IRIDEX Corporation

Good day and thank you for standing by. Welcome to the second quarter 2023 Iridex earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today. Tripp 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 1st, 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 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. ERDX 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.

Good afternoon, and thank you all for joining us. Today I'll provide updates on our business progress, and FWOD 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, and 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 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 base, 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 cycle 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 expectation, 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 sweep management software aid surgeons in reliably delivery of the proper dose. The baseline dosing recommendations that were issued over a year ago by our clinical consensus panel were based on studies published at the time. Since then, more dosing studies, which I'll highlight later, have shown that higher dosing through slower sweep speeds improves patient outcomes. Training surgeons on dosing guidelines Ensuring proper technique through case support and upgrading system software 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 achieved the desired outcomes at 30- and 90-day follow-ups. We believe this process can contribute considerably to growth over time. as some of our lower volume accounts increase their confidence in 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 MPT-LT 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're 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 was physician-sponsored and represents 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 the topic of dose escalation, three different studies totaling 130 patients demonstrated over 30% reduction in ILP with greater efficacy from slower sweep speeds while delivering the same excellent patient profile, 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-cateract and failed mixed 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 has provided Iridex the confidence to invest in a larger scale multi-center 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. We're 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 to 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 and our second quarter results exhibited that. As economic fears subside and new products clear 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 multi-year 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 multi-year runway with current resources. Now I'd like to turn the call over to Fuad to cover financial details.

Thank you, Dave. Good afternoon, everyone, and thank you for joining us today. I would 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% 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 23 compared to the same period in 22. This is 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 17 cents per share compared to a net loss of 2.2 million or 14 cents per share for the same period in 22. We ended a 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 coming quarters as we unwind inventory-related investments and continue to execute on a prudent expense management strategy. To wrap up, given the software 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 to 57 million compared to prior expectation of 57 to 59 million. G6 probe 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 install base is now expected to expand by 210 to 230 systems compared to 225 to 250 systems previously. With that, Dave and I would like to turn the call over to the operator for questions. Operator?

Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. One moment for questions. Our first question comes from Scott Henry with Roth Capital. You may proceed.

Thank you, and good afternoon. 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 a rebound a little bit in retina. Is that correct? At least the second half of the year, you're not expecting this Q2 trend to maintain.

That's right. Hey, Scott, the stabilization, as we refer to it, 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, and we think that's stabilizing. Those orders are coming in this quarter that were deferred last quarter, and it just feels like there's a general improvement in sentiment. Interest rate increases appear to have pretty much topped out. And 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.

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

So we implemented a price increase around the middle of last year. And so we were successful in having that hold in the marketplace. And so 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 pretty much be back equivalent by the beginning of 2024. But it was more of a one-time event as opposed to a continued increase in the price. And that was primarily in U.S. market and less so internationally.

Okay, and final micro-oriented question. You know, this probe utilization has always been the hook to getting this compounding growth, and 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?

Yeah, so 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 the results, but as our treatment, as with any treatment in glaucoma, there's a percentage of those that you just don't get the outcome that you sought. And I feel like our customers tend to recall those situations and question the procedure. And if we're not there to reinforce it or even just ask them to, well, let's look at the consolidated data on your patients, that they can back off to a smaller group of patients. And that's what we've been dealing with. So that's why our focus on higher efficacy with continued safety profile, because you have to have that, coupled with a means to achieve it with sweep 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. But it's... It's in 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 mixed space. Even though we're not directly competing with them, we are competing for the attention of the doctors. And so it's an effort. It's a a feet-on-the-street effort to focus on our target accounts and move them down that pathway. So that's the mechanism, and it's going slower, as we've reported, than we aspire to, I'll say, you know, as we put our guidance out at the beginning of the year. But we are quite confident that the results that are being achieved will ultimately prevail and the adoption will continue to broaden.

