[LETTERHEAD OF STUBBS, ALDERTON & MARKILES, LLP]
JOHN MCILVERY
Partner
Direct 818.444.4502
Voice
Direct Fax 818.474.8602
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E-Mail jmcilvery@biztechlaw.com
May 23, 2007
VIA EDGAR AND FACSIMILE
Securities and Exchange Commission
Division of Corporation Finance
100 F Street, N.E.
Washington, D.C. 20549-3561
RE: IRIS INTERNATIONAL, INC.
RESPONSES TO STAFF COMMENTS OF APRIL 26, 2007
Ladies and Gentlemen:
On behalf of IRIS International, Inc. (the "COMPANY"), we hereby
provide the following responses in reply to the Staff's comment letter, dated
April 26, 2007 (the "COMMENT LETTER"). The factual information provided herein
relating to the Company has been made available to us by the Company. Paragraph
numbering used for each response set forth below corresponds to the numbering
used in the Comment Letter.
FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
CONSOLIDATED STATEMENTS OF OPERATIONS, PAGE 42
1. REVENUE AND THE RELATED COST OF SALES FROM RENTAL OR SERVICE
ARRANGEMENTS THAT ACCOUNT FOR MORE THAN 10% OF NET SALES SHOULD BE
SEPARATELY PRESENTED ON THE FACE OF THIS STATEMENT. PLEASE REVISE
FUTURE FILINGS AS NECESSARY TO SEPARATELY PRESENT THE REVENUES AND
RELATED COSTS OF SALES FROM TANGIBLE GOODS, SERVICES AND RENTALS ON
YOUR CONSOLIDATED STATEMENTS OF INCOME OR TELL US HOW YOUR CURRENT
PRESENTATION COMPLIES WITH RULE 5-03(B)(1) AND RULE 5-03(B)(2) OF
REGULATIONS S-X.
The Company believes that the current presentation of revenues from
rental or service arrangements complies with Rules 5-03(b)(1) and Rule
5-03(b)(2) of Regulations S-X. Revenues from both rental arrangements
and service arrangements accounted for less than 10% of net sales for
the twelve months ended December 31, 2006, as well as for the three
months ended March 31, 2007.
Rental revenue, which is included in "Sales of IVD instruments" in the
Consolidated Statements of Operations, amounted to $335,000 and $45,000
15260 Ventura Boulevard, 20th Floor, Sherman Oaks, California 91403
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Securities and Exchange Commission
May 23, 2007
Page 2
for the twelve months ended December 31, 2006 and the three months
ended March 31, 2007, respectively, or less than 1% of total revenues
in both periods.
Service revenue, which is included in both "Sales of IVD consumables
and service" and "Sales of sample processing instruments and supplies"
in the Consolidated Statements of Operations, amounted to $6,127,000,
or 8.7% of total revenues for the twelve months ended December 31,
2006, and $1,674,000, or 8.3% of total revenues for the three months
ended March 31, 2007.
The Company will continue to monitor its rental and service revenues
each quarter to determine if the 10% threshold is exceeded.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, PAGE 47
REVENUE RECOGNITION, PAGE 49
2. WE SEE FROM YOUR DISCLOSURE ON PAGE 10 THAT YOU SELL YOUR PRODUCTS
INTERNATIONALLY THROUGH DISTRIBUTORS AND ON PAGE 61 THAT APPROXIMATELY
$20.1 MILLION OF YOUR SALES ARE TO INTERNATIONAL CUSTOMERS. PLEASE
DESCRIBE FOR US THE SIGNIFICANT TERMS OF YOUR AGREEMENTS WITH
DISTRIBUTORS, INCLUDING PAYMENT, RIGHTS OF RETURN, EXCHANGE, PRICE
PROTECTION AND OTHER SIGNIFICANT MATTERS. EXPLAIN AND SUPPORT WHY IT IS
APPROPRIATE TO RECOGNIZE REVENUE TO INTERNATIONAL DISTRIBUTORS AT THE
TIME OF SHIPMENT. REFER TO SAB 104 AND SFAS 48 AS NECESSARY. PLEASE
ALSO REVISE FUTURE FILINGS TO COMPLY.
The Company utilizes standardized distribution agreements for
substantially all of its distributors for the sale of its products in
approximately 60 countries. The following is a brief summary of the
material terms of the Company's standardized distribution agreements:
o SHIPPING - FOB Chatsworth, California.
o PRICING - US Dollars.
o PAYMENTS - Via wire transfer within sixty (60) days of
invoice.
o CREDIT LIMITS - Each distributor is given a credit limit based
on its credit worthiness.
o RIGHT OF RETURN - A distributor may only return products to
the Company if defective. No product may be returned without
the Company's prior written authorization.
o PRICE PROTECTION - None.
Securities and Exchange Commission
May 23, 2007
Page 3
o WARRANTY - The Company warrants that its products will be free
from defects for a period of the lesser of fifteen (15) months
from date of shipment or twelve (12) months from the date of
installation.
o TERMINATION - Ninety (90) days written notice by either party.
