##### 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 September 29, 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 AvenueMountain View, California
    
    94043-1824(Address of principal executive offices)
    
    (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
    
    3Notes to Unaudited Condensed Consolidated Financial Statements
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    12Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    20Item 4T. Controls and Procedures
    
    20PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    21Item 1A. Risk Factors
    
    22Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    37Item 3. Defaults Upon Senior Securities
    
    37Item 4. Submission of Matters to a Vote of Security Holders
    
    37Item 5. Other Information
    
    37Item 6. Exhibits
    
    38Signature
    
    39EXHIBIT 10.1EXHIBIT 10.2EXHIBIT 10.3EXHIBIT 10.4EXHIBIT 10.5EXHIBIT 10.6EXHIBIT 10.7EXHIBIT 10.9EXHIBIT 31.1EXHIBIT 32.1




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PART I FINANCIAL INFORMATION
 
 Item 1. Condensed Consolidated Financial Statements (unaudited)
 IRIDEX Corporation
 
 Condensed Consolidated Balance Sheets
 (in thousands)
 September 29,
    
    
    December 30,2007
    
    
    2006 (1)AssetsCurrent assets:Cash and cash equivalents
    
    $
    5,795
    
    
    $
    21,051Restricted cash
    
    
    3,800
    
    
    
    Accounts receivable, net
    
    
    8,516
    
    
    
    6,052Inventories
    
    
    13,250
    
    
    
    9,499Prepaids and other current assets
    
    
    2,053
    
    
    
    1,264Total current assets
    
    
    33,414
    
    
    
    37,866Property and equipment, net
    
    
    1,840
    
    
    
    1,087Goodwill
    
    
    10,509
    
    
    
    Other intangible assets, net
    
    
    14,488
    
    
    
    Other long term assets
    
    
    299
    
    
    
    1,224Total assets
    
    $
    60,550
    
    
    $
    40,177Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    3,552
    
    
    $
    1,830Bank line of credit
    
    
    5,110
    
    
    
    Accrued compensation
    
    
    1,540
    
    
    
    1,517Accrued expenses
    
    
    4,435
    
    
    
    2,392Accrued warranty
    
    
    2,182
    
    
    
    866Deferred revenue
    
    
    3,977
    
    
    
    1,415Bank term loan  current portion
    
    
    5,311
    
    
    
    Total current liabilities
    
    
    26,107
    
    
    
    8,020Commitments and contingenciesStockholders equity:Preferred stock
    
    
    5
    
    
    
    Common stock
    
    
    83
    
    
    
    79Additional paid-in capital
    
    
    38,500
    
    
    
    29,697Accumulated other comprehensive loss
    
    
    (25
    )
    
    
    Treasury stock, at cost
    
    
    (430
    )
    
    
    (430
    )(Accumulated deficit) retained earnings
    
    
    (3,690
    )
    
    
    2,811Total stockholders equity
    
    
    34,443
    
    
    
    32,157Total liabilities and stockholders equity
    
    $
    60,550
    
    
    $
    40,177
 
 (1)
    
    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
    
    
    Nine Months EndedSeptember 29,
    
    
    September 30,
    
    
    September 29,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Sales
    
    $
    13,575
    
    
    $
    9,222
    
    
    $
    41,390
    
    
    $
    26,869Cost of sales
    
    
    7,390
    
    
    
    4,350
    
    
    
    23,412
    
    
    
    13,076Gross profit
    
    
    6,185
    
    
    
    4,872
    
    
    
    17,978
    
    
    
    13,793Operating expenses:Research and development
    
    
    1,319
    
    
    
    1,506
    
    
    
    4,636
    
    
    
    3,955Selling, general and administrative
    
    
    5,920
    
    
    
    4,854
    
    
    
    21,740
    
    
    
    12,651Total operating expenses
    
    
    7,239
    
    
    
    6,360
    
    
    
    26,376
    
    
    
    16,606Loss from operations
    
    
    (1,054
    )
    
    
    (1,488
    )
    
    
    (8,398
    )
    
