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Item 2. Management’s Discussion and Analysis

2022-05-12 compared with 2021-11-12 · 36 added, 74 removed, 69 unchanged (61% of the section changed)

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.”

IRIDEX Corporation 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.

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Our laser consoles consist of the following product lines:

Glaucoma – This product line includes our Cyclo G6 laser system used for the treatment of glaucoma;

Medical Retina – Our medical retina product line includes our IQ 532 and IQ 577 laser photocoagulation systems, which are used for the treatment of diabetic macular edema and other retinal diseases;

Glaucoma – This product line includes our Cyclo G6 ® Laser and delivery devices used for the treatment of glaucoma;

Medical Retina – Our medical retina product line includes our IQ 532 ® Laser and IQ 577 ® Laser photocoagulation systems, which are used for the treatment of diabetic macular edema and other retinal diseases, and our PASCAL ® Synthesis Photocoagulator for the treatment of retinal diseases;

Surgical Retina – Our surgical retina line of products includes our OcuLight ® TX, OcuLight SL, OcuLight SLx, OcuLight GL and OcuLight GLx 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.

The OcuLight 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, servicing 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 MicroPulse P3 (“MP3”) probe and G-Probe;

Glaucoma – Probes used in our glaucoma product line include our patented MicroPulse P3 ® Probe, G-Probe ® and G-Probe Illuminate ® ;

Surgical Retina – Our surgical retina probes include our EndoProbe ® family of products used in vitrectomy procedures.

Ophthalmologists typically use our laser systems in hospital operating room (“OR”) and ambulatory surgical centers (“ASCs”), as well as their offices and clinics.

In the ORs and ASCs, ophthalmologists use our laser systems with either an indirect laser ophthalmoscope or a consumable, single use MP3 probe, G-Probe or EndoProbe.

Ophthalmologists typically use our laser systems in hospital operating rooms (“ORs”) and ambulatory surgical centers (“ASCs”), as well as their offices and clinics.

In ORs and ASCs, ophthalmologists use our laser systems with either an indirect laser ophthalmoscope or a consumable, single use MicroPulse P3 probe, G-Probe , G-Probe Illuminate or EndoProbe.

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.

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Three Months Ended

Nine Months Ended

October 2, 2021

September 26, 2020

October 2, 2021

September 26, 2020

April 2, 2022

April 3, 2021

Total revenues

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Provision for income taxes

The following comparisons are between the three months ended October 2, 2021 and September 26, 2020:

The following comparisons are between the three months ended April 2, 2022 and April 3, 2021:

Three Months Ended

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(in thousands)

October 2, 2021

September 26, 2020

Total revenues

Our total revenues increased by $4.5 million, or 50.7%, from $8.8 million to $13.3 million.

The increase is primarily due to the increase in sales of our retina products, Cyclo G6 products and other revenues compared to the prior year when our business was severely impacted by the COVID-19 pandemic.

Revenues from retina products increased 75.6%, primarily driven by an increase in sales of our Iridex Retina products in both domestic and international markets compared to the prior year when capital equipment sales were especially impacted by the COVID-19 pandemic, and an increase due to the inclusion of PASCAL product revenue from our acquisition of TMLS assets, particularly in international markets .

Revenues from Cyclo G6 products increased 13.3%, driven primarily by an increase in Cyclo G6 probes sales.

Other revenues, comprised of service, royalty, freight, legacy G probes and revenue related to exclusive distribution rights, increased 46.6% primarily due to an increase in service and legacy G probes revenues and the revenue related to exclusive distribution rights.

While we believe that demand for our products remains and our outlook has improved, the overall capital expenditure landscape within hospitals, surgi-centers and physician offices is still being impacted by the general level of uncertainty brought on by COVID-19 and the spread of the Delta variant.

Until this subsides, we anticipate capital expenditures may continue to be deferred.

Gross Profit and Gross Margin.

Gross profit increased by $2.1 million, or 58.2%, from $3.7 million to $5.8 million.

Gross margin increased by 2.1% from 41.5% to 43.6%.

