IRIDEX Corporation (IRIX) Q1 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and thank you for standing by. Welcome to the IRIDEX First Quarter 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s presentation, Ms. Leigh Salvo, Investor Relations. Ma’am, please begin.

Thank you and thank you all for participating in today’s call. Joining me are Will Moore, Chief Executive Officer and Atabak Mokari, Chief Financial Officer. Earlier today, IRIDEX released its financial results for the quarter ended March 31, 2018. A copy of the press release is available on the company’s website. Before we begin, I would like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements made during this call that are not statements of historical fact, including statements concerning our strategic priorities, product development matters, sales and marketing matters, including our presence at future industry events, sales trends, including our ability to secure orders from hospitals, clinics and ambulatory surgery centers, the markets in which we operate, including Korea and China, the recall of our LIO product, its impact on our business and results and our plans to return this product to market, our ability to convert backlog, orders, our guidance for 2018, including overall and product line revenues and G6 system and probe shipment levels, our strategic goals and our plans to provide public updates on these matters. All forward-looking statements are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results to differ materially. Accordingly, you should not place undue reliance on these statements. For a discussion of the risks and uncertainties associated with our business, please see our most recent Form 10-K and Form 10-Q filings with the Securities and Exchange Commission. IRIDEX disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, May 3, 2018. With that, I will turn the call over to Will.

Thank you, Leigh. Good afternoon and thank you all for joining us. We are off to a solid start in 2018 and are making progress in our shift towards a glaucoma disposables-oriented business model. Financial highlights for our first quarter include a 50% year-over-year increase in revenues for our Cyclo G6 system for the treatment of glaucoma. Total revenues for the quarter were $9.5 million primarily driven by new G6 system placements and increased probe utilization. In the quarter, we shipped 99 G6 systems and a record 11,600 probes. Since our launch in March 2015, we have shipped 973 G6 systems and more than 78,000 G6 probes. I am pleased with the strides our commercial team is making with both new and existing customers as well as the impact our marketing organization is having on raising awareness on the benefits of our MicroPulse technology in the treatment of all stages of glaucoma. On our last call, I highlighted two priorities for 2018. First, to improve the G6 probe utilization from our existing installed base, while continuing installed base expansion across the globe and second, to introduce new products that have the potential to improve the quality, reliability and manufacturing costs of all our products. We continue to make progress towards this objective and I look forward to providing an update on our product development progress in the coming quarters. I would like to take the next few minutes to provide highlights of our progress during the first quarter towards our primary objective of driving G6 commercial adoption. As we noted on our last call, increased G6 probe utilization in the U.S. through improved sales execution and integrating our clinical specialist team is a high priority for us. We are seeing increasing levels of productivity as our new sales reps gain tenure and our new clinical specialists have completed training and were recently deployed into the field. As our sales reps and clinical specialists work together to improve customer service with our existing G6 installed base, including enhanced customer training, we expect this will lead to greater adoption of our technology and increased probe utilization. Additionally, our marketing organization continues to make progress, raising awareness of the benefits of our MicroPulse technology for the treatment of glaucoma. These efforts have led to an increasing level of interest in our products around the world as evidenced by our results and improved lead generation at recent key industry events. At the recent ASCRS and ARVO meetings, two of the leading ophthalmic tradeshows, we had significant presence. This includes 10 papers and posters presented that reviewed the treatment of over 550 eyes with our MicroPulse technology for glaucoma. In the Asia-Pacific region, we recently participated in two important industry events and I was especially encouraged by the widespread attention from some of the most notable glaucoma specialists in the region. These events included the Asia-Pacific glaucoma congress in Korea, where we had two podium presentations and the Japanese ophthalmic society meeting, where two papers and posters were presented on the benefits of MicroPulse technology for glaucoma. Overall, the continued cadence of support for our G6 products and MicroPulse technology is encouraging. And we expect to continue this pace to build awareness. I am especially encouraged by the recent momentum of repeat orders of both G6 systems and probes from existing customers and a growing base of system orders from large hospital networks, ophthalmology clinics and ambulatory surgery centers. We were just in the early stages with several of these new customers I believe they have the potential to drive expanded probe utilization. Internationally, sales of our G6 systems and probes were strong. This was due in large part to a growing traction in several of our target countries, including Japan, which is experiencing accelerating adoption as our KOL launch strategy progresses. We are making progress on the build-out of our direct German sales organization. At the upcoming European Glaucoma Society Meeting, we are delighted to have our first KOL from Germany present her results with our technology. Our experience in other countries has been that this serves as an important catalyst to drive our KOL launch efforts. And in anticipation of G6 regulatory approval in China, we have already initiated our KOL launch efforts, including training of KOLs in Taiwan and Hong Kong. Overall, I am confident that we are laying a great foundation for anticipated regulatory approval in Korea and China this year. Turning our attention to retina products, as we discussed on our last call, we made the decision to voluntarily recall our TruFocus LIO premier laser accessory. The accessory is used in both surgical and medical retina procedures. Our team made the conservative decision to remove the device from the marketplace until we could identify the source of the problem, the device or user-related. We have conducted a thorough investigation of this situation and have developed an action plan to return this product to the market. That includes updates to our operator manual, testing, customer training and regulatory filings. We are pleased to announce that we recently began the shipment of updated LIOs in select countries outside the U.S. and expect to resume shipments thereafter in the U.S., pending regulatory review. The LIO recall did impact our medical and surgical retina business in the first quarter. However, we continue to see solid underlying demand in our medical retina business for the treatment of diabetic macular edema and have a significant backlog of orders. Before I turn the call over to Atabak, I would like to welcome our two new board members, Maria Sainz and David Bruce. They each bring extensive and relevant experience in product development and commercialization that directly aligns with our priority to accelerate Cyclo G6 adoption and utilization worldwide. Maria brings significant experience with the medical device industry. She most recently served as the CEO of two venture-backed startups, CardioKinetix and Concentric Medical. Prior to that, she held numerous leadership roles of increasing responsibility at Guidant, including significant experience outside the U.S. David has extensive experience in the medical device industry, including serving as the CEO of three growth stage companies, Arstasis, Patient Safety Technologies, and EP Medical Systems. Prior to that, he served in the ultrasound business at Siemens Medical in ACUSON. Maria and David are ideal additions to our team and we look forward to their contributions. At this point, I would like to turn the call over to Atabak to provide further detail on our financial results for the quarter and guidance for 2018. I will then share some closing remarks and open the call for questions. Atabak?

