IRIDEX Corporation — Q1 2019 Form 10-Q
Business context and reporting period
IRIDEX develops, manufactures and markets ophthalmic medical devices, including laser consoles, delivery devices and consumables used to treat glaucoma and retinal diseases. The unaudited quarter ended March 30, 2019 comprised 13 weeks; comparisons are with the 13 weeks ended March 31, 2018.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Revenue | $10.595 million | $9.509 million; up 11.4% |
| Gross profit and margin | $4.257 million; 40.2% | $3.922 million; 41.2% |
| Operating expenses | $7.293 million | $7.539 million |
| Operating loss | $3.036 million | $3.617 million |
| Net loss / diluted loss per share | $3.048 million / $0.22 | $3.603 million / $0.31 |
| Operating cash flow | $(3.797) million | $(2.727) million |
| Cash and cash equivalents | $17.175 million at March 30, 2019 | $21.194 million at December 29, 2018 |
| Working capital | $25.3 million | $29.1 million at December 29, 2018 |
Cash decreased by $4.019 million during the quarter. Investing cash use was $0.163 million, including capital expenditures and an earn-out payment; financing cash use was $0.093 million, primarily payroll taxes on equity awards. No borrowings are listed on the balance sheet. The company reported total liabilities of $13.224 million, including $4.202 million of operating lease liabilities.
Changes versus prior period
- Revenue increased across G6 ($3.106 million, up 9.3%), Retina ($5.599 million, up 14.0%) and Other ($1.890 million, up 7.6%). Management attributed Retina growth partly to normalization following the prior-year voluntary LIO recall; G6 growth was driven by international sales.
- Gross margin declined 1.0 percentage point, which management attributed to geographic and product mix.
- Operating expenses fell 3.3%, with lower R&D consulting costs and lower G&A bonus expense partly offsetting largely unchanged sales and marketing costs. The operating and net losses narrowed.
- Operating cash use increased by $1.070 million year over year, principally due to working-capital movements, including higher bonus payouts and vendor-payment timing, partly offset by higher collections.
- International revenue was 50.9% of total, compared with 48.9% a year earlier; Asia/Pacific Rim revenue increased to $2.298 million from $1.563 million.
Outlook, risks and unusual items
- Management said existing cash and cash equivalents should meet anticipated cash needs for the next 12 months. No revenue or earnings guidance was provided.
- Purchase commitments with vendors totaled approximately $12.6 million through fiscal 2020. Operating lease liabilities were $4.202 million, with a 2.9-year weighted-average remaining lease term.
- The company adopted lease accounting (ASC 842) on December 30, 2018, recognizing a $3.678 million net right-of-use asset and $4.202 million lease liabilities at quarter-end. Adoption increased assets by $4.0 million and liabilities by $4.5 million; management said the standard did not affect operating results.
- The TruFocus LIO Premiere voluntary recall termination request was pending with the FDA at filing. IRIDEX had obtained clearance for an updated device but warned of possible adverse events, further recall-related costs and uncertain market acceptance.
- Other material risks include manufacturing and supplier constraints, product quality and warranty exposure, international-market and currency risks, competition, regulation and reimbursement uncertainty, and reliance on distributors and product acceptance. Management cited no expected material adverse effect from ordinary-course legal matters.
- Warranty liability ended at $0.707 million, including a $0.151 million adjustment reducing reserves for pre-existing warranties. The earn-out liability was $0.312 million and is measured using significant unobservable inputs.
- Disclosure controls and procedures were assessed as effective at the reasonable-assurance level; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether revenue growth and the Retina recovery continue, particularly after launch of the updated LIO and resolution of the recall.
- How quickly cash is being consumed and whether working-capital outflows persist; assess the company’s 12-month liquidity statement against vendor purchase commitments and lease obligations.
- Whether gross-margin pressure from product and geographic mix improves or worsens.
- The FDA status of the LIO recall termination request, the updated device’s safety and market adoption, and any resulting warranty or liability costs.
- Exposure to supply-chain constraints and international sales risks, including the fact that one customer represented 12% of accounts receivable at quarter-end.