IRIDEX Corporation — Q1 2012 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2012, compared with the three months ended April 2, 2011. IRIDEX develops and sells ophthalmic laser systems, delivery devices, consumables, and related services. In February 2012, it sold its aesthetics business to Cutera; results for that business are presented as discontinued operations, so continuing results reflect ophthalmology.
Financial performance and liquidity
| Metric | Q1 2012 | Prior comparable quarter |
|---|---|---|
| Continuing revenue | $8.305 million | $8.196 million |
| Gross profit / margin | $3.986 million / 48.0% | $4.084 million / 49.8% |
| Operating expenses | $4.222 million | $3.824 million |
| Continuing operating loss | $0.236 million | Operating income of $0.260 million |
| Continuing net loss | $0.265 million | Continuing net income of $0.185 million |
| Net income, including discontinued operations | $1.605 million | $0.566 million |
| Operating cash flow, continuing operations | $(1.328) million | $(0.727) million |
Net income included $1.870 million of income from discontinued operations, including a $2.032 million after-tax gain on the aesthetics sale, partly offset by a $0.162 million discontinued-operations loss. The sale generated $5.1 million net cash proceeds. Continuing gross margin declined as manufacturing spending increased while operations were rebalanced following the sale.
Cash and cash equivalents were $13.856 million at March 31, versus $10.789 million at December 31, 2011; working capital was $22.7 million. The cash increase included proceeds from the business sale. The company had no borrowings under its $5.0 million secured revolving facility, which was scheduled to mature June 11, 2012. Total liabilities were $6.658 million; the filing reports no outstanding bank loans. A $0.510 million amount related to discontinued operations was held in restricted cash/escrow.
Changes, outlook, and risks
- Revenue rose 1.2%. Domestic system sales fell 23.5% to $1.3 million, while international system sales increased 18.2% to $2.6 million; recurring revenue rose 4.8% to $4.4 million. Management cited sales timing and growth in GreenTip-related recurring sales.
- R&D increased 20.0% to $1.2 million, and sales and marketing rose 5.6% to $1.9 million. Management expects these expenses to increase to support new products and sales growth. It identified 50% as its short-term gross-margin goal and said it intends to balance investment with revenue growth to maintain profitability for the year; no specific revenue or earnings guidance was provided.
- Management said current cash, expected operating cash flows, and the credit facility should provide sufficient liquidity for the next 12 months. Continuing operations nevertheless used $1.328 million of operating cash in the quarter.
- The company warned that the aesthetics sale removes a business that had covered its direct costs and could adversely affect near-term profitability; it must adjust costs or grow ophthalmology revenue. Other stated risks include quarter-to-quarter sales volatility, competition and reimbursement uncertainty, reliance on international distributors and limited-source suppliers, and regulatory and product-liability exposure. The company does not hedge foreign-currency risk.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. It reported no pending litigation believed likely to have a material adverse effect.
Important facts for investors to verify
- Whether ophthalmology revenue and recurring sales can grow enough to offset the sold aesthetics business and operating-cost increases.
- Whether gross margin recovers toward management’s 50% short-term goal after manufacturing rebalancing.
- Cash use from continuing operations, the sustainability of liquidity, and the status or replacement of the revolving facility after its June 11, 2012 maturity.
- The final tax and cash effects of the sale, including the anticipated tax carryback/refund and the reported after-tax gain.
- Execution of new-product plans and exposure to distributor, supplier, reimbursement, and regulatory risks.