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IRIX > SEC Filings for IRIX > Form 10-Q on 5-May-2014All Recent SEC Filings

Show all filings for IRIDEX CORP

Form 10-Q for IRIDEX CORP


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 27, 2014 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.


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 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 GL, OcuLight GLx , OcuLight SL, and OcuLight SLx, 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 all of our laser systems. Towards the end of 2012, we introduced the TxCell Scanning Laser Delivery System, a durable delivery device which operates with our IQ 532 and IQ 577 laser consoles. The TxCell Scanning Laser Delivery System 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, and facilitates the use of the laser console in MicroPulse 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 and materials to support new product development; 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, the medical device tax 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

                                                          Three Months Ended
                                                    March 29,            March 30,
                                                       2014                2013
Revenues                                                   100.0 %             100.0 %
Cost of revenues                                            51.1 %              52.7 %
Gross margin                                                48.9 %              47.3 %
Operating expenses:
Research and development                                    11.6 %              11.1 %
Sales and marketing                                         16.9 %              18.2 %
General and administrative                                  14.7 %              13.3 %
Proceeds from demutualization of insurance
carrier                                                        - %              (5.3 )%
Total operating expenses                                    43.2 %              37.3 %
Income from operations                                       5.7 %              10.0 %
Other expense, net                                           0.9 %               0.2 %
Income from operations before provision for
income taxes                                                 4.8 %               9.8 %
Provision for income taxes                                   0.1 %               0.1 %
Net income                                                   4.7 %               9.7 %

The following comparisons are between the three month periods ended March 29, 2014 and March 30, 2013:


                                       Three Months         Three Months
                                           Ended               Ended
(in thousands)                        March 29, 2014       March 30, 2013       Change in $       Change in %
Systems - domestic                    $         1,670     $          1,416     $         254              17.9 %
Systems - international                         3,832                2,917               915              31.4 %
Recurring revenues                              4,827                4,540               287               6.3 %
OEM                                                 -                   66               (66 )          (100.0 )%
Total revenues                        $        10,329     $          8,939     $       1,390              15.5 %

Our total revenues increased $1.4 million or 15.5% from $8.9 million to $10.3 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 sales of our TxCell scanning delivery device. 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 royalties from our licensed distribution partner, Alcon, Inc. ("Alcon"). OEM sales have ceased as our OEM partner, Bausch & Lomb, Incorporated ("B&L"), has discontinued selling this product.

Gross Profit and Gross Margin.

Gross profit was $5.1 million for the quarter ended March 29, 2014 compared with $4.2 million for the comparable period a year earlier, an increase of $0.8 million or 19.5%. Gross margin was 48.9% for the quarter ended March 29, 2014 compared with 47.3% for the comparable period a year earlier, an increase of 1.6 percentage points. The increase in gross margins was due to improved direct margins as a result of improved pricing discipline and reduced product material costs and overhead efficiencies, which were partly offset by a change in channel mix with a higher proportion of sales being generated through our international distribution channel.

Gross margin is expected to 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 increased $0.2 million or 19.9% from $1.0 million to $1.2 million. The increase in spending was primarily attributable to the start of the IQ product platform cost reduction program and increases in other new product development that we anticipate running throughout 2014.

Sales and Marketing.

Sales and marketing expenses increased $0.1 million or 7.6% from $1.6 million to $1.7 million. The increase in spending was primarily due an increase in costs associated with the inclusion of our independent sales force resulting from the Peregrine agreement.

General and Administrative.

General and administrative expenses increased $0.3 million or 27.8% from $1.2 million to $1.5 million. The increase was primarily attributable to the inclusion of certain severance costs of $0.1 million and an increase in non-cash stock equity compensation charges of $0.1 million.

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. This was a one-time event.

Other Expense, Net.

For the three months ended March 29, 2014 and March 30, 2013, interest and other expense, net, consisted primarily of expense recorded for the re-measurement of the fair value of the contingent earn-out liabilities incurred as a result of the Company's prior acquisitions. These amounts were $99 thousand and $19 thousand for the quarters ended March 29, 2014 and March 30, 2013, respectively.

Income Taxes.

For the three months ended March 29, 2014 and March 30, 2013, the Company recorded an income tax provision of $13 thousand and $5 thousand, respectively.

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 29, 2014, we had cash and cash equivalents of $14.0 million, working capital of $25.2 million compared to cash and cash equivalents of $13.4 million and working capital of $24.6 million as of December 28, 2013. The increase in cash and cash equivalents for the three months ended March 29, 2014, was generated primarily by income from operations of $0.5 million, plus the add back of $0.5 million for non-cash items, less changes in working capital of $0.4 million. We used $0.1 million on capital expenditures and $0.1 million on paying the contingent earn-out liability. Exercises of stock options generated $0.3 million and we spent $0.2 million purchasing stock under our stock repurchase program. 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.

Contractual Obligations and Commitments.

Our contractual obligations and commitments as of March 29, 2014 are as follows:

                                               Payment Due by Period
                                          Less than 1     1 - 3     3 - 5
          (in thousands)        Total        Year         Years     Years     Thereafter
     Operating lease payments $   996   $         680   $   302   $    14   $          0
     Purchases commitments      3,276           1,026     1,500       750              0
     Total obligations        $ 4,272   $       1,706   $ 1,802   $   764   $          0

Our operating lease commitments consist primarily of our facility lease and various office and computer equipment leases.

Our purchase commitments consist primarily of non-cancellable purchase commitments with vendors to manufacture certain components and ophthalmic instrumentation.

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 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 ( and Twitter feed ( 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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