| IRIS INTERNATIONAL INC Item 1A Risk Factors Forward-Looking Statements This Annual Report on Form 10-K contains forward-looking statements, which reflect our current views about future events and financial results |
| We have made these statements in reliance on the safe harbor created by that Private Securities Litigation Reform Act of 1995 |
| Forward-looking statements include our views on future financial results, financing sources, product development, capital requirements, market growth and the like, and are generally identified by phrases such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans” and similar words |
| Forward-looking statements are merely predictions and therefore inherently subject to uncertainties and other factors which could cause the actual results to differ materially from the forward-looking statement |
| These uncertainties and other factors include, among other things: • unexpected technical and marketing difficulties inherent in major product development efforts such as the new applications for our urinalysis workstation, • the potential need for changes in our long-term strategy in response to future developments, • future advances in diagnostic testing methods and procedures, as well as potential changes in government regulations and healthcare policies, both of which could adversely affect the economics of the diagnostic testing procedures automated by our products, • increasing competition from imaging and non-imaging based in-vitro diagnostic products |
| Set forth below are additional significant uncertainties and other factors affecting forward-looking statements |
| The readers should understand that the uncertainties and other factors identified in this Annual Report are not a comprehensive list of all the uncertainties and other factors that may affect forward-looking statements |
| We do not undertake any obligation to update or revise any forward-looking statements or the list of uncertainties and other factors that could affect those statements |
| Related to Our Business Our success depends largely on the acceptance of our iQ200 product line |
| Our current strategy assumes that our iQ200 operating platform will be adopted by a large number of end-users |
| We have invested and continue to invest a substantial amount of our resources in promotion and marketing of the iQ200 product line in order to increase its market penetration, expand sales into new geographic areas and enhance and expand its system features |
| Failure of our iQ200 operating platform to achieve and maintain a significant market presence, or the failure to successfully implement our promotion and marketing strategy, will have a material adverse effect on our financial condition and results of operations |
| Any failure to successfully introduce our future products and systems into the market could adversely affect our business |
| The commercial success of our future products and systems depends upon their acceptance by the medical community |
| Our future product plans include capital-intensive laboratory instruments |
| We believe that these products can significantly reduce labor costs, improve precision and offer other distinctive benefits to the medical research community |
| However, there is often market resistance to products that require significant capital expenditures or which eliminate jobs through automation |
| We have no assurance that the market will accept our future products and systems, or that sale of our future products and systems will grow at the rates expected by our management |
| Any failure to successfully develop new products could adversely affect our business |
| Our commercial success depends on the timely development of new products that are needed for future growth |
| These new products depend on our success in demonstrating technical feasibility and achieving cost targets and functionality demanded by the market |
| Significant delays in product releases will result in budget over-runs and lower revenues |
| 10 ______________________________________________________________________ [38]Table of Contents If we fail to meet changing demands of technology, we may not continue to be able to compete successfully with our competitors |
| The market for our products and systems is characterized by rapid technological advances, changes in customer requirements, and frequent new product introductions and enhancements |
| Our future success depends upon our ability to introduce new products that keep pace with technological developments, enhance current product lines and respond to evolving customer requirements |
| Our failure to meet these demands could result in a loss of our market share and competitiveness and could harm our revenues and results of operations |
| Any failure or inability to protect our technology and confidential information could adversely affect our business |
| Our commercial success depends in part on our ability to protect and maintain our Automated Intelligent Microscopy (or AIM) and other proprietary technology |
| We have received patents with respect to portions of the technologies of AIM However, ownership of technology patents may not insulate us from potentially damaging competition |
| Patent litigation relating to clinical laboratory instrumentation patents (like the ones we own) often involves complex legal and factual questions |
| Therefore, we can make no assurance that claims under patents currently held by us, or our pending or future patent applications, will be sufficiently broad to adequately protect what we believe to be our proprietary rights |
| Additionally, one or more of our patents could be circumvented by a competitor |
| We believe that our proprietary rights do not infringe upon the proprietary rights of third parties |
| However, third parties may assert infringement claims against us in the future |
| If we are unsuccessful in our defense against any infringement claim our patents, or patents in which we have licensed rights, may be held invalid and unenforceable |
| Trade Secrets |
| We have trade secrets, unpatented technology and proprietary knowledge related to the sale, promotion, operation, development and manufacturing of our products |
