IRIDEX CORP 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This discussion and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions, that are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management and should be read in conjunction with the section of this Quarterly Report on Form 10-Q entitled “Risk Factors.” Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section entitled “Risk Factors.” Overview IRIDEX is an ophthalmic medical technology company focused on the development and commercialization of breakthrough products and procedures used to treat sight-threatening eye conditions, including glaucoma and retinal diseases. Our propriety MicroPulse ® Technology and Endpoint Management™ Technology are used for the treatment of glaucoma and retina disorders. Both technologies are offered as optional treatment modes in select laser consoles in addition to the standard continuous-wave (“CW”) treatment mode. They allow low-energy, subvisible, tissue-sparing laser therapy by different means: MicroPulse technology uses short, microsecond-long laser pulses that allow tissue to cool between pulses giving physicians finer control of thermal elevation to minimize tissue damage. Endpoint Management technology uses a delivery algorithm to titrate the laser energy. CW laser photocoagulation can stabilize vision over the long term but can also result in varying degrees of vision loss. Both MicroPulse and Endpoint Management technologies have demonstrated clinical efficacy with a safer profile compared to standard high-energy CW laser for the treatment of both retinal diseases and glaucoma. Our products consist of laser consoles, delivery devices and consumable probes. Our laser consoles consist of the following product lines: • Glaucoma – Our primary glaucoma console line is the Cyclo G6 ® laser system with MicroPulse technology. In addition, our medical retina consoles have features supporting glaucoma laser treatments. • Medical Retina – Our medical-retina product line includes our portable IQ 532 ® and IQ 577 ® laser systems with MicroPulse technology; and the Pattern Scanning Laser (“PASCAL”) System, an integrated workstation with Endpoint Management technology and MicroPulse technology. These systems are ideal for multispecialty practices because these lasers also can be used to treat glaucoma, i.e., single-spot laser trabeculoplasty using MicroPulse technology, iridotomy, and iridectomy using the IQ lasers; and pattern scanning laser trabeculoplasty (“PSLT”) using the PASCAL laser system. • Surgical Retina – Our surgical-retina product line includes our OcuLight ® TX and OcuLight ® SLx (with MicroPulse technology) laser photocoagulation systems. These systems are often used in vitrectomy procedures, which are used to treat proliferative diabetic retinopathy, macular holes, retinal tears and detachments. Our business generates recurring revenues through sales of consumable products, predominantly single-use laser probe devices and other instrumentation, as well as repair, service and extended service contracts for our laser systems. Our laser probes consist of the following product lines: • Glaucoma – Probes used in our glaucoma product line include our patented single-use delivery devices - MicroPulse P3 ® , G-Probe ® , and G-Probe Illuminate ® . • Surgical Retina – Probes used in our surgical-retina product line include our family of single-use EndoProbe ® handpieces. Ophthalmologists typically use our laser systems in hospital operating rooms and ambulatory surgical centers, as well as their offices and clinics. In operating rooms and ambulatory surgical centers, ophthalmologists use our laser systems with either an indirect laser ophthalmoscope or a single-use consumable probe, including MicroPulse P3 ® , G-Probe ® and G-Probe Illuminate ® delivery devices, and EndoProbe handpieces. In the offices and clinics, ophthalmologists use our laser systems with either an indirect laser ophthalmoscope or a slit-lamp adapter. Our products are sold in the United States and Germany predominantly through a direct sales force and internationally (aside from Germany) primarily through independent distributors. 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. However, increases in the value of the U.S. dollar against any local currencies could cause our products to become relatively more expensive to customers in a particular country or region, leading to reduced revenue or profitability in that country or region. Sales to direct end users transacted through our German office are denominated in Euros and are subject to risks associated with currency fluctuations. Cost of revenues consists primarily of our direct manufacturing costs which include the cost of components and sub-systems, assembling, packaging, shipping and testing components at our facility, direct labor and associated overhead, warranty, royalty and 22 amortization of intangible assets and depot service costs. For certain of our products, we are responsible for the cost of the fully assembled product that is manufactured by a third-party. 