RxSight, Inc.

Good day and thank you for standing by. Welcome to the RxSite second quarter 2023 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 the session, you will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. 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 first speaker today, Alex Wong. Please go ahead.

Thank you, Operator. Presenting today are RxSight President and Chief Executive Officer, Dr. Ron Kurtz, and Chief Financial Officer, Shelley Toonan. Earlier today, RxSight released financial results for the three and six months ended June 30, 2023. A copy of the press release is available on the company's website. Before we begin, I would like to inform you that comments and responses to questions during today's call reflect management's views as of today, August 7, 2023, and will include forward-looking and opinion statements, including predictions, estimates, plans, expectations, and other information. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties. These risks and uncertainties are more fully described in our press release issued today and in our filings with the Securities and Exchange Commission, or SEC. Our SEC filings can be found on our website or the SEC's website. Investors are cautioned not to place undue reliance on forward-looking statements, and we disclaim any obligation to update or revise these forward-looking statements. We will also discuss certain non-GAAP financial measures. Disclosures regarding non-GAAP financial measures, including reconciliations with the most comparable GAAP measures, can be found in the press release. Please note that this conference call will be available for audio replay on our investor websites. With that, I will turn the call over to President and Chief Executive Officer, Dr. Ron Kurtz.

Good afternoon, and thank you for joining us. Today, we report another strong quarterly performance for RxSite, representing our 10th consecutive period of quarter-over-quarter top-line growth and driven by higher key operating metrics. In addition, we have taken further steps to strengthen our financial position. I'll discuss the favorable trends underlying our business later in the call. But first, Shelley will review our second quarter 2023 financial performance and recent balance sheet transactions.

Thank you, Ron. Good afternoon, everyone. Our excite generated second quarter 2023 revenue of $20.8 million, up 83% compared to $11.4 million in the year-ago quarter and up 19% compared to the $17.5 million in the first quarter of 2023. We sold 67 light delivery devices in the second quarter of 2023, up 37% compared to 49 units in the year-ago period, and up 20% compared to the 56 units in the first quarter of 2023. Second quarter 2023, LDD sales generated revenue of $7.7 million, up 36% and 19% versus the second quarter of 2022 and first quarter of 2023, respectively. As of June 30th, 2023, our LDD installed base increased to 523 units, up 78% and 15% versus the second quarter of 2022 and first quarter of 2023, respectively. We sold 12,622 LALs in the second quarter of 2023, up 134% and 20% compared to the 5,400 units and 10,523 units in the same year-ago quarter and first quarter of this year, respectively. Second quarter 2023 LAL unit sales generated $12.4 million in revenue, up 132% and 19% compared to the $5.3 million and $10.4 million in the second quarter of 2022 and the first quarter of 2023, respectively. LAL revenue represented 60% of total revenue in the second quarter of 2023, up from 47% and 59% in the second quarter of 2022 and first quarter of 2023, respectively. Gross margin in the second quarter of 2023 was 58% compared to 42% in the same year-ago quarter and 59% in the first quarter of 2023. Recall that the first quarter 2023 gross margin was favorably impacted by LDD material price decreases, freight savings, and improvements in other costs included in LAL cost of sales, so the slight sequential change is consistent with our expectations. SG&A expenses in the second quarter of 2023 were $18.2 million, up 27%, versus $14.4 million in the year-ago quarter, reflecting increased expenses in sales and marketing, personnel costs, and travel. and increased non-cash stock-based compensation in sales, marketing, and G&A. On a sequential basis, SG&A expenses were up 12% due primarily to increased personnel costs from increased headcount and increased marketing costs. R&D expenses in the second quarter of 2023 rose 20% to $7.4 million compared to $6.2 million in the same year-ago quarter and $7.2 million in the first quarter of 2023. The change versus the year-ago quarter was primarily due to increased clinical study costs and increased headcount. We reported gap net loss in the second quarter of 2023 of $13.8 million, or a loss of 40 cents per basic and diluted share, using weighted average shares outstanding at 34.5 million shares. This compares to a GAAP net loss of $16.7 million, or 61 cents per share on a basic and diluted basis in the same year-ago quarter. Non-cash stock-based compensation and loss on extinguishment of debt in the second quarter of 2023 was $4 million and $362,000, respectively, resulting in a non-GAAP loss of $9.5 million or a loss of 28 cents per basic and diluted share. Please refer to the unaudited non-GAAP reconciliation and disclosure included in today's press release for more comparative information. We ended the second quarter of 2023 with cash, cash equivalents, and short-term investments of $147.1 million compared to $153.9 million at March 31st, 2023. The change in the cash balance includes proceeds from our at-the-market program or ATM, stock option exercises and employee stock purchase plan share issuances less the pay down of $20 million in debt plus termination fees and cash used in operations. Excluding the proceeds from financing and capital activities and use of capital for principal debt repayments, cash used in operating activities during the second quarter was $9.5 million. This compares to $16.5 million in cash used in operating activities in the first quarter of 2023, which included annual bonus payouts and higher increases in accounts receivable and inventory relative to the second quarter of 2023. On our last conference call, we indicated that we expect sequential quarterly reductions in cash use from operations in 2023. However, we may see a tick up in the third quarter because our second quarter cash use from operations was lower than expected, due primarily to improvements in accounts receivable terms and higher accounts payable and accrued expenses. During the second quarter of 2023, we continued to implement our ATM program designed to further strengthen our balance sheet, raising $19.4 million net of fees through the sale of common shares. We used these proceeds to reduce our term loan debt by half to $20 million. And as noted in today's press release, we raised an additional $11.9 million net of fees in July under the ATM and paid off our remaining $20 million debt balance. Turning now to guidance, based on our second quarter 2023 performance, we are increasing our 2023 guidance range to $81 to $86 million, up from prior guidance of $79 to $84 million. Our new guidance implies a year-over-year growth rate of 65 to 75% and assumes a typical cataract seasonality pattern with the third quarter lighter due to summer vacation schedules. We are also revising our 2023 guidance range for gross margin to 58 to 60% versus prior guidance of 56 to 58%. The increase reflects continuing favorable revenue mix of LAL sales along with improved gross margin from our reconfigured LDD, which we expect to be in shipping this year with a gross margin benefit largely in the fourth quarter. We are increasing our 2023 operating expense guidance to $106 to $109 million, an increase of $1 million at the top and bottom of the range. The increase reflects consulting fees, additional headcount, and expanded auditor fees relating to the implementation of Sarbanes-Oxley. With the increase in our market cap in the second quarter, we became subject to Section 404 of the Sarbanes-Oxley Act, effective with our December 31, 2023 fiscal year end, and 10-K to be filed in February 2024. The 2023 OPEX guidance represents a 25% to 29% rise over 2022 and primarily reflects our continued investments to build a large, durable post-operative light treatment infrastructure to support sustained long-term LAL procedure growth. It also includes non-cash stock-based compensation expense of $15 to $16 million. Since late 2022, we have raised $102.5 million net of fees through our confidentially marketed public offering and ATM program, paid off $40 million in term loan debt, and reduced our annual interest expense by approximately $5.6 million. We believe our cash and short-term investment balances, combined with no outstanding debt, strengthens our balance sheet and leaves us well-positioned to achieve profitability from operations with a healthy balance sheet. With that, I'll turn the call back to Ron.

