Earnings Call Transcript - IRIX Q2 2021

Operator, Operator

Good day and thank you for being here. Welcome to the IRIDEX Q2 2021 Earnings Conference Call. Currently, all participants are in listen-only mode. After the presentations from the speakers, there will be a question-and-answer session. I would now like to turn the call over to your speaker today, Hunter Cabi, from Investor Relations. Please proceed.

Hunter Cabi, Investor Relations

Thank you, and thank you all for participating in today’s call. Joining me are Dave Bruce, Chief Executive Officer, and Fuad Ahmad, Interim Chief Financial Officer. Earlier today, IRIDEX released financial results for the quarter ended July 03, 2021. 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 facts, including but not limited to statements concerning our strategic goals and priorities, product development matters, sales trends, and 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, future events or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, August 12, 2021. And with that, I will turn the call over to Dave.

Dave Bruce, CEO

Good afternoon and thank you all for joining us. As we announced a very strong quarter for IRIDEX, I can't help remembering that entering last year's second quarter, COVID had plunged our company into shocking changes to our market environment. And as a result, we took steps to ensure the security of our business. These included implementing significant cost controls and cash preservation measures to extend our operating runway. And today our cash is about two and a half times what it was then. We have significantly improved our cost structure, allowing us to invest for growth. In addition, we prioritized re-engaging with our significant installed base while expanding awareness of the benefits of our non-incisional MicroPulse Transscleral Laser Therapy procedure for new customers. A year later, our installed base exceeds 2000 systems, and glaucoma probe sales reached record quarterly levels. Lastly, we continued to pursue initiatives that would deepen our market penetration and improve gross margins. Today we are seeing an investment in expanding the U.S. sales and marketing team beginning to show results. In addition, we're achieving efficiencies in manufacturing costs, overhead absorption on higher sales, and an increasing percentage of our revenue from higher-margin disposables, which helped to improve gross margins to over 45% this quarter. The integration of the PASCAL product line acquired earlier this year from our collaboration with Topcon is going smoothly. Overall, we meaningfully strengthened and positioned our company for long-term growth. Turning now specifically to second-quarter results. Revenue was $13.4 million, a 116% year-over-year increase and a record high going back to 2007 when IRIDEX was a very different company. We also saw significant growth in our glaucoma business, including a new record of 16,000 Cyclo G6 probes sold. Our retina business had a robust return on sales, nearly tripling off the COVID lows of the second quarter last year. The integration of the PASCAL product line acquired from Topcon during the first quarter is progressing well without any disruption to production volumes, and we're generally on track in our transition to Topcon's portion of distribution in our worldwide sales partner network. This momentum as we head into the second half of 2021 gives us confidence to raise full-year guidance to a total revenue of $50 million to $52 million, reflecting growth of 38% to 43% over fiscal year 2020. Also to increase expected Cyclo G6 probe sales to a range of 58,000 to 60,000 units. Diving deeper into our glaucoma business, Cyclo G6 product family revenue was $3.6 million, an increase of 70% year-over-year. Cyclo G6 probe sales increased 103% year-over-year and 18% quarter-over-quarter. While we anticipate there will be seasonal quarterly lumpiness, we are confident in the solid growth trajectory being established. Moving to our Cyclo G6 glaucoma laser systems, we sold 47 units in the second quarter of 2021. While we believe there continues to be a large opportunity for system placements with new customers. This volume is consistent with our current strategic focus on driving procedure adoption and probe utilization over system placements. On the retina side of our business, we saw product revenue grow 190% year-over-year, including a 28% contribution from sales of PASCAL products acquired from Topcon. Through the second quarter, our new retina focused U.S. sales team and our direct international distributors came up to speed on PASCAL products, leading to strong sales performance. Simultaneously, we've