IRIDEX Corporation — Q3 2012 Form 10-Q
Reporting period: Quarter ended September 29, 2012; filed November 5, 2012. Amounts below are in millions of dollars unless otherwise stated. IRIDEX operates in ophthalmology following its February 2012 sale of the aesthetics business; comparative results classify aesthetics as discontinued operations.
Financial performance and liquidity
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue from continuing operations | $7.881 | $8.258 | $24.631 | $24.539 |
| Gross profit / gross margin | $3.911 / 49.6% | $3.990 / 48.3% | $12.008 / 48.8% | $12.012 / 49.0% |
| Operating expenses | $4.490 | $3.729 | $13.173 | $11.251 |
| Income (loss) from continuing operations, after tax | ($0.555) | $0.256 | ($0.423) | $1.340 |
| Net income (loss), including discontinued operations | ($0.745) | $0.349 | $1.196 | $1.824 |
| Basic EPS | ($0.08) | $0.04 | $0.13 | $0.20 |
- Revenue mix: Q3 systems—domestic $1.694 million, international $1.959 million; recurring revenue $4.123 million; OEM $0.105 million. For nine months, recurring revenue was $12.893 million, systems revenue was $11.493 million, and OEM revenue was $0.245 million.
- Cash and liquidity: Cash and cash equivalents were $13.734 million at September 29, versus $10.789 million at December 31, 2011; working capital was $22.6 million, and $0.5 million was held in escrow. Total current assets were $28.613 million and current liabilities $5.972 million.
- Cash flows, nine months: Continuing operating activities used $1.545 million; investing activities used $0.551 million; financing activities used $0.173 million. Discontinued operations provided $5.214 million of net cash, including $4.632 million from investing activities. Cash increased $2.945 million overall.
- Debt: The filing reports that the Silicon Valley Bank loan and security agreement expired in June 2012. No outstanding bank borrowings are reported at quarter-end. Total liabilities were $6.678 million.
Material changes versus comparable periods
- Q3 continuing revenue declined 4.6%; domestic system sales rose 4.4%, but international system sales fell 24.5%, which management attributed chiefly to unsettled business conditions in the Middle East and South America. Recurring revenue grew 5.9%, helped by Alcon sales of the licensed GreenTip product.
- Nine-month continuing revenue was nearly flat, up 0.4%. Recurring revenue increased 6.6%, offsetting lower domestic systems, international systems, and OEM sales.
- Q3 continuing operations swung to a $0.555 million after-tax loss from $0.256 million of income. Operating expenses rose 20.4%, including $0.7 million of severance expense in general and administrative costs. Gross margin improved in Q3 but edged down for the nine-month period.
- Nine-month net income included $1.619 million from discontinued operations, including a $2.032 million after-tax gain on the aesthetics sale. Continuing operations recorded a $0.423 million loss, versus $1.340 million of income in the prior-year period.
- The aesthetics sale generated $5.1 million of net cash and a $1.149 million pretax gain. The sale also produced tax effects, including a reported $0.9 million tax benefit, contributing to the $2.032 million after-tax gain.
Outlook, commentary, and risks
- Management stated its short-term gross-margin goal remains 50%. It expected research and development and sales and marketing expenses to moderate, and said it was moderating investment in personnel and programs to balance spending with revenue growth and return to profitability.
- Management expected continued benefit from GreenTip sales through Alcon. OEM sales were expected to cease shortly because Bausch & Lomb had discontinued the relevant product.
- Management said cash, together with the company’s ability to generate operating cash flow, would be sufficient for the next 12 months. No formal revenue or earnings guidance was provided.
- Key risks include the loss of aesthetics-business contribution, uneven international demand, competition and reimbursement uncertainty, dependence on distributors and collaborative partners, reliance on sole- or limited-source suppliers, product development and regulatory hurdles, and quarterly sales volatility. The filing also flags a potential 2.3% U.S. medical-device tax and warns that the company might not be able to pass it on to customers.
- Other notable items: $0.8 million of legal-settlement income was recorded in each nine-month comparison period; the 2012 receipt was the final payment. The earn-out liability was $0.719 million, with fair-value remeasurement expense affecting results. The company repurchased $0.578 million of stock during the nine months. Management reported effective disclosure controls and no material change in internal control over financial reporting; it reported no litigation expected to materially affect the company.
Most important facts for investors to verify
- Whether continuing ophthalmology revenue and recurring-product growth can offset weaker international systems sales and the loss of aesthetics and OEM revenue.
- Whether the stated 12-month liquidity outlook remains supportable given $1.545 million of cash used by continuing operations and the company’s profitability objective.
- The details and timing of the expected tax refunds and carryforwards, including the valuation allowance against deferred tax assets and uncertain tax positions.
- Potential cash obligations and valuation assumptions for the $0.719 million acquisition earn-out liability, and any indemnification obligations related to the aesthetics sale.
- Whether expense moderation, gross-margin improvement, and the anticipated cessation of Bausch & Lomb OEM sales develop as management described.