IRIDEX Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparable period ended April 1, 2017. Both periods comprised 13 weeks. IRIDEX develops, manufactures, and markets ophthalmic medical devices, including laser systems, delivery devices, and consumables.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $9.509 million | $10.483 million | Down 9.3% |
| Gross profit / margin | $3.922 million / 41.2% | $4.465 million / 42.6% | Margin down 1.4 percentage points |
| Operating expenses | $7.539 million | $6.323 million | Up $1.216 million |
| Operating loss | $3.617 million | $1.858 million | Loss increased |
| Net loss | $3.603 million | $1.866 million | Loss increased |
| Basic and diluted loss per share | $0.31 | $0.16 | Loss per share increased |
| Cash used in operating activities | $2.727 million | $1.622 million | Cash use increased |
Systems revenue fell 41.3% domestically to $1.253 million and 12.8% internationally to $2.593 million. Recurring revenue rose 5.3% to $5.663 million, mainly from G6-related probe sales. Management attributed the systems decline primarily to the voluntary TruFocus LIO Premiere recall, partly offset by higher G6 system sales and a reversal of part of the recall-related reserve. Lower gross margin reflected geographic mix and less efficient overhead absorption, partly offset by higher-margin G6 revenue and reserve reversals.
Research and development expense decreased 17.6% to $1.104 million, principally due to lower salary costs from reduced headcount, partly offset by regulatory costs. Sales and marketing expense increased 38.6% to $4.050 million, reflecting higher headcount, commissions, and selling costs. General and administrative expense increased 15.7% to $2.385 million, including higher bonus, severance, German operations, and public-company compliance costs.
Cash, liquidity, and obligations
- Cash and cash equivalents were $18.522 million at March 31, 2018, down from $21.707 million at December 30, 2017. Working capital was $25.7 million, versus $29.1 million.
- Operating cash use was $2.727 million; investing cash use was $0.366 million, including $0.274 million of capital expenditures and $0.092 million in earn-out payments. Financing cash use was $0.115 million.
- The company reported no fixed- or variable-rate debt outstanding. Current liabilities were $9.255 million; total liabilities were $9.957 million.
- Management believes existing cash will cover anticipated needs over the next 12 months. Contractual obligations totaled $16.675 million, including $5.424 million of operating leases and $11.251 million of purchase commitments.
Developments, outlook, and risks
- Product recall: IRIDEX initiated a voluntary recall of the TruFocus LIO Premiere on February 23, 2018. It reported three adverse events involving the device and 104 units at customer sites worldwide. Return to the U.S. market will likely require FDA 510(k) clearance. At quarter-end, approximately $1.5 million was accrued for U.S. recall-related sales returns and warranty/material costs. The company reversed $172,000 of sales-return reserve and $368,000 of warranty-related expense for products shipped outside the U.S.; updated devices began shipping to certain foreign markets on April 27, 2018.
- Guidance: No specific revenue or earnings guidance is provided. Management expects gross margins to fluctuate with geographic and product mix, new product introductions, manufacturing efficiency, and volume.
- Legal matter: IRIDEX sued Quantel in January 2018, alleging patent infringement, breach of agreement, and MicroPulse trademark infringement. The filing warns that an unsuccessful case could materially adversely affect the company.
- Other risks: The filing highlights product quality and manufacturing issues, dependence on distributors and limited-source suppliers, regulatory approval and compliance requirements, competition, international-market exposure, and variability in quarterly results. The company does not hedge currency exposure; most international sales were denominated in U.S. dollars, with German direct sales exposed to euro fluctuations.
- Taxes and accounting: The company was still evaluating certain effects of the 2017 Tax Act. It adopted ASC 606 in Q1 2018 with no opening retained-earnings adjustment. A full valuation allowance was recorded against federal and state deferred tax assets in 2017.
- Management concluded disclosure controls and procedures were effective at the reasonable-assurance level; no material change in internal control over financial reporting was reported.
Investor verification priorities
- Track U.S. recall costs, customer returns, product availability, FDA clearance timing, and whether overseas shipments of the updated device progress as expected.
- Assess whether G6 systems and probe sales can offset ongoing weakness in other retina-system sales and restore revenue growth.
- Monitor operating expenses and cash burn against the $18.5 million cash balance and management’s 12-month liquidity assessment.
- Review gross-margin trends and the effects of sales mix, production efficiency, and recall-related reserve adjustments.
- Follow the Quantel litigation, the company’s $16.7 million contractual obligations, and the Tax Act accounting assessment.