Okay, great. Thank you. And I guess just one kind of big picture question, and I apologize if it seems like I'm just thinking out loud in advance. You know, when I look at the company, you guys have done a pretty good job. We just had one of the toughest quarters we've had in the past five quarters, and you still only lost a million dollars. So the business has been run well. The retina acquisition was fantastic. uh but when i think 12 to 18 months out i don't know if you can grow fast enough to turn profitable maybe you can maybe you can't you're not going to lose a whole lot of money but at some point i would think you would want to be either a buyer or a seller in order to bring scale and to bring you know profitability uh to the company given the economic environment we're in right now and Ideally, you're a buyer. You find another great deal, and that brings scale, and you're profitable. But if you can't find anything because everything's too expensive, sometimes that's the best time to sell. I'm curious how you think of that situation. I'm sure it's come across at a board meeting or two.

Yeah. Look, 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. So 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. So 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, and we'll continue to be open to those kinds of things. Obviously, we're not announcing anything in particular, and we have to go public with it when we made such a decision, so I'm not really ready to say that there's anything going on at this particular moment for in 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.

Okay. Thank you for the color on that. I appreciate the response. And thank you for taking the questions and my apologies for taking so much time. Thank you.

No problem. Thank you, Scott.

Thank you. One moment for questions. Our next question comes from Tom Steffen with Stiefel. You may proceed. Great. Hey, guys. Thanks for the questions.

I guess I'll piggyback sort of off that last question, mainly just around the balance sheet. And maybe just to zero in a little bit, can you guys just talk about, you know, where you think the burn might be exiting the year? And then, you know, rough expectations of maybe when you can turn the corner on profitability is, you know, I think given with where the balance sheet currently is, that might have to come fairly soon. And 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, you know, will, I guess, sort of reverse the other way in terms of strength and weakness.

Yeah. So one of the impetus for our adjustments in the second quarter, and, you know, we've We've been continuing to keep an eye on the opportunity to reduce inventory. So we do see the supply chain challenges softening and our need to carry a larger amount of inventory reducing. So we put, you know, upwards of 4 million additional inventory in place from pre-COVID periods. And we've unwound some of that, but there's a fair amount more to go. So we think that that's actually a tailwind of capital over the next, quarters, as well as a reduced operating cash usage and continued growth. And we've looked at it, extended lower growth, these mid-single-digit growth rates. And we can continue to reduce our cash usage and extract some cash from the balance sheet and we still see multi-year runway. So exiting the year, we don't give guidance on that, but we think this quarter is a representative quarter on the path downward and we can achieve something, ultimately achieve something below a million a quarter and continue to keep reducing that as we go forward. Now that's predicated on successful sales. And we think we can increase the glaucoma growth rate, but it's been a challenge as we've demonstrated in at least the first two quarters of this year. And then we do ultimately consider the capital softness to be pretty temporary and that we can get back to growth on that front. And we have incremental cost reductions on the cost of goods sold side of things that can also help us with cash flow. So, you know, it's not that we have an excess of capital and cross break even and build, but we have several years of execution capability and the ability to manage the expense side to maintain that as we've done here in the middle of the year 2023. Got it. Helpful caller.

And maybe my last two will just be on glaucoma. And the first, I guess the first quick one, in the quarter, what was probe growth for G6 in the U.S. and O.U.S.? That's the first part. And then the second part, you know, just on the guide for probes, it still implies two-age growth of, I think, high single-digit percent year over year. But 1H was, I think, essentially flat against easier comps. So what gives you the confidence the guide down today is maybe enough of a reset. I mean, even if I look at utilization, I think it's expected to be flattish in 2H when it really has declined consistently year over year for a number of quarters now. So yeah, two-parter, US versus OUS probes, growth rates there in the quarter, and then just confidence that guidance on probes is a number that you can add?

Yeah, so the split we normally don't talk about. I think periodically we'll highlight, you know, an extra variation. But this particular quarter was about even. So they both, I think, grew in that kind of that mid single-digit range on units. And I think we did call out a particular weakness in the first quarter internationally. So when we look at, to your second question, when you look at, okay, well, 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 of the year. Part of it is that, you know, that what we believe is more of a one-time decline of first quarter performance, won't be repeated in the subsequent two quarters. And we're also feeling that our programs are succeeding, that we are achieving incremental adoption. And frankly, the second piece of the net growth rate is reducing that decline where you have accounts that were running at one rate and then backed off. Either one of several users declined, they weren't getting the results that they intended, maybe we hadn't spent any time with them to bring them up to speed on current practices and assuring that their technique was there and they didn't get some results and they declined on usage. And we think that message is getting out stronger and stronger and will continue to proliferate and people will understand that it's about the dosing that they're delivering and not the device itself or the technique and the procedure itself that's questionable. And we're seeing that anecdotally, for example, On a trade show, people will come to our booth and the tone of the conversations is around, you know, if I'm not getting the results that are being reported in these studies, what am I doing wrong? What do I need to do differently? And, you know, that's different from, you know, say prior years where there was just a real question, does this thing really achieve the goals? kinds of results because I'm not seeing them. So I think the mentality is changing, but it takes time. And that's where giving guidance is a challenge. And we have an optimism that we will be successful in delivering this message and having people's behavior permanently changed. And they will incorporate us in that moderate portion of the continuum. And there's so many patients and specialists in the comprehensive category that we really think good traction or a modest uptick of traction there can really provide some leverage. Got it.