Thank you, Shelly. Last week, we marked the second anniversary of our IPO, and I'd like to use my time today to highlight the progress we've made to position RxSight for long-term success. First, we substantially increased the size and scope of our commercial organization, which has done a remarkable job as evidenced by the two-year growth trends in our business. Compared to the second quarter of 2021, revenue is up 325% and quarterly LDD unit sales are up by more than 160%. Our installed base is roughly three times the size it was two years ago and now extends into Canada. Over this same period, LAL unit sales are up almost 600% and currently accounts for the majority of our total revenue. As Shelley just summarized, we have also continued to strengthen our balance sheet and investor base, which we believe provides a strong foundation for continued execution of our growth strategy and sets us on a path for future operating profits. At the same time, we've added new institutional shareholders to our ownership base and experienced a five-fold increase in the average daily trading volume of our stock, which, along with the rise in market capitalization, has substantially increased the universe of institutions that can consider a meaningful RxSight position. Driving our success since the IPO has been the outstanding performance of our light adjustable lens across a wide range of patient types and preferences. We focused our efforts these past two years on continually refining the LAL technology and the critical knowledge base to enable doctors to deliver the best possible experience and results for patients. The LAL stands apart from every other premium IOL in the market today because postoperative adjustability allows patients to achieve precise, high-quality vision that they can test drive and customize to arrive at their unique desired visual outcome. The growing body of real-world clinical data collected over the past two years underscores the LAL's ability to deliver superior uncorrected binocular visual acuity and with the vast majority of patients achieving excellent vision over a range of distances without increases in visual side effects such as glare and halo or reductions in contrast vision, a combination of outcomes that are increasingly being prioritized by doctors and patients but are difficult to achieve consistently with competing fixed power lenses. By appealing to a wide variety of standard and premium IOL patients, The LAL enables practices to achieve a rapid return on investment for the LDD and establish an important ongoing premium revenue stream that can be further leveraged as additional practitioners tap into an existing light treatment infrastructure. We believe this will continue to be an important factor in growing LAL utilization, which has been rising steadily over the past two years. In closing, we are pleased with the strides that the RxSight team has made in collaborating with our customers and investors as a public company. While we are still in the early stages of adoption, the LAL is beginning to change the premium IOL landscape and fuel expansion of this high-growth market. Through a continued focus on customer needs and the thoughtful execution of our growth strategy, we believe the LAL can ultimately occupy a leading position in the premium cataract market. delivering sustained long-term value to all stakeholders. With that, I'll ask the operator to open the call for questions.