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. Impact of Macroeconomic Conditions to our Business Current macroeconomic conditions exhibit challenges that can affect capital equipment purchasing demand and timing, including recessionary fears, inflation concerns, changing interest rates, concerns related to the upcoming presidential election in the United States, as well as other geopolitical developments, have impacted and may continue to impact business spending and the economy as a whole. As a result, we have seen customers extend purchase decision cycles. We have also experienced some demand softness due to pricing effects from the strength of the U.S. Dollar that have impacted and may continue to impact our operations. The macroeconomic conditions on our business and operations remain uncertain, and it is not possible for us to predict the duration and extent to which they will affect our business, future results of operations, and financial condition. For more information on risks associated with the current macroeconomic conditions, see the section titled “Risk Factors” in Item 1A of Part II. Results of Operations The following table sets forth certain operating data as a percentage of revenues: Three Months Ended Nine Months Ended September 28, 2024 September 30, 2023 September 28, 2024 September 30, 2023 Revenues 100.0 % 100.0 % 100.0 % 100.0 % Cost of revenues 62.7 % 56.3 % 61.3 % 57.1 % Gross margin 37.3 % 43.7 % 38.7 % 42.9 % Operating expenses: Research and development 11.2 % 12.0 % 12.1 % 13.0 % Sales and marketing 22.8 % 29.8 % 27.5 % 31.4 % General and administrative 19.4 % 16.6 % 20.9 % 16.5 % Total operating expenses 53.4 % 58.4 % 60.5 % 60.9 % Loss from operations (16.1 %) (14.7 %) (21.8 %) (18.0 %) Other income, net (0.4 %) (0.5 %) (0.6 %) 0.9 % Loss from operations before provision for income taxes (16.5 %) (15.2 %) (22.4 %) (17.1 %) Provision for income taxes 0.1 % 0.1 % 0.2 % 0.1 % Net loss (16.6 %) (15.3 %) (22.6 %) (17.2 %) The following comparisons are between the three months ended September 28, 2024 and September 30, 2023 (in thousands): Revenues Three Months Ended Change in $ Change in % September 28, 2024 September 30, 2023 Cyclo G6 $ 3,127 $ 3,042 $ 85 2.8 % Retina 6,450 7,865 (1,415 ) (18.0 %) Other 2,004 1,943 61 3.1 % Total revenues $ 11,581 $ 12,850 $ (1,269 ) (9.9 %) Our total revenues decreased by $1.3 million, or 9.9%, from $12.9 million to $11.6 million. The decrease was driven by overall softer demand in our Retina product lines and lower royalties due to the expiration of licensed patents, partially offset by increases Glaucoma "Cyclo G6" product lines. 23 While we believe that the market for our products remains strong, the overall capital expenditure landscape within hospitals, surgical centers and physician offices may continue to be negatively impacted by persistent macroeconomic concerns. Gross Profit and Gross Margin Gross profit decreased $1.3 million, or 23.1% from $5.6 million to $4.3 million. Gross margin decreased by 6.4% from 43.7% to 37.3%. The decrease in gross margin was driven by lower royalty revenues. Gross margins may fluctuate due to changes in the relative proportion of domestic and international sales, the product mix of sales, introduction of new products, manufacturing variances, total unit volume changes that lead to greater or lesser production efficiencies and other factors. Research and Development Research and development expenses decreased by $0.2 million, or 15.7% from $1.5 million to $1.3 million. Spending on investment in PASCAL product line and on new and expanded product portfolio decreased as we completed these projects. Sales and Marketing Sales and marketing expenses decreased $1.2 million, or 30.8%, from $3.8 million to $2.6 million. The decrease was related to lower sales costs associated with lower commissions and reduction on headcount. General and Administrative General and administrative expenses increased by $0.3 million, or 15.6% from $1.9 million to $2.2 million. The increase is a result of higher consulting costs and deal related legal expenses. Other Income (Expense), Net Other expense, net was $46 thousand for the three months ended September 28, 2024 compared to other expense, net, of $58 thousand for the three months ended September 30, 2023. Other income (expense), net, consisted primarily of interest income or expense and foreign currency transaction gain or loss. Income Taxes We recorded an income tax provision of $17 thousand and $8 thousand for the three months ended September 28, 2024 and September 30, 2023, respectively. The following comparisons are between the nine months ended September 28, 2024 and September 30, 2023 (in thousands): Revenues Nine Months Ended Change in $ Change in % September 28, 2024 September 30, 2023 Cyclo G6 $ 9,416 $ 10,369 $ (953 ) (9.2 %) Retina 20,519 21,936 (1,417 ) (6.5 %) Other 6,038 7,106 (1,068 ) (15.0 %) Total revenues $ 35,973 $ 39,411 $ (3,438 ) (8.7 %) Our total revenues decreased by $3.4 million, or 8.7%, from $39.4 million to $36.0 million. The decrease was driven by softer demand in our Glaucoma and Retina product lines, and by lower royalties due to the expiration of licensed patents. While we believe that the market for our products remains strong, the overall capital expenditure landscape within hospitals, surgical centers and physician offices may continue to be negatively impacted by persistent macroeconomic concerns discussed above. Gross Profit and Gross Margin Gross profit decreased $3.0 million, or 17.8%, from $16.9 million to $13.9 million. Gross margin decreased by 4.2% from 42.9% to 38.7%. The decrease in gross margin was driven by lower revenues and higher manufacturing overhead absorbed by less revenue. Gross margins may fluctuate due to changes in the relative proportion of domestic and international sales, the product mix of sales, introduction of new products, manufacturing variances, total unit volume changes that lead to greater or lesser production efficiencies and other factors. 