IRIDEX Corporation — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 27, 2020; unaudited. Comparisons are with the periods ended June 29, 2019, unless otherwise stated. Amounts are in U.S. dollars.
Business context
IRIDEX develops, manufactures and markets ophthalmic medical devices, including laser systems, delivery devices and consumables for glaucoma and retinal conditions. Its revenue also includes service, support and royalties. The company operates in one segment: ophthalmology.
Financial highlights
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $6.219 million | $10.426 million | $15.240 million | $21.021 million |
| Gross profit / margin | $2.406 million / 38.7% | $4.549 million / 43.6% | $6.322 million / 41.5% | $8.806 million / 41.9% |
| Operating loss | $2.784 million | $2.468 million | $4.437 million | $5.504 million |
| Net loss | $2.780 million | $2.419 million | $4.431 million | $5.467 million |
| Basic and diluted loss per share | $0.20 | $0.18 | $0.32 | $0.40 |
For the six months ended June 27, 2020, operating cash use was $3.439 million, compared with $5.161 million a year earlier. Investing activities used $79,000; financing activities provided $2.493 million, primarily from the PPP loan. Cash declined by $1.029 million to $11.624 million.
At June 27, 2020, current assets were $25.763 million, current liabilities $7.575 million, and working capital $18.1 million. Total assets were $29.275 million and stockholders’ equity was $18.794 million. The company reported $2.497 million of PPP borrowing: $1.110 million current and $1.387 million long term. The filing reports no other borrowing balance.
Material changes and drivers
- Q2 revenue fell 40.4%; first-half revenue fell 27.5%. Management attributed the declines primarily to COVID-19-related reductions in elective procedures and delays in capital purchases.
- Q2 Retina revenue declined 50.3% and Cyclo G6 revenue 36.9%; first-half declines were 37.8% and 22.0%, respectively. Lower sales volume increased the share of fixed manufacturing overhead per unit, reducing gross margin.
- Operating expenses fell year over year in both periods, reflecting reduced headcount and lower commissions, travel, marketing activity and legal expenses. Despite lower operating expenses, Q2 operating and net losses increased; first-half losses improved.
- Cash and cash equivalents decreased from $12.653 million at December 28, 2019 to $11.624 million. Accounts receivable fell to $5.784 million from $9.323 million; total liabilities fell to $10.481 million from $12.108 million, including the new PPP borrowing.
Outlook, risks and contingencies
- Management expects operating losses and negative operating cash flows through July 3, 2021, but believes existing cash will cover anticipated needs for the next 12 months. It provides no specific revenue or earnings guidance.
- COVID-19 reduced demand beginning in mid-March; the impact continued through Q2 and into Q3. The company said future effects were uncertain and dependent on procedure volumes, customer purchasing, public-health measures and broader economic conditions.
- The company intends to seek forgiveness of its $2.497 million PPP loan. If not forgiven, principal and interest payments were scheduled to begin in October 2020; the loan bears 1% interest and matures in April 2022. Because the loan exceeds $2 million, it may be audited; an adverse outcome could require repayment and could result in penalties.
- Purchase commitments through fiscal 2021 were approximately $9.9 million. Operating lease liabilities totaled $2.513 million, with a weighted-average remaining term of 1.7 years.
- Management identified potential supply and launch disruption for laser systems planned for the latter half of 2020, including manufacturing by a third party in Wuhan, China. Other risks include reliance on limited-source suppliers, product quality and regulatory compliance, and continuing weakness in elective procedures.
- The filing states that goodwill was not impaired in the Q2 2020 annual test. The 2018 TruFocus LIO voluntary recall termination request remained pending. Management said ordinary-course legal matters were not expected to have a material adverse effect.
Key facts for investors to verify
- Whether elective ophthalmic procedures and capital-equipment purchases recover, and how that affects revenue and gross margin.
- Whether the company’s cash balance and stated 12-month liquidity outlook remain adequate given expected operating losses and cash use.
- The outcome of the PPP forgiveness application or any audit, and any resulting repayment obligation.
- Whether the company can meet its purchase commitments while managing lower demand and any supply-chain or product-launch delays.
- The status of the TruFocus LIO recall termination request and any subsequent product-safety developments.