The Company has reviewed SAB 104 and SFAS 48 and has concluded that it
has met all of the revenue recognition criteria for sales to
international customers during 2006, as reported in the Form 10-K.
NOTE 3. ACQUISITIONS, PAGE 52
3. WE SEE THAT A SIGNIFICANT PORTION OF THE PURCHASE PRICE OF LEUCADIA
TECHNOLOGIES WAS ALLOCATED TO IN-PROCESS RESEARCH AND DEVELOPMENT.
PLEASE TELL US AND REVISE FUTURE FILINGS TO DISCLOSE THE NATURE OF THE
IN-PROCESS PROJECTS ACQUIRED AND HOW THE FAIR VALUE WAS DETERMINED.
PLEASE ALSO TELL US THE STATE OF COMPLETION AT ACQUISITION AND THE
EXTENT OF EFFORT NECESSARY TO COMPLETE THE IN-PROCESS PROJECT(S),
INCLUDING COSTS. DISCLOSE WHETHER THE TECHNOLOGY WAS BROUGHT TO
FRUITION, AND IF NOT, DISCLOSE WHY NOT. ADDITIONALLY, IN PERIODS AFTER
A SIGNIFICANT WRITE-OFF YOU SHOULD DISCUSS THE STATUS OF EFFORTS TO
COMPLETE THE PROJECTS, AND THE ACTUAL OR EXPECTED IMPACT OF ANY DELAYS
ON YOUR EXPECTED INVESTMENT RETURN, RESULTS OF OPERATIONS AND FINANCIAL
CONDITION.
The in-process research and development acquired as part of the
acquisition in April 2006 of Leucadia Technologies, Inc., a development
stage company, focused on the development of ultra-sensitive and
specific in-vitro diagnostic products based on ultra-sensitive
detection technologies combined with novel and specific methods of
isolation of rare cells from biological fluids.
Subsequent to the purchase of Leucadia, the Company engaged an
independent advisory firm that specialized in valuing intangible assets
in accordance with SFAS 141. The valuation included discussions with
the Company concerning existing products and current research and
development efforts. Additionally, the valuation firm followed the
guidelines of SFAS No. 86, SFAS No. 2, FIN4 and FIN6 in addressing the
identification and valuation of intangible assets, as well as the
classification of the assets as completed technology or technology
under development. Following these discussions and applying these
guidelines, the valuation firm concluded and agreed with the Company
that Leucadia's (i) ultra-sensitive Prostate-Specific Antigen (PSA)
utilizing its Nucleic Acid Detection Immuno-Assay technology and (ii)
bubble isolation and separation technology for the detection of
bacteria in urine, were programs under development as of the date of
acquisition. In addition, the Company concluded that Leucadia had
Securities and Exchange Commission
May 23, 2007
Page 4
completed the development of core detection and isolation technologies.
The valuation of the technologies under development was based on the
income approach utilizing the discounted cash flow method applied to
the projected cash flows associated with Leucadia's products under
development over their expected life.
In February 2007, the Company filed a 510(k) application with the U.S.
Food and Drug Administration (FDA) for its PSA test, which was within
the expected development timeline of the product. The Company expects
the PSA test to be launched by the end of 2007 after FDA clearance. In
addition, the Company is on schedule with its development program for
the bacteria screening tests. The Company expects to conclude its
feasibility studies mid-year. Following these studies, the Company will
proceed to the next phase of development with its instrumentation
product development group, to facilitate the development of an
automated bacteria screening instrument to indicate if there is
bacteria and/or yeast present in urine. The Company anticipates
launching this product in 2009. There have been no impairments of these
technologies since acquisition, as the Company continues to progress
with the development and commercialization of these products in
accordance with its internal development timelines. The Company
anticipates that it will meet the target dates for completion of each
of these projects. The costs for completing these projects are included
in the Company's total research and development budget.
EXHIBIT 3.1
4. WE NOTE THE SECTION 302 CERTIFICATION OF YOUR CEO AND CFO ARE NOT IN
THE PROPER FORM AS PARAGRAPH 4 IMPROPERLY REFERENCES EXCHANGE ACT RULES
13A-14 AND 15D-14 AND EXCHANGE ACT RULES 13A-15-15(F). IN FUTURE
FILINGS, PLEASE FILE SECTION 302 CERTIFICATIONS SET FORTH IN ITEM
601(B)(31) OF REGULATION S-K WHICH PROPERLY REFER TO EXCHANGE ACT RULES
13A-15(E) AND 15D-15(E) AND EXCHANGE ACT RULES 13A-15(F), RESPECTIVELY.
ADDITIONALLY, AS PART OF YOUR RESPONSE, PLEASE REPRESENT TO US THAT THE
SECTION 302 CERTIFICATIONS MEET THE DEFINITIONS AS DETAILED IN EXCHANGE
ACT RULES 13A-15(E) AND 15D-15(E) AND EXCHANGE ACT RULES 13A-15(F).
