IRIDEX Corporation — Q3 2019 Form 10-Q
Reporting period: The quarter and nine-month period ended September 28, 2019. IRIDEX develops, manufactures and markets ophthalmic medical devices, including laser systems, delivery devices and consumables used to treat glaucoma and retinal diseases. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $10.664 | $11.320 | $31.685 | $31.133 |
| Gross profit / margin | $4.283 / 40.2% | $4.576 / 40.4% | $13.089 / 41.3% | $12.766 / 41.0% |
| Operating expenses | $6.136 | $7.636 | $20.446 | $22.725 |
| Operating loss | $(1.853) | $(3.060) | $(7.357) | $(9.959) |
| Net loss | $(1.785) | $(3.074) | $(7.252) | $(9.957) |
| Basic and diluted loss per share | $(0.13) | $(0.26) | $(0.53) | $(0.85) |
- Cash flow: Nine-month operating cash use was $7.724 million, compared with $7.974 million in 2018. Investing activities used $0.443 million; financing activities used $0.151 million. Cash and cash equivalents declined $8.246 million to $12.948 million.
- Balance sheet and liquidity: At September 28, cash was $12.948 million, working capital was $21.9 million and total assets were $35.958 million. Total liabilities were $11.970 million. No conventional borrowing is shown; operating lease liabilities totaled $3.539 million ($1.388 million current and $2.151 million long-term).
- Other commitments: Non-cancellable vendor purchase commitments through fiscal 2020 were approximately $6.2 million. Operating lease expense was approximately $1.0 million for the first nine months.
Changes versus the prior comparable periods
- Q3 revenue decreased 5.8%, primarily as retina sales fell 13.2%; management attributed the comparison in part to higher China sales in Q3 2018. G6 revenue rose 3.6%, and other revenue rose 7.0%.
- Nine-month revenue increased 1.8%. G6 revenue rose 8.1% and other revenue rose 7.1%, partly offset by a 3.1% decline in retina revenue.
- Operating losses narrowed in both comparisons as operating expenses declined. For Q3, sales and marketing fell 15.3% and general and administrative expense fell 30.8%, with lower headcount-related costs and other spending cited. Nine-month operating expenses declined by $2.279 million.
- Gross margin was nearly flat year over year in Q3, down 0.2 percentage points; the nine-month margin improved 0.3 points. Management cited geographic and product mix, manufacturing overhead spending and variances as factors.
- Cash fell from $21.194 million at fiscal year-end 2018. Unlike the first nine months of 2018, when the company received $10.6 million in net proceeds from a stock issuance, the 2019 period had no comparable equity proceeds.
Outlook, management commentary and risks
- IRIDEX stated that existing cash and cash equivalents should meet anticipated cash needs for at least the next 12 months. The filing provides no specific revenue, earnings or margin guidance.
- Management expects gross margins to fluctuate with product and geographic mix, new products, manufacturing variances and production volumes. Results may also vary due to seasonality, sales timing and operational factors.
- The company initiated a worldwide voluntary recall of the TruFocus LIO Premiere accessory in 2018 after reports of three adverse events. Its request to terminate the recall, submitted to the FDA in March 2019, remained pending; an updated device had received FDA clearance. The filing notes potential safety, adoption and financial risks.
- IRIDEX disclosed that it must meet MDSAP requirements to continue selling in Canada after December 31, 2019. Failure to comply could prevent Canadian sales.
- Other principal risks include product quality and supply constraints, reliance on sole- or limited-source suppliers and distributors, competition, international-market exposure, regulatory and reimbursement changes, and potential need for additional capital. Legal matters in the ordinary course were not expected by management to have a material adverse effect.
- Operating lease accounting was adopted at the start of fiscal 2019, adding recognized right-of-use assets and lease liabilities; the company said adoption did not affect its statement of operations. Disclosure controls were assessed as effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether cash use and operating losses continue to improve, and whether the stated 12-month cash sufficiency remains supportable.
- Whether the FDA terminates the TruFocus LIO Premiere recall and whether the updated accessory achieves safe use and market acceptance.
- Whether IRIDEX meets MDSAP requirements by the stated deadline to preserve Canadian sales.
- Whether retina revenue stabilizes and G6 and recurring service, royalty and consumables revenue sustain growth.
- How vendor commitments, lease payments, warranty estimates and any future financing needs affect liquidity and potential dilution.