IRIDEX Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended April 3, 2021; comparison is with the three months ended March 28, 2020. Figures are in U.S. dollars; financial amounts below are in millions unless stated otherwise.
Business context
IRIDEX develops, manufactures and sells ophthalmic laser systems, delivery devices and consumables, including products for glaucoma and retinal disease. In March 2021, it acquired substantially all of Topcon Medical Laser Systems’ PASCAL business, issued shares to Topcon America, and entered into an exclusive international distribution arrangement with Topcon.
Financial performance and liquidity
- Revenue: $11.96, up 32.6% from $9.02. Retina revenue rose 61.1% to $6.66, partly reflecting PASCAL and stronger IRIDEX retina sales; Cyclo G6 revenue increased 14.6% to $3.35. Other revenue was essentially flat at $1.95.
- Profitability: Gross profit was $4.94, up 26.1%; gross margin declined to 41.3% from 43.4%, primarily due to geographic and product mix. Operating expenses increased to $6.78 from $5.57. Net loss widened to $2.01 from $1.65; loss per share was $0.14 versus $0.12.
- Cash flow: Operating cash flow was positive $11.83, compared with use of $1.45 a year earlier. The company attributed the improvement mainly to receipt of the distribution exclusivity fee and vendor-payment timing. Investing cash outflow was $5.42, primarily for the PASCAL acquisition; financing cash inflow was $9.89, primarily from the Topcon-related stock issuance.
- Liquidity: Cash and cash equivalents were $27.99 at quarter-end, versus $11.63 at January 2, 2021; working capital was $31.5. Management expects operating losses and negative operating cash flows through April 2, 2022, but believes existing cash is sufficient for anticipated needs over the next 12 months.
- Debt and obligations: PPP loan balances totaled approximately $2.50, bearing 1% interest; forgiveness had been requested but was not assured. Future purchase commitments through fiscal 2022 were approximately $13.9.
Material changes and unusual items
- The PASCAL asset purchase was recorded at a preliminary purchase price of $5.34, including acquired inventory, developed technology, in-process R&D, trade names, customer relationships and goodwill. The purchase-price allocation may change during the measurement period.
- Topcon paid $17.5 in March; approximately $2.0 more was expected only if specified Japan distribution-transition conditions were met. The transaction’s allocated value included $14.8 for exclusive distribution rights. No exclusivity revenue was recognized in the quarter; the company reported $12.47 of total deferred revenue at quarter-end, including approximately $10.3 of non-current exclusivity-fee revenue.
- The company issued 1,618,122 shares to Topcon America for $10.0 gross proceeds. Net proceeds from common-stock issuance were $9.88, increasing the share count and diluting existing holders.
- General and administrative expense rose 55.1%, mainly due to legal and consulting costs associated with the PASCAL acquisition and Topcon distribution agreement. R&D expense increased 62.0%, including acquired-business costs.
Outlook, risks and contingencies
Management said demand and its outlook had improved, but warned that COVID-19 uncertainty continued to weigh on hospital, surgery-center and physician-office capital spending; further deferrals were possible. It provided no specific revenue or earnings guidance. Key risks include COVID-19 impacts, international sales and distributor execution, Topcon transition and regulatory approvals, product quality and supply constraints, and the company’s continuing losses. The $2.0 conditional Topcon payment and the Japan-related refund provision are subject to stated conditions. The PPP loan may not be forgiven and could be audited; an adverse outcome could require repayment and potentially expose the company to penalties. The company reported no legal proceedings it believed would have a material adverse effect.
Important facts for investors to verify
- Whether Topcon’s Japan and other regional approvals and distributor transitions proceed, and whether the conditional $2.0 payment is received.
- How much reported growth is sustained by recurring product demand versus PASCAL acquisition effects and deferred exclusivity fees; operating cash flow was substantially affected by the upfront fee and payment timing.
- Whether gross margin can recover from the quarter’s product and geographic mix, and whether acquired PASCAL operations deliver expected results.
- Whether the PPP loan is forgiven and how the company funds ongoing losses, purchase commitments and other obligations.