I can just follow up on some of your last comments. Just around the physician education, you know, with the dosing recommendations and patient selection, I mean, I think those initiatives started maybe it was late 2021 at AAO, if I'm remembering correctly. So the consensus panel and, you know, this initiative has been out there for a decent amount of time. So, Dave, do you have any kind of tangible evidence, any figures you can provide maybe for those first 50 to 100 physicians who you interacted with regarding, you know, this specific initiative around dosing, around patient selection. Do you have any evidence that these things are working, that utilization is accelerating within these accounts? Maybe just to give us maybe some confidence that while these do take time to develop, those early kind of cohorts of doctors, you're seeing that play out in the field. And hopefully that question makes sense.

Yeah, the pace of improvement comes from two sides of the equation, right? I described capturing new clinicians with new dosing and carrying them through until they see the results in their own practice and continue on with those patients. And that can take anywhere from a couple of months to six months or longer working with them. In terms of the dosing recommendations, the consensus panel recommendation was what we consider to be, and I think they conveyed to be, a baseline starting point. That's a safe place to start. But there is a continuum of dosing and escalated dosing to generate better outcomes better durability, and what we're now seeing in the studies that are coming out, maintaining a strong safety profile. That's a newer piece of the puzzle for clinicians that they can go from what was, say, a 20-second hemisphere sweep speed treatment and slow that down to a 30-second hemisphere treatment, so slowing it down by over a third and still get better outcomes with the same safety profile. That has to work its way through the system. The study I was referring to, the single center study that was performed on prospective three-dosing arms of about 20 patients each, is a key piece of evidence that demonstrates that when you reduce sweep speed, you get better outcomes and progressively better outcomes and a much higher percentage of success. So those are the kind of things we're seeing. And it just does take an extended period of time for that to be captured by users. No, it's just that ours is a different procedure than, say, a mix procedure where you make your incision, you make your cut or put your plug, and you get out, close the hole, and you're done. Ours, they look at it at 30 days and then at 90 days. So it's a slower-moving proof, so to speak. And then on the opposite side, we do still experience those customers who – Either we haven't communicated that message or they aren't receptive to it and they may have a lesser experience than they want and choose to use it on fewer patients or stop using it. And that's a subtraction from the growth piece we get. So our net number... in the mid-single digits, we think can improve both more success with newer sites and bringing up to speed on dosing existing happy users so they broaden the patients they use them on and give us a net growth number, and then reducing the declines. And, you know, we're talking about the difference our guidance was in the 10% growth range. We're tracking around 5%. The difference in success of those efforts can make that 5% swing up pretty quickly. So that's how we're viewing it and pursuing it, and we're confident that that will ultimately prevail and the growth rates will increase.

Okay, so the early kind of cohorts of your installed base that you went to with these dosing recommendations, still kind of TBD on if that is driving accelerated utilization. And I guess, you know, should we start, can we start to see some evidence, you know, by the end of this year or?

Yeah, I think what you're asking for is us to report on, you know, maybe some subsets of patient's or sorry, some subsets of users in these various categories and how the traction has been achieved on those. We can take a look at that and potentially address that in future calls. Perfect.

Yeah, I think that would be really helpful. Thanks for the time.

Okay. Thank you, John.

Thank you. I'd now like to turn the call back over to Dave Bruce for any closing remarks.

Thank you all for joining the call. Looking forward to reporting improvements in coming quarters, and thank you for your confidence in the company. That's all for today.

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