    
    (2,813
    )Legal settlement
    
    
    
    
    
    
    
    
    
    
    2,500
    
    
    
    Interest and other (expense) income, net
    
    
    (184
    )
    
    
    184
    
    
    
    (603
    )
    
    
    540Loss before income taxes
    
    
    (1,238
    )
    
    
    (1,304
    )
    
    
    (6,501
    )
    
    
    (2,273
    )Benefit from (provision for) income taxes
    
    
    
    
    
    
    161
    
    
    
    
    
    
    
    293Net loss
    
    $
    (1,238
    )
    
    $
    (1,143
    )
    
    $
    (6,501
    )
    
    $
    (1,980
    )Net loss per share  basic and diluted
    
    $
    (0.15
    )
    
    $
    (0.15
    )
    
    $
    (0.80
    )
    
    $
    (0.26
    )Shares used in computing net loss per
share  basic and diluted
    
    
    8,218
    
    
    
    7,758
    
    
    
    8,165
    
    
    
    7,680
  2




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IRIDEX Corporation
 
 Condensed Consolidated Statements of Cash Flows
 (Unaudited, in thousands)
 Nine Months EndedSeptember 29,
    
    
    September 30,2007
    
    
    2006Cash flows from operating activities:Net loss
    
    $
    (6,501
    )
    
    $
    (1,980
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    3,079
    
    
    
    390Non-cash stock-based compensation
    
    
    1,033
    
    
    
    1,360Provision for doubtful accounts
    
    
    1,412
    
    
    
    108Provision for inventories
    
    
    388
    
    
    
    51Changes in operating assets and liabilities, net of assets and liabilities acquired:Accounts receivable
    
    
    (3,875
    )
    
    
    108Inventories
    
    
    (4,140
    )
    
    
    14Prepaids and other current assets
    
    
    (789
    )
    
    
    246Other long term assets
    
    
    
    
    
    
    (106
    )Accounts payable
    
    
    1,722
    
    
    
    (1
    )Accrued warranty
    
    
    1,316
    
    
    
    Accrued expenses
    
    
    2,066
    
    
    
    (721
    )Deferred revenue
    
    
    2,562
    
    
    
    256Net cash provided by operating activities
    
    
    (1,727
    )
    
    
    (275
    )Cash flows from investing activities:Purchases of available-for-sale securities
    
    
    
    
    
    
    (17,651
    )Proceeds from maturity of available-for-sale securities
    
    
    
    
    
    
    8,804Purchases of property and equipment
    
    
    (1,702
    )
    
    
    (358
    )Purchases of intangible
    
    
    (16,618
    )
    
    
    Goodwill
    
    
    (10,509
    )
    
    
    Other Assets
    
    
    924
    
    
    
    Net cash used in investing activities
    
    
    (27,905
    )
    
    
    (9,205
    )Cash flows from financing activities:Proceeds from issuance of common stock
    
    
    2,889
    
    
    
    1,264Proceeds from issuance of preferred stock
    
    
    4,890
    
    
    
    Proceeds of credit facility, net of repayment
    
    
    10,421
    
    
    
    Restricted Cash
    
    
    (3,800
    )
    
    
    Net cash provided by financing activities
    
    
    14,400
    
    
    
    1,264Effect of foreign exchange rate changes
    
    
    (24
    )
    
    
    Net decrease in cash and cash equivalents
    
    
    (15,256
    )
    
    
    (8,216
    )Cash and cash equivalents at beginning of period
    
    
    21,051
    
    
    
    12,655Cash and cash equivalents at end of period
    
    $
    5,795
    
    
    $
    4,439
  3




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IRIDEX Corporation
 
 Notes to Unaudited Condensed Consolidated Financial Statements
 1. Basis of Presentation
     2. Summary of Significant Accounting Policies
  Revenue Recognition
  4




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Valuation of Goodwill and Intangible Assets
    Deferred Revenue
  Nine Months Ended(in thousands)
    
