
    
    3,392,813
    
    
    
    1,982,482
    
    
    
    1,647,698
  ABSTAIN
    
    FOR
    
    AGAINST4,000
    
    
    7,210,454
    
    
    
    53,047
 -48-




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##### Table of Contents



Item 5. Other Information
  
 Item 6. Exhibits
 10.1
    
    Settlement Agreement dated as of April 6, 2007 by and between
the Company and Synergetics, Inc. and Synergetics USA, Inc.10.2
    
    First Amendment dated as of April 19, 2007, to the Business Loan
and Security Agreement by and between the Company and
Mid-Peninsula Bank, part of Greater Bay Bank N.A. (which is
incorporated herein by reference to Exhibit 10.1 to the Current
Report on Form 8-K filed with the Commission on April 24, 2007).10.3
    
    Amendment dated as of April 19, 2007, to the Export-Import Bank
Loan and Security Agreement by and between the Company and
Mid-Peninsula Bank, part of Greater Bay Bank N.A. (which is
incorporated herein by reference to Exhibit 10.2 to the Current
Report on Form 8-K filed with the Commission on April 24, 2007).10.4
    
    Business Loan and Security Agreement by and between the Company
and Mid-Peninsula Bank, part of Greater Bay Bank N.A., dated
January 16, 2007 (which is incorporated herein by reference to
Exhibit 99.1 to the Current Report on Form 8-K filed with the
Commission on January 22, 2007).10.5
    
    Export-Import Bank Loan and Security Agreement by and between
the Company and Mid-Peninsula Bank, part of Greater Bay Bank
N.A., dated January 16, 2007 (which is incorporated herein by
reference to Exhibit 99.2 to the Current Report on Form 8-K
filed with the Commission on January 22, 2007).10.6
    
    Letter from Mid-Peninsula Bank, part of Greater Bay Bank N.A.,
to the Company, dated April 23, 2007 (which is incorporated
herein by reference to Exhibit 10.6 to the Current Report on
Form 8-K filed with the Commission on April 24, 2007).10.7
    
    IRIDEX Corporation 1998 Stock Plan, amended and restated as of
June 19, 2007.10.8
    
    Letter Agreement, dated as of June 27, 2007 by and between the
Company and Laserscope, a California corporation and
wholly-owned subsidiary of American Medical Systems, Inc.31.1
    
    Certification of Chief Executive Officer (Principal Executive
and Principal Financial Officer) pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer (Principal Executive
and Principal Financial Officer) pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
 -49-




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Trademark Acknowledgments
   IRIDEX Corporation
(Registrant)Date: August 14, 2007
    By:
    /s/ BARRY G. CALDWELLName:
    Barry G. CaldwellTitle:
    President and Chief Executive Officer
(Principal Executive and Principal Financial Officer) -50-




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Index
 10.1
    
    Settlement Agreement dated as of April 6, 2007 by and between the
Company and Synergetics, Inc. and Synergetics USA, Inc.10.2
    
    First Amendment dated as of April 19, 2007, to the Business Loan and
Security Agreement by and between the Company and Mid-Peninsula Bank,
part of Greater Bay Bank N.A. (which is incorporated herein by
reference to Exhibit 10.1 to the Current Report on Form 8-K filed
with the Commission on April 24, 2007).10.3
    
    Amendment dated as of April 19, 2007, to the Export-Import Bank Loan
and Security Agreement by and between the Company and Mid-Peninsula
Bank, part of Greater Bay Bank N.A. (which is incorporated herein by
reference to Exhibit 10.2 to the Current Report on Form 8-K filed
with the Commission on April 24, 2007).10.4
    
    Business Loan and Security Agreement by and between the Company and
Mid-Peninsula Bank, part of Greater Bay Bank N.A., dated January 16,
2007 (which is incorporated herein by reference to Exhibit 99.1 to
the Current Report on Form 8-K filed with the Commission on January
22, 2007).10.5
    
    Export-Import Bank Loan and Security Agreement by and between the
Company and Mid-Peninsula Bank, part of Greater Bay Bank N.A., dated
January 16, 2007 (which is incorporated herein by reference to
Exhibit 99.2 to the Current Report on Form 8-K filed with the
Commission on January 22, 2007).10.6
    
    Letter from Mid-Peninsula Bank, part of Greater Bay Bank N.A., to the
Company, dated April 23, 2007 (which is incorporated herein by
reference to Exhibit 10.6 to the Current Report on Form 8-K filed
with the Commission on April 24, 2007).10.7
    
    IRIDEX Corporation 1998 Stock Plan, amended and restated as of June
19, 2007.10.8
    
    Letter Agreement, dated as of June 27, 2007 by and between the
Company and Laserscope, a California corporation and wholly-owned
subsidiary of American Medical Systems, Inc.31.1
    
    Certification of Chief Executive Officer (Principal Executive and
Principal Financial Officer) pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer (Principal Executive and
Principal Financial Officer) pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.