Earnings Call Transcript - IRIX Q2 2023

Philip Taylor, Investor Relations

Thank you, 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 1, 2023. 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 the 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 10, 2023. And with that, I'll turn the call over to Dave.

David Bruce, CEO

Good afternoon, and thank you all for joining us. Today, I'll provide updates on our business progress and Fuad will then provide details on second quarter financials, and we'll open the call for questions. In the second quarter of 2023, we generated $12.9 million in total revenue, a reduction of $900,000 versus last year's second quarter. Continued moderate growth in glaucoma revenue was offset by declines in surgical and medical retina. This was our first quarter experiencing reduced royalty income resulting from the previously discussed expiration of licensed patents. As we continue to execute our strategy, we're managing through two dynamics that have impacted our growth. We experienced more cautious customer behavior, which lengthened capital purchasing cycles and softened our systems sales. Also, our initiatives to accelerate glaucoma procedure adoption are taking longer to gain traction across the customer base. As a result, with first half of the year performance below our expectations, we are updating our guidance for the full year 2023 and now expect revenue to be in the range of $55 million to $57 million. Cyclo G6 probe sales of 61,000 to 63,000 units and expansion of the Cyclo G6 system installed base by 210 to 230 systems. Looking ahead, we believe our long-term growth opportunity is strong based on the uniquely differentiated clinical value propositions of our non-incisional glaucoma treatments as well as launching our refreshed market-leading retina laser platforms. While our glaucoma procedure growth rate is currently in the mid-single digits, we believe we have the technology, strategy and team to accelerate our growth from here. Our optimism is highlighted by the increasing clinical interest in MicroPulse TLT and the Cyclo G6 platform, as shown by the 16 posters presented at the recent World Glaucoma Congress and the multiple levers we're implementing across our substantial user base to drive utilization. These include education on proper dosing and patient selection, the rollout of suite management software, targeting adoption among comprehensive ophthalmologists and most notably expanding clinical evidence supporting MicroPulse TLT through a large-scale multicenter prospective clinical trial. These are necessary steps to retain attention in a crowded glaucoma device space but together represent a larger scale opportunity to become a key treatment choice for the moderate stage glaucoma patient. In parallel, we recognize the need to preserve our capital runway to reach this longer-term goal. On our last call, we talked about steps taken to reduce our operating cash usage, and this quarter's usage declined to $1.2 million and additional cost controls and inventory reduction actions are in place to further decrease cash usage in the coming quarters. Revenue growth at the current rate of our higher-margin disposable probes is expected to continue reducing cash usage and bridge operations until our initiatives gain meaningful traction and accelerate growth. Looking closer at our glaucoma business, second quarter Cyclo G6 revenue increased by 5% year-over-year to $3.7 million. Global adoption of the G6 platform continued as we increased our installed base of systems by 41 units in the quarter. Probe revenue increased by 9% year-over-year, driven by ASP increases and 4% volume growth. While the 15,500 probes sold in the quarter was below our expectations, we're encouraged by progress in several aspects of the business. Our current top initiative is educating customers on the updated MicroPulse TLT dosing recommendations to ensure clinicians achieve large IOP reductions and a strong safety profile with our glaucoma treatments, using systems with suite management software. This requires a high-touch effort from our team. With this approach, the process entails clinicians treating an initial cohort of patients with our proctoring, then tracking results to confirm they achieve the desired outcomes at 30 and 90-day follow-up. We believe this process can contribute considerably to growth over time as some of our lower-volume accounts increase their confidence in the procedure outcomes and choose to treat a broader profile of patients with MicroPulse TLT. Another area of focus is targeting comprehensive ophthalmologist users. They largely see and manage glaucoma patients earlier in the disease continuum generally at the mild stage through moderate severity patients before referring to glaucoma specialists. This represents a larger provider and patient pool, second only to the mild stage population, which is primarily treated with SLT and medication drops. We see a significant opportunity for MP-TLT to provide a clinical and business opportunity for these practices to manage their patients longer by treating patients they would otherwise have referred on. Retaining those patients in the practice to deliver future regular visits and diagnostic test revenue can approach $2,000 per patient per year over additional years. In recent surgical cases our team has proctored, we are observing the population being treated is about 40% pre-incisional patients. Furthermore, we're seeing the average procedure volume by comprehensive users can be significantly higher than traditional glaucoma specialists. The last glaucoma growth initiative I'll discuss today is expanding the clinical data supporting MicroPulse TLT. There were 16 posters presented recently at the World Glaucoma Conference. All but one of these were physician-sponsored and represent the broadening clinical interest in MicroPulse TLT. These studies contained over 850 combined eyes studied and cover topics from traditional continuous wave applications to demonstrating structural safety in adjacent tissues, the various patient cohort types with MicroPulse treatment and various dosing parameters. I'd like to highlight a few findings from these studies. On a topic of dose escalation, three different studies totaling 130 patients demonstrated over 30% reduction in IOP, with greater efficacy from slower sweep speeds while delivering the same excellent patient safety profile. One of these studies was a randomized 60-patient prospective single-center study. The patient inclusion criteria was a key target cohort of ours, post cataract and failed mix patients needing further treatment. Patients were randomly assigned to three different dosing protocols. Dose escalation was accomplished by slowing sweep speed, thereby extending the dwell time of probe energy and increasing the target tissue temperature or by adding additional passes of the probe. Higher IOP reductions were achieved by each escalated dose with an average 50% reduction at the highest dosing while still maintaining the same safety profile across all doses. These types of findings can provide the confidence for surgeons to pursue higher efficacy with the comfort that safety will be maintained. The positive results of these dose escalation studies have provided IRIDEX the confidence to invest in a larger scale multicenter prospective trial. The goal of the trial will be to demonstrate the safety and effectiveness of MicroPulse TLT for the moderate stage glaucoma patients with statistically powered patient volumes. We're in the final stages of designing the study protocol as guided by a small group of influential KOLs. We're finalizing selection of the CRO and identifying investigational centers interested in participating. Still targeting first patient enrollment by year-end. A successful study would provide powerful support for G6 adoption and utilization by an increasing number of clinicians. We remain confident we have the right product and a cost-effective strategy to increase our penetration in the glaucoma market over time. Shifting our focus now to update on the retina business. Revenue in the second quarter declined to $6.9 million from $7.5 million in the prior year period. While we continue to see strong interest in our PASCAL platform, its growth was offset by softness in surgical and medical retina systems. As we mentioned on our last call, during the second quarter, we saw lengthening sales cycles for capital equipment amid uncertainty in the rising interest rate macro environment. That seems to be stabilizing recently, but remains difficult to forecast rebound timing. We are tracking toward our U.S. launch of the new single spot laser platform with our new IRIDEX 532 and 577 versions in the fourth quarter. As with the start of any new product cycle, when international distributors prepare for these transitions, inventories and order volumes can soften until the new products are available. This, coupled with generally slower capital purchase cycles can soften demand, as our second quarter results exhibited that. As economic fears subside and new product or international regulatory approvals, these challenges should turn to a growth tailwind in 2024. We will continue to execute our strategy and top initiatives with a constant focus on preserving our cash runway that provides multiyear execution visibility. In the second quarter, we took steps to reduce our operating expenses and extend our runway and are tempering our project spending going forward. We also see meaningful recovery of cash by further reducing inventory in the third and fourth quarters that was built up to mitigate supply chain challenges. We continue to balance spending to support our growth plans against the cash usage rate to maintain a multiyear runway with current resources.