24 Research and Development Research and development expenses decreased by $0.8 million, or 15.6%, from $5.1 million to $4.3 million. Spending on investment in PASCAL product line and on new and expanded product portfolio decreased as we completed these new projects. We implemented cost savings measures including reductions in workforce that resulted in lower headcount expenses. Sales and Marketing Sales and marketing expenses decreased by $2.5 million, or 20.1%, from $12.4 million to $9.9 million. The decrease was related to the reduction in headcount and lower consulting and travel expenses. General and Administrative General and administrative expenses increased by $1.2 million, or 18.3%, from $6.3 million to $7.5 million. The increase is a result of higher consulting costs and deal related legal expenses. Other Income (Expense), Net Other expense, net increased by $0.5 million from net income of $0.3 million to net other expense, net of $0.2 million for the nine months ended September 28 2024. Other income (expense), net, consisted primarily of interest income or expense and foreign currency transaction gain or loss. Income Taxes We recorded an income tax provision of $74 thousand and $30 thousand for the nine months ended September 28, 2024 and September 30, 2023, respectively. Liquidity, Capital Resources and Management Plans 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, 2024, we had cash and cash equivalents of $3.9 million and working capital of $8.5 million compared to cash and cash equivalents of $7.0 million and working capital of $14.5 million as of December 30, 2023. Net cash used in operating activities was $6.0 million in the nine months ended September 28, 2024 compared to net cash used in operating activities of $5.8 million in the nine months ended September 30, 2023. The increase in net cash used in operating activities, expressed in direct cash flow terms, was primarily due to cash used in inventory, prepaids, and other current assets and accrued expenses, partially offset by decreases in cash paid to accounts payable and increased cash collections from accounts receivable. For the nine months ended September 28, 2024, and September 30, 2023 net cash used in investing activities was $4 thousand and $141 thousand, respectively, which consisted of capital expenditures. For the nine months ended September 28, 2024, net cash $2.8 million was provided by financing activities of issuance of convertible notes, net. For the nine months ended September 30, 2023, net cash used in financing activities was $50 thousand. We have historically funded our operations primarily through sales of our products to customers, sales of our common stock and borrowing arrangements. As of September 28, 2024, our principal sources of liquidity consisted of cash and cash equivalents of $3.9 million. We have incurred net losses over the last several years, and as of September 28, 2024, have an accumulated deficit of approximately $89.6 million. We expect to continue to incur operating losses and negative cash flows from operations. Management evaluates whether there are relevant conditions and events that, in the aggregate, raise substantial doubt about the Company’s ability to continue as a going concern and to meet its obligations as they become due within one year after the date that the financial statements are issued. The accompanying condensed consolidated financial statements have been prepared assuming we will continue as a going concern. For the nine months ended September 28, 2024, we implemented cost savings initiatives to increase operational efficiencies across all departments, which we expect will decrease our operating expenses and increase working capital through January 3, 2026. Based on these cost savings initiatives implemented by us and the closing of the $3.4 million Note with Lind (with an option to have an additional $1.5 million in a Subsequent Note), management believes we have alleviated substantial doubt about our ability to satisfy our liquidity needs over the next 12 months. On August 7, 2024, we closed a Note with Lind and raised net proceeds of approximately $3.4 million. These funds are sufficient to meet our immediate and near-term capital requirements. Our future capital requirements will depend on many factors, including our strategic alternatives, the timing and extent of our spending to support research and development activities, the timing and cost of establishing additional sales and marketing capabilities, the introduction of new and enhanced products and our costs to implement new manufacturing technologies. In the event that additional financing is required from outside sources, we may not be 25 able to raise it on terms acceptable to us or at all. Any debt financing obtained by us in the future could also involve restrictive covenants relating to our capital-raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. Additionally, if we raise additional funds through further issuances of equity, our existing stockholders could suffer dilution in their percentage ownership of our company, and any new equity securities we issue could have rights, preferences and privileges senior to those of holders of our common stock. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to grow or support our business and to respond to business challenges could be limited. 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. Item 3. Quantitative and Qualitat ive Disclosure about Market Risk As a “smaller reporting company,” as defined in Rule 12b-2 of the Exchange Act, we are not required to provide the information called for by this Item.