Thank you. We will now conduct the question and answer session. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Thank you. Our first question is from Craig Bijoux of B of A Securities. Please proceed with your question. One moment for our next question. Thank you. Our next question comes from Robbie Marcus of JP Morgan. Please proceed with your question.

Oh, great. Thanks for taking the question. Congrats on a nice quarter. Thank you, Robbie. Maybe to start, You know, this is the third quarter in a row by my math where we're seeing a really nice tick up in utilization in lens per LDD in the quarter. You know, I think starting in fourth quarter and now first and second, it's a pretty significant step up. So maybe just speak to some of the trends you're seeing. How broad-based is this across the... portfolio, is it driven by a top percentage or is it more wholesome from top to bottom across users? And then I'll throw my second question in as well. You've had another quarter of really nice LDD placement. The installed base is now over 500. How are you thinking about where you stand in terms of penetration of LDDs versus the broader you know, potential base, and is future growth going to be coming more from LAL uptake or LDD placements? Thanks a lot.

Thank you, Robbie. I'll start, and Shelly can add in anything. So with respect to utilization, you know, generally we think the increase in utilization has been broad-based, and some of that is attributable to, you know, existing customers who've continued to increase their utilization as they've seen the benefits of the technology, as more doctors in the practice have access to the infrastructure that has already been established in those practices. And then also with new customers, both because the characteristics of the light-adjustable lens are more broadly known, and so doctors are more confident in starting with more of a commitment to the technology, starting with larger volumes. And then, of course, our team, which consists both of our sales team as well as our clinical trainers, as we have you know, learned over the last several years how to give practices the information for them to start more efficiently and to expand more efficiently. So I think all of those have been factors in the growth of LAL utilization, and we would anticipate that those factors would continue. Anything to add there, Shelley?

No.

With respect to LDD penetration, as you noted, we're above 500 now. We still think that's a fraction of the overall possibility. In the U.S., there are several thousand practices that do cataract surgery, and we're still in a minority of those. So we still see room for growth on the LDD side as well.

Yeah, I would just add to clarify a little bit. You know, one of the things that's been nice about our LDD sales as well is that we've had good discipline in terms of pricing, that the pricing and ASP for the LDD has remained, changes are very narrow. And then just to clarify on what Ron said in terms of penetration, there are about 10,000 surgeons in the U.S. today who do cataract surgery. We believe, you know, a few thousand, 2,000 to 3,000 do the majority, maybe 70% of the total number. But we don't believe our total market is limited to those high volume practices. Because, in fact, as we get more mature, obviously today we're fishing where the fish are, but it also offers an opportunity for other surgeons to provide premium IOL, specifically the LAL, to their patients with superior results and allow them to get in the market. Anything else, Ron?

No. Any follow-up, Robby?

No, you answered it all. Appreciate taking the questions. Thanks a lot. Thank you.

One moment for our next question. Thank you. Our next question comes from Steve Lichtman of Oppenheimer and Co. Incorporated. Please proceed with your question.

Thank you. Evening, everyone. Beyond the top line, the other standout looked to be on the gross margin side. So a couple of questions there. One, what's driving the underlying gross margin benefit? Is it just mix or is there something else afoot? And then secondly, Shelly, can you level set us on where you think we should be exiting the fourth quarter with the lower cost LDD system in place? Okay.

Thank you, Steve. Yeah, the gross margin has really been driven by a few things. One is, of course, mix, right, with the LAL substantially more profitable at the margin level than the LDD. And that is something we see as a continuing trend. Costs have also gone down as we have, as we've increased the amount of production we have in the LAL as well. We do expect to see some nice margin expansion in the fourth quarter, but not much in the third relative to what we achieved in the first and second quarter due to the fact that our reconfigured LDD will bear a higher gross margin, and we think that will have benefit. So we should see some differential between the third and the fourth quarters based upon not only mix, but as well as the introduction of our reconfigured LDD.