The increase in gross margin was primarily attributable to a decrease in manufacturing overhead rate because of higher sales volume and a shift in product mix.

Gross margins are expected to 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 (“R&D”) expenses increased by $0.9 million, or 105.8%, from $0.9 million to $1.8 million.

The increase in spending was primarily attributable to an increased level of spending on laser systems and inclusion of R&D expense from our acquisition of the PASCAL Business.

Sales and Marketing.

Sales and marketing expenses increased by $0.9 million, or 32.3%, from $3.0 million to $3.9 million.

General and Administrative.

General and administrative expenses increased by $0.6 million, or 33.8%, from $1.7 million to $2.2 million.

The increase in spending was primarily attributable to higher personnel costs and an increase in legal and consulting expenses associated with acquisition of the PASCAL Business and execution of the Exclusive Distribution Agreement with Topcon.

Other Income (Expense), Net.

Other income, net was zero, compared to $0.1 million.

Other income (expense), net, consisted primarily of interest income or expense and foreign currency gain or loss.

Income Taxes.

We recorded an income tax provision of $8 thousand for both quarters.

The following comparisons are between the nine months ended October 2, 2021 and September 26, 2020:

Nine Months Ended

(in thousands)

October 2, 2021

September 26, 2020

April 2, 2022

April 3, 2021

Total revenues

Our total revenues increased by $1.4 million, or 11.9%, from $12.0 million to $13.4 million.

The increase is primarily due to the increase in sales of our retina products, Cyclo G6 products and other revenues compared to prior year when our business was severely impacted by the COVID-19 pandemic.

Revenues from retina products increased 97.0%, primarily driven by an increase in sales of our Iridex Retina products in both domestic and international markets compared to the prior year when capital equipment sales were especially impacted by the COVID-19 pandemic, and an increase due to the inclusion of PASCAL product revenue from our acquisition of TMLS assets, particularly in the international markets .

Revenues from Cyclo G6 products increased 29.2%, driven primarily by an increase in Cyclo G6 probes sales.

Other revenues, comprised of service, royalty, freight, legacy G probes and revenue related to exclusive distribution rights, increased 29.3% primarily due to an increase in service revenue and the revenue related to exclusive distribution rights.

Until this subsides, we anticipate capital expenditures may continue to be deferred.

The increase in revenue was driven by higher Cyclo G6 product revenue, continued strength of the Retina product line in both domestic and international markets, including full quarter sales of the PASCAL product line, an increase in service revenues and the revenue related to exclusive distribution rights.

Until this pandemic subsides, we anticipate capital expenditures may continue to be deferred.

Gross Profit and Gross Margin.

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Gross margin increased by 3.3% from 41.3% to 44.6%.

The increase in gross margin was primarily attributable to a decrease in manufacturing overhead rate with higher sales volume and a shift in product mix.

The increase in gross margin was driven by the longer-term strategic focus to increase higher margin probes within the product mix, continuing pricing discipline and inclusion of recognized revenue from the sale of distribution rights to Topcon .

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Research and development (“R&D”) expenses increased by $0.9 million, or 81.6%, from $1.2 million to $2.1 million.

The increase in spending was primarily attributable to an increased level of spending on laser systems and inclusion of R&D expense from our acquisition of the PASCAL Business.

The increase in spending was primarily attributable to an increased level of spending on new product development initiatives and on development of PASCAL product line.

Sales and Marketing.

Sales and marketing expenses increased by $1.3 million, or 44.2%, from $3.0 million to $4.3 million.

The increase was primarily attributable to higher commission expense because of higher sales and higher travel expenses compared to the prior year when the COVID-19 pandemic greatly reduced our business activity, partially offset by a decrease in marketing activities due to COVID-19 relative to the first quarter of prior year.

The increase was primarily attributable to the targeted expansion of our sales and marketing programs.

General and Administrative.

General and administrative expenses increased by $1.7 million, or 34.3%, from $5.1 million to $6.8 million.

The increase in spending was primarily attributable to an increase in legal and consulting expenses associated with acquisition of the PASCAL Business and execution of the Exclusive Distribution Agreement with Topcon.

