IRIDEX Corporation — Q2 2019 Form 10-Q
Reporting period: Quarter ended June 29, 2019; six-month results are also compared with the periods ended June 30, 2018. IRIDEX develops and sells ophthalmic laser systems, delivery devices, consumables, and related services for glaucoma and retinal conditions.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $10.426 million | $10.304 million | $21.021 million | $19.813 million |
| Gross profit / margin | $4.549 million / 43.6% | $4.268 million / 41.4% | $8.806 million / 41.9% | $8.190 million / 41.3% |
| Operating loss | $2.468 million | $3.282 million | $5.504 million | $6.899 million |
| Net loss | $2.419 million; $0.18 per share | $3.280 million; $0.28 per share | $5.467 million; $0.40 per share | $6.883 million; $0.59 per share |
| Cash used in operating activities | Not separately presented for the quarter | $5.161 million | $5.053 million |
Q2 revenue grew 1.2%; first-half revenue grew 6.1%. For the first half, G6 revenue rose 10.3% to $6.457 million, retina revenue rose 3.4% to $10.847 million, and other revenue rose 7.1% to $3.717 million. In Q2, G6 growth was partly offset by a 5.9% decline in retina revenue.
Gross margin improvement reflected lower manufacturing overhead spending, partly offset by manufacturing overhead variances that included a warranty adjustment. Operating expenses declined year over year, principally due to lower sales and marketing costs; the company remained loss-making.
Liquidity, cash flow and obligations
- Cash and cash equivalents were $15.633 million at June 29, 2019, down from $21.194 million at December 29, 2018. Working capital was $23.5 million, versus $29.1 million at year-end.
- First-half investing cash use was $0.310 million, including $0.111 million of capital expenditures and $0.199 million paid against the acquisition earn-out. Financing cash use was $0.101 million, primarily payroll taxes on equity awards.
- The balance sheet reports operating lease liabilities of $3.879 million, including $1.363 million current. No funded-debt balance is presented in the supplied financial statements. First-half operating lease expense was approximately $0.7 million.
- Non-cancellable purchase commitments were approximately $11.6 million through fiscal 2020. The company reported no material off-balance-sheet arrangements.
Outlook, risks and unusual items
- Management stated that existing cash and cash equivalents should be sufficient for anticipated cash needs over the next 12 months. The filing provides no quantified revenue or earnings guidance.
- Key risks include ongoing operating losses and cash use; manufacturing, quality-control and supplier constraints; reliance on international distributors and international sales; competition and reimbursement uncertainty; and regulatory and product-liability exposure.
- The company’s 2018 voluntary recall of the TruFocus LIO Premiere remained relevant: its request to terminate the recall was pending with the FDA. IRIDEX had obtained clearance for an updated device, but noted potential adverse events and uncertainty about market acceptance.
- The company adopted lease accounting in fiscal 2019, recognizing right-of-use assets and lease liabilities; management said adoption did not affect reported operating results. Goodwill was not impaired in the second-quarter annual test.
- Disclosure controls and procedures were judged effective at the reasonable-assurance level; no material change in internal control over financial reporting was reported. Ordinary-course legal matters were not expected by management to have a material adverse effect.
Important facts for investors to verify
- Whether revenue growth, particularly G6 sales, can continue and offset weakness in retina products.
- Whether operating losses and cash outflows moderate sufficiently to preserve liquidity beyond management’s stated 12-month outlook.
- The status and consequences of the TruFocus LIO recall termination request, and customer acceptance and safety of the updated device.
- How the $11.6 million of purchase commitments, lease obligations, supplier exposure, and any financing arrangements affect future cash needs.
- Whether warranty estimates and manufacturing costs remain consistent with the reported margin improvement.