    September 29, 2007Balance, beginning of period
    
    $
    1,415Additions to deferral through acquisition
    
    
    1,938Additions to deferral
    
    
    6,385Revenue recognized
    
    
    (5,761
    )Balance, end of period
    
    $
    3,977
 5




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Warranty
  Nine Months Ended(in thousands)
    
    September 29, 2007Balance, beginning of period
    
    $
    866Warranty accrual acquired through acquisition
    
    
    1,771Accruals for warranty expenses during the period
    
    
    (153
    )Warranty expenses charged to reserve during the period
    
    
    (302
    )Balance, end of period
    
    $
    2,182
 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
    
    
    3,359Total purchase price
    
    $
    28,607
   6




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##### Table of Contents



(in thousands)Accounts receivable
    
    $
    5,309Finished goods inventory
    
    
    2,879Other current assets
    
    
    311Property and equipment
    
    
    681Intangible assets
    
    
    16,447Deferred Revenue
    
    
    (1,938
    )Accrued Warranty
    
    
    (1,771
    )Accrued Liabilities
    
    
    (3,819
    )Fair value of net assets acquired
    
    
    18,099Goodwill
    
    
    10,508Total purchase price
    
    $
    28,607
   Gross
    
    
    
    
    
    
    Net,Useful
    
    
    Annual
    
    
    Carrying
    
    
    Accumulated
    
    
    CarryingIntangible Asset Acquired
    
    Lives
    
    
    Amortization
    
    
    Value
    
    
    Amortization
    
    
    ValueGemini Handset  Core Technology
    
    10 Years
    
    $
    299
    
    
    $
    2,995
    
    
    $
    210
    
    
    $
    2,785Gemini  Current Technology
    
    4 Years
    
    
    1,282
    
    
    
    5,129
    
    
    
    901
    
    
    
    4,228Other Products  Current Technology
    
    1 Year
    
    
    341
    
    
    
    341
    
    
    
    240
    
    
    
    101Accessories  Current Technology
    
    4 Years
    
    
    15
    
    
    
    62
    
    
    
    11
    
    
    
    51Services  Contractual Customer Relationships
    
    10 Years
    
    
    532
    
    
    
    5,318
    
    
    
    374
    
    
    
    4,945Contractual Distribution Agreement
    
    5 Years
    
    
    370
    
    
    
    1,848
    
    
    
    260
    
    
    
    1,588Trade Name
    
    5 Years
    
    
    151
    
    
    
    754
    
    
    
    106
    
    
    
    648$
    2,990
    
    
    $
    16,447
    
    
    $
    2,102
    
    
    $
    14,345
   7




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(in thousands)2007
    
    $
    2,8932008
    
    
    2,7232009
    
    
    2,7062010
    
    
    2,6622011
    
    
    1,413Thereafter
    
    
    4,050Total
    
    $
    16,447
   4. Bank Borrowings
    8




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5. Inventories
   September 29,
    
    
    December(in thousands)
    
    2007
    
    
    30, 2006Raw materials and work in progress
    
    $
    5,243
    
    
    $
    4,000Finished goods
    
    
    8,007
    
    
    
    5,499Total inventories
    
    $
    13,250
    
    
    $
    9,499
 6. Contingencies
    9




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7. Computations of Net Loss Per Common Share
    8. Business Segments
   Three Months Ended September 29, 2007
    
    
    Three Months Ended September 30, 2006Ophthalmology
    
    
    Aesthetics
    
    
    
    
    
    
    Ophthalmology
    
    
    AestheticsMedical
    
    
    Medical
    
    
    
    
    
    
    Medical
    
    
    Medical(in thousands)
    
    Devices
    
    
    Devices
    
    
    Total
    
    
    Devices
    
    
    Devices
    
    
    TotalSales
    
    $
    7,865
    
    
    $
    5,710
    
    
    $
    13,575
    
    
    $
    7,954
    
    
    $
    1,268
    
    
    $
    9,222Direct cost of goods sold
    
    
    2,481
    
    
    
    2,442
    
    
    
