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IRIX > SEC Filings for IRIX > Form 10-Q on 6-May-2013All Recent SEC Filings

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Form 10-Q for IRIDEX CORP


6-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q contains trend analysis and other forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, such as statements relating to levels of future sales, long term growth, market acceptance and adoption of our products and operating results; license revenue; gross margins; managing cash flows; general economic conditions and levels of international sales; corporate strategy; effects of seasonality; FDA inspections; our current and future liquidity and capital requirements; and levels of future investment in research and development efforts. In some cases, forward-looking statements can be identified by terminology, such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "intends," "potential," "continue," or the negative of such terms or other comparable terminology. These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to differ materially from those expressed or implied by such forward-looking statements, including as a result of the factors set forth under "Factors That May Affect Future Operating Results" and other risks detailed in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 28, 2013 and detailed from time to time in our reports filed with the Securities and Exchange Commission. The reader is cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date of this quarterly report on Form 10-Q. We undertake no obligation to update such forward-looking statements to reflect events or circumstances occurring after the date of this report.

Overview

IRIDEX Corporation is a leading worldwide provider of therapeutic based laser systems, delivery devices and consumable instrumentation used to treat sight-threatening eye diseases in ophthalmology. Our ophthalmology products are sold in the United States predominantly through a direct sales force and internationally through approximately 70 independent distributors into over 100 countries.

We manage and evaluate our business in one segment-ophthalmology. We break down this segment by geography-Domestic (U.S.) and International (the rest of the world). In addition, we review trends by laser system sales (consoles and durable delivery devices) and recurring sales (single use consumable laser probes and other associated instrumentation ("consumables"), service and support).

Our ophthalmology revenues arise primarily from the sale of our IQ and OcuLight laser systems, consumables and service and support activities. Our current family of IQ products includes IQ 532, IQ 577 and IQ 810 laser photocoagulation systems and our OcuLight products include OcuLight TX, OcuLight Symphony (Laser Delivery System), OcuLight SL, OcuLight SLx, OcuLight GL and OcuLight GLx laser photocoagulation systems. Certain of our laser systems are capable of performing traditional continuous wavelength photocoagulation and our patented Fovea-Friendly MicroPulse laser photocoagulation. Towards the end of 2012, we introduced the TxCell Scanning Laser Delivery System which saves significant time in a variety of laser photocoagulation procedures in allowing physicians to deliver the laser in a multi-spot scanning mode, a more efficient method for these procedures than the traditional single spot mode. Our current family of laser probes includes a wide variety of products in 20, 23 and 25 gauge for vitreoretinal surgery and glaucoma surgery.


Table of Contents

In March 2013, the Company entered into a global distribution and supply agreement with Peregrine Surgical Ltd. ("Peregrine") which was completed on April 1, 2013. Under the agreement, IRIDEX will become a worldwide distributor for Peregrine labeled products and Peregrine will become part of the IRIDEX supply chain.

Sales to international distributors are made on open credit terms or letters of credit and are currently denominated in U.S. dollars and accordingly, are not subject to risks associated with currency fluctuations.

Cost of revenues consists primarily of the cost of purchasing components and sub-systems, assembling, packaging, shipping and testing components at our facility, direct labor and associated overhead; warranty, royalty and amortization of intangible assets; and depot service costs.

Research and development expenses consist primarily of personnel costs, materials to support new product development and research support provided to clinicians at medical institutions developing new applications which utilize our products; and regulatory expenses. Research and development costs have been expensed as incurred.

Sales and marketing expenses consist primarily of costs of personnel, sales commissions, travel expenses, advertising and promotional expenses.

General and administrative expenses consist primarily of costs of personnel, legal, accounting and other public company costs, insurance and other expenses not allocated to other departments.

Results of Operations

The following table sets forth certain operating data as a percentage of
revenues:



                                                                Three Months Ended
                                                    March 30, 2013              March 31, 2012
Revenues                                                      100.0 %                     100.0 %
Cost of revenues                                               52.7 %                      52.0 %

Gross margin                                                   47.3 %                      48.0 %

Operating expenses:
Research and development                                       11.1 %                      14.2 %
Sales and marketing                                            18.2 %                      22.4 %
General and administrative                                     13.3 %                      14.2 %
Proceeds from demutualization of insurance
carrier                                                        (5.3 )%                      0.0 %

Total operating expenses                                       37.3 %                      50.8 %

Income (loss) from continuing operations                       10.0 %                      (2.8 )%
Other expense, net                                             (0.2 )%                     (0.3 )%

Income (loss) from continuing operations
before income taxes                                             9.8 %                      (3.1 )%
Provision for income taxes                                      0.1 %                       0.1 %

Income (loss) from continuing operations,
net of tax                                                      9.7 %                      (3.2 )%
Income from discontinued operations, net of
tax                                                             0.0 %                      22.5 %

Net income                                                      9.7 %                      19.3 %

The following comparisons are between the three month periods ended March 30, 2013 and March 31, 2012:

Revenues.



