IRIDEX Corporation — Q2 2021 Form 10-Q
Reporting period: Fiscal quarter and six months ended July 3, 2021; each period comprised 13 weeks. Financial amounts below are in U.S. dollars; “$ million” is used for readability.
Business context and key developments
IRIDEX develops and sells ophthalmic laser systems, delivery devices, consumables, and related services for glaucoma and retinal conditions. In March 2021, it acquired substantially all assets of Topcon Medical Laser Systems’ PASCAL business, issued Topcon 1,618,122 shares for $10.0 million, and granted Topcon exclusive distribution rights in certain international markets. The PASCAL acquisition added product revenue, particularly in international markets.
Financial performance and liquidity
| Metric | Three months ended July 3, 2021 | Six months ended July 3, 2021 | Comparable 2020 period |
|---|---|---|---|
| Revenue | $13.426 million | $25.385 million | $6.219 million; $15.240 million |
| Gross profit / margin | $6.108 million / 45.5% | $11.047 million / 43.5% | $2.406 million / 38.7%; $6.322 million / 41.5% |
| Operating loss | $1.138 million | $2.979 million | $2.784 million; $4.437 million |
| Net income (loss) | $1.393 million | $(0.617) million | $(2.780) million; $(4.431) million |
| Operating cash flow | $10.599 million for the six-month period | $(3.439) million |
- Quarterly revenue rose 115.9% year over year; six-month revenue rose 66.6%. Retina revenue increased 190.5% in the quarter and 111.1% year to date, while Cyclo G6 revenue increased 70.3% and 38.0%, respectively.
- Gross margin improved year over year, which management attributed mainly to higher volume reducing manufacturing overhead per unit and a favorable product mix. Operating expenses nevertheless increased, including R&D and sales and marketing spending.
- Q2 net income included a $2.5 million gain from full forgiveness of the Paycheck Protection Program loan. The company still recorded an operating loss in the quarter; excluding that forgiveness gain, the reported net result would not reflect a comparable operating profit. Six-month results remained a net loss.
- Cash and cash equivalents were $26.259 million at July 3, 2021, versus $11.626 million at January 2, 2021; working capital was $32.8 million versus $16.7 million. Total liabilities were $23.640 million. The PPP loan balance was zero following forgiveness; operating lease liabilities totaled $2.990 million, including current and long-term amounts.
- Six-month investing cash use was $5.468 million, primarily the $5.343 million PASCAL asset purchase. Financing provided $9.457 million, mainly from $9.878 million net common-stock proceeds. Operating cash flow benefited substantially from Topcon distribution-rights cash receipts and increased customer collections; deferred revenue rose to $12.484 million, including deferred exclusivity fees.
- Common shares outstanding increased from 13.900 million at January 2 to 15.784 million at July 3, including the Topcon issuance and other equity activity.
Outlook, risks, and unusual items
- Management expected operating losses and negative operating cash flows to continue through July 2, 2022, but believed existing cash would cover anticipated needs for at least the next 12 months. It provided no specific revenue or earnings guidance.
- Management said demand and its outlook had improved, but hospital, surgery-center, and physician-office capital spending remained affected by COVID-19 uncertainty and the Delta variant; capital purchases could continue to be deferred.
- The Topcon transaction’s distribution fee is recognized over a 10-year exclusivity term as regional regulatory approvals are obtained. Approximately $10.2 million of non-current and $1.1 million of current deferred revenue related to exclusivity fees at quarter-end. About $3.4 million allocated to Japan and Belarus was constrained pending approvals and distributor transitions; $2.0 million of the transaction consideration was conditional on specified Japan-related steps.
- Key risks include ongoing COVID-19 disruption, execution and revenue performance of the Topcon relationship, international-market and distributor dependence, competition, manufacturing and supplier constraints, and regulatory or product-quality issues. Non-cancellable purchase commitments through fiscal 2022 were approximately $14.2 million.
- One customer represented 15% of quarterly revenue; Japan represented 12% of quarterly revenue. The company reported no legal proceeding expected to have a material adverse effect. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of reported Q2 profitability and operating cash flow reflects the one-time PPP forgiveness and Topcon-related cash receipts, versus recurring operations.
- Whether PASCAL integration and Topcon distribution deliver sustainable incremental sales, and whether regional approvals, distributor transfers, and the remaining conditional $2.0 million proceed as planned.
- Whether revenue growth and improved gross margins persist after comparison with the pandemic-affected 2020 period, given ongoing capital-spending uncertainty and higher operating expenses.
- How the stated expectation of continued losses and negative operating cash flow through July 2, 2022 develops relative to available cash, working capital, and purchase commitments.
- Whether customer and geographic concentration, supply-chain capacity, and COVID-19-related procedure delays create material changes to collections, demand, or product availability.