    4,923
    
    
    
    2,444
    
    
    
    560
    
    
    
    3,004Direct gross margin
    
    
    5,384
    
    
    
    3,268
    
    
    
    8,652
    
    
    
    5,510
    
    
    
    708
    
    
    
    6,218Total unallocated
indirect costs
    
    
    
    
    
    
    
    
    
    
    (9,890
    )
    
    
    
    
    
    
    
    
    
    
    (7,522
    )Pre-tax income (loss)
    
    
    
    
    
    
    
    
    
    $
    (1,238
    )
    
    
    
    
    
    
    
    
    
    $
    (1,304
    )
 Nine Months Ended September 29, 2007
    
    
    Nine Months Ended September 30, 2006Ophthalmology
    
    
    Aesthetics
    
    
    
    
    
    
    Ophthalmology
    
    
    AestheticsMedical
    
    
    Medical
    
    
    
    
    
    
    Medical
    
    
    MedicalDevices
    
    
    Devices
    
    
    Total
    
    
    Devices
    
    
    Devices
    
    
    TotalSales
    
    $
    23,443
    
    
    $
    17,947
    
    
    $
    41,390
    
    
    $
    23,175
    
    
    $
    3,694
    
    
    $
    26,869Direct cost of goods sold
    
    
    6,991
    
    
    
    9,153
    
    
    
    16,144
    
    
    
    7,186
    
    
    
    1,718
    
    
    
    8,904Direct gross margin
    
    
    16,452
    
    
    
    8,794
    
    
    
    25,246
    
    
    
    15,989
    
    
    
    1,976
    
    
    
    17,965Total unallocated
indirect costs
    
    
    
    
    
    
    
    
    
    
    (31,747
    )
    
    
    
    
    
    
    
    
    
    
    (20,238
    )Pre-tax income (loss)
    
    
    
    
    
    
    
    
    
    $
    (6,501
    )
    
    
    
    
    
    
    
    
    
    $
    (2,273
    )
   10




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9.
    
    Stock-based Compensation
 Stand-Alone Options
   Expected life
    
    4.5 yearsInterest rate
    
    
    4.5
    %Volatility rate
    
    
    0.59
  Three months ended
    
    
    Nine months endedSeptember 29,
    
    
    September 30,
    
    
    September 29,
    
    
    September 30,(in thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Cost of sales
    
    $
    36
    
    
    $
    28
    
    
    $
    105
    
    
    $
    95Research and development
    
    
    35
    
    
    
    67
    
    
    
    147
    
    
    
    188Sales, general and administrative
    
    
    222
    
    
    
    331
    
    
    
    781
    
    
    
    1,077$
    293
    
    
    $
    426
    
    
    $
    1,033
    
    
    $
    1,360
 10. Subsequent Events
 Appointment of Independent Registered Public Accounting Firm
  Resignation of CEO and Appointment of CEO
   11. AMS Settlement
  11




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12. Recent Accounting Pronouncements
  
 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
 12




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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;
expectations regarding our effective tax rate; continued receipt of payments from the Synergetics
Settlement; general economic conditions; levels of international sales and our current liquidity,
ability to obtain additional financing and impact of concern regarding our ability to generate
sufficient cash flow 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
      Resignation of CFO
  13




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Resignation of CEO and Appointment of CEO
   Results of Operations
  Three Months Ended
    