Other Income (Expense), Net.

Other income, net was $2.4 million, compared to $0.2 million.

Other income (expense), net, consisted primarily of interest income or expense and foreign currency gain or loss.

We recognized a $2.5 million gain on PPP Loan forgiveness as other income during the nine months ended October 2, 2021.

General and administrative expenses decreased by $0.8 million, or 30.2%, from $2.6 million to $1.8 million.

The decrease in spending was primarily attributable to lower legal and consulting expenses with prior year’s spending mainly related to the acquisition of the PASCAL Business and execution of the Exclusive Distribution Agreement with Topcon.

Other Expense, Net.

Other expense, net was $0.1 million, compared to $0.2 million.

Other expense, net, consisted primarily of foreign currency gain or loss and interest income or expense.

Income Taxes.

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In addition, liquidity includes the ability to obtain appropriate financing or to raise capital.

As of October 2, 2021, we had cash and cash equivalents of $25.6 million and working capital of $30.9 million compared to cash and cash equivalents of $11.6 million and working capital of $16.7 million as of January 2, 2021.

Net cash provided by operating activities was $10.0 million in the nine months ended October 2, 2021 compared to net cash used in operating activities of $3.0 million in the nine months ended September 26, 2020.

The increase in net cash provided by operating activities, expressed in direct cash flow terms, was primarily due to the payment received for the distribution exclusivity fee and increase in cash receipts from customers, partially offset by an increase in vendor payments and increase in payroll due to higher headcount.

For the nine months ended October 2, 2021, net cash used in investing activities was $5.5 million, which consisted primarily of the purchase of the PASCAL Business for $5.3 million.

Net cash used in investing activities for the nine months ended September 26, 2020 was $0.1 million, which consisted of capital expenditures.

For the nine months ended October 2, 2021, net cash provided by financing activities was $9.4 million, primarily from the net proceeds arising from the issuance of common stock and proceeds from stock option exercises, partially offset by payroll taxes related to net share settlement of equity awards .

For the nine months ended September 26, 2020, net cash provided by financing activities was $2.5 million, reflecting the proceeds from the PPP loan.

As of April 2, 2022, we had cash and cash equivalents of $20.6 million and working capital of $29.3 million compared to cash and cash equivalents of $23.9 million and working capital of $29.6 million as of January 1, 2022.

Net cash used in operating activities was $3.3 million in the three months ended April 2, 2022 compared to net cash provided by operating activities of $11.8 million in the three months ended April 3, 2021.

The increase in net cash used operating activities, expressed in direct cash flow terms, was primarily due to the receipt of distribution exclusivity fee during the prior year period, an increase in vendor payments consistent with increased manufacturing activities and increase in payroll due to higher headcount and higher bonus payout, partially offset by increase in cash receipts from customers.

For the three months ended April 2, 2022, net cash used in investing activities was $26 thousand for capital expenditures.

Net cash used in investing activities for the three months ended April 3, 2021 was $5.4 million, which consisted primarily of the purchase of PASCAL business.

For the three months ended April 2, 2022, net cash provided by financing activities was $6 thousand, primarily from proceeds from stock option exercises .

For the three months ended April 3, 2021, net cash provided by financing activities was $9.9 million, primarily from the net proceeds arising from the issuance of common stock.

W e have historically funded our operations primarily through sales of our products to customers, and through common stock and borrowing arrangements.

As of October 2, 2021, our principal sources of liquidity consisted of cash and cash equivalents of $25.6 million.

We have incurred net losses over the last several years, and as of October 2, 2021, have an accumulated deficit of approximately $59.7 million.

We expect to continue to incur operating losses and negative cash flows from operations through October 1, 2022.

As of April 2, 2022, our principal sources of liquidity consisted of cash and cash equivalents of $20.6 million.

We have incurred net losses over the last several years, and as of April 2, 2022, have an accumulated deficit of approximately $64.6 million.

We expect to continue to incur operating losses and negative cash flows from operations through April 1, 2023.

We believe our existing cash and cash equivalents will be sufficient to meet our anticipated cash needs over the next 12 months.

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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.

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.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis