IRIDEX Corporation (NASDAQ:IRIX) Q3 2024 Earnings Call Transcript

IRIDEX Corporation (NASDAQ:IRIX) Q3 2024 Earnings Call Transcript November 16, 2024

Operator: Thank you all for participating in today’s call. Joining me from the company are Scott Shuda, Executive Chairman; Patrick Mercer, Chief Executive Officer; and Fuad Ahmad, Interim Chief Financial Officer. Earlier today, IRIDEX released financial results for the quarter ended September 28, 2024. A copy of the press release is available on the company’s website. Before we begin, I’d like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements made during this call that are not statements of historical fact, including, but not limited to, statements concerning our strategic goals and priorities, product development matters, sales trends and the markets in which we operate.

All forward-looking statements are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place reliance on these statements. For a discussion of the risks and uncertainties associated with our business, please see our most recent Form 10-K and Form 10-Q filings with the SEC. IRIDEX disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, November 12, 2024.

And with that, I’ll turn the call over to Scott.

Scott Shuda: Good afternoon, and thank you all for joining us. I’ll start today’s call by providing a high-level overview of some of the most important current topics at IRIDEX. Then I’ll introduce our new CEO, Patrick Mercer, who will share his perspective on the recently completed quarter. Next, Fuad will walk us through the third quarter financial results. And last, Patrick will go into detail on some important strategic topics. Today’s call will not include a question-and-answer session. In my portion of today’s call, I will cover three things, why we recently made the change as CEO, the status of our strategic review and cost-cutting measures underway that are designed to eliminate the long-running cash burn and quickly move the company toward breakeven operations.

These three things are all closely related, and each shares the same driver, the extended length of time our strategic review has been ongoing. IRIDEX’ Board of Directors was not satisfied with the pace and progress of the strategic review. And as stated in the press release that announced the elevation of Patrick Mercer to CEO, it was believed that new leadership had the potential to accelerate the process and get the company to the desired results of delivering a transaction that will unlock shareholder value. Moving to the second topic, the status of our strategic review. I’m happy to report that we appear to have been successful in accelerating our agenda. Among other proactive steps taken, Patrick and I teamed up at the recent American Academy of Ophthalmology’s conference in Chicago to meet with representatives of more than a half dozen entities.

Q&A Session

Between these meetings and calls both before and after the conference, we have reconfirmed that there is strong interest in IRIDEX, our global brand and industry-leading products. There was also an appreciation expressed by several third parties for the opportunity to restart or reinvigorate discussions and also our willingness to consider broader and more creative transaction structures. IRIDEX is, along with its bankers, in active discussions with multiple entities, and I can reiterate that an announcement with respect to one or more transactions is both possible and desired before the end of the year. Third and last, following the change in CEO, the company has adopted a much less tolerant attitude toward the company’s operating cash burn.

There was a belief that heavier spending could continue given the expectation of the transaction in the company’s near-term future. That approach may have been appropriate at some point in the past, but Patrick and I believe that it is now the right thing to take steps that will bring costs more in line with the company’s operating cash flows. We expect that the fourth quarter, which is our seasonally strongest period, will be EBITDA positive. Before handing the microphone over to Patrick, I’d like to provide a few items of introduction on our new CEO. Patrick has been with the company for six years. Before becoming the company’s CEO, Patrick served first as Chief Operating Officer and then also became the company’s President. Prior to becoming CEO, in his entire tenure with the company, Patrick’s role was to serve as IRIDEX’ number two executive.

While Chief Operating Officer, Patrick’s broad responsibilities included manufacturing, R&D and regulatory affairs. Patrick has led and will continue to lead the process of outsourcing more of the company’s manufacturing processes with the goal of helping the company to continue offering its products at internationally competitive prices. In the weeks since being named IRIDEX’ CEO, Patrick has worked quickly and effectively on multiple fronts, and his positive energy has been noticed and well received both inside and outside the company. Patrick, over to you.