    Nine Months endedSeptember 29,
    
    September 30,
    
    September 29,
    
    September 30,2007
    
    2006
    
    2007
    
    2006Sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    54.4
    %
    
    
    47.2
    %
    
    
    56.6
    %
    
    
    48.7
    %Gross profit
    
    
    45.6
    %
    
    
    52.8
    %
    
    
    43.4
    %
    
    
    51.3
    %Operating expenses:Research and development
    
    
    9.7
    %
    
    
    16.3
    %
    
    
    11.2
    %
    
    
    14.7
    %Sales, general and administrative
    
    
    43.6
    %
    
    
    52.7
    %
    
    
    52.5
    %
    
    
    47.1
    %Total operating expenses
    
    
    53.3
    %
    
    
    69.0
    %
    
    
    63.7
    %
    
    
    61.8
    %Loss from operations
    
    
    (7.8
    )%
    
    
    (16.1
    )%
    
    
    (20.3
    )%
    
    
    (10.5
    )%Interest and other expense, net
    
    
    (1.3
    )%
    
    
    2.0
    %
    
    
    4.6
    %
    
    
    2.0
    %Loss before income taxes
    
    
    (9.1
    )%
    
    
    (14.1
    )%
    
    
    (15.7
    )%
    
    
    (8.5
    )%Benefit from income taxes
    
    
    0.0
    %
    
    
    (1.7
    )%
    
    
    0.0
    %
    
    
    1.1
    %Net loss
    
    
    (9.1
    )%
    
    
    (12.4
    )%
    
    
    (15.7
    )%
    
    
    (7.4
    )%
  Three Months Ended
    
    
    NineMonths EndedSeptember 29, 2007
    
    
    September 30, 2006
    
    
    September 29, 2007
    
    
    September 30, 2006Percentage
    
    
    
    
    
    
    Percentage
    
    
    
    
    
    
    Percentage
    
    
    
    
    
    
    Percentageof total
    
    
    
    
    
    
    of total
    
    
    
    
    
    
    of total
    
    
    
    
    
    
    of total(dollars in thousands)
    
    Amount
    
    
    sales
    
    
    Amount
    
    
    sales
    
    
    Amount
    
    
    sales
    
    
    Amount
    
    
    salesDomestic
    
    $
    7,200
    
    
    
    53.0
    %
    
    $
    5,699
    
    
    
    61.8
    %
    
    $
    22,256
    
    
    
    53.8
    %
    
    $
    16,126
    
    
    
    60.0
    %International
    
    
    6,375
    
    
    
    47.0
    %
    
    
    3,523
    
    
    
    38.2
    %
    
    
    19,134
    
    
    
    46.2
    %
    
    
    10,743
    
    
    
    40.0
    %Total
    
    $
    13,575
    
    
    
    100.0
    %
    
    $
    9,222
    
    
    
    100.0
    %
    
    $
    41,390
    
    
    
    100.0
    %
    
    $
    26,869
    
    
    
    100.0
    %
 Three Months Ended
    
    
    Nine Months EndedSeptember 29, 2007
    
    
    September 30, 2006
    
    
    September 29, 2007
    
    
    September 30, 2006Percentage
    
    
    
    
    
    
    Percentage
    
    
    
    
    
    
    Percentage
    
    
    
    
    
    
    Percentageof total
    
    
    
    
    
    
    of total
    
    
    
    
    
    
    of total
    
    
    
    
    
    
    of total(dollars in thousands)
    
    Amount
    
    
    sales
    
    
    Amount
    
    
    sales
    
    
    Amount
    
    
    sales
    
    
    Amount
    
    
    salesOphthalmology:Domestic
    
    $
    4,490
    
    
    
    33.0
    %
    
    $
    4,803
    
    
    
    52.1
    %
    
    $
    13,458
    
    
    
    32.5
    %
    
    $
    13,441
    
    
    
    50.0
    %International
    
    
    3,374
    
    
    
    24.9
    %
    
    
    3,151
    
    
    
    34.2
    %
    
    
    9,984
    
    
    
    24.1
    %
    
    
    9,734
    
    
    
    36.2
    %Total
    
    $
    7,864
    
    
    
    57.9
    %
    
    $
    7,954
    
    
    
    86.3
    %
    
    $
    23,442
    
    
    
    56.6
    %
    
    $
    23,175
    
    
    
    86.2
    %Aesthetics:Domestic
    
    $
    2,710
    
    
    
    20.0
    %
    
    $
    896
    
    
    
    9.7
    %
    
    $
    8,798
    
    
    
    21.3
    %
    
    $
    2,685
    
    
    
    10.0
    %International
    
    
    3,001
    
    
    
