IRIDEX Corporation (IRIX) Q2 2022 Earnings Report, Transcript and Summary

Good day and thank you for standing by. Welcome to the IRIDEX Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to Leigh Salvo with Investor Relations. Please go ahead.

Thank you, Carmen and thank you all for participating in today's call. Joining me are David Bruce, Chief Executive Officer; and Fuad Ahmad, Interim Chief Financial Officer. Earlier today, IRIDEX released financial results for the quarter ended July 2, 2022. A copy of the press release is available on the company's website. Before we begin, I'd 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, but not limited to statements concerning our strategic goals and priorities, product development matters, sales trends and the markets in which we operate. 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 or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place 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 SEC. 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 and future events or otherwise. This conference call contains time sensitive information and is accurate only as of live broadcast today, August 15, 2022. And with that, I'll turn the call over to Dave.

Good afternoon, and thank you all for joining us today. [Technical Difficulty] strong and this year's summer slowdown appears to be short-term and attributable to a combination of factors. Macro headwinds from inflationary pressure in US dollar strength relative to foreign exchange rates has dampened our OUS retina capital system sales during the quarter and increasing pricing pressure on our international customers from high inflation across many segments, driven up customers total spending and has led them to assess their capital purchase appetites. In the glaucoma market segment, we experienced relative procedure volume weakness in the second quarter. This is largely due to strong comparable result in the prior year second quarter. But on top of this, we did experienced headwinds from continued COVID impacts to surgi center capacity and patient procedure volumes. Surprisingly, vacations by doctor, staff and patients ran unusually high, and as a result, added to reduced delayed procedures. These combined to deliver some procedure softness in late May and June. We believe these headwinds are temporary, and our team has maintained steady focus on expanding our market and building the physician adoption of our non-incisional approach to treating glaucoma and retinal disease. Clinicians have proven receptive to our enhanced dosing guidance and our monitoring patient outcomes over time as they build experience toward expanded usage on a wider indication of patients. While this process is taking longer than we like, our confidence remains high that we're demonstrating improved outcomes that will lead to broader adoption. Glaucoma probe sales volume increased 2% quarter-over-quarter, but declined 6% versus the prior year. As I discussed, the decline stems from second quarter 2021 OUS probe sales that were particularly strong, as the partnering distributors placed and sold final orders before Topcon took over distribution for over half of our OUS territories. Despite these challenges, we pleased that second quarter probe sales attained our second highest quarter ever, only behind last year's second quarter. In Japan, we completed distributor transition at the beginning of the second quarter, marking the last of our large international market transitions. As part of the transition Topcon receive product inventories from the prior distributor and therefore placed minimal orders in the quarter. We anticipate renewed contribution from this region in the latter half of the year and going forward. In June, we were pleased to receive our long awaited regulatory clearance to market and sell our Cyclo G6 Glaucoma platform in China. This important milestone opens up a significant new market for IRIDEX, an estimated 9.4 million adults in China are afflicted with glaucoma that the market scale comparable to that of the US. We sold the initial systems and probes to begin the launch and together with our distribution partners Topcon and Clinico we conducted clinical launch meetings with over 70 physicians, significantly exceeding our expectation of 15 to 20 from our initial onsite. Together with our partners we will support pilot sites and patient experience to build a strong initial presence in China that we can then leverage to penetrate the broader market. To support the growing awareness of TLT in our China launch, we expanded our commercial team with the addition of a Vice President of Marketing, as well as new sales team members, two in the US and three internationally. Increase in our sales team enables us to continue broadening the geographic reach and focus of our sales efforts. Lastly, our capital position remains secure, so again this quarter we deployed some cash to mitigate potential supply chain impacts and we continue investing in initiatives to secure our long-term growth. Year-to-date cash reduction is approximately $5.9 million with about $3.1 million of that shifted in current assets and cash to inventories and prepayments to mitigate lingering supply chain challenges. On the clinical front, we had several notable update that put on the work over the previous quarters, [indiscernible] presentations and industry article supporting the dosing impact on outcomes and the importance of sweep speed techniques are increasing awareness of methods to secure optimal results. The first clinical paper from our TLT consensus committee has been published and the Group is finalizing the submission for the second half of the guidance paper, which will be published in the same journal. We expect these papers to serve as critical proof point as we continue to drive adoption of TLT and introduce this technology to more and more physicians. Turning to product launches, we're excitedly preparing to launch a new suite of laser systems at the upcoming AAO Conference, beginning September 30. This launch will include new platforms for the three main laser products within our retina treatment portfolio, not only with the platform to deliver modernized architecture and ultimately connectivity capability, but they provide IRIDEX a lower cost of manufacturing, which we can use to drive share gains and improved margins. We expect initial shipments in the US to begin in Q4 followed by OUS approvals over the next several quarters and will roll out international market launches as those come us. As we look at the full-year ‘22 we assessed our performance year-to-date and the impact from extended prevalence of COVID, plus the macro headwinds affecting our expectations for the second half of the year, and conclude that it's prudent to lower our revenue and probe guidance for the year. Our updated full-year 2022 outlook is as follows: total revenue of $56 million to $58 million, reflecting growth of 4% to 8% year-over-year. And we now expect probe sales of 61,000 to 63,000, growth of 5% to 8% over 2021. Our expectation for Glaucoma system sales remains unchanged at 225 units to 250 units. We'll continue to focus on executing our growth catalysts and when combined with typically stronger second half of the year sales, we are confident in our ability to build momentum through the remainder of 2022. In summary we perceive the current challenges as impacting the fiscal year ‘22, but we're confident that we have in place and energized commercial team, high quality distribution network, enhanced product portfolio and a multi-year capital runway that will allow us to succeed in our long-term growth strategy and position IRIDEX as the leading provider of non-incisional laser based treatments in the ophthalmology market. With that, I'd like to turn the call over to Fuad.