Thank you, Will. I will begin with an update on the G6 business. In the first quarter of 2018, G6 revenues increased approximately 50% compared to the first quarter of 2017. In first quarter of 2018, we shipped 99 G6 systems compared to 64 in the prior year period. System ASP was slightly higher relative to the fourth quarter. On the G6 probe side, we shipped a record 11,600 probes in the first quarter of 2018 compared to 6,600 in the prior year period, an increase of 76%. Probe ASP in the U.S. was relatively flat and decreased o-U.S. compared to the fourth quarter. Lower ASP o-U.S. was driven by some programs that we have initiated for KOL development and to better understand the demand curve outside of the U.S. given the wide range of reimbursements in different countries. From a geographic perspective, as Will mentioned, we had a strong quarter o-U.S. that shifted the mix relative to prior quarters. In the first quarter, approximately 50% of our G6 systems shipped was in the U.S. while approximately 60% of our G6 probes was in the U.S. Total revenues for the first quarter of 2018 were $9.5 million compared to $10.5 million in the prior year period, representing a year-over-year decrease of 9%. Growth in our G6 revenues was more than offset by a decrease in medical and surgical retina revenues primarily due to the LIO recall issues that Will described. In the first quarter of 2018, domestic system sales decreased 41% to $1.3 million from $2.1 million in the first quarter of 2017, while our international system sales decreased 13% to $2.6 million from $3.0 million in the comparable quarter. Recurring revenues in the first quarter of 2018 increased 5% to $5.7 million from $5.4 million in the prior year period as growth in our G6 probes was partially offset by a decline in our legacy probes. Gross margin in the first quarter of 2018 was 41.2% compared to 42.6% in the first quarter of 2017. Gross margin was primarily impacted by an unfavorable geographic mix and less efficient overhead absorption partially offset by the benefit of higher margin G6 revenues and the reversal of a portion of the reserves related to the LIO recall. Our G6 contribution margin in the first quarter was approximately 64%. Operating expenses for Q1 2018 were at $7.5 million, up from $6.3 million in Q1 2017. The level of our operating expenses reflects our growth investments to support our expanding commercial infrastructure, including increased sales and marketing expenses. Consequently, our operating loss in the first quarter of 2018 was $3.6 million compared with operating loss of $1.9 million in the prior year’s first quarter. From a balance sheet perspective, we ended the first quarter of 2018 with $18.5 million in cash and no debt. Turning to our guidance for 2018, we are reiterating our previously stated guidance of G6 probe shipments of 40,000 to 45,000, which represents growth of approximately 32% year-over-year at the midpoint and expect shipments of 350 to 400 G6 systems. We also continue to expect total revenue for the full year to range from $37 million to $41 million. With that, I will turn the call back over to Will for some closing remarks.