Great, thanks. And then just my follow-up, I guess, on the LDD number, real nice sequential increase here and above our expectations. Can you talk to ASCRS and how coming out of that, any tailwinds that you saw coming out of that conference where you did have, you know, a pretty big presence and, you know, is that part of what we're seeing here in this LDD number? Thanks.

I agree. We had a very strong ASCRS, and certainly that has helped us in Q2. I think it's generally consistent with increasing awareness about the light-adjustable lens, and that awareness drives interest on the parts of practices. So we see that as a trend that has grown significantly and we would hope that would continue to grow.

Thanks, Ron. Thanks, Sherry.

Thank you. One moment for our next question. Thank you. Our next question comes from Ryan Zimmerman of BTIG. Please proceed with your question.

Hey, good afternoon, and congrats on a nice quarter. I want to ask just... couple of questions, Ron, more of a big picture question first. But as you've seen the uptake in the market here, I think when we talked earlier this quarter, it almost feels like your aspirations are expanding, your aperture is widening. And just as you see such good adoption, does it change kind of how you view your commercial strategy in terms of not just the US market, but I guess The question kind of hints at, you know, aspirations beyond the U.S., Canada, maybe Mexico where some of the clinical trial cases were done, and what the opportunity may be internationally and if and when we could see that.

So, you know, as you know, Ryan, ophthalmology is really an international field, but the U.S. traditionally has led in terms of especially in terms of the private pay markets. And so we're focused on fully developing the U.S. market initially, and that is our primary focus. But we do see significant opportunities outside the U.S. as well. And as we have started in Canada, we'll continue to develop those with time.

I think we might run specifically to Europe because of the CE mark and kind of their, you know, the disarray relative to approvals. And so that does push off any kind of European opportunity for us. But we don't think that that's something we would have pulled the trigger on anyway, given the opportunity in the U.S.

Okay. I appreciate that incremental caller, Shelly. And then the second question, you know, one of the large peers in the ophthalmic market reported earlier this earnings season said the health of the premium market has been weak. This is the second quarter in a row they've said that, yet you continue to put up kind of, you know, I think really good results. And I'm curious if what your view is of the health of cataract market, given some of that commentary we've seen from some of your larger competitors.

Well, you know, the overall, the cataract market continues to grow driven by demographics. And then within the overall cataract market, the premium market is still the main opportunity for practices to grow their revenue relative to, you know, continued reductions in reimbursement that they receive for cataract surgery and other reimbursed services. So we see the premium market as being a primary engine for growth in ophthalmology. And as you noted, we have seen our numbers continue to grow.

Okay. I'll leave it there. Thanks.

One moment for our next question. Thank you. Our next question comes from Larry Beagleson of Wells Fargo. Please proceed with your question.

Hi, this is Charles on for Larry. Can you hear me okay? Yes.

Thank you. Hi, Charles.

Hi. First, congrats on the nice quarter. I wanted to follow up a little bit. So on your newer lower cost LDD, so that was approved at the start of the year. Can you just refresh us, give an update where you guys are at preparing for the launch and building inventory? Last turn, it sounded like second half launch. Is that going to be a phased approach, and is there going to be any kind of limit by inventory availability there to talk about? Thanks.

Thank you, Charles. So, you know, as you noted, the reconfigured LVD, again, was approved earlier in the year. It has the same functionality as our current LDD, primarily will have its impact on the margin. And as Shelly noted, we're anticipating that to be primarily towards the end of the year. that has really been our plan for the year, and I don't see many changes there.

To your question of supply chain, supply chain is still tough, but it's continuing to improve. One of our strategies is not to introduce the reconfigured LDD until we're certain that we have the finished goods in stock, as well as

The supply chain has stabilized and so that is part of our strategy and ensuring that we have You know full availability for our customers Okay, great, thank you One moment for our next question Thank you our next question comes from Greg Bijou of BNA securities, please proceed with your question I

Good afternoon. Sorry about earlier. I guess I missed my initial slot, but thanks for putting me on. I guess, you know, I had two questions on competition. And, you know, I wanted to kind of see what you're seeing on, you know, the field level or the ground level and what you're hearing from docs anecdotally. I believe, and it's a bit of a follow-up on a question that was asked before, but Is it truly patient awareness? Is it the patient satisfaction, the results that the doctor's seeing? Is it the ability to potentially price at a premium to other competitive IOL, premium IOLs? And then the second competition question is just, you know, anything that you guys know of or have heard or kind of worries you about, you know, some of the bigger players and the development of new lenses there.

