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IRIX > SEC Filings for IRIX > Form 10-Q on 4-Nov-2013All Recent SEC Filings

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Form 10-Q for IRIDEX CORP


4-Nov-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 our anticipated levels of future sales; our operating results and long term growth; market acceptance and adoption of our products and our outlook for system sales; our gross margin goals and performance; the success of our efforts to reduce costs and manage 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; levels of future investment in research and development and sales and marketing efforts; and our product distribution strategies with Alcon, Inc. and Peregrine Surgical Ltd. 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 direct and independent sales forces 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 our patented Fovea-Friendly MicroPulse laser photocoagulation in addition to conventional continuous wavelength photocoagulation offered by each of our laser systems. Towards the end of 2012, we introduced the TxCell Scanning Laser Delivery System which saves significant time in a variety of laser photocoagulation procedures by 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. The majority of our recurring revenues come from the sale of laser probes and our current family of laser probes includes a wide variety of products in 20, 23 and 25 gauge for vitreoretinal surgery and glaucoma surgery.

In March 2013, the Company entered into a global distribution and supply agreement with Peregrine Surgical Ltd. ("Peregrine") which commenced on April 1, 2013. Under the agreement, IRIDEX became a worldwide distributor for Peregrine labeled products and Peregrine became part of the IRIDEX supply chain. In addition, IRIDEX assumed responsibility for the independent sales force consisting of 10 representatives who sell the Peregrine products domestically. The Peregrine products consist of laser probes and other associated instrumentation and are a logical fit within our existing product portfolio. The ultimate objective is to have all of our channels both domestically and internationally sell both IRIDEX and Peregrine labeled consumable products.

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                            Nine Months Ended
                                       September 28,          September 29,          September 28,          September 29,
                                           2013                   2012                   2013                   2012
Revenues                                        100.0 %                100.0 %                100.0 %                100.0 %
Cost of revenues                                 50.4 %                 50.4 %                 51.4 %                 51.2 %
Gross margin                                     49.6 %                 49.6 %                 48.6 %                 48.8 %
Operating expenses:
Research and development                          9.7 %                 12.8 %                 10.1 %                 13.4 %
Sales and marketing                              19.6 %                 23.8 %                 19.3 %                 23.8 %
General and administrative                       13.3 %                 20.4 %                 13.4 %                 16.3 %
Proceeds from demutualization of
insurance carrier                                 0.0 %                  0.0 %                 (1.7 )%                 0.0 %
Total operating expenses                         42.6 %                 57.0 %                 41.1 %                 53.5 %
Income (loss) from continuing
operations                                        7.0 %                 (7.4 )%                 7.5 %                 (4.7 )%
Legal settlement                                  0.0 %                  0.0 %                  0.0 %                  3.2 %
Other expense, net                               (0.9 )%                (1.5 )%                (0.7 )%                (0.8 )%
Income (loss) from continuing
operations before income taxes                    6.1 %                 (8.9 )%                 6.8 %                 (2.3 )%
Provision for income taxes                        0.5 %                  1.8 %                  0.2 %                 (0.6 )%
Income (loss) from continuing
operations, net of tax                            5.6 %                 (7.1 )%                 6.6 %                 (1.7 )%
Income (loss) from discontinued
operations, net of tax                            0.0 %                 (2.4 )%                 0.0 %                  6.6 %
Net income (loss)                                 5.6 %                 (9.5 )%                 6.6 %                  4.9 %

The following comparisons are between the three month periods ended September 28, 2013 and September 29, 2012:

Revenues.





                            Three Months Ended         Three Months Ended
(in thousands)              September 28, 2013         September 29, 2012           Change in $               Change in %
Systems - domestic         $              2,252       $              1,694       $              558                      32.9 %
Systems - international                   2,407                      1,959                      448                      22.9 %
Recurring revenues                        4,783                      4,123                      660                      16.0 %
OEM                                          84                        105                      (21 )                   (20.0 )%
Total revenues             $              9,526       $              7,881       $            1,645                      20.9 %

Our total revenues increased $1.6 million or 20.9% from $7.9 million to $9.5 million, as a result of increases in both system sales and in our recurring revenues. The increase in system sales was due to an increase in sales of our IQ lasers that features MicroPulse. The increase in recurring revenues was attributable to the inclusion of sales generated by the independent sales force resulting from the Peregrine agreement, as well as an increase in sales of our licensed GreenTip product by our distribution partner, Alcon, Inc. ("Alcon"), and we anticipate benefiting from these sales for the foreseeable future. OEM sales are expected to cease shortly as our OEM partner, Bausch & Lomb, Incorporated ("B&L"), has discontinued selling this product.

Gross Profit and Gross Margin.

Gross profit was $4.7 million compared with $3.9 million, an increase of $0.8 million or 20.8%. Gross margin remained constant at 49.6% for both periods which is in line with our short term goal for gross margin of 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.'"


Research and Development.

Research and development ("R&D") expenses decreased $0.1 million or 8.3% from $1.0 million to $0.9 million. The decrease in spending was primarily attributable to a decrease in headcount and associated costs. We anticipate a slight increase on the spending level in R&D in support of new products and certain product cost reduction programs we are initiating going forward.

Sales and Marketing.

Sales and marketing expenses remained constant at $1.9 million. We anticipate an increase in our sales and marketing spending due to the inclusion of the independent sales forces amongst other items with the objective of driving increased sales.

General and Administrative.

General and administrative expenses decreased $0.3 million or 21.3% from $1.6 million to $1.3 million. The decrease was primarily attributable to the fact that we recorded $0.7 million in severance and related costs in Q3 2012, this reduction in expenditures was partially offset by increased expenses associated with the Medical Device Tax, and an increase in compensation charges.