Thank you, Dave, and good afternoon everyone. I will now review our financial performance for the second quarter of fiscal 2022, starting with revenue. Total revenue for the second quarter of -- second quarter was $13.8 million, up 2% from $13.4 million in the second quarter of last year. We sold 15,000 Cyclo G6 probes in the second quarter, a decline of 6% from the prior period and a 2% increase quarter-over-quarter. As Dave noted earlier, the year-over-year decline was primarily a result of the prior period including final orders by distributors in advance of our move to Topcon’s exclusive distribution. Moreover, we are also experiencing some headwinds from a stronger dollar as vast majority of us revenue is priced in USD. We sold 48 Cyclo G6 systems in the quarter compared to 47 in the prior period. Year-to-date we have sold 104 Cyclo G6 systems, tracking our initial expectation for the full year and validating our worldwide installed base expansion goals for 2022. It also highlight the broadening adoption of TLT for the treatment of glaucoma. Total product revenue from our Cyclo G6 product family was $3.5 million down 3% compared to the second quarter of 2021. Turning to our retina business. Product revenue was $7.5 million, flat compared to the prior year period. Strength in our legacy IRIDEX retina products was offset by relative softness in PASCAL revenue. Recall that last year in Q2 and Q3 we shipped extra units to start building inventory in Japan ahead of a shipment blackout as we registered IRIDEX as the manufacturer of record for PASCAL. Other revenue, which includes royalties, services and other legacy products increased 22% to $2.7 million in the second quarter of 2022 compared to the same period in 2021. The substantial increase resulted from higher service revenue and higher amortized revenue recognition from the sale of distribution rights to Topcon. We expect to sustain this level for the balance of the year. Gross profit of $6.3 million in the quarter reflected gross margin of 45.6% compared to 45.5% in the second quarter of 2021. We expect that further margin expansion will come from increased probe volumes and sale of our new laser platforms as they take the place of existing systems in the future. Operating expenses for the second quarter was $8.4 million compared to $7.2 million in the same period of the prior year. The increase was the result of higher R&D spend on planned investments in new product developments and additional R&D capability from the acquisition of the PASCAL product line. Additional planned investments in the sales organization, as well as expanded marketing and clinical activities also contributed to the higher operating expense in the period versus the same period last year. Higher R&D and sales and marketing expense was partially offset by lower G&A expense in the period. Net loss in the second quarter of 2022 was $2.2 million or a net loss of $0.14 per share compared to an income of $0.09 per share for the same period in 2021. Please note, second quarter of 2021 included a one-time gain of $2.5 million from forgiveness of our PPP loan. We ended the quarter with cash and cash equivalents of $18 million, representing cash usage of $2.7 million during the quarter. Cash usage included approximately $1.1 million investment in inventory and related pre-orders. We believe these investments in materials and inventory are necessary to mitigate potential supply chain bottlenecks in the future. We expect to start bringing down inventory starting in the fourth quarter of fiscal 2022 and into fiscal 2023. We reiterate that these shifts in our current assets are an essential part of the supply chain management strategy in the current environment. In conclusion, I'll provide an update to our guidance for 2022. As Dave mentioned, we now expect total revenue for fiscal year 2022 to be $56 million to $58 million compared to $57 million to $59 million previously. G6 probe sales are now expected to range from 61,000 to 63,000 compared to a range of 67,000 to 70,000 previously. And finally, our expectations for growth for Cyclo G6 Glaucoma Laser systems installed base growth remains unchanged at 225 to 250 units. With that, Dave and I would like to turn the call over to the operator for questions, operator?