Fuad Ahmad, Interim CFO

Thank you, Dave. Good afternoon, everyone, and thank you for joining us today. I'd like to begin by reviewing our financial performance for the second quarter of fiscal 2023. Starting with revenue. Our total revenue for the second quarter was $12.9 million, representing a decrease of approximately 7% compared to the second quarter of last year. Modest growth from the Cyclo G6 product family was offset by declines in the retina product line. Roughly half of the decline is also due to previously reported loss of royalty revenue in the quarter. Moving to product revenues. Total revenue from Cyclo G6 product family in the second quarter was $3.7 million, up 5% compared to the same period in '22. We sold 15,500 Cyclo G6 probes in the second quarter, representing revenue growth of 9% on 4% unit growth from the prior year period. We also sold 41 Cyclo G6 systems in the quarter compared to 48 in the prior year period. Our retina product revenue in the second quarter was $6.9 million, a decline of 9% from the prior period. This decline, we believe, is a result of macroeconomic uncertainties and a high interest rate environment. Other revenue, which includes royalties, services, and other legacy products decreased 15% to $2.3 million in the second quarter of 2023 compared to the same period in '22. This was driven primarily by reduced royalty revenue from expiration of license patents as previously reported. Gross profit for the second quarter of '23 was $5.4 million compared to $6.3 million in the prior year period. Gross margin was 41.7% compared to 45.6% in the second quarter of '22. The decline in gross margin was a result of lower overhead absorption in the current period. Operating expenses for the second quarter were $8.3 million, a small decrease compared to $8.4 million in the same period last year. Note that the current period includes over $200,000 of separation costs related to expense reductions implemented in the quarter. Our net loss in the second quarter of '23 was $2.8 million or net loss of $0.17 per share compared to a net loss of $2.2 million or $0.14 per share for the same period in '22. We ended the quarter with cash and cash equivalents of $9.8 million, representing cash usage of $1.2 million during the quarter, a substantial improvement from recent prior quarters. We remain focused on expense management and operating efficiencies and expect steady improvement in the coming quarters as we unwind inventory-related investments and continue to execute on a prudent expense management strategy. To wrap up, given the softer results in the first half of the year, we are lowering our guidance for fiscal 2023. We now expect total revenue for fiscal 2023 to be $55 million to $57 million compared to a prior expectation of $57 million to $59 million. G6 unit sales are now expected to range from 61,000 to 63,000 from 65,000 to 67,000 previously and Cyclo G6 glaucoma laser system installed base is now expected to expand by 210 to 230 systems compared to 225 to 250 systems previously.