conducted extensive training programs with Topcon and their sub-distributors in those regions where we're transitioning IRIDEX products into their hands and we continue to have high confidence in the long-term growth potential for our collaboration. We have enjoyed solid order flow from Topcon for PASCAL products. Well outside the U.S., we've recognized that a part of this is built out of inventory in Japan ahead of temporary import limitations as we shift to IRIDEX labeled PASCAL product registrations later this year. Finally, our OUS sales of IRIDEX products in the second quarter were still primarily through existing distributors as they finished out their termination period following notification of the transfer to Topcon. Next, I'd like to highlight some of the growth investments we're making in sales and marketing. In the first quarter of this year, we split and expanded the U.S. sales team into 12 dedicated glaucoma territories and six dedicated retina territories. Sales rep training programs were completed in Q2, and our new reps are coming up to speed. Encouragingly, dedicated retina rep sales have been an important contributor to our recent U.S. business strength, as I noted earlier. We also increased our investment in building clinical evidence and developing closer key opinion leader relationships that can improve confidence and adoption of our non-incisional Transscleral Laser Therapy products. Going forward, we plan to expand the clinical physician to physician messaging around TLT that we believe will support expanded adoption and use across broader patient indications. In the second quarter, we virtually attended the World Glaucoma Congress, where MicroPulse TLT was well represented with 18 peer-reviewed presentations and posters. We also budgeted for the anticipated return of in-person trade meetings and clinical events that will require greater investment, but we expect will provide good returns downstream. At our first live meeting this year, Hawaiian Eye and Retina, we showcased the new IRIDEX 810 laser with good feedback in reception. Recently, we launched new IRIDEX branding, including a new logo, look, and messaging on our website, in advertising, and at the American Society of Cataract and Refractive Surgery meeting in Las Vegas. Our goal with this rebranding is to raise awareness and position IRIDEX's unique non-incisional laser treatment runway for glaucoma patients, a truly beneficial combination of effective and safe treatments to manage ocular pressures in controlling glaucoma for mild, moderate, and advanced disease severity without surgical incisions. A few other notable second-quarter updates I would like to highlight include the notice that our Paycheck Protection Program loan was forgiven. Fuad will cover the details and impact later. Also, we filed our Form S-3 with the SEC to register Topcon's shares in July. This routine filing establishes market liquidity capability for Topcon in accordance with our collaboration agreements signed and closed in March. On July 13, CMS published its calendar year 2022 Medicare Physician Fee Schedule proposed rule for the coming year, which included significant reductions in payments for certain MIGS devices used in combination with cataract surgery. The proposal reduces incremental physician payment for the concomitant use of these devices by over 90% and significantly reduces the facility payment as well. Well, it's not unusual for CMS to recommend reducing payments, and it did propose a 5% reduction for IRIDEX's CPT code. We believe there is potential, but surgeons will reevaluate the relative merits of various devices and find it economically more attractive to increase usage of our probe-based glaucoma procedures. Much of our peer-reviewed clinical data on MicroPulse TLT regularly demonstrates 30% IOP reductions versus a few millimeters of mercury for some MIGS devices studied, making TLT a clinically attractive alternative treatment as well. In conclusion, new sales records this quarter demonstrate that IRIDEX is breaking out to new highs of performance, and we're proud of the results that our team has achieved. We are wary, however, that the rise in the Delta variant and other associated COVID-related restrictions could limit access to our customers, or possibly slow the completion of the distribution transitions to Topcon territories, and we're watching these dynamics carefully. Nevertheless, we're confident that we can manage through headwinds, and we are most enthused because we believe we're still in the early stages of our opportunities, and see the pathway for long-term upside. With that, I'd like to turn the call over to Fuad.