Thank you. [Operator Instructions] Our first question comes from the line of Tom Stephan with Stifel. Please proceed.

Great. Hey guys, thanks for the questions. If I can just start on G6 guidance, you maintain the systems placement guide which I would think would be the impacted portion from inflation in macro, which I think on the retina side you said may be impacted, but then with G6, I think the probe shipments is where guidance came down somewhat meaningfully for 2H. So I guess on the probe side what else are you seeing beyond macro, because I guess, would that least procedure volumes be a bit more resistant to macro, just trying to make sense of this dynamic. Is it competition? Just any color there, Dave, would be would be helpful.

Sure. Hi, Tom. Yeah, I would say that macro is a factor and then as we shifted distribution, some of the softness in the second quarter was inventory shifts. For example, in Japan, as I mentioned. Going forward, we think we'll recover on those items and reestablish the growth trajectory. Our original guidance was about 18% probe growth through the course of the year and we've been relatively flat year-to-date versus last year. So as we start to grow again in the second half, we've got that lack of growth in the first half to the carry and that's why the numbers are down. So we're going to grow at a rate that -- we're starting at a lower base than we would have expected for the second half of the year. So I think when you -- when we do that math, you see it coming lower than you would expect. We're actually pretty pleased with the guidance of system sales that it indicates the appetite is there to adapt and our visibility is such that we're feeling comfortable that there is still demand there. Those price points for that capital equipment or not to hide in $20,000, $25,000 range. So that's the easier capital purchase to continue forward with, then retina laser system that might be between $50,000 and $100,000 depending on the feature set. Does that clarified things for you a bit?

Yeah. That's helpful. Actually I think that's a really good segue into my second question. Just on kind of the medium term for G6. Not going to ask you to guide for 2023, but I'm curious how we should be thinking about next year at this stage. It sounds like some of the current headwinds are transitory, what is your medium-term outlook? Because I do think guidance implies flattish utilization in 2022 versus 2021, but again, you do think it sounds like you'll get back on the normal growth trajectory of that business. So for 2023, is it fair to think about G6 kind of getting back to the 15% to 20% plus growth rates as we enter next year?

I think so. We thought that was going to be the case this year. And I think COVID persisted longer than I think many of us anticipated. And it kept this in a level as opposed to growth in this first half of the year. We established growth in the second half of the year and I think that continues, but there are a couple of nice catalyst to accelerate that growth. Now with really have high confidence that our newer dosing and sweep speed communication coming from papers, KOLs and our sales teams call on our customers is really going to take -- capture traction and start the number one give very consistent and durable results and cause our clinicians to start to broaden the patient based on which they use it. For the longest time, we've talked about expanding to the more moderate stage patients. But before you get that you've got to get that confidence and the durability and especially the safety profile, and we think we're building that now. So I think those things will come out as we move along in the second half of the year. There are also some studies that are ongoing that will demonstrate the current dosing with the current probe and the outcomes and safety profile from that. So as that emerges, I think it gives the greater and greater confidence of existing users, to broaden the patient selection and newer users to come on board. So yes, we think ‘23 we should be on a higher growth trajectory, barring any other [indiscernible] events that start to now effect usage and ability to do procedure volumes and those kinds of things.

Got it. That's helpful. Maybe last one from me, just on the sales force. Can you remind us how large it is now between each segment? And just talk about the strategy and the rationale here kind of where these new reps will be focused between the different businesses?