    22.1
    %
    
    
    372
    
    
    
    4.0
    %
    
    
    9,150
    
    
    
    22.1
    %
    
    
    1,009
    
    
    
    3.8
    %Total
    
    $
    5,711
    
    
    
    42.1
    %
    
    $
    1,268
    
    
    
    13.7
    %
    
    $
    17,948
    
    
    
    43.4
    %
    
    $
    3,694
    
    
    
    13.8
    %
 14




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Ophthalmology and Aesthetics Sales Overview:
    Ophthalmology Sales
   Aesthetic Sales
   15




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Gross Margin
      Research and Development
   Selling, General and Administrative
  16




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Amortization of Purchased Intangibles
   Interest and Other (Expense) Income, Net
  Income Taxes
  Liquidity and Capital Resources
  17




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##### Table of Contents




    
    a $3.9 million decrease in accounts receivable;
    
    a $4.1 million decrease in inventory;
    
    a $1.7 million increase in accounts payable, and
    
    a $2.1 million increase in accrued expenses.
      18




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##### Table of Contents



Recent Accounting Pronouncements
  19




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##### Table of Contents



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
      20




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Plan for Remediation of Material Weaknesses
   
    
    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.
     
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  21




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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.
     22




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We Have More Indebtedness and Fewer Liquid Resources After the Acquisition of the Aesthetics
Business of Laserscope, Which Has Adversely Affected 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;
    
    make 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;
 23




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##### Table of Contents




    
    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.
  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;
    
    retaining key employees, including members of our aesthetics sales force;
    
    consolidating corporate and administrative infrastructures;
 24




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
    
    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.
  25




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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;
    
    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.
  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.
  26




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Our Future Success Depends on Our Ability to Develop and Successfully Introduce New Products
and New Applications.
  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.
  We Depend on Sales of Our Ophthalmology Products for a Significant Portion of Our Operating
Results.
  27




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##### Table of Contents



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.
   We Are Exposed to Risks Associated With Worldwide Economic Slowdowns and Related
Uncertainties.
  28




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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.
  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.
  29




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##### Table of Contents



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;
    
    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.
  30




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##### Table of Contents



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;
    
    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;
 31




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##### Table of Contents




    
    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.
   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.
  32




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##### Table of Contents



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.
    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.
  33




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##### Table of Contents



We Rely on Patents and Proprietary Rights to Protect our Intellectual Property and Business.
     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.
  34




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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.
  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.
  35




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##### Table of Contents



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.
   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.
   36




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##### Table of Contents



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.
     
 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
  
 Item 5. Other Information
  37




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##### Table of Contents



Item 6. Exhibits
 3.1
    
    Certificate of Designation, Preferences and Rights of Series A Preferred Stock of IRIDEX Corporation,
filed with the Secretary of State of the State of Delaware, August 31, 2007 (which is incorporated herein
by reference to Exhibit 3.1 to the Current Report on Form 8-K filed with the Commission on September 7,
2007).4.1
    
    Form of Common Stock Purchase Warrant (which is incorporated herein by reference to Exhibit 4.1 to the
Current Report on Form 8-K filed with the Commission on September 7, 2007).4.2
    
    Investor Rights Agreement by and between the Company, BlueLine Capital Partners, LP; BlueLine Capital
Partners III, LP and BlueLine Capital Partners II, LP, dated August 31, 2007 (which is incorporated herein
by reference to Exhibit 4.2 to the Current Report on Form 8-K filed with the Commission on September 7,
2007).10.1
    
    Letter Agreement Amendment by and between the Company and Laserscope, dated July 31, 2007 (filed herewith).10.2
    
    Patent, Trademark and Copyright Security Agreement by and between the Company and Mid-Peninsula Bank,
dated July 31, 2007 (filed herewith).10.3
    
    Second Letter Agreement Amendment by and between the Company and Laserscope, dated August 6, 2007 (filed
herewith).10.4
    
    Consulting Agreement by and between the Company and James D. Pardee, dated July 31, 2007 (filed herewith).10.5
    