Patrick Mercer: Thank you, Scott. Good afternoon, everyone. In this portion of the call, I will provide some thoughts on our performance in the third quarter and our outlook for the fourth quarter and beyond. Revenue for the third quarter was lower than anticipated, primarily due to challenges in our retina business. However, this appears to be largely a timing issue. In the second quarter, we reported solid growth in retina sales, and we’ve seen a strong start to the fourth quarter as well. The slower sales in Q3 were not unique to our company. Many capital equipment firms, both within and outside the healthcare sector, have faced similar sell-through delays. Additionally, we have experienced some shipment delays in certain regions due to regulatory hurdles, but these are expected to be resolved in the fourth quarter.

As we said in our press release, the third quarter has traditionally been the quarter most subject to seasonal softness. We are encouraged despite this. We saw increasing momentum in our glaucoma products family. That business is predominantly based on single-use probes that are consumed and must be restocked, and thus, they are much less subject to issues that might affect larger-ticket capital equipment purchases. Aggregate glaucoma probe and console sales were both up versus the prior year. Turning to the fourth quarter. I am in regular contact with members of our sales teams, and I’m hearing encouraging reports, particularly as it relates to orders received and shipped early in the quarter. Some of this is likely related to a very productive showing at this year’s American Academy of Ophthalmology meeting in Chicago.

We had strong activity in the booth and generated many promising leads for both our retina and glaucoma products. This year’s AAO is also where we introduced and began taking orders for our new I-5 laser platform. These are the systems where most of the work is performed by our contract manufacturing partners. The new console features a slick new user interface and utilizes the same basic layout with this design to deliver significant product efficiencies. After Fuad takes us through the details of the recently completed quarter, I will come back and talk about two strategic topics, first, our cost-cutting program to bring expenses in line with our revenue; second, the LCD reimbursement change for glaucoma that will go into effect on November 17, which represents a 180-degree reversal from what we saw last year.

I am excited for the opportunity to explain why we believe the new LCD is likely to encourage physicians to perform more glaucoma procedures using IRIDEX laser consoles and probes. Over to you, Fuad.

Fuad Ahmad: Good afternoon, and thank you for joining us today. I would like to begin by reviewing our financial performance for the third quarter ended September 28, 2024. Total revenue in the third quarter of fiscal ’24 was $11.6 million, representing a 10% decline compared to $12.9 million in the same period of the prior year. Total revenue from Cyclo G6 product family in the third quarter was $3.1 million, an increase of 3% versus the third quarter of ’23. This is driven primarily by stabilization of probe sales on improved clarity on the glaucoma procedure reimbursement environment in the US. We sold 13,600 Cyclo G6 probes in the third quarter, representing a sequential decline of 10% compared to the second quarter of ’24.

This is consistent with seasonal decline in probe volumes we experienced in the third quarter. Overall, probe sales are recovering towards historical business patterns. We sold 26 Cyclo G6 systems in the quarter compared to 27 in the prior year period. Our retina segment revenue in the third quarter of ’24 was $6.5 million, down 18% compared to the third quarter of ’23. The significant year-over-year decline is a result of the reemergence of lengthening capital sales cycles and a delay in shipping capital equipment due to regulatory hurdles in certain key geographies. However, we expect such regulatory hurdles to be resolved in the fourth quarter to allow shipments in those territories. Other revenue, which includes royalties, services and other legacy products, was $2 million in the third quarter of ’24 compared to $1.9 million in the third quarter of ’23.

Gross profit in the third quarter of 2024 was $4.3 million compared to $5.6 million in the prior year period. Our overall gross margin was 37.3% compared to 43.7% in the third quarter of 2023. The decline in gross margin was due to the small shift in product mix and lower overhead absorption on reduced revenue. Operating expenses in the third quarter of ’24 were $6.2 million, a decline of $1.1 million compared to $7.3 million in the same period last year. The decrease in operating expenses was a result of cost reduction initiatives that began early in the year. We expect OpEx reduction trend to continue in the fourth quarter when we experience a full quarter of cost reductions that were implemented in the third quarter. Our net loss in the third quarter of ’24 was $1.9 million or $0.12 per share compared to a net loss of $1.8 million or $0.11 per share for the same period in ’23.