Sure. So in the US, we have a team of six territories, plus support team that adds up to about 10 on the retina side of the business. And so that's capital business, it's primarily a replacement business although there is some expansion in facilities that want to have a satellite facility and have the same kind of equipment in that facility. But overall, the doctor base is everyone has a later and it’s -- now it's really an opportunity for our new platforms to have some growth as we replace older systems with newer systems. So that's the retina side in the US. And then the glaucoma side in the US, we have 14 territory so we just brought us up from 12 to 14. We have some clinical support team members, as well as the management and inside support. And so that team totals about -- just about 20 people and that's focused on glaucoma exclusively in the US. And then internationally, we expanded by three in -- both in Asia Pacific, as well as in Europe to put more support in place to help Topcon and their distributors drive the business in their channels. So we added, what we call area sales manager as well as clinical specialists to help support cases and train sales reps in the territories. And so that international team now totals about seven people covering with roughly 60 distributors and including the sub-distributors under Topcon.

Great, that's helpful. And if I can squeeze in one more just going back to glaucoma, obviously, there is a lot of new entrants from a product perspective recently and even more so on the horizon. Dave, can you just talk about your view on the competitive landscape. And you know to what extent maybe it's factored into the revised guidance? And I guess just more broadly, how are you thinking about ramping competition and the extent that that might affect kind of G6 utilization? Thanks.

Sure. We think that our non-incisional approach is relatively unique that we can treat the moderate stage to the later stage and we don't need an incision and we don't need the clinician to decide to make a decision in order to treat. For example, a mix stand-alone. And what we're hearing from the clinicians is, their preference if they can avoid it is to not make an decision and use our technique if they're satisfied that it delivers the results and the safety profile. That said, I think there is a lot of interest in understanding it and potentially trialing some of the newer entrants and new approvals for stand-alone. And so I think it's taking some mindshare. I don't know at this point that is really affecting, we don't hear that, Oh, well, I’m doing a bunch of these other things now, so I’m using yours less, we just did not hear that. So I think it's out there. I think it's a distraction. I think that space has so many competitors and all of them with a large number of sales reps. But there's just a thunderous noise in that space targeted at glaucoma specialist and comprehensive who are doing [indiscernible]. And so we're one of the voices in one sense that they're hearing. So we think from a product standpoint, we're well differentiated, but from a communication standpoint, we think it's a challenge to be heard with all the other noise. Internationally, I think there's less of that because I think mix is less eagerly adopted or at least in the percentages internationally. And so we don't feel that is challenging. There are a couple of competitors out there attempting to do what we do in our non-incisional probe approach. But as we've detailed, there's so much work that has gone into getting the right configuration of the probe, the right clinical and dosing and technique and the training and support that we think we have a relatively dominant position in the actual procedure volumes going on and that we can maintain that.

Great. Thanks, Dave.

Thank you. One moment for our next question please. Our next question comes from the line of Scott Henry with ROTH. Please go ahead.

Thank you, and good afternoon. Just a couple of questions. Dave, I guess, first, and I know you've talked about it in the prepared remarks and probably in the last question as well. But I just wanted to flush it out one more time. So the G6 came in below expectations and I've heard a lot of different things, capacity constraints. What do you think was the main driver? Why it came in below expectation? And if you don't want to put it on just one thing, maybe if there are like -- how would -- if you're just trying to simplify it as much as possible, what do you think happened in 2Q that made things not turn out as much as you thought they would?

I think its two things that you can look to that are very straightforward. Number one, the COVID persistence continued to dampen procedure volume at least in our facilities with our procedures. And secondly, it was very visible to us that the latter part of May and into June there was just procedure volume softness. And I was quite surprised when we canvassed that this concept of vacations kept coming up. So I at first didn't necessarily believe it, but I've heard that other conference calls, people have observed the same phenomenon. So I think that's a very short term focus thing. I think it's hard to extrapolate and we hate to look at week by week or month by month and call it a trend, but we did see recovery in July that made us more comfortable that, number one, there was some proof to that, and number two, that people did actually come back from their vacations. And I think ---

When you say -- Dave, when you say procedure volume softness, it sounds like you're speaking about the market, not market share as much as the denominator in the equation?

Look, it's notoriously hard to get market share indications, but it's pretty clear that our sites, we're saying yes, we're doing many fewer procedures. Our clinicians are on vacation or staff is on vacation or sick or patients don't want to come in because they know five people who had COVID and they just don't want to be exposed. And those are the indicators for us. We don't really have good macro visibility on what was happening to cataract procedures and those kinds of things.