Fuad Ahmad, Interim CFO

Thank you, Dave, and good afternoon, everyone. I will now summarize our financial performance for the second quarter of fiscal 2021. Starting with revenue. Total revenue for the second quarter of fiscal '21 was $13.4 million, up 116% from $6.2 million in the second quarter of last year, and up 12% sequentially. Revenue from our glaucoma product family in the second quarter of fiscal '21 was $3.6 million, up 70% compared to the second quarter of fiscal '20, and up 7% sequentially. We sold 16,000 G6 probes in the quarter, up 103% from the same period last year, and 18% above the first quarter of fiscal '21. As was the case in the first quarter, we again saw strong year-over-year growth in OUS, up over 126%. We sold 47 Cyclo G6 systems in the second quarter of '21, compared to 42 in the prior year period. Our retina product line revenue improved significantly in the second quarter of fiscal '21, posting a 190% increase compared to the same period last year. Our results for the second quarter of fiscal '21 included $2.1 million of revenue from the PASCAL product line acquired from Topcon. However, even adjusting for the PASCAL revenue, year-over-year growth was approximately 108%. Other revenue which includes royalty services and other legacy products and revenues related to exclusive distribution rights were approximately $2.3 million in the second quarter of fiscal '21, up 50% compared to the prior period. The growth is due to higher service revenue and increased field activity inclusion of additional services revenue from the PASCAL product line and recognition of distribution rights revenue from the Topcon transaction. Gross margins in the second quarter fiscal '21 increased 680 basis points to 45.5% compared to the second quarter of fiscal '20. The gross margin improvement is attributed primarily to significant overhead absorption on the 116% increase in year-over-year revenue and recognition of certain manufacturing cost savings in the period. Operating expenses for the second quarter of fiscal '21 were $7.2 million, compared to $5.2 million in the same period of the prior year, a 40% increase. The increase was due primarily to additional R&D expenses from the acquisition of the PASCAL business and planned investments in the sales organizations beginning in early 2021. As you may recall in the second quarter of '20, we received a Paycheck Protection Program loan in the amount of $2.5 million. Pursuant to the terms of the loan, we were eligible to apply for forgiveness, which we did in the fourth quarter of fiscal '20. In June of this year, we received a notice of forgiveness. As a result, you recognized $2.5 million non-operating gain and other income in the second quarter of fiscal '21. We recorded $1.4 million in net income in the second quarter of fiscal '21, or a net income of $0.09 per share, up from a net loss of $2.8 million, or a net loss of $0.20 per share for the same period last year. However, even after adjusting for one-time gain on forgiveness of debt, our loss per share for the period would have been $0.07, still a substantial improvement over the same period last year. We ended the second quarter of fiscal '21 with cash and cash equivalents of $26.3 million, down from $28 million from the end of the first quarter of fiscal '21, reflecting cash usage amount of $1.7 million. Turning to our outlook for the remainder of the year. Despite some lingering uncertainty on new COVID variants and inevitable distribution transition volatility, we have delivered strong revenue performance. Strong first half momentum as we head into the second half of fiscal '21 gives us the confidence to raise our guidance for the full year. We now expect revenue to be in the range of $50 million to $52 million. This is up from our previously expected range of $48 million to $51 million. We're also increasing our G6 probe unit sales guidance range to 58,000 to 60,000 from a previous guidance range of 56,000 to 59,000, while keeping Cyclo G6 glaucoma laser system sales guidance of 250 to 275 units unchanged.

Operator, Operator

Our first question comes from Jon Block from Stifel. Your line is now open.

Jonathan Block, Analyst

Great. Thanks, guys, and good afternoon. Maybe I'll start just a really strong probe number; you took up the guidance for probes for the year. Maybe give some more commentary, in other words, is it broad-based in the accounts, is that a reflection of the bifurcated sales rep approach that I believe you recently implemented? Is it a steeper adoption curve and some of the accounts that adopted the new probe? Just a little bit more color on the nice step up in probe utilization, please?

