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, Italy, UK (Glaucoma), India, and other smaller markets) primarily through Topcon Corporation (“Topcon”) and other 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. 22 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 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, tariffs and retaliatory responses, trade wars, heightened interest rates as a result of government actions to combat inflation, and uncertainty in the global banking and financial services market, 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 sections titled “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 28, 2024. Results of Operations The following table sets forth certain operating data as a percentage of revenues: Three Months Ended March 29, 2025 March 30, 2024 Revenues 100.0 % 100.0 % Cost of revenues 57.5 % 62.1 % Gross margin 42.5 % 37.9 % Operating expenses: Research and development 7.4 % 13.1 % Sales and marketing 20.6 % 31.9 % General and administrative 16.2 % 21.0 % Total operating expenses 44.2 % 66.0 % Loss from operations (1.7 %) (28.1 %) Other income, net (12.3 %) (1.1 %) Loss from operations before provision for income taxes (14.0 %) (29.2 %) Provision for income taxes 0.1 % 0.3 % Net loss (14.1 %) (29.5 %) The following comparisons are between the three months ended March 29, 2025 and March 30, 2024 (in thousands): Revenues Three Months Ended Change in $ Change in % March 29, 2025 March 30, 2024 Cyclo G6 $ 3,181 $ 2,953 $ 228 7.7 % Retina 6,645 6,774 (129 ) (1.9 %) Other 2,070 2,034 36 1.8 % Total revenues $ 11,896 $ 11,761 $ 135 1.1 % Our total revenues increased by $0.1 million, or 1.1%, from $11.8 million to $11.9 million. The increase was driven by an increase in our glaucoma product group and in services and other revenue, partially offset by a decrease in our retina products. 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, including those from ongoing geopolitical uncertainty, tariffs and trade wars. Gross Profit and Gross Margin Gross profit increased $0.6 million, or 13.4% from $4.5 million to $5.1 million. Gross margin increased by 4.6% from 37.9% to 42.5%. The increase in gross margin was the result of lower manufacturing expenses and a more favorable product mix. 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, responses to the evolving macroeconomic and geopolitical uncertainty, including tariffs and trade wars, and other factors. Research and Development Research and development expenses decreased by $0.7 million, or 43.0% from $1.6 million to $0.9 million. The decrease was related to our cost savings measures we implemented, resulting in lower headcount expenses. Spending on investment in new and expanded products was also curtailed. Sales and Marketing Sales and marketing expenses decreased $1.3 million, or 34.5%, from $3.7 million to $2.5 million. The decrease was related to our cost savings measures, including reductions in workforce that resulted in lower headcount expenses, lower consulting expenses, travel expenses, lower tradeshows and public relations expenses, and lower clinical studies expenses. General and Administrative General and administrative expenses decreased by $0.5 million, or 21.8% from $2.5 million to $1.9 million. The decrease is a primarily due to a decrease in consulting costs and deal related legal expenses. Other Income (Expense), Net Other expense, net, was $1.5 million for the three months ended March 29, 2025, driven primarily by the costs associated with the Lind Note payable settlement. Other expense, net, was $0.1 million for the three months ended March 30, 2024, consisting primarily of interest and amortization of loan expenses related to the Lind Note transaction. Income Taxes We recorded an income tax provision of $12 thousand and $38 thousand for the three months ended March 29, 2025 and March 30, 2024, 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 March 29, 2025, we had cash and cash equivalents of $7.2 million and working capital of $14.3 million compared to cash and cash equivalents of $2.4 million and working capital of $7.0 million as of March 30, 2024. Net cash used in operating activities was $1.1 million in the three months ended March 29, 2025 compared to net cash used in operating activities of $1.6 million in the three months ended March 30, 2024. The increase in net cash provided by operating activities was primarily due to reduction in net loss and reduction in inventory, offset by decreases in collections of accounts receivable and a paydown of liabilities. For the three months ended March 29, 2025, net cash used in investing activities was $11 thousand, which consisted of capital expenditures. For the three months ended March 30, 2024, net cash used in investing activities was $3 thousand, which consisted of capital expenditures. For the three months ended March 29, 2025, net cash from financing activities was $6.0 million. We received $10 million in issuance of convertible preferred shares and convertible debt, offset by $4.0 million in early prepayment of convertible debt. For the three months ended March 30, 2024, no net cash was used in financing activities. We have historically funded our operations primarily through sales of our products to customers, sales of our common stock and borrowing arrangements. As of March 29, 2025, our principal sources of liquidity consisted of cash and cash equivalents of $7.2 million. We have incurred net losses over the last several years, and as of March 29, 2025, have an accumulated deficit of approximately $89.6 million. On March 19, 2025, the Company entered into the Novel Securities Agreement and a Note Purchase Agreement and the Novel Note Purchase Agreement with Novel. Pursuant to the Novel Securities Agreement and the Novel Note Purchase Agreement, Novel 24 has the right to purchase additional convertible promissory notes (the “Growth Notes”) in an aggregate principal amount of $10,000,000. The Growth Notes are issuable in three installments, with one third of the aggregate principal amount issuable upon each yearly anniversary of the March 19, 2025. Notwithstanding any provision in the Transaction Documents (as defined in the Initial Novel Note) to the contrary, in no circumstance shall the Company be required to deliver to Novel any shares of Series B Preferred Stock or common stock pursuant to the terms of the Transaction Documents to the extent that (i) the aggregate of all such shares issued by the Company would exceed 19.99% of either (a) the total number of shares of common stock outstanding as of March 19, 2025 or (b) the total voting power of the Company’s securities outstanding as of March 19, 2025 that are entitled to vote on a matter being voted on by holders of the common stock, or (ii) such delivery would cause the holder to become, directly or indirectly, a “beneficial owner” (as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended) of more than 19.99% of either (a) the total number of shares of common stock outstanding as of such date or (b) the total voting power of the Company’s securities outstanding as of such date that are entitled to vote on a matter being voted on by holders of the common stock, in each case, unless shareholder approval has been obtained We believe our existing cash and cash equivalents will be sufficient to meet our anticipated cash needs over the next 12 months. Our future capital requirements will depend on many factors, including our growth rate, 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. 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 significant 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. 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.