Okay. I mean, I Guess –

That's the basis of our belief that procedure volumes were significantly softer or significant enough, softer to kind of leave us flat to down. Then the second piece is really in the international space and it's something that I've been talking about since the beginning of the collaboration with Topcon is that, we will see these quarterly periods where we'll have volume shifts of orders from one quarter to the next quarter just based on the timing of when they place their stocking or orders for their sub distributors or end customers. And I think we saw some of that internationally and I used the example of Japan where that distribution shift occurred really at the end of Q1, beginning of Q2. And with that final shift over same inventory and probe inventory. So the normal flow of orders from that region didn't come to us and we expect that to come in the future. But that -- it's a significant market for us, Japan, and it effect -- that effect is global. So I think those are probably the two biggest, they're clearly short term. I think the macro, if I would give you a third, is that, even though people are quite receptive and users understand the importance of dosing and sweep speed on outcomes, our procedure does take a while to see that outcome and durability. So typically, they will evaluate it thirty days, but then they also want to see three and six months outcomes, both from a reduction of intraocular pressure, percentage reduction, also safety profile. So like I said, it took -- in the comments, it's taking longer than we anticipate, but the results seem to be there. And so we're quite confident that that adoption will be confirmed and we'll get that broadening. And so as that plays through, I think that we can accelerate our growth and have recovery from those sort term factors from the quarter.

Yes. I mean, I guess what I was trying to flush out is, all of this seems temporary and glaucoma is not going away, barring some sort of contraction from the economic cycle where perhaps people just see the doctor less for a period of time that should reverse at some point. You should expect to see growth return to trend perhaps in 2022. Is that a fair assumption?

Yes, that's very fair assumption. It's our expectation. We've continued hiring, we're pushing our marketing programs and clinical programs to get back to that phase. And look, you can't exceed every quarter, expectations every quarter, you're either under projecting or have a rabbit pull out of your hat each time. This is one of those quarters where it became clear that these factors didn't cause significant declines, but they prevented the growth that we were expecting to achieve. And look, I think it's very short term in the sense that the specific quarter elements were clear. That said, we still have work to do to drive adoption, engagement with clinicians and expand both the clinical and the study base so that the evidence builds and the comfort level is there. And that's what drives adoption. So it's a multi quarter event. We're comfortable that we're going to recover from these headwinds. And we're still quite optimistic on the capital equipment opportunity as well when you look at the reduction of our guidance it was really related to the glaucoma probe reduction. We really haven't put a significant reduction in for capital equipment in the second half of the year and that's partly because we've got new products and some excitement coming and partly because we feel like we've got the value proposition to continue to drive that business.

Okay, great. And just another question, no real reason to ask it now, but it seems it was on my mind. On the R&D side, company spends a good amount, $2 million a quarter on research and development. The question is, I don't know, some of that may be sales related. But what products is the company working on? And where is the return from that investment? Not that there isn't one I'm just curious if you want to highlight any of the stuff you are working on?

Yes. So some of the focus -- a significant part of the focus of R&D right now has been getting our new platforms, in particular, PASCAL platform through the production cycle and launch, and it's a next level platform as opposed to an improvement of the current platform. So it entails a higher level of investment and a longer period of time and we're coming to the end of that. And the opportunity really is to redeploy those to other areas of opportunity. And look at the spend that we should be having given those opportunities. There's a whole wave of connectivity and connectivity to various clinicians and bringing images into the field, there are some smattering of offerings out there. Our Topcon partner is quite strong in that space between their diagnostic equipment, communicating between, say, [Technical Difficulty] And then we think there are advances to be made in the way we deliver energy for glaucoma and other applications in the front of the eye delivering energy to create a therapeutic or some type of a clinical effect and have a delivery device that may or may not be disposable, but drives incremental revenue for the company as procedure volume grows. And so we will invest in those things going forward. I'm not ready to disclose the competitive space and no point in disclosing those things to our competitors.

Okay, great. Well, thank you for taking the questions.

Thank you. And with that, we end our Q&A session for today. I will turn the call back to David Debbie Bruce for final remarks.

Thank you. And thanks everyone for joining the call. We'll continue to work on behalf of growth and strong shepherding of the assets and look forward to reporting to you next quarter.

And with that, ladies and gentlemen, we thank you for participating in today's program. You may now disconnect. Everyone, have a great day.