IRIDEX Corporation — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended October 2, 2021; comparisons are to periods ended September 26, 2020. Amounts are in U.S. dollars. IRIDEX develops, manufactures and markets ophthalmic laser systems, delivery devices and consumables for glaucoma and retinal diseases.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $13.3m | $8.8m | $38.6m | $24.0m |
| Gross profit / margin | $5.8m / 43.6% | $3.7m / 41.5% | $16.8m / 43.5% | $10.0m / 41.5% |
| Operating expenses | $7.9m | $5.5m | $22.0m | $16.3m |
| Operating loss | $(2.2)m | $(1.8)m | $(5.1)m | $(6.3)m |
| Net loss | $(2.2)m | $(1.7)m | $(2.8)m | $(6.2)m |
| Net loss per diluted share | $(0.14) | $(0.12) | $(0.18) | $(0.44) |
- Q3 revenue increased 50.7%; nine-month revenue increased 60.7%. Retina sales rose 75.6% in Q3 and 97.0% year to date, including contribution from the acquired PASCAL business. Cyclo G6 revenue rose 13.3% and 29.2%, respectively.
- Gross margin improved by 2.1 percentage points in Q3 and 2.0 points year to date, which management attributed mainly to higher production volume lowering manufacturing overhead per unit and to product mix.
- Q3 net loss increased year over year despite higher revenue, as operating expenses rose. Nine-month net loss narrowed, partly because of a $2.5m gain from PPP loan forgiveness; operating loss remained $5.1m.
- Research and development, sales and marketing, and general and administrative expenses were $1.8m, $3.9m and $2.2m in Q3, respectively. Higher R&D reflected increased laser-system spending and PASCAL-related costs; sales and marketing rose with commissions and travel; G&A rose partly due to transaction-related legal and consulting costs.
Cash, liquidity and obligations
- Cash and cash equivalents were $25.6m at October 2, 2021, up from $11.6m at January 2, 2021. Working capital was $30.9m, versus $16.7m.
- Nine-month operating cash flow was positive $10.0m, compared with negative $3.0m in the prior-year period. The increase was driven significantly by receipt of the Topcon distribution fee and higher customer receipts. Deferred revenue increased by $11.2m during the period, so operating cash flow benefited substantially from amounts received but not yet recognized as revenue.
- Investing cash outflow was $5.5m, mainly the $5.3m PASCAL acquisition. Financing cash inflow was $9.4m, chiefly from $9.9m net proceeds from common-stock issuance and stock-option exercises.
- The approximately $2.5m PPP loan, including accrued interest, was fully forgiven in June 2021; no PPP loan balance remained at quarter-end. Operating lease liabilities totaled $2.9m. Purchase commitments through fiscal 2022 were approximately $16.1m.
- Management expects operating losses and negative operating cash flows through October 1, 2022, but believes existing cash will cover anticipated needs for at least 12 months. No specific revenue or profitability guidance was provided.
Material developments and unusual items
- In March 2021, IRIDEX acquired substantially all relevant Topcon Medical Laser Systems assets, including the PASCAL product line, for approximately $5.3m. The preliminary allocation included $2.3m of inventory, $2.2m of identified intangible assets and $0.4m of goodwill; the purchase-price allocation remained subject to revision.
- Topcon invested $10.0m for 1,618,122 IRIDEX shares and received exclusive distribution rights for certain retina and glaucoma products in specified international territories. The overall transaction was expected to provide approximately $19.5m net proceeds, including a $2.0m amount subject to conditions. IRIDEX recognized $0.2m of related exclusivity revenue in Q3 and $0.3m year to date; deferred revenue was $12.4m at quarter-end, including approximately $9.9m of noncurrent exclusivity fees.
- Topcon accounted for 21% of Q3 revenue and 15% of nine-month revenue, and 23% of quarter-end accounts receivable, creating customer and partner concentration exposure.
- During Q3, modification of 56,900 stock awards resulted in $0.4m of incremental stock-based compensation expense. Common shares outstanding rose from 13.9m at fiscal year-end to 15.9m at quarter-end, including the Topcon investment issuance.
Outlook, risks and contingencies
- Management said demand had improved but warned that hospital, surgery-center and physician-office capital spending remained affected by COVID-19 uncertainty and the Delta variant; further deferrals were possible. The filing says pandemic effects may continue to disrupt demand, operations and supply.
- Topcon distribution execution, regulatory approvals and transfer of existing distributor relationships are important uncertainties. The Japan-related $2.0m payment was conditional, and fees may apply under specified termination provisions.
- Other key risks include manufacturing and supplier constraints, product defects and recalls, competition, reliance on international sales and distributors, regulatory compliance, reimbursement uncertainty, and the possibility of needing additional capital. Management noted that financing may not be available on acceptable terms.
- IRIDEX reported no legal proceeding it believed would have a material adverse effect. The filing also notes that the termination request for the 2018 voluntary TruFocus LIO Premiere recall remained pending with the FDA.
- Management concluded disclosure controls and procedures were effective at the reasonable-assurance level; no material change in internal control over financial reporting was reported.
Investor verification priorities
- Assess how much revenue and cash generation depend on Topcon, including deferred exclusivity fees, conditional payments and successful regional distribution transitions.
- Track recurring product demand and margins separately from PASCAL acquisition effects, pandemic recovery and product mix.
- Evaluate cash-flow durability: reported operating cash flow included substantial deferred-revenue receipts, while management anticipated negative operating cash flows through October 1, 2022.
- Monitor the $16.1m purchase commitments, supplier capacity, inventory growth and ability to meet demand without margin pressure.
- Check progress on the pending LIO recall termination request and any further product-quality or regulatory developments.