The Company notes the error in the Section 302 certifications and will
ensure that such certifications are in proper form in all future
filings. Additionally, the Company represents to the Staff that the
Section 302 certifications in the Form 10-K meet the definitions as
detailed in Exchange Act Rules 13a-15(e) and 15d-15(e) and Exchange Act
Rules 13a-15(f).
5. IN THIS REGARD, WE NOTE THAT THE CERTIFICATION FILED AS REQUIRED BY
EXCHANGE ACT RULE 13A-14(A) IMPROPERLY LABELS THE REPORT AS AN "ANNUAL
REPORT" IN PARAGRAPHS 1, 2, 3 AND 4. IN FUTURE FILINGS, THE
CERTIFICATION SHOULD BE REVISED SO AS TO NOT INCLUDE A REFERENCE TO
"ANNUAL" OR "QUARTERLY" REPORTS. REFER TO ITEM 601(B)(31) OF REGULATION
S-K.
Securities and Exchange Commission
May 23, 2007
Page 5
The Company notes the Staff's comments and will omit reference to
"Annual" or "Quarterly" reports in the certifications included in all
future filings.
FORM 8-K FILED MARCH 7, 2007
6. WE NOTE THAT YOU PRESENT YOUR NON-GAAP MEASURES AND RECONCILIATIONS IN
THE FORM OF SUPPLEMENTAL INFORMATION AS ADJUSTED STATEMENTS OF
OPERATIONS. THIS FORMAT MAY BE CONFUSING TO INVESTORS AS IT ALSO
REFLECTS SEVERAL NON-GAAP MEASURES, INCLUDING (AND NOT NECESSARILY
LIMITED TO) NON-GAAP COST OF GOOD SOLD, NON-GAAP GROSS MARGIN, NON-GAAP
TOTAL OPERATING EXPENSES, NON-GAAP OPERATING INCOME (LOSS), NON-GAAP
INCOME (LOSS) BEFORE INCOME TAXES, NON-GAAP INCOME TAXES PROVISION
(BENEFIT), NON-GAAP NET INCOME (LOSS) AND NON-GAAP BASIC NET INCOME
(LOSS) PER SHARE WHICH HAVE NOT BEEN DESCRIBED TO INVESTORS. IN FACT,
IT APPEARS THAT MANAGEMENT DOES NOT USE THESE NON-GAAP MEASURES BUT
THEY ARE SHOWN HERE AS A RESULT OF THE PRESENTATION FORMAT. PLEASE NOTE
THAT INSTRUCTION 2 TO ITEM 2.02 OF FORM 8-K REQUIRES THAT WHEN
FURNISHING INFORMATION UNDER THIS ITEM YOU MUST PROVIDE ALL THE
DISCLOSURES REQUIRED BY PARAGRAPH (e)(1)(i) OF ITEM 10 OF REGULATION
S-K, INCLUDING A RECONCILIATION TO THE DIRECTLY COMPARABLE GAAP MEASURE
FOR EACH NON-GAAP MEASURE PRESENTED AND EXPLAIN WHY YOU BELIEVE THE
MEASURES PROVIDE USEFUL INFORMATION TO INVESTORS.
o TO ELIMINATE INVESTOR CONFUSION, PLEASE REMOVE THE ADJUSTED
STATEMENTS OF INCOME FROM ALL FUTURE FILINGS AND INSTEAD
DISCLOSE ONLY THOSE NON-GAAP MEASURES USED BY MANAGEMENT THAT
YOU WISH TO HIGHLIGHT FOR INVESTORS, WITH APPROPRIATE
RECONCILIATIONS.
o PLEASE NOTE THAT IN THE EVENT THAT YOUR FORM 8-K IS
INCORPORATED BY REFERENCE INTO A 1933 ACT REGISTRATION
STATEMENT, WE MAY HAVE ADDITIONAL QUESTIONS RELATING TO THE
APPROPRIATENESS OF THIS INFORMATION BEING INCLUDED IN A
DOCUMENT FILED WITH, AND NOT JUST FURNISHED TO, THE
COMMISSION. AT THAT TIME, WE MAY REQUEST AN AMENDMENT TO THE
FORM 8-K.
The Company notes the Staff's comments and will comply with the Staff's
requests in all future filings that include disclosure of non-GAAP
financial measures.
* * * * *
Securities and Exchange Commission
May 23, 2007
Page 6
The Company acknowledges that:
o the company is responsible for the adequacy and accuracy of
the disclosure in the filing;
o staff comments or changes to disclosure in response to staff
comments do not foreclose the Commission from taking any
action with respect to the filing; and
o the company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
We hope the above has been responsive to the Staff's comments. If you
have any questions or require any additional information or documents, please
telephone Veronica Tarrant, the Company's Interim Chief Financial Officer at
(818) 709-1244 x7256 or the undersigned at (818) 444-4502.
Sincerely,
/s/ John J. McIlvery
-------------------------
John J. McIlvery
cc: Cesar Garcia
Veronica Tarrant