IRIDEX Corporation's first-quarter 2024 earnings call provided a mixed bag of news for investors. While the strategic review process remains ongoing, a previously anticipated asset sale has fallen through, leaving some wondering about the company's next steps. However, amidst the discussion of market firming, order deferrals, and recovering probe sales, one seemingly minor detail emerged that might hold a deeper significance: a significant increase in IRIDEX's accounts payable.

On the surface, the rise in payables from $4.5 million in Q4 2023 to $7.7 million in Q1 2024 seems easily explained. Management attributed it to increased inventory purchases, delayed receivables, and a late-quarter product mix shift. But could this surge in payables, exceeding even typical seasonal fluctuations, be a more deliberate strategy on IRIDEX's part, a subtle whisper of the direction they are heading in the strategic review process?

Let's delve deeper. IRIDEX is in a state of flux. They are actively pursuing a transaction or a series of transactions, seeking to unlock value for their stockholders. While discussions continue for both specific product lines and the entire company, the landscape shifted with the failed asset sale. This leaves IRIDEX with a tighter cash position and a pressing need to demonstrate the value of their remaining assets to potential buyers.

Here's where the rise in payables becomes intriguing. What if this increase isn't merely a result of external factors but rather a proactive move to bolster the attractiveness of the retina business? By building inventory, IRIDEX could be signaling to potential buyers that they are prepared to meet increased demand for their newly refreshed retina portfolio.

The launch of the new Pascal laser scanning platform and the new single-spot platform has generated considerable customer interest, and IRIDEX likely anticipates a revenue boost in the coming quarters. By increasing inventory, they are demonstrating their confidence in this growth trajectory and assuring potential buyers that they can handle a surge in orders.

Consider this: if IRIDEX intends to sell the retina business as a standalone entity, a robust inventory position becomes a critical asset. It would showcase the business's ability to meet immediate demand and minimize supply chain disruptions, thus increasing its valuation in the eyes of a buyer.

Furthermore, the late-quarter product mix shift mentioned by management could be further evidence of this strategy. The scramble to generate systems and shift them towards the end of the quarter might indicate an effort to prioritize filling orders for the new retina platforms, even at the expense of delaying shipments for other products. This would further support the hypothesis that IRIDEX is strategically positioning the retina business for a sale.

Numbers tell a compelling story. The 6% year-over-year decline in retina product revenue in Q1 2024 was solely due to longer sales cycles and equipment deferrals, factors expected to reverse soon. Meanwhile, global sales of Pascal scanning laser systems witnessed robust growth, underscoring the potential for a rebound in the retina business.

""While the period of capital equipment softness has extended longer than we anticipated, IRIDEX’s position in our markets remains strong based on the differentiated features and clinical evidence supporting our technology. Our refreshed retina portfolio, which includes the new IRIDEX 532 and 577 single spot laser platforms is generating customer interest that we expect to boost revenues in upcoming quarters plus further recovery driven by stabilized reimbursement for glaucoma procedures supports improved G6 probe sales.""

If we factor in a potential 10-15% increase in retina revenue in Q2 2024, driven by the new platforms and recovering capital equipment trends, the strategic benefit of a higher inventory position becomes evident. IRIDEX would be poised to capitalize on this growth, demonstrating a strong revenue stream and a healthy operational capacity to a potential buyer.

Projected Retina Revenue Growth

The following chart illustrates a hypothetical projection of IRIDEX's retina revenue, assuming a rebound in Q2 2024.

Of course, this is just a hypothesis. Perhaps the surge in payables is simply a confluence of external factors, as management suggested. However, given IRIDEX's current situation and their active pursuit of strategic alternatives, it's worth considering whether this whisper in the financials might be a deliberate maneuver to attract a buyer for their valuable retina business.

The coming quarters will be critical for IRIDEX. As they navigate the complexities of the strategic review process, the signals within their financial data will offer valuable clues for discerning investors. The whispers in the payables might be just the beginning of a captivating story.

"Fun Fact: Did you know that the name IRIDEX is a blend of "Iris," the colored part of the eye, and "Dex," short for dexterity, signifying the company's focus on precise ophthalmic instruments? It's a testament to their long-standing commitment to innovative technologies that treat sight-threatening eye diseases."