| We generally enter into confidentiality agreements with our employees, suppliers and consultants |
| However, we cannot guarantee that our trade secrets, unpatented technology or proprietary knowledge will not become known or be independently developed by competitors |
| If any of this proprietary information becomes known to third parties, we may have no practical recourse against these parties |
| Copyrights and Trademarks |
| We claim copyrights in our software and the ways in which it assembles and displays images |
| We also claim trademark rights in the United States and other foreign countries |
| However, we can make no assurance that we will be able to obtain enforceable copyright and trademark protection, nor that this protection will provide us a significant commercial advantage |
| Potential Litigation Expenses |
| Offensive or defensive litigation regarding patent and other intellectual property rights could be time-consuming and expensive |
| Additionally, litigation could demand significant attention from our technical and management personnel |
| Any change in our ability to protect and maintain our proprietary rights could materially and adversely affect our financial condition and results of operations |
| Our products could infringe on the intellectual property rights of others |
| Given the complete factual and legal issues associated with intellectual property rights, there can be no assurance that our current and future products do not or will not infringe the intellectual property rights of others |
| A determination that such infringement exists or even a claim that it exists could involve us in costly litigation and have an adverse effect on our business and financial condition |
| We operate in a consolidating industry that creates barriers to our market penetration |
| The healthcare industry in recent years has been characterized by consolidation |
| Large hospital chains and groups of affiliated hospitals prefer to negotiate comprehensive supply contracts for all of their supply needs at 11 ______________________________________________________________________ [39]Table of Contents once |
| Large suppliers can often equip an entire laboratory and offer hospital chains and groups one-stop shopping for laboratory instruments, supplies and service |
| Larger suppliers also typically offer annual rebates to their customers based on the customer’s total volume of business with the supplier |
| The convenience and rebates offered by these large suppliers are administrative and financial incentives that we do not offer our customers |
| Our plans for further market penetration in the urinalysis market will depend in part on our ability to overcome these and any new barriers resulting from continued consolidation in the healthcare industry |
| The failure to overcome such barriers could have a material adverse effect on our financial condition or results of operation |
| Since we operate in the medical technology industry, our products are subject to government regulation that could impair our operations |
| Most of our products are subject to stringent government regulation in the United States and other countries |
| These regulatory processes can be lengthy, expensive and uncertain |
| Additionally, securing necessary clearances or approvals may require the submission of extensive official data and other supporting information |
| Our failure to comply with applicable requirements could result in fines, recall or seizure of products, total or partial suspension of production, withdrawal of existing product approvals or clearances, refusal to approve or clear new applications or notices, or criminal prosecution |
| If any of these events were to occur, they could harm our business |
| Changes in existing federal, state or foreign laws or regulations, or in the interpretation or enforcement of these laws, could also materially and adversely affect our business |
| Changes in government regulation of the healthcare industry could adversely affect our business |
| Federal and state legislative proposals are periodically introduced or proposed that would affect major changes in the healthcare system, nationally, at the state level or both |
| Future legislation, regulation or payment policies of Medicare, Medicaid, private health insurance plans, health maintenance organizations and other third-party payors could adversely affect the demand for our current or future products and our ability to sell our products on a profitable basis |
| Moreover, healthcare legislation is an area of extensive and dynamic change, and we cannot predict future legislative changes in the healthcare field or their impact on our industry or our business |
| Any impairment in our ability to market our products could have a material adverse effect on our financial condition and results of operation |
| We may not be able to realize the deferred tax asset relating to our tax net operating loss carry forward |
| As of December 31, 2005, we have deferred tax assets of approximately dlra10 million resulting from the differences between the financial statement and the tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse |
| Management believes it is more likely than not that the deferred tax assets will be realized through future taxable income or alternative tax strategies |
| However, the net deferred tax assets could be reduced in the near term if management’s estimates of taxable income during the carryforward period are not realized or are significantly reduced or alternative tax strategies are not available |
| Although the Company believes that the deferred tax asset is recoverable, there is no assurance that we will be able to generate taxable income in the years that the differences reverse |
| Also, if we undergo an ownership change as defined in Section 382 of the Internal Revenue Code, NOLs generated prior to the ownership change would be subject to an annual limitation |
| If this occurs, a valuation allowance may be necessary |
| We rely on independent and some single-source suppliers for key components of our instruments |
| Any delay or disruption in the supply of components may prevent us from selling our products and negatively impact our operations |