                                   Three Months Ended          Three Months Ended
(in millions)                        March 30, 2013              March 31, 2012            Change in $          Change in %
Systems - domestic                $                1.4        $                1.3        $         0.1                 11.0 %
Systems - international                            2.9                         2.6                  0.3                 11.8 %
Recurring revenues                                 4.5                         4.4                  0.1                  3.8 %
OEM                                                0.1                         0.0                  0.1                  0.0 %

Total revenues                    $                8.9        $                8.3        $         0.6                  7.6 %

Both domestic and international system sales increased continuing the trend in orders we saw at the end of the prior year and driven by increasing adoption of our MicroPulse enabled laser systems and the successful introduction of our new high speed delivery device, TxCell. Recurring revenues improved due to the continued success of our licensing and distribution agreement with Alcon. Competition for consumable products remains strong with increased price sensitivities amongst our customers. We believe the distribution and supply agreement we entered into with Peregrine will help address this issue by providing us with more consumable products to allow us to differentiate our offering and over time reduce the cost of certain existing consumable products; and therefore provide us more pricing strategies.

Gross Profit and Gross Margin.

Gross profit was $4.2 million compared to $4.0 million in the prior period, an increase of $0.2 million or 6.1%. The increase in gross profit was driven from increased revenues, although the impact was mitigated by a reduction in the gross margin. Gross margin decreased in the current quarter to 47.3% of revenues from 48.0% in the quarter ended March 31, 2012. Manufacturing and service spending remained constant across both time periods. The reduction was due to a shift in product mix to more system sales, particularly internationally through our distributor channel where we obtain a lower average selling price, and also due to the introduction of TxCell. Historically, our newer products have a higher cost component at introduction and as the product matures we take steps to reduce costs and these steps are underway. Our short term goal for gross margin remains at 50%.

Gross margins as a percentage of revenues will continue to fluctuate due to changes in the relative proportions of domestic and international sales, the product mix of sales, manufacturing variances, total unit volume changes that lead to greater or lesser production efficiencies and a variety of other factors. See Item 1A. "Risk Factors-Factors That May Affect Future Results - "Our Operating Results May Fluctuate from Quarter to Quarter and Year to Year."


Table of Contents

Research and Development.

Research and development ("R&D") expenses decreased $0.2 million or 15.7% from $1.2 million to $1.0 million as a result of reduced headcount and associated expenses.

Sales and Marketing.

Sales and marketing expenses decreased by 12.8% from $1.9 million to $1.6 million. The decrease is attributable to a decrease in headcount and related costs and to a reduced focus on traditional selling and marketing expenditures, such as trade shows, to an increased focus on online and social media-based marketing and selling programs.

General and Administrative.

General and administrative expenses remained constant at $1.2 million, despite the inclusion of additional costs of approximately $0.1 million associated with the medical device tax.

Proceeds from demutualization of insurance carrier.

During the period we received $0.5 million as a result of the demutualization and acquisition of our product and liability insurance carrier.

Interest and Other Expense, Net.

Interest and other expense, net consisted primarily of additional expense recorded for the fair value remeasurement of the contingent earn-out liabilities incurred as a result of the Company's recent acquisitions.

Income Taxes.

The Company recorded an income tax provision of $5 thousand and $2 thousand for continuing operations for the quarter ended March 30, 2013 and March 31, 2012, respectively. Our income tax provision is benefiting from a reduction in the valuation allowance that fully offsets the Company's deferred tax asset.

Liquidity and Capital Resources.

Liquidity is our ability to generate sufficient cash flows from operating activities to meet our obligations and commitments. In addition, liquidity includes the ability to obtain appropriate financing or to raise capital.

As of March 30, 2013, we had cash and cash equivalents of $11.6 million, working capital of $21.9 million and $0.5 million of cash held in escrow compared to cash and cash equivalents of $11.9 million, working capital of $20.7 million and $0.5 million of cash held in escrow as of December 29, 2012. For the quarter ended March 30, 2013, $0.4 million was used in operating activities which resulted from net income of $0.9 million and the add back of $0.3 million non-cash items which were more than offset by the changes in operating assets and liabilities of $1.6 million. We used $0.1 million of net cash in investing activities, primarily in paying down the earn-out liability associated with prior acquisition. $0.2 million was generated by financing activities, which represented the net effect of stock options exercised by employees, offset by shares repurchased by the Company.

Management is of the opinion that the Company's current cash and cash equivalents together with our ability to generate cash flows from operations and our current credit facility provide sufficient liquidity to operate for the next 12 months.

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