IRIDEX Corporation — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 29, 2013; comparative periods ended June 30, 2012. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise. IRIDEX develops and sells ophthalmic laser systems, delivery devices, consumables, and related services, and reports one operating segment.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Revenue | $9.210 | $8.445 | $18.149 | $16.750 |
| Gross profit / margin | $4.482 / 48.7% | $4.111 / 48.7% | $8.713 / 48.0% | $8.097 / 48.3% |
| Income from continuing operations, net | $0.415 | $0.397 | $1.289 | $0.132 |
| Net income | $0.415 | $0.336 | $1.289 | $1.941 |
| Diluted EPS | $0.04 | $0.03 | $0.13 | $0.19 |
| Cash from continuing operating activities | Not presented quarterly | $0.666 | $(1.808) |
Q2 revenue increased 9.1%; first-half revenue increased 8.4%. Q2 continuing-operations income improved from a loss before other items of $0.350 million in 2012 to operating income of $0.515 million in 2013. The prior-year periods included an $0.800 million legal settlement payment; first-half 2013 operating expenses also benefited from a $0.473 million insurance-carrier demutualization payment. First-half 2012 net income included a $1.809 million after-tax gain from discontinued operations, principally the aesthetics-business sale, which explains why reported net income fell year over year despite higher continuing-operations income.
Liquidity, cash flow, and capitalization
- Cash and cash equivalents were $13.505 million at June 29, 2013, up from $11.901 million at December 29, 2012. Working capital was $23.0 million, versus $20.7 million at year-end.
- First-half cash from continuing operations was $0.666 million. Operating cash flow included working-capital investment, including $0.728 million in higher receivables and $0.905 million in higher inventory. Investing activities used $0.270 million; financing activities provided $0.698 million, including $0.814 million from option exercises. The $0.510 million release of the aesthetics-sale escrow also contributed to the reported cash increase.
- Total liabilities were $7.144 million. The balance sheet does not show interest-bearing borrowings; it includes a $0.545 million contingent earn-out liability. Cash substantially exceeded current liabilities of $6.683 million.
- Common shares outstanding were 9.729 million at quarter-end (9.775 million as of July 19). In June, 500,000 preferred shares converted into 1.0 million common shares after the stock met the contractual trading-price trigger. The company also repurchased 16,904 shares in the first half and retained $2.9 million of authorization under its $3.0 million repurchase program.
Material changes and management commentary
- System revenue rose on international sales, including two large orders; management also cited wider adoption of MicroPulse systems. Recurring revenue grew 9.2% in Q2 and 6.5% in the first half, supported by Peregrine product sales and higher Alcon sales of licensed GreenTip products.
- Revenue from Peregrine products followed a global distribution and supply agreement effective April 1, 2013; IRIDEX assumed responsibility for 10 domestic independent sales representatives. Bausch & Lomb had discontinued the relevant OEM product, and IRIDEX expected those sales to cease shortly.
- Q2 gross margin remained 48.7%; management’s short-term gross-margin goal was 50%, to be pursued through pricing and cost-reduction initiatives. Management anticipated a slight increase in R&D spending for new products and cost reduction, and increased sales-and-marketing spending to support sales growth.
- Management described the system-sales outlook as positive and said cash, together with expected operating cash generation, was sufficient for operations for the next 12 months. No numerical revenue or earnings guidance was provided.
Risks, contingencies, and unusual items
- Results may fluctuate with product mix, seasonality, order timing, customer demand, reimbursement policies, pricing, and manufacturing efficiency. The company noted that European sales are generally lower in the third quarter.
- International sales represented 46.1% of Q2 revenue. Sales are generally denominated in U.S. dollars and are not currently hedged; a stronger dollar could make products less competitive abroad.
- IRIDEX depends on independent distributors and sales representatives, certain sole- or limited-source suppliers, and commercial partners including Alcon. It also faces competition, product-acceptance and development risks, and extensive FDA and foreign regulatory requirements.
- The filing identifies a potential 2.3% U.S. medical-device excise tax and warns that inability to pass it on could reduce profits. It also cites product-liability, warranty, intellectual-property, and manufacturing risks. Management reported no pending litigation believed likely to have a material adverse effect.
- The $0.545 million earn-out valuation is based on projected royalties and other unobservable assumptions; changes in estimates affect earnings. The company reported a fully valuation-allowed deferred tax asset of approximately $10.1 million at December 29, 2012 and $1.0 million of unrecognized tax benefits at that date.
Most important facts for investors to verify
- Whether revenue growth—especially recurring revenue and international system sales—continues after the contribution from two large orders and the Peregrine distribution change.
- Whether gross margin can reach management’s 50% goal while the company increases sales, marketing, and R&D spending.
- The timing and financial impact of Bausch & Lomb OEM sales ending, and the durability of Alcon GreenTip and Peregrine-related revenue.
- Potential dilution from the preferred-stock conversion, outstanding options, and the CEO’s market-performance restricted-stock-unit award.
- Whether operating cash generation remains adequate as receivables and inventory grow, and whether management’s stated 12-month liquidity assessment remains valid.