| Certain of our components are obtained from outside vendors, and the loss or breakdown of our relationships with these outside vendors could subject us to substantial delays in the delivery of our products to our customers |
| Furthermore certain key components of our instruments are manufactured by only one supplier |
| 12 ______________________________________________________________________ [40]Table of Contents For example, ARKRAY is the single source supplier for our line of urine chemistry analyzers and related consumable products and spare parts |
| Roche Diagnostics is the sole source for our proprietary CHEMSTRIP/IRIStrip urine test strips and related urine test strip readers, both used in our legacy instruments, the Model 500 and 939UDx urinalysis workstations |
| Because these suppliers are the only vendors with which we have a relationship for a particular component, we may be unable to sell products if one of these suppliers becomes unwilling or unable to deliver components meeting our specifications |
| Our inability to sell products to meet delivery schedules could have a material adverse effect on our reputation in the industry, as well as our financial condition and results of operation |
| One of our single-source suppliers has terminated its agreement with us |
| Roche Diagnostics has exercised its right to terminate its agreements with us relating to the supply of test strips and related urine test strip readers |
| Roche will continue to supply test strips and replacement readers to our installed base of legacy workstations until 2009 |
| The failure to successfully and timely complete the phase out of their strips and readers with the introduction of our new iQ200 analyzers would have a material adverse affect on our instrument sales and the revenue growth for system consumables and service |
| We face intense competition and our failure to compete effectively, particularly against larger, more established companies will cause our business to suffer |
| The healthcare industry is highly competitive |
| We compete in this industry based primarily on product performance, service and price |
| Many of our competitors have substantially greater financial, technical and human resources than we do, and may also have substantially greater experience in developing products, obtaining regulatory approvals and manufacturing and marketing and distribution |
| Further, our competitive position could be harmed by the establishment of patent protection by our competitors or other companies |
| The existing competitors or other companies may succeed in developing technologies and products that are more effective or affordable than those being developed by us or that would render our technology and products less competitive or obsolete |
| If we are unable to effectively compete in our market, our financial condition and results of operation will materially suffer |
| Our success depends on our ability to attract, retain and motivate management and other skilled employees |
| Our success depends in significant part upon the continued services of key management and skilled personnel |
| Competition for qualified personnel is intense and there are a limited number of people with knowledge of, and experience in, our industry |
| We do not have employment agreements with most of our key employees nor maintain life insurance polices on them |
| The loss of key personnel, especially without advance notice, or our inability to hire or retain qualified personnel, could have a material adverse effect on our instrument sales and our ability to maintain our technological edge |
| We cannot guarantee that we will continue to retain our key management and skilled personnel, or that we will be able to attract, assimilate and retain other highly qualified personnel in the future |
| Defective products may subject us to liability |
| Our products are used to gather information for medical decisions and diagnosis |
| Accordingly, a defect in the design or manufacture of our products, or a failure of our products to perform for the use that we specify, could have a material adverse effect on our reputation in the industry and subject us to claims of liability arising from inaccurate or allegedly inaccurate test results |
| Misuse of our products by a technician that results in inaccurate or allegedly inaccurate test results could similarly subject us to claims of liability |
| We currently maintain product liability insurance coverage for up to dlra1dtta0 million per incident and up to an aggregate of dlra2dtta0 million per year |
| We also currently maintain a product liability umbrella policy for coverage of claims 13 ______________________________________________________________________ [41]Table of Contents aggregating to dlra10dtta0 million |
| Although management believes this liability coverage is sufficient protection against future claims, there can be no assurance of the sufficiency of these policies |
| Any substantial underinsured loss would have a material adverse effect on our financial condition and results of operation |
| Furthermore, any impairment of our reputation could have a material adverse effect on our sales and prospects for future business |
| We have not received any indication that our insurance carrier will not renew our product liability insurance at or near current premiums; however, we cannot guarantee that this will continue to be the case |
| In addition, any failure to comply with Federal Drug Administration regulations governing manufacturing practices could hamper our ability to defend against product liability lawsuits |
| Business interruptions could adversely affect our business |
| Products for Iris Diagnostics and Sample Processing are manufactured in a single facility for each division and are vulnerable to interruption in the event of war, terrorism, fire, earthquake, power loss, floods, telecommunications failure and other events beyond our control |
| If our facilities were significantly damaged or destroyed by any cause, we would experience delays in locating a new facility and equipment and qualifying the new facility with the FDA Our results would suffer |