Dave Bruce, CEO

Sure. Hi, Jon. The strongest component was growth in international probe usage. It had been delayed from the third and fourth quarter last year when the U.S. was rebounding strongly. It really started coming on in the first and second quarters of this year. So, that's the most significant piece; a broader set of units installed in the first half of the year has increased that, the site placements and therefore the broader set of people using. In the U.S., it's still growing, not at the same rate as internationally, and we have expanded the team, but they're coming up to speed on the expanded territories. So, we haven't seen as big an impact in growth. But again, compared to where we were in the third and fourth quarters last year with the surge domestically, we're comfortable with that growth, and we continue to reach out to all of the potential opportunities, including moving existing users toward more moderate stage patients and broadening the pool of applicable patients. There are numerous additional people who could come on board, as well as new site placements. So, our focus is really on driving adoption and utilization and secondarily pursuing new sites.

Jonathan Block, Analyst

Okay, got it. That was very helpful, and then maybe just a follow-up to that. You guys are reporting maybe a week or two later than some others, and I mean everything is evolving and changing with COVID unfortunately in the Delta variant. Is there anything to call out as recent trends that you're seeing in some hotspots that I think might also be some pretty big glaucoma markets like Florida or Texas? I'm just curious if you're seeing any pullback in some of those hotspots due to Delta that may have started to take hold over the past two to three weeks.

Dave Bruce, CEO

It's probably too short a timeframe to see any results in revenue. But we are anecdotally hearing a lot about the old COVID restrictions on access from our reps, for our reps and supporting cases, visiting the offices; all of those restrictions in numerous markets are coming back. Our teams are as focused as ever on communicating. It may have some impact; it may flatten things a bit as you look forward, but we don't see it as a major headwind. The ability to have either phone or Zoom conversations still exists. So, we'll just manage through it, but we are seeing—as is in the general news—we're seeing restrictions that at the margin will affect our abilities. However, we're still scheduling cases, live cases and support, as well as education sessions in the practices and those kinds of things, just with, I would say, increased restrictions on the requirements for the reps to show up.

Jonathan Block, Analyst

Got it. And last one for me. Well, I'll make it two parts, one for Fuad. Even in light of some of the challenges that Dave called out, you're still increasing guidance. But do we take some of those headwinds into account and think about anything on the cadence? In other words, is the seasonality—for when we think about the back part of the year—is the seasonality in Q3 more pronounced relative to what we've experienced in past years? And then, Dave, maybe just to conclude, the Topcon training, I think you've called it out; you mentioned good progress there. Is it complete? Is there anything more to do from a training perspective of their sales force for your products? Thanks, guys.

Fuad Ahmad, Interim CFO

In terms of the seasonality, I think that if you look at the experience Q3, it's typically the low right period; Europe shuts down for some period of time. So, I think we're seeing the same level of seasonality and Q4 is still expected to be the strongest quarter of the year. So, I think that we're still comfortable with that cadence holding out for the year.

Dave Bruce, CEO

And then on the training side, first of all, the training has never been done. However, going through the first phase where the new sales teams are adapting to sell IRIDEX products, for example, we did it in two stages. We conducted a global training session that is loaded on Topcon's—what's called Topcon University, and that's their general training tool. Then we went country by country with our team engaging with the local team to work on IRIDEX products both on the retina side and then the glaucoma side to ensure that they had the detail of how we go about pursuing, for example, glaucoma opportunities and taking people through validation processes and those kinds of things to drive adoption. We expect to continue, and our focus and our requirement is that we do as much as is needed to try to make it seamless, and it just continues on. There's kind of a minimal coming-up-to-speed period.

Jonathan Block, Analyst

Perfect. Thanks for your time, guys.

Fuad Ahmad, Interim CFO

Thank you.

Dave Bruce, CEO

Thanks, Jeff.

Operator, Operator

Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to David Bruce for closing remarks.

Dave Bruce, CEO

Thank you, operator, and thank you all for attending the call. We're very pleased with our performance this quarter, and we're going to stay focused on our growth trajectory and execution. So thanks, everyone.

Operator, Operator

This concludes today's conference call. Thanks for participating. You may now disconnect.