IRIDEX Corporation — Q3 2022 Form 10-Q
Business context and period. IRIDEX develops, manufactures and sells ophthalmic laser systems, delivery devices, consumables and related services for glaucoma and retinal conditions. The unaudited fiscal quarter ended October 1, 2022 (13 weeks); nine-month results cover the 39 weeks ended that date. Comparatives are the periods ended October 2, 2021.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $14.6 million | $13.3 million | $41.8 million | $38.6 million |
| Gross profit / margin | $6.5 million / 44.1% | $5.8 million / 43.6% | $18.7 million / 44.8% | $16.8 million / 43.5% |
| Operating expenses | $8.2 million | $7.9 million | $24.8 million | $22.0 million |
| Operating loss | $1.7 million | $2.2 million | $6.1 million | $5.1 million |
| Net loss | $1.8 million | $2.2 million | $6.4 million | $2.8 million |
| Basic and diluted loss per share | $0.11 | $0.14 | $0.40 | $0.18 |
Cash, liquidity and debt. Cash and cash equivalents were $15.9 million at October 1, 2022, down from $23.9 million at January 1, 2022. Working capital was $24.7 million, versus $29.6 million at year-end. Operating activities used $7.9 million in the first nine months of 2022, compared with providing $10.0 million in the prior-year period. Investing activities used $0.2 million and financing activities used $0.1 million. The company had no borrowings under its $8.0 million revolving facility; the facility term was extended to December 1, 2023. Management stated that existing cash should cover anticipated needs for at least 12 months.
Total liabilities were $26.9 million, including $14.6 million of deferred revenue and $2.0 million of operating lease liabilities. There was no reported funded debt outstanding. Inventory increased to $10.8 million from $7.6 million at January 1, 2022.
Material changes versus prior periods
- Q3 revenue rose 10.3%; nine-month revenue rose 8.1%. Retina revenue grew 12.5% in Q3 and 7.1% year to date; Cyclo G6 revenue grew 10.0% in Q3 and 3.8% year to date.
- Q3 gross margin improved 0.5 percentage points; nine-month gross margin improved 1.3 points. Management cited favorable product/geographic mix, pricing discipline and Topcon distribution-rights revenue.
- Q3 operating loss narrowed year over year, while nine-month operating loss widened. Nine-month net loss increased partly because the prior-year period included a $2.5 million gain from PPP loan forgiveness; current-period other expense was $0.2 million versus prior-year other income of $2.4 million.
- Operating cash flow shifted from a $10.0 million source to a $7.9 million use. Management cited higher vendor payments to mitigate supply-chain challenges and higher payroll, partly offset by customer receipts.
- Sales and marketing expense increased 13.6% in Q3 and 26.7% year to date, primarily reflecting expanded programs. Nine-month R&D expense increased 23.8%, reflecting new product and PASCAL development.
Outlook, risks and unusual items
- Management said demand remained and its outlook had improved, but expected some customer capital expenditures to be deferred amid COVID-related uncertainty, higher costs and softer expected global economic activity. No numerical revenue or earnings guidance was provided.
- The company expected continuing operating losses and negative operating cash flow. Its liquidity assessment depends on forecasted cash needs; additional financing may not be available on acceptable terms.
- Topcon is a related party, exclusive distributor in certain international regions and a significant customer. It accounted for 31% of Q3 revenue and 29% of nine-month revenue; its receivable was 37% of accounts receivable at quarter-end. Topcon holds a 10.1% voting interest.
- Non-cancellable purchase commitments were approximately $22.6 million through fiscal 2024, including $10.7 million due within 12 months.
- Deferred revenue was $14.6 million, of which approximately $13.0 million related to Topcon exclusive distribution rights. The company recognized $0.4 million of that revenue in Q3 and $1.0 million in the first nine months.
- Key disclosed risks include COVID-19 and macroeconomic effects on elective procedures and capital spending, supply-chain constraints and limited-source suppliers, product quality and regulatory compliance, reliance on Topcon and international distributors, competition, and foreign exchange exposure. The filing reports ordinary-course legal matters but says management does not expect their outcomes to have a material adverse effect. The 2018 voluntary TruFocus LIO Premiere recall termination request remained pending.
- Management concluded disclosure controls and procedures were effective as of October 1, 2022; it reported no material changes in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether revenue growth and gross-margin improvement persist, particularly in Retina and Topcon-related sales.
- Whether operating cash burn, inventory growth and vendor commitments remain manageable relative to cash and available revolving credit.
- Topcon’s sales performance, payment collections, distribution exclusivity arrangements and concentration of revenue and receivables.
- Whether customer capital spending, supply availability, costs and elective ophthalmic procedure volumes develop as management expects.
- The status of the TruFocus LIO recall termination request and any product, regulatory or litigation developments.