| In addition, we may not carry adequate business interruption insurance to compensate us for losses that may occur and any losses or damages incurred by us could be substantial |
| If we are unable to manage our growth, our results could suffer |
| We have been experiencing significant growth in the scope of our operations |
| This growth has placed significant demands on our management, as well as operational resources |
| In order to achieve our business objectives, we anticipate that we will need to continue to grow |
| If this growth occurs, it will continue to place additional significant demands on our management and our operational resources, and will require that we continue to develop and improve our operational, financial and other internal controls both in the US and internationally |
| In particular, if our growth continues, it will increase the challenges in implementing appropriate control systems, expanding our sales and marketing infrastructure capabilities, providing adequate training and supervision to maintain high quality standards, and preserving our cultural values |
| The main challenge associated with our growth has been the management of our expenses |
| Our inability to scale our business appropriately or otherwise adapt to growth, could cause our business, financial condition and results of operations to suffer |
| Our quarterly sales and operating results may fluctuate in future periods, and if we fail to meet expectations the price of our common stock may decline |
| Our quarterly sales and operating results have fluctuated significantly in the past and are likely to do so in the future due to a number of factors, many of which are not within our control |
| If our quarterly sales or operating results fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially |
| Factors that might cause quarterly fluctuations in our sales and operating results include the following: • variation in demand for our products, including seasonality; • our ability to develop, introduce, market and gain market acceptance of new products and product enhancements in a timely manner; • our ability to manage inventories, accounts receivable and cash flows; • our ability to control costs; • the size, timing, rescheduling or cancellation of orders from consumers and distributors; and • our ability to forecast future sales and operating results and subsequently attain them |
| The amount of expenses we incur depends, in part, on our expectations regarding future sales |
| In particular, we expect to continue incurring substantial expenses relating to the marketing and promotion of our products |
| 14 ______________________________________________________________________ [42]Table of Contents Since many of our costs are fixed in the short term, if we have a shortfall in sales, we may be unable to reduce expenses quickly enough to avoid losses |
| Accordingly, you should not rely on quarter-to-quarter comparisons of our operating results as an indication of our future performance |
| We depend on independent distributors to sell our products in international markets |
| We sell our products in international markets through independent distributors |
| These distributors may not command the necessary resources to effectively market and sell our products |
| If a distributor fails to meet annual sales goals, it may be difficult and costly to locate an acceptable substitute distributor |
| If a change in our distributors becomes necessary, we may experience increased costs, as well as substantial disruption and a resulting loss of sales |
| Our sales in international markets are subject to a variety of laws and political and economic risks that may adversely impact our sales and results of operations in certain regions |
| Our ability to capitalize on growth in international markets is subject to risks including: • changes in currency exchange rates which impact the price to international consumers; • the burdens of complying with a variety of foreign laws and regulations; • unexpected changes in regulatory requirements; and • the difficulties associated with promoting products in unfamiliar cultures |
| We are also subject to general, political, economic and regulatory risks in connection with our international sales operations, including: • political instability; • changes in diplomatic and trade relationships; • general economic fluctuations in specific countries or markets; and • changes in regulatory schemes |
| Any of the above mentioned factors could adversely affect our sales and results of operations in international markets |
| We are subject to currency fluctuations |
| We are exposed to certain foreign currency risks in the importation of goods from Japan |
| The line of urine chemistry analyzers, two assemblies for our iQ200 platform and related consumables strips and spare parts are sourced from ARKRAY, a supplier located in Kyoto, Japan |
| Our purchases from this supplier are denominated in Japanese Yen |
| These components represent a significant portion of our material costs |
| Fluctuations in the US Dollar/ Japanese Yen exchange rate could result in increased costs for our key components |
| Any increases would reduce our gross margins and would be likely to result in a material adverse effect on our profitability |
| Similarly, we are also exposed to currency fluctuations with respect to the exportation of our products |
| All of our sales are denominated in US Dollars |
| Accordingly, any fluctuation in the exchange rate between the US Dollar and the currency of the country with which we are exporting products could also affect our ability to sell internationally |
| Risks Related to Ownership of Our Common Stock Anti-takeover provisions of Delaware law could delay or prevent an acquisition of our Company |
| We are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which regulates corporate acquisitions |
| These provisions could discourage potential acquisition proposals and could delay or prevent a change in control transaction |
| They could also have the effect of discouraging others from making tender offers for our common stock or preventing changes in our management |