Scott Henry, Analyst

I've got a few questions. So I'll start with the micro-oriented questions. First, when I look at your guidance and I look at the quarter, it seems like you expect to rebound a little bit in retina. Is that correct? Or at least the second half of the year, you're not expecting this Q2 trend to maintain?

David Bruce, CEO

That's right, Scott. The stabilization as we referred to it seems to be coming. You hear it in the greater economy as well. But we didn't see cancellations. Just deferrals, people just took longer in their decision processes to order. We think that's stabilizing. Those orders are coming in this quarter that were deferred last quarter. It feels like there's a general improvement in sentiment. Interest rate increases appear to have pretty much topped out. I think people perceiving that are moving forward with their plans. So we think the second half of the year can be closer to expectations, but we were down enough in the first half of the year that we really need to adjust that full year guidance.

Scott Henry, Analyst

Okay. And then shifting to G6. It seems like prices are strong. I mean, it just seems like you get a little more kick for the price than I would have expected. Is that accurate?

David Bruce, CEO

We implemented a price increase around the middle of last year. We're successful in having that hold in the marketplace. The second quarter and the first quarter demonstrated a bigger revenue increase than unit increase. That gap will start to subside as we go forward in the third and fourth quarter as we start to lap that timing of that increase and feedback equivalent by the beginning of 2024. It was more of a one-time event as opposed to a continued increase in the price. That was primarily in the U.S. market and less so internationally.

Scott Henry, Analyst

Okay. And final micro-oriented question. This probe utilization has always been the hook to getting this compounding growth. You've made adjustments, I guess, maybe the trial will help now, but how do you get that probe utilization per system getting to higher numbers than it currently is?

David Bruce, CEO

Yes. The root of the challenge is in driving the confidence to the point where clinicians are just advising patients as they come through and recommending the procedure on a broader set of patients. What we find is they'll pursue a group of patients and maybe be happy with these results, but as our treatment is with any treatment in glaucoma, there's a percentage of those that you just don't get the outcome that you sought. I feel like our customers tend to recall those situations and question the procedure. If we're not there to reinforce it or even just ask them to, let's look at the consolidated data on your patients, they can back off to a smaller group of patients. That’s what we've been dealing with. Our focus on higher efficacy with continued safety profile is crucial because you have to have that coupled with a means to achieve it with suite management software plus some clinical evidence that it actually has worked in investigators' hands. Those are the tools that we're using to drive the change in perception. It’s a noisy environment. There are a lot of other devices out there, companies with more sales reps pursuing their various device sales, particularly in the mix space. Even though we're not directly competing with them, we are competing for the attention of the doctors. This is an effort. It's a feet-on-the-street effort to focus on our target accounts and move them down that pathway. This is the mechanism. It’s going slower than we aspire to, but we are quite confident that the results being achieved will ultimately prevail and that the adoption will continue to broaden.

Scott Henry, Analyst

Thank you. I have a broader question. I apologize if it seems like I'm just thinking out loud. When I look at the company, I see that you have managed well. Even in one of your toughest quarters in the past five, you only lost $1 million. The business is being run effectively. The retina acquisition was excellent. However, looking 12 to 18 months ahead, I'm unsure if you can grow quickly enough to become profitable. It's possible, but it's also possible you may not. You're not losing significant amounts of money, but I would expect that you would eventually want to either acquire a company or sell to achieve scale and profitability in the current economic climate. Ideally, you would acquire another good opportunity to scale and enhance profitability. But if you can't find anything because prices are too high, it can be the right time to sell. I'm interested in your thoughts on this situation, as I'm sure it's been discussed in board meetings.