    Subordination Agreement by and between the Company, Mid-Peninsula Bank, American Medical Systems, Inc. and
Laserscope, dated August 14, 2007 (filed herewith).10.6
    
    Security Agreement made by the Company in favor of each of American Medical Systems, Inc. and Laserscope,
dated August 14, 2007 (filed herewith).10.7
    
    Settlement Agreement by and between the Company, American Medical Systems, Inc. and Laserscope, dated
August 14, 2007 (filed herewith).10.8
    
    Securities Purchase Agreement dated August 31, 2007 by and between the Company, BlueLine Capital Partners,
LP; BlueLine Capital Partners III, LP and BlueLine Capital Partners II, LP (which is incorporated herein
by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Commission on September 7,
2007).10.9
    
    Separation Agreement by and between
the Company and Barry G. Caldwell, dated October 18, 2007 (filed herewith).31.1
    
    Certification of Chief Executive Officer (Principal Executive and Principal Financial Officer) pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).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 (filed
herewith).
 
 
    
    Portions of this exhibit have been omitted pursuant to a
request for confidential treatment filed with the Commission. 38




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##### Table of Contents



Trademark Acknowledgments
   IRIDEX Corporation (Registrant)Date: November 19, 2007
    By:
    /s/ THEODORE A. BOUTACOFFName:
    Theodore A. BoutacoffTitle:
    President and Chief Executive Officer

(Principal Executive and Principal Financial Officer) 39




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##### Table of Contents



Index
 3.1
    
    Certificate of Designation, Preferences and Rights of Series A Preferred Stock of IRIDEX Corporation,
filed with the Secretary of State of the State of Delaware, August 31, 2007 (which is incorporated herein
by reference to Exhibit 3.1 to the Current Report on Form 8-K filed with the Commission on September 7,
2007).4.1
    
    Form of Common Stock Purchase Warrant (which is incorporated herein by reference to Exhibit 4.1 to the
Current Report on Form 8-K filed with the Commission on September 7, 2007).4.2
    
    Investor Rights Agreement by and between the Company, BlueLine Capital Partners, LP; BlueLine Capital
Partners III, LP and BlueLine Capital Partners II, LP, dated August 31, 2007 (which is incorporated herein
by reference to Exhibit 4.2 to the Current Report on Form 8-K filed with the Commission on September 7,
2007).10.1
    
    Letter Agreement Amendment by and between the Company and Laserscope, dated July 31, 2007 (filed herewith).10.2
    
    Patent, Trademark and Copyright Security Agreement by and between the Company and Mid-Peninsula Bank,
dated July 31, 2007 (filed herewith).10.3
    
    Second Letter Agreement Amendment by and between the Company and Laserscope, dated August 6, 2007 (filed
herewith).10.4
    
    Consulting Agreement by and between the Company and James D. Pardee, dated July 31, 2007 (filed herewith).10.5
    
    Subordination Agreement by and between the Company, Mid-Peninsula Bank, American Medical Systems, Inc. and
Laserscope, dated August 14, 2007 (filed herewith).10.6
    
    Security Agreement made by the Company in favor of each of American Medical Systems, Inc. and Laserscope,
dated August 14, 2007 (filed herewith).10.7
    
    Settlement Agreement by and between the Company, American Medical Systems, Inc. and Laserscope, dated
August 14, 2007 (filed herewith).10.8
    
    Securities Purchase Agreement dated August 31, 2007 by and between the Company, BlueLine Capital Partners,
LP; BlueLine Capital Partners III, LP and BlueLine Capital Partners II, LP (which is incorporated herein
by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Commission on September 7,
2007).10.9
    
    Separation Agreement by and between
the Company and Barry G. Caldwell, dated October 18, 2007 (filed herewith).31.1
    
    Certification of Chief Executive Officer (Principal Executive and Principal Financial Officer) pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).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 (filed herewith).
 
 
    
    Portions of this exhibit have been omitted pursuant to a
request for confidential treatment filed with the Commission.