Good day, and thank you for standing by. Welcome to the IRIDEX second quarter 2022 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 one one on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Leigh Salvo with Investor Relations. Please go ahead.
Thank you, Carmen, 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 2, 2022. 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, August 15, 2022. With that, I'll turn the call over to Dave.
Good afternoon, and thank you all for joining us today. Following our Topcon collaboration and capital infusion in March of last year, IRIDEX has enjoyed a multi-quarter trajectory, tracking significantly higher top line revenue. In this year's second quarter results, we experienced a plateau with total revenue growth leveling to 2% year-over-year. The context is important here. Last year's quarter was particularly strong, and this year's summer slowdown appears to be short term and attributable to a combination of factors. Macro headwinds from inflationary pressure and U.S. dollar strength relative to foreign exchange rates has dampened our OUS retina capital system sales during the quarter. Increasing pricing pressure on our international customers from high inflation across many segments has driven up customers' total spending and has led them to assess their capital purchase appetites.
In the glaucoma market segment, we experienced relative procedure volume weakness in the second quarter. This is largely due to strong comparable results in the prior year's second quarter. On top of this, we did experience headwinds from continued COVID impacts to surgery center capacity and patient procedure volumes. Surprisingly, vacations by doctors, staff and patients ran unusually high and as a result added to reduced or delayed procedures. These combined to deliver some procedure softness in late May and June. We believe these headwinds are temporary, and our team has maintained steady focus on expanding our market and building the physician adoption of our non-incisional approach to treating glaucoma and retinal disease. Clinicians have proven receptive to our enhanced dosing guidance and are monitoring patient outcomes over time as they build experience toward expanded usage on a wider indication of patients.
While this process is taking longer than we like, our confidence remains high that we're demonstrating improved outcomes that will lead to broader adoption. Glaucoma probe sales volume increased 2% quarter-over-quarter, but declined 6% versus the prior year. As I discussed, the decline stems from second quarter 2021 OUS probe sales that were particularly strong as departing distributors placed and sold final orders before Topcon took over distribution for over half of our OUS territories. Despite these challenges, we're pleased that second quarter probe sales attained our second highest quarter ever, only behind last year's second quarter. In Japan, we completed distributor transition at the beginning of the second quarter, marking the last of our large international market transitions. As part of the transition, Topcon received product inventory from the prior distributor and therefore placed minimal orders in the quarter.
We anticipate renewed contribution from this region in the latter half of the year and going forward. In June, we were pleased to receive our long-awaited regulatory clearance to market and sell our Cyclo G6 glaucoma platform in China. This important milestone opens up a significant new market for IRIDEX. An estimated 9.4 million adults in China are afflicted with glaucoma. That's a market scale comparable to that of the U.S. We sold the initial systems and probes to begin the launch, and together with our distribution partners, Topcon and Clinico, we conducted clinical launch meetings with over 70 physicians, significantly exceeding our expectation of 15-20 from our initial launch sites. Together with our partners, we'll support pilot sites and patient experience to build a strong initial presence in China that we can then leverage to penetrate the broader market.
To support the growing awareness of PLT and our China launch, we expanded our commercial team with the addition of a vice president of marketing, as well as new sales team members, two in the US and three internationally. Increasing our sales team enables us to continue broadening the geographic reach and focus of our sales efforts. Lastly, our capital position remains secure, though again this quarter, we deployed some cash to mitigate potential supply chain impacts, and we continue investing in initiatives to secure our long-term growth. Year-to-date cash reduction is approximately $5.9 million, with about $3.1 million of that shifted from in current assets to cash to inventories and prepayments to mitigate lingering supply chain challenges. On the clinical front, we had several notable updates that build on the work done over the previous quarters.
Clinical presentations and industry articles supporting the dosing impact on outcomes and the importance of sweep speed technique are increasing awareness of methods to secure optimal results. The first clinical paper from our PLT consensus committee has been published, and the group is finalizing the submission for the second half of the guidance paper, which will be published in the same journal. We expect these papers to serve as critical proof point as we continue to drive adoption of PLT and introduce this technology to more and more physicians. Turning to product launches, we're excitedly preparing to launch a new suite of laser systems at the upcoming AAO conference beginning September 30. This launch will include new platforms for the three main laser products within our retina treatment portfolio.