David Bruce, CEO

Yes. That's the constant question as you manage a company, whatever your growth rate, cash usage or cash generation, what's the right strategic point to change, either monetize or leverage yourself to go in different directions or add different directions. For us, we evaluate that not constantly, but on a regular basis and try to look at the opportunities availing us on both sides of the table and make some decisions. We're not opposed to either direction, but the right opportunity has to come along. We found it in the Topcon collaboration in 2021, and it took us a while to get to the consummation of that, but that turned out to be quite a good transaction for us in both business terms and capital. We'll continue to be open to those kinds of things. Obviously, we're not announcing anything in particular. We have to go public with it when we make such a decision, so I'm not really ready to say that there's anything going on at this particular moment for an answer to your question, but we are aware that those kinds of decision points come and cause us to be more focused and we'll communicate that when we're at the right point for such a thing.

Thomas Stephan, Analyst

Great. I guess I'll piggyback sort of off that last question, mainly just around the balance sheet. Can you guys just talk about where you think the burn might be exiting the year? Rough expectations of maybe when you can turn the corner on profitability? Given with where the balance sheet currently is, that might have to come fairly soon. When you do turn the corner on profitability, what are kind of the key drivers of that? Is it mix? Is it further cost reductions? Just any color here to give us some comfort that the balance sheet will sort of reverse the other way in terms of strength and weakness.

David Bruce, CEO

One of the reasons for our adjustments in the second quarter was our continued focus on the opportunity to reduce inventory. We are noticing that supply chain challenges are easing, which means our need to hold a large amount of inventory is decreasing. We added over $4 million in inventory compared to pre-COVID times. We've managed to reduce some of that, but there’s still more to do. We believe this will actually provide a financial boost in the upcoming quarters, along with less cash being used in operations and ongoing growth. We looked at scenarios with lower growth rates, which are around mid-single digits. We can keep reducing our cash use and generate some cash from our balance sheet, giving us a multi-year runway. While we don’t offer guidance for the year-end, we consider this quarter to be indicative of a downward trend, and we aim to achieve under $1 million per quarter in cash usage moving forward. This depends on successful sales. We believe we can boost the growth rate in glaucoma, although it has been difficult, as shown in the first two quarters this year. We view the current capital challenges as temporary, and we are confident we can return to growth in this area. We are also working on additional cost reductions related to the cost of goods sold, which can further improve our cash flow. Although we don't have excess capital to break even at this moment, we have several years of capability to execute and manage expenses effectively.

Thomas Stephan, Analyst

Got it. Helpful color. And maybe my last two will just be on glaucoma. In the quarter, what was probe growth for G6 in the U.S. and outside the U.S.? And on the guide for probes, it still implies second half growth of, I think, high single-digit percent year-over-year, but first half was, I think, essentially flat against easier comps. So what gives you the confidence that the guide down today is maybe enough of a reset? Even if I look at utilization, I think it’s expected to be flattish in second half when it really has declined consistently year-over-year for a number of quarters now.

David Bruce, CEO

The split we normally don't talk about, but this particular quarter was about even. Both grew in the mid-single-digit range on units. To your second question, when you look at, okay, you were well below your expectation in the first half of the year and yet you're kind of back to your intended growth rate in the second half, part of it is that we believe is more of a one-time decline of first quarter performance won't be repeated in the subsequent two quarters. We also feel that our programs are succeeding in achieving incremental adoption. The second piece of the net growth rate is reducing that decline where accounts were running at one rate and then backed off. They weren’t getting the results they intended. We think that message is getting out stronger and stronger, and will continue to proliferate. The recent tone of conversations at trade shows is different. People ask if they're not getting the results being reported in these studies, what are they doing wrong. That mentality is changing, but it takes time. That’s where giving guidance is a challenge. We are optimistic that we will be successful in delivering this message and having people's behavior permanently change. There are opportunities in the comprehensive category that can really provide growth.

Thomas Stephan, Analyst

Got it. If I can just follow up on some of your last comments regarding the physician education, with the dosing recommendations and patient selection. These initiatives started maybe late 2021 at AAO. Do you have any tangible evidence, any figures you can provide for those first 50 to 100 physicians you interacted with regarding this specific initiative? Do you have any evidence that these things are working, that utilization is accelerating within those accounts?

David Bruce, CEO

The pace of improvement comes from two sides of the equation. I described capturing new clinicians with new dosing and carrying them through until they see the results in their own practice. That can take anywhere from a couple of months to six months or longer. The consensus panel recommendation was what we consider to be a baseline starting point. That's a safe place to start. There is a continuum of dosing and escalated dosing to generate better outcomes. The study I was referring to demonstrates that when you reduce sweep speed, you get better outcomes and progressively better durability while maintaining a strong safety profile. These studies take time to be captured by users, but it will lead to net growth in the mid-single digits improving over time. We’re seeing traction, but it will take time for results to fully mesh within the systems being used. We need to look at some subsets of patients or users in categories in the future calls. Thank you all for joining the call. Looking forward to reporting improvements in the coming quarters, and thank you for your confidence in the company. That's all for today.

Operator, Operator

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