So, you know, I think all the things that you mentioned, Craig, are in play. Certainly the awareness of the quality of the results that patients and doctors can obtain with the light adjustable lens is an important factor. Once the system becomes available to doctors, then that allows them to offer it to more patients, more doctors in the practice. So I think all of these things are in play. And the ability to, you know, have a really strong ROI is obviously a factor as well. And doctors are pricing the technology at a level commensurate with the quality of the results that it produces. So all of those are important to growth. With respect to competition, again, We have the same visibility of the competition that everybody else does as far as we can tell. We don't see anything on the horizon even in the near midterm. There are some projects out there, but it's not an easy task to make a technology that delivers all the aspects of the light-adjustable lens. You know, it remains to be seen whether and when somebody's going to be able to do that. And then, you know, even when somebody enters, if they do, you know, they'll be entering at a point when we'll already have introduced a whole slew of improvements to the technology in response to market requirements. So I think it's going to be a tough road for somebody to follow.

Got it. That's helpful. Thanks, Ron. And maybe a quick follow-up for Shelly. On the new LDD, and I guess it's part of longer-term peak margins, but I guess my question is about how should we think about where you can bring peak gross margin and how long does it take you to get to that level?

So I think you're asking not specifically about the reconfigured LDD, or are you talking about overall margins in the long run for the company?

Yeah, more overall margins. Shelly, I know you have been reluctant to provide some detail. So if you're willing to give detail, I'd love to hear it, but just overall margins for the company.

Yeah, and so, you know, with the reconfigured LDD, and I think I've said this before, we expect to be able to stabilize that margin in the 20 to 30% range, and we've been lower than that, and hopefully more toward the high end as we, you know, because we've got good volume in that product as well. Overall, really, if we think out long term, you know, there's a big market for LDD sales But typical of razor blade companies, in the long run, we would expect probably 90% of our revenue to come from the LAL. And that is very price stable, has been so far, because of the value it offers. And I would expect long range will be in the mid 80% gross margin level, maybe even as high as 90, but that remains to be seen.

Great. Thanks and congrats on a strong quarter.

One moment for our next question. Thank you. Our next question comes from David Saxon of Needham & Poe. Please proceed with your question.

Yeah. Hi, Ron. Hi, Shelly. Thanks for taking my questions and congrats on the quarter. Maybe to follow up to one of Craig's questions, it's been two years since you've been public. You've been a little further along in the launch. So I wanted to ask, are you hearing the same areas of pushback from prospective docs as you were a few years ago? Or has the awareness and interest been established and it's just more of a question of getting out and engaging with the docs and placing LDDs? and also any color on kind of how the sales cycle has changed.

Yeah, thank you, David. I think, you know, the same general interactions are going on. I think we have obviously, you know, a larger and more experienced commercial team, and we have more experience that we can point to and that we can refer new practices or practices looking at our technology, too, so that they can get, you know, information not only from us but from other customers that might be more like them. But, you know, so, for example, you know, unlike other intraocular lenses, we have a piece of capital equipment, and that obviously – has a cost to it. But, you know, over the last several years we've established that the ROI for that piece of capital is pretty quick, you know, in the six to nine months on average and can be quite faster. And so that makes new practices coming on board more comfortable, but they still need to go through, you know, their own financial analysis. And so it's, you know, both Shelley and I have been in similar business models before, and I would say it never gets easy. But, you know, we've seen, I think we have more answers for potential customers.

Got it. Thanks for that, Ron. Maybe a follow-up for Shelley, just on the operating expense guidance. I think it implies around 33% growth in the back half versus 20% growth we saw in the first half. So what's driving that? What investments are you making? Anything there would be helpful. And thanks so much.

Thank you so much. Of course, I did mention the SOX expenses as well as the audit fees associated with SOX. You get most of that right at the end of the year. And also for the back end year, You know, we add clinical applications personnel and pace with our LDD sales. You know, we add a few account managers and other people if we need to expand our marketing. And, of course, by the third and fourth quarter, you get that full impact of those additions as well during the year. And that's what really drives the OpEx up as you exit the year.

Great. Thank you.

I am showing no further questions at this time, and I would now like to turn the conference back to Ron Kurtz for closing remarks.

Well, thank you all for your time and attention today. As always, we appreciate your interest in RxSite and look forward to updating you on our progress in future quarters. Goodbye.

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