Legal Settlement and Interest and Other Expense, Net.

For the three months ended September 28, 2013 and for the same period a year earlier, interest and other expense, net consisted primarily of expense recorded for the fair value remeasurement of the contingent earn-out liabilities incurred as a result of the Company's recent acquisitions and was $0.1 million for both periods.

Income Taxes.

The Company recorded an income tax provision of $50 thousand for the quarter ended September 28, 2013, compared to a benefit from income taxes of $141 thousand for the comparable quarter of the prior year, for continuing operations.

The following comparisons are between the nine months ended September 28, 2013 and September 29, 2012:

Revenues.





                            Nine Months Ended          Nine Months Ended             Change               Change
(in thousands)              September 28, 2013         September 29, 2012             in $                 in %
Systems - domestic         $              5,223       $              4,485       $          738                 16.5 %
Systems - international                   8,087                      7,008                1,079                 15.4 %
Recurring revenues                       14,124                     12,893                1,231                  9.5 %
OEM                                         241                        245                   (4 )                1.6 %
Total revenues             $             27,675       $             24,631       $        3,044                 12.4 %

Our total revenues increased $3.0 million or 12.4% from $24.6 million to $27.7 million, as a result of increases in both system sales and in our recurring revenues. The increase in system sales was due to an increase in sales of our IQ lasers that features MicroPulse, and during the second quarter of the current year, we received two large international orders. We believe the outlook for system sales continues to look positive. The increase in recurring revenues was attributable to the inclusion of sales generated by the independent sales force resulting from the Peregrine agreement, as well as an increase in sales of our licensed GreenTip product by our distribution partner, Alcon, and we anticipate benefiting from these sales for the foreseeable future. OEM sales are expected to cease shortly as our OEM partner, B&L, has discontinued selling this product.

Gross Profit and Gross Margin.

Gross profit was $13.4 million compared with $12.0 million an increase of $1.4 million or 11.9%. Gross margin remained fairly constant at 48.6% compared to 48.8%.

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."


Research and Development.

R&D expenses decreased $0.5 million or 14.9% from $3.3 million to $2.8 million. The decrease in spending was primarily attributable to a decrease in headcount and associated costs. We anticipate a slight increase on the spending level in R&D in support of new products and certain product cost reduction programs we are initiating.

Sales and Marketing.

Sales and marketing expenses decreased $0.5 million or 8.9% from $5.9 million to $5.3 million. The decrease in spending was primarily attributable to a decrease in headcount and related cost and to a decrease in general spending, partly offset by commissions and other costs associated with the expansion of our independent sales force resulting from the Peregrine transaction.

General and Administrative.

General and administrative expenses decreased $0.3 million or 8.2% from $4.0 million to $3.7 million. The decrease was primarily attributable to the fact that we recorded $0.7 million in severance and related costs in Q3 2012, this reduction in expenditures was partially offset by increased expenses associated with the Medical Device Tax, and an increase in compensation charges.

Proceeds from Demutualization of Insurance Carrier.

In January 2013, we received $0.5 million as a result of the demutualization of our product and liability insurance carrier.

Legal Settlement and Interest and Other Expense, Net.

The legal settlement relates to payments received from Synergetics, Inc. associated with a 2007 settlement of legal claims for patent infringement. The $0.8 million received during the nine months ended September 29, 2012 represented the final payment.

For the nine months ended September 28, 2013 and for the same period a year earlier, interest and other expense, net consisted primarily of expense recorded for the fair value re-measurement of the contingent earn-out liabilities incurred as a result of the Company's recent acquisitions and was $0.2 million for both periods.

Income Taxes.

For the nine months ended September 28, 2013, the Company recorded an income tax provision of $58 thousand compared to an income tax benefit of $134 thousand for the comparable period of the prior year, for continuing operations.

Discontinued Operations.

In February 2012, we sold our aesthetics business to Cutera, Inc. The operating results and the associated assets and liabilities of our aesthetics business have been classified as discontinued operations for all periods presented.

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 September 28, 2013, we had cash and cash equivalents of $14.1 million, working capital of $23.8 million compared to cash and cash equivalents of $11.9 million and working capital of $20.7 million as of December 29, 2012. The increase in cash and cash equivalents for the nine months ended September 28, 2013 was generated primarily by income from continuing operations, after the add back of non-cash items, of $2.9 million, partially offset by changes in operating assets by $1.6 million. We used $0.2 million on capital expenditures and $0.3 million on paying the contingent earn-out liability. Exercises of stock options generated $1.1 million and we spent $0.2 million to purchase stock under our stock repurchase program, and we received $0.5million in cash from the release of funds held in escrow. See Item 2, Unregistered Sales of Equity Securities and Use of Proceeds in Part II, Other Information, for additional information.

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


Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Other Information

IRIDEX Corporation was incorporated in California in February 1989 as IRIS Medical Instruments, Inc. In November 1995, we changed our name to IRIDEX Corporation and reincorporated in Delaware. Our executive offices are located at 1212 Terra Bella Avenue, Mountain View, California 94043-1824, and our telephone number is (650) 940-4700. We can also be reached at our website at www.IRIDEX.com. Investors and others should note that we announce material financial information to our investors using SEC filings, press releases, our investor relations website, public conference calls and webcasts. We use these channels as well as social media to communicate with investors, customers and the public about our company, our products and other issues. It is possible that the information we post on social media channels could be deemed to be material information. We encourage investors, our customers, and others interested in our company to review the information we post on our Facebook page (www.facebook.com/IRIDEX) and Twitter feed (https://twitter.com/IRIDEX). Any information on, or that can be accessed through, our website and social media channels is not part of this report.

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