Thank you, Atabak. In closing, our overall goal remains the same to make the G6 platform the golden standard of care used to treat glaucoma patients. With a large and expanding patient population, we believe that we have multiple opportunities to grow our installed base and increase utilization. I am pleased to see the growing awareness and traction of our commercial teams are making as well as the growing worldwide awareness of our G6 platform and MicroPulse technology. We look forward to updating you on our progress in the coming quarters. Lastly, I would like to take a moment to say thank you to all our employees and for your ongoing dedication and strong drive to succeed together. With that, I would like to turn the call over to the operator for questions. Operator?

[Operator Instructions] Our first question or comment comes from the line of David Solomon from ROTH Capital Partners. Your line is open.

Hey, guys. Congrats on the quarter and nice for taking my question. I guess I will get started with the G6. Can I get – I just missed you guys when you said the percentage of G6 system revenues that were U.S. and o-U.S., I got – the probes were 60% what was the systems?

The systems was 50%.

50?

Yes.

Alright. Okay. And just on the G6 side especially utilization, it seems like international utilization has really ticked up. Can I get a little color on what exactly is going on to help you guys there?

Well, there is a couple of things, David. One, we are seeing, as I said, expanded awareness and consumption in Japan, but I think there is still a lot of noise in this number, because distributors o-U.S. tend to buy larger quantities at a time. It gets a little lumpy to be able to deal with the shipping costs and exports. So it’s improving, but you may see it go up and you may see it go down a little bit until the volume gets substantially larger.

Okay. And then on the U.S. side, you mentioned progress with the clinical utilization specialists, how many do you have out in the field right now?

Is it 3? 2, we have 2 in the field at the moment, the last one – we have one more that’s in final interviews, but two in the field, both have been trained and just recently began working outside with the sales force and that does not include the field manager that we hired before that. But to answer your question on the impact, they were not deployed in the first quarter, so they were – the results in the first quarter don’t reflect their activities. They have only hit the field here within the last short while.

Okay, that’s helpful. Thank you. And just regarding the conference, the conferences, main events, what kind of – what kind of feedback are you getting from just general ophthalmologists and people who haven’t been familiar with the device when they are seeing these presentations, anything we can glean that you – either from your own observations while there or things that you have gotten feedback from the KOLs we presented? Just whether there are certain hesitations that are now maybe no longer there for certain docs or just anything that we can maybe learn regarding those events.

I think – well, I attended the two shows, o-U.S. and the response there was from reading documents of other doctors around the world, they are very excited to get it. There is issues that in the Asian market from the meds they use that cause them – cause problems and irritations for the patients, so having something else is quite attractive. The issues that I think you may – we have heard of is that people are interested in talking about is what I call is, is transient mydriasis, which generally comes from, I will say, a poor technique, meaning that they are putting the energy to a place where they shouldn’t be. That’s just comes from a more improved training, but I want to make clear that it’s transient, usually if it happens, it goes away in a very short period of time. That tends to stop, the doctors ask questions, of how long does it take before it goes away? And it’s usually a few weeks, if that. But the number of people that have that is very small. That’s the beauty and the negative of what I will call the AGS blog.

Absolutely. Thanks. And then just regarding the international front, especially Asia, you mentioned Korea and China, what kind of timeframe could we expect those to maybe go through the approval and be launched, roughly?

