IRIDEX Corporation — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 28, 2013. Unaudited results; dollar figures below are in millions unless noted. IRIDEX develops, manufactures, and sells ophthalmic laser systems, delivery devices, consumables, and related services.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $9.526 | $7.881 | $27.675 | $24.631 |
| Gross profit / margin | $4.724 / 49.6% | $3.911 / 49.6% | $13.437 / 48.6% | $12.008 / 48.8% |
| Income (loss) from continuing operations, net of tax | $0.530 | ($0.555) | $1.819 | ($0.423) |
| Net income (loss) | $0.530 | ($0.745) | $1.819 | $1.196 |
| Diluted earnings (loss) per share | $0.05 | ($0.08) | $0.18 | $0.13 |
- Revenue rose 20.9% in Q3 and 12.4% year to date. Q3 growth came from domestic and international system sales and recurring revenue. Nine-month system sales benefited in part from two large international orders in Q2.
- Q3 operating income from continuing operations was $0.665 million, compared with a $0.579 million loss a year earlier. Nine-month operating income was $2.077 million, including a $0.473 million benefit from insurance-carrier demutualization.
- Cash and cash equivalents were $14.089 million at September 28, up from $11.901 million at December 29, 2012. Working capital was $23.8 million. Cash from continuing operating activities was $1.357 million for the nine months, versus cash used of $1.545 million in the prior-year period.
- Cash increased $2.188 million overall. The period included $0.510 million from release of the aesthetics-sale escrow, $1.077 million from option exercises, $0.235 million of capital expenditures, $0.287 million of earn-out payments, and $0.194 million of share repurchases.
- Total liabilities were $6.960 million, including $6.519 million of current liabilities. The filing states the company had no fixed- or variable-rate debt outstanding. The current ratio was approximately 4.7.
- Inventory increased to $9.998 million from $8.035 million, contributing to operating cash use; the cash flow statement shows a $1.963 million inventory outflow.
Changes versus comparable periods and notable items
- Q3 recurring revenue increased 16.0% to $4.783 million; domestic systems revenue grew 32.9% and international systems revenue 22.9%. The company attributed recurring-revenue growth partly to the Peregrine sales force and Alcon sales of the licensed GreenTip product.
- For the first nine months, research and development expense fell 14.9% and sales and marketing expense fell 8.9%, chiefly due to lower headcount and related spending. Management anticipated modestly higher R&D and sales and marketing spending going forward.
- 2012 comparisons include unusual items: nine-month 2012 results included $1.619 million of after-tax income from discontinued aesthetics operations and an $0.800 million legal-settlement payment. The aesthetics business was sold to Cutera in February 2012; it contributed no revenue or earnings in 2013.
- In June 2013, all 500,000 Series A preferred shares automatically converted into 1,000,000 common shares after the stock met the contractual trading-price condition. The company had 9,804,582 common shares outstanding on October 18, 2013.
- The company repurchased 36,537 shares for approximately $0.194 million during the first nine months and retained $2.8 million of authorization under its $3.0 million program.
Outlook, risks, and other disclosures
- Management said the outlook for system sales remained positive and expected continued benefit from Peregrine-related consumable sales and Alcon’s GreenTip sales. It anticipated Bausch & Lomb OEM sales would cease shortly because B&L discontinued the product.
- Management considered cash and expected operating cash flows sufficient to fund operations for the next 12 months. No formal numerical revenue or earnings guidance was provided.
- Key risks include quarterly sales volatility and seasonality; reliance on international distributors and significant international revenue; competition and product acceptance; reimbursement and healthcare regulation, including the U.S. medical-device tax; product development and regulatory approval; supplier concentration; inventory forecasting; and product liability or quality issues.
- The company reported no material pending litigation, no material off-balance-sheet arrangements, and no subsequent events requiring disclosure. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
- The $0.546 million acquisition earn-out liability is measured using Level 3 inputs, including projected royalties and discount rates; changes in estimates can affect earnings. The filing also disclosed a $10.1 million deferred tax asset fully offset by a valuation allowance at December 29, 2012.
Investor verification points
- Assess how much revenue growth is recurring and sustainable, separating Peregrine and Alcon contributions from laser-system orders, including the large Q2 international orders.
- Monitor inventory growth, operating cash conversion, and whether cash generation supports management’s 12-month liquidity assessment.
- Reconcile reported earnings with the demutualization proceeds, prior-year discontinued-operation gains, and legal-settlement income when comparing periods.
- Review the impact of the preferred-stock conversion, option exercises, restricted stock awards, and repurchases on dilution and per-share results.
- Track the end of B&L OEM sales and the company’s ability to maintain gross margins near its stated short-term goal of 50%.