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 proprietary 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 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 proprietary MicroPulse® and Continuous Wave laser therapies for glaucoma have been adopted by physicians around the globe as effective tools for managing and slowing the progression of glaucoma. 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 Our overall manufacturing strategy is to continuously develop and refine our processes to achieve our objectives of continuity of supply, quality of supply and margin enhancement. Over time, this may lead to in-sourcing or outsourcing certain functions in various geographic locations to achieve our objectives. 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, tariffs and retaliatory responses, trade wars, conflicts in the Middle East, lapse in government funding, healthcare reform initiatives, unexpected changes in taxes or policies, inflation concerns, changing interest rates, as well as other geopolitical developments and uncertainty, 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. 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 January 3, 2026. Results of Operations The following table sets forth certain operating data as a percentage of revenues: Three Months Ended April 4, 2026 March 29, 2025 Revenues 100.0 % 100.0 % Cost of revenues 59.8 % 57.5 % Gross margin 40.2 % 42.5 % Operating expenses: Research and development 7.7 % 7.4 % Sales and marketing 21.5 % 20.6 % General and administrative 13.8 % 16.2 % Total operating expenses 43.0 % 44.2 % Loss from operations (2.8 %) (1.7 %) Other expense, net (1.2 %) (12.3 %) Loss from operations before provision for income taxes (4.0 %) (14.0 %) Provision for income taxes 0.5 % 0.1 % Net loss (4.5 %) (14.1 %) The following comparisons are between the three months ended April 4, 2026 and March 29, 2025 (in thousands): Revenues Three Months Ended Change in $ Change in % April 4, 2026 March 29, 2025 Cyclo G6 $ 3,643 $ 3,181 $ 462 14.5 % Retina 5,827 6,645 (818 ) (12.3 %) Other 2,329 2,070 259 12.5 % Total revenues $ 11,799 $ 11,896 $ (97 ) (0.8 %) 23 Our total revenues decreased by $0.1 million, or 0.8%, from $11.9 million to $11.8 million. Revenue in our glaucoma and other revenue product groups increased, partially offset by a decrease in our retina products. 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 uncertainties, including the conflicts in the Middle East, tariffs and trade wars, and other factors. Gross Profit and Gross Margin Gross profit decreased by $0.3 million, or 6.2% from $5.0 million to $4.7 million. Gross margin decreased by 2.3% from 42.5% to 40.2%. The decrease in gross margin was primarily due to higher manufacturing costs and increased product costs related to recent tariff developments as the Company continues its transition to lower-cost contract manufacturers. 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, conflicts in the Middle East, including tariffs and trade wars, and other factors. Research and Development Research and development expenses remained relatively flat at $0.9 million. This reflects management’s continued focus on cost saving initiatives, including reduced spending on new and expanded product investments. Sales and Marketing Sales and marketing expenses remained relatively flat at $2.5 million. This also reflects management’s continued focus on cost saving initiatives and maintaining stable spending levels within this function. General and Administrative General and administrative expenses decreased by $0.3 million, or 16.0% from $1.9 million to $1.6 million. The decrease was primarily attributable to lower consulting costs, reduced deal related legal expenses, and cost savings realized from the general and administrative function transfer initiative announced in prior periods. Other Income (Expense), Net Other expense, net, was $0.1 million for the three months ended April 4, 2026, primarily consisting of interest and amortization of loan expenses. 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. Income Taxes We recorded an income tax provision of $58 thousand and $12 thousand for the three months ended April 4, 2026 and March 29, 2025, 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 April 4, 2026, we had cash and cash equivalents of $4.6 million and working capital of $11.8 million compared to cash and cash equivalents of $6.0 million and working capital of $12.0 million as of January 3, 2026. Net cash used in operating activities was $1.3 million in the three months ended April 4, 2026 compared to net cash used in operating activities of $1.1 million in the three months ended March 29, 2025. The increase in net cash used in operating activities was primarily due to increase in loss from operations. For the three months ended April 4, 2026, net cash used in investing activities was $0.1 million, which consisted of capital expenditures. 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 April 4, 2026, net cash used in financing activities was $1 thousand, primarily related to taxes paid to net share settlement of equity awards. For the three months ended March 29, 2025, net cash from financing activities was $6.0 million. In the first fiscal quarter of 2025, we received $10 million in issuance of convertible preferred shares and convertible debt, offset by $4.0 million in early prepayment of convertible debt. We have historically funded our operations primarily through sales of our products to customers, sales of our common stock and borrowing arrangements. As of April 4, 2026, our principal sources of liquidity consisted of cash and cash equivalents of $4.6 million. 24 We have incurred net losses over the last several years, and as of April 4, 2026, have an accumulated deficit of approximately $92.9 million. On March 19, 2025, the Company entered into the Novel Securities Agreement and the Novel Note Purchase Agreement with Novel. Pursuant to the Novel Securities Agreement and the Novel Note Purchase Agreement, Novel 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 after March 19, 2025. We have not issued any Growth Notes, but may do so in the future. 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 rates, 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 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 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. 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 significantly 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 Disclosures 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.