I wish I could give you an answer. There is usually about a year to a little more than a year from the time you start. We are into that timeframe now. So, we here anticipate Korea any day, but any day could be another 30. Could be a little bit longer, but I think that’s the response. China is – I don’t really have an answer. We are working with them on an ongoing basis. We have given them information. They come back with more questions and we answered those questions. And I anticipate it happening in the near term, but I can’t give you an answer, David, when that would be.

Okay, that’s helpful. And just switching gears to the retina side, so obviously, there seems to be some progress on the o-U.S. side, if I heard you correctly. Can I just get a little bit more color on the U.S. side with what the developments have been?

Sure. So we went through as I said on the call extensive investigation to try to determine what the problem was. We went through that piece and we have made a determination and put together an action plan to bring the product back to the market. That requires us to file something with the FDA. There is so many different documents, whether it’s a 510(k) special letter to file, a GAAP 510(k), a catch up 510(k) and those are just little terms that people use on it, but it is – they are actual 510(k)s. And Ed Sinclair, our regulatory lead, is filing the paperwork. We hope to have it filed within the next few weeks. And then that gives us about a 30-day response from them – from the FDA to get us to the point where we can release in the U.S.

Thanks. That’s very helpful. And just switching gears for one last time for my final question, just on guidance, obviously, it’s the first quarter, so we don’t know what’s going to happen going forward, but this is a very good quarter. Just want to get your thoughts on where you stand with guidance right now given the progress, especially in the G6 side? Thanks for taking my questions guys.

Thanks David for the question. So as we mentioned, we reiterated our guidance for the year. While we are happy with the Q1 results, I think it’s – we didn’t feel it’s prudent to make any changes at this time, but we are happy with how we started off the year.

Thank you. Our next question or comment comes from Larry Haimovitch from HMTC. Your line is open.

Good afternoon, Will. Good afternoon, Atabak.

Hi, Larry.

Hi, Larry.

So what percent of the total revenue for the quarter was G6 revenue both systems and disposables?

Approximately 30%.

Approximately 30%. And I am assuming that’s up from last year’s percentage, which I would think was more in the 20% to 25% range?

Exactly, yes.

Okay. And for the full year, Atabak, when you look at your guidance, what percent approximately would the G6 account for of the full year?

I think it depends on how quickly we get the LIO issue resolved and the retina business stabilizes, but I think over time, in general, we expect that percentage to tick up as the G6 commercialization becomes a growing portion of our business.

Is it reasonable to think that it would be more than 30% certainly by the end of the year? If you look at Q4, for example, could Q4 be 30%? I would think it would be.

Hopefully, yes. It could be, yes.

Okay. And I had a second question I just had a brain fart. Okay. So what is the cash flow situation like, it looks like you burned about $3 million in the first quarter roughly maybe a little more. Are we expecting that – is it fair to annualize that number or is that number going to decrease as we go through the year?

As you look back over the last several quarters, we have burned in the roughly $2.5 million range, plus or minus. And I think our expectations are that, that burn will decrease over time, as we – as the revenue – the G6 revenue continues to grow. And as you know, comes in at a higher contribution margin and as the retina business stabilizes and can suck up more of the overhead. So hopefully, over time, that as the year progresses, that level of burn is narrowed. The counter to that is, is that as the G6 continues and we see the returns from our investments that could warrant additional investments to continue to ramp the roof there. So those are the two countervailing forces.

And when you look at full year of G6 revenue for 2018, Atabak, what percent approximately is capital equipment or the boxes versus disposables, is it roughly 50-50?

No, it’s much higher than that, I mean the disposables is in the 75% range.

It’s already that high?

Yes.

So if you exit the year, let’s say, at 35% of revenue being G6 revenue, Q4, 75% or more of that would be disposable revenue, correct?

Yes.

Okay, great. I had another question, but I am going to jump back in queue and come back.

Okay. Thanks, Larry.

Thank you. I would now like to turn the conference over to Mr. Will Moore for any closing remarks.

Thank you once again for joining the call today. We look forward to seeing many of you during our upcoming conferences and marketing trips. Please have a great evening and we will talk to you soon.

Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program. You may now disconnect. Everyone have a wonderful day.