Now, on to cash position and cash flows. Cash and cash equivalents totaled $3.9 million as of September 28, 2024. Cash balance as of September included $3.4 million of net proceeds from the convertible note offering that was announced and closed in the third quarter of ’24. The proceeds from the offering were used primarily to improve our working capital. Therefore, as we mentioned on our previous call, cash usage in the third quarter of ’24 was elevated compared to the second quarter. We utilized additional liquidity to optimize our working capital position, improve our supply chain relationships and manage short-term cash variability. However, as a result of our cost optimization efforts and improved working capital position, we expect to significantly improve cash usage in the fourth quarter.

This is consistent with our commitment to make IRIDEX EBITDA profitable in the fourth quarter and going forward as we advance our strategic process. In summary, we have strengthened our balance sheet and continue making meaningful progress in decreasing operating costs. We remain focused on improving operating performance and are making significant progress in the strategic review process. I will now turn the call back over to Patrick.

Patrick Mercer: Thank you, Fuad. Before concluding today’s call, I want to spend a little more time developing 2 important topics. First up is our cost-cutting program. This is something that I believe is overdue and therefore something I started on my first day on the job as CEO. IRIDEX has, for the last several years, operated under a program where it was believed that aggressive spending in sales and marketing and elsewhere could drive accelerated adoption of new products and achieve the growth that would justify the original spend. More recently, the operating assumption had been to maintain a high spend rate in order to maximize revenues going into a strategic transaction. As Scott said in opening the call, the extended time the strategic review has been ongoing now requires a change in this operating approach.

Steps are underway to accelerate what had been a gradual cost reduction program. My objective is to bring the company’s ongoing expenses in line with the company’s ability to support these expenses. Starting in the fourth quarter of 2024, we begin making some aggressive changes. Our initiatives include significant cost reduction across all departments, renegotiating supplier contracts to free up capital and reducing inventory levels. Additionally, we will accelerate engagement with our global contract manufacturing partners to take steps that are designed to improve gross margins through increased outsourcing. As a result of these initiatives, IRIDEX expects to achieve EBITDA breakeven or better in the fourth quarter of 2024. One final thing to note before moving on to my second topic.

I have explained that for some time, the company has been spending aggressively on sales and marketing and elsewhere with the intention to maximize total revenues. That idea also works in reverse. As we pull back on the historic aggressive rate of spend, we are likely to forgo some revenues. We are comfortable with this. And going forward, we will focus on the best opportunities for us, those who are our competitive advantages deliver the highest rates of return and potential for value creation. I’m happy to report that the third parties we are talking to as part of the strategic review are comfortable with this change. Many have commented that they believe our business would and will be more attractive with an improved financial return profile.

And that leads right into my second topic, the competitive advantages created by materially changed glaucoma reimbursement landscape that will come into existence next week when the revised and final LCD goes into effect. The new LCD is believed to have significant strategic importance for IRIDEX. Recall that in the fourth quarter of last year, we are very surprised when the initial version of the LCD, which very clearly was directed at MIGS devices, that is minimally invasive glaucoma surgery devices, nonetheless pulled cyclophotocoagulation into the proposed changes to the reimbursement policy. Last year, we presented our case to the MACs, and they explicitly agreed that our cyclophotocoagulation or CPC product offerings are not included within the definitions used for MIGS devices.

The final and updated LCD clearly excludes any limitations on CPC or any procedure involving IRIDEX products. As I’ll explain, the process of our glaucoma procedures being initially included in the original LCD and ultimately excluded from the final LCD, we believe, has helped draw valuable attention to our offerings. What the new reimbursement restrictions will do starting next week is change the reimbursement landscape for glaucoma treatments. Physicians may no longer utilize MIGS devices as the first-line treatment for mild to moderate glaucoma, and physicians may no longer stack multiple MIGS procedures in a single treatment. Because physicians will find their options for utilizing MIGS procedures materially restricted, we believe the new reimbursement paradigm has significant potential to increase physician adoption of IRIDEX glaucoma products and procedures.

We tested this thesis with multiple parties during the American Academy of Ophthalmology’s conference in Chicago last month and received repeated affirmation. We also observed a steady stream of physicians visiting our booth and participating in our wet lab trainings and initiating discussion about their intention to increase the number of MicroPulse TLT procedures they will perform in their practice. You can be assured that we have made all of these observations and recent experiences part of the conversations we are having with third parties related to our ongoing strategic review process. With that, we will conclude our remarks. We look forward to updating shareholders on future results and events. Thank you.

End of Q&A: