IRIDEX Corporation — Q1 2013 Form 10-Q
Business context and reporting period
IRIDEX develops, manufactures and sells ophthalmic laser systems, delivery devices, consumables, and service and support. The company reports one ophthalmology segment. This unaudited quarter ended March 30, 2013; comparisons are with the three months ended March 31, 2012. The aesthetics business was sold in February 2012 and is presented as discontinued operations.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Revenue | $8.939 million | $8.305 million |
| Gross profit / margin | $4.231 million / 47.3% | $3.986 million / 48.0% |
| Operating income (loss) from continuing operations | $897,000 | ($236,000) |
| Income (loss) from continuing operations, net of tax | $874,000 | ($265,000) |
| Net income | $874,000 | $1.605 million |
| Basic / diluted EPS | $0.10 / $0.09 | $0.18 / $0.18 |
| Cash used in operating activities | $406,000 | $1.242 million |
At March 30, 2013, cash and cash equivalents were $11.581 million, total current assets $27.392 million, current liabilities $5.483 million, and working capital approximately $21.9 million. The company also reported $510,000 of restricted cash in escrow. Total liabilities were $6.025 million; the balance sheet does not show conventional debt. The earn-out liability was $588,000. Total assets were $29.152 million.
Changes versus the prior comparable period
- Revenue rose 7.6%. Domestic and international system sales increased, while recurring revenue grew modestly. International sales were $4.730 million, or 52.9% of revenue.
- Gross profit increased 6.1%, but gross margin declined 0.7 percentage points to 47.3%. Management attributed the decline to product mix, more international distributor system sales, and TxCell’s higher initial product costs.
- Research and development expense fell 15.7% to $996,000, and sales and marketing expense fell 12.8% to $1.625 million, primarily reflecting lower headcount and related costs. General and administrative expense was approximately flat at $1.186 million.
- Operating results improved to income from continuing operations of $897,000 from a loss of $236,000. Q1 2013 included $473,000 of proceeds from an insurance carrier demutualization.
- Q1 2012 net income included $1.870 million of after-tax income from discontinued operations, including the aesthetics-business sale gain. Thus, reported net income declined year over year despite the improvement in continuing operations.
- Cash declined $320,000 during Q1 2013. Operating cash use improved from the prior year, but working-capital movements were a significant use of cash.
Outlook, commentary and risks
Management stated that cash, expected operating cash flows, and the current credit facility should provide sufficient liquidity for the next 12 months. The company’s short-term gross-margin goal remained 50%; management cautioned that margins fluctuate with product and geographic mix, volume, and manufacturing efficiency. No specific revenue or earnings guidance was provided.
Management cited increased adoption of MicroPulse-enabled systems and the TxCell delivery device as drivers of system sales, and Alcon-related licensing and distribution activity as support for recurring revenue. A global distribution and supply agreement with Peregrine Surgical was entered into in March and completed April 1, 2013; IRIDEX expects the relationship to broaden consumables offerings and potentially reduce costs over time.
Key disclosed risks include intense competition and consumables price sensitivity; dependence on international distributors and sales; reimbursement and healthcare-policy uncertainty, including the U.S. medical-device tax; product acceptance and development risks; reliance on sole- or limited-source suppliers; regulatory and quality-system requirements; and quarterly and seasonal sales volatility. The filing reported no litigation pending that management believed could materially adversely affect the company. Disclosure controls were assessed as effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether revenue growth and system adoption continue, and whether the Peregrine agreement delivers the expected product and cost benefits.
- Whether gross margin recovers toward management’s 50% goal as TxCell matures and product mix changes.
- Whether operating cash flow improves, given Q1 cash use and the working-capital outflow.
- Whether the $510,000 escrow is released as expected; the filing said no claims had been made by Cutera as of March 30, 2013.
- The potential dilution and compensation cost from equity awards, including the CEO’s market-performance award for up to 220,000 shares, and the preferred stock’s $5.0 million liquidation preference.
- The company’s ability to sustain international distributor performance and manage currency-related competitiveness; management said current ophthalmology sales and costs were predominantly denominated in U.S. dollars and it did not hedge currency risk.