IRIDEX Corporation — Q1 2020 Form 10-Q
Business context and reporting period
IRIDEX develops, manufactures and sells ophthalmic laser systems, delivery devices, consumables and related services for glaucoma and retinal conditions. This unaudited report covers the 13 weeks ended March 28, 2020; the comparable period ended March 30, 2019.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $9.0 million | $10.6 million |
| Gross profit / gross margin | $3.9 million / 43.4% | $4.3 million / 40.2% |
| Operating expenses | $5.6 million | $7.3 million |
| Operating loss | $1.7 million | $3.0 million |
| Net loss | $1.7 million; $0.12 per share | $3.0 million; $0.22 per share |
| Cash used in operating activities | $1.5 million | $3.8 million |
At March 28, 2020, cash and cash equivalents were $11.1 million, working capital was $19.1 million, total assets were $30.9 million, and total liabilities were $9.7 million. The company reported an accumulated deficit of $52.3 million. The balance sheet lists operating lease liabilities but no separate borrowing balance. In April 2020, after quarter-end, IRIDEX received a $2.5 million PPP loan.
Material changes versus the prior comparable period
- Revenue fell 14.9%, primarily as retina revenue declined 26.2% to $4.1 million; G6 revenue fell 5.9% to $2.9 million. Other revenue increased 3.9% to $2.0 million.
- U.S. revenue was $4.4 million and international revenue was $4.6 million. Japan represented 13% of revenue in Q1 2020.
- Gross margin improved 3.2 percentage points, which management attributed mainly to product mix and lower manufacturing overhead spending.
- Operating expenses declined 23.6%, with lower personnel costs following headcount reductions, lower commissions and reduced marketing program spending. Net loss narrowed by $1.4 million.
- Cash declined $1.5 million from year-end 2019. Lower operating cash use than in Q1 2019 reflected working-capital changes, lower operating expenses and bonus payment timing.
Outlook, risks and unusual items
- Management expected operating losses and negative operating cash flows to continue through March 31, 2021, but believed existing cash would cover anticipated needs for the next 12 months. It cautioned that additional financing, if needed, might not be available on acceptable terms.
- COVID-19 affected business late in Q1. IRIDEX reported reduced global procedure volumes, limited operations, slower manufacturing, employee work-from-home measures and travel restrictions; management expected a greater impact in Q2 and later periods. The duration and financial effects remained uncertain.
- The $2.5 million PPP loan may be forgiven subject to program conditions; forgiveness is not assured. If not forgiven or if the loan is found ineligible, it is repayable at 1% interest, with a maturity date of April 22, 2022. The company disclosed potential audit, repayment, penalty and reputational risks.
- Purchase commitments through fiscal 2021 were approximately $10.5 million. Operating lease liabilities totaled $2.9 million.
- The company’s voluntary recall of the TruFocus LIO Premiere remained a risk: its request to terminate the recall was pending, and use of the updated device could still lead to adverse events. Ordinary-course litigation was not expected by management to have a material adverse effect.
- Management stated disclosure controls were effective as of March 28, 2020, and reported no material changes in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- How COVID-19 affected Q2 and subsequent demand, elective procedures, manufacturing and cash use.
- Whether the PPP loan qualified for, and ultimately received, forgiveness, or required repayment.
- Whether revenue and margins stabilized after the steep decline in retina sales, and whether reduced expenses are sustainable.
- Whether cash and working capital remain sufficient given continuing losses and the $10.5 million of purchase commitments.
- The status and financial implications of the TruFocus LIO recall termination request and any related product-safety developments.