Not only will the platforms deliver modernized architecture and ultimately connectivity capability, but they provide IRIDEX a lower cost of manufacturing, which we can use to drive share gains and improve margins. We expect initial shipments in the US to begin in Q4, followed by OUS approvals over the next several quarters, and we'll roll out international market launches as those come. As we look at the full year 2022, we assess our performance year to date and the impact from extended prevalence of COVID, plus the macro headwinds affecting our expectations for the second half of the year, and conclude that it's prudent to lower our revenue and probe guidance for the year. Our updated full year 2022 outlook is as follows. Total revenue of $56 million-$58 million, reflecting growth of 4%-8% year-over-year.
We now expect probe sales of 61,000- 63,000, growth of 5%-8% over 2021. Our expectation for glaucoma system sales remains unchanged at 225- 250 units. We'll continue to focus on executing our growth catalysts, and when combined with typically stronger second half of the year sales, we have confidence in our ability to build momentum through the remainder of 2022. In summary, we perceive the current challenges as impacting the fiscal year 2022, but we're confident that we have in place an energized commercial team, high quality distribution network, enhanced product portfolio, and a multi-year capital runway that will allow us to succeed in our long-term growth strategy and position IRIDEX as the leading provider of non-incisional laser-based treatments in the ophthalmology market. With that, I'd like to turn the call over to Fuad.
Thank you, Dave, and good afternoon, everyone. I will now review our financial performance for the second quarter of fiscal 2022, starting with revenue. Total revenue for the second quarter was $13.8 million, up 2% from $13.4 million in the second quarter of last year. We sold 15,000 Cyclo G6 probes in the second quarter, a decline of 6% from the prior period, and a 2% increase quarter-over-quarter. As Dave noted earlier, the year-over-year decline was primarily a result of the prior period, including final orders by distributors in advance of our move to Topcon's exclusive distribution. Moreover, we're also experiencing some headwinds from a stronger dollar as the vast majority of our revenue is priced in USD. We sold 48 Cyclo G6 systems in the quarter compared to 47 in the prior period.
Year to date, we have sold 104 Cyclo G6 systems, tracking our initial expectation for the full year and validating our worldwide install base expansion goals for 2022. It also highlights the broadening adoption of TLT for the treatment of glaucoma. Total product revenue from our Cyclo G6 product family was $3.5 million, down 3% compared to the second quarter of 2021. Turning to our retina business. Product revenue was $7.5 million, flat compared to the prior period. Strength in our legacy IRIDEX retina product was offset by relative softness in PASCAL revenue. Recall that last year in Q2 and Q3, we shipped extra units to start building inventory in Japan ahead of a shipment blackout as we registered IRIDEX as the manufacturer of record for PASCAL.
Other revenue, which includes royalties, services, and other legacy products, increased 22% to $2.7 million in the second quarter of 2022 compared to the same period in 2021. The substantial increase resulted from higher service revenue and higher amortized revenue recognition from the sale of distribution rights to Topcon. We expect to sustain this level for the balance of the year. Gross profit of $6.3 million in the quarter reflected gross margin of 45.6% compared to 45.5% in the second quarter of 2021. We expect that further margin expansion will come from increased probe volumes and sale of our new laser platforms as they take the place of existing systems in the future.
Operating expenses for the second quarter were $8.4 million compared to $7.2 million in the same period of the prior year. The increase was a result of higher R&D spend on planned investments in new product developments and additional R&D capability from the acquisition of the PASCAL product line. Additional planned investments in the sales organization as well as expanded marketing and clinical activities also contributed to the higher operating expense in the period versus the same period last year. Higher R&D and sales and marketing expense was partially offset by lower G&A expense in the period. Net loss in the second quarter of 2022 was $2.2 million or a net loss of $0.14 per share, compared to an income of $0.09 per share for the same period in 2021.
Please note, second quarter of 2021 included a one-time gain of $2.5 million from forgiveness of our PPP loan. We ended the quarter with cash and cash equivalents of $18 million, representing cash usage of $2.7 million during the quarter. Cash usage included approximately $1.1 million investment in inventory and related pre-orders. We believe these investments in materials and inventory are necessary to mitigate potential supply chain bottlenecks in the future. We expect to start bringing down inventory starting in the fourth quarter of fiscal 2022 and into fiscal 2023. We reiterate that these shifts in our current assets are an essential part of the supply chain management strategy in the current environment. In conclusion, I'll provide an update to our guidance for 2022.
As Dave mentioned, we now expect total revenue for fiscal year 2022 to be $56 million-$58 million, compared to $57 million-$59 million previously. G6 probe sales are now expected to range from 61,000-63,000, compared to a range of 67,000-70,000 previously. Finally, our expectations for growth for Cyclo G6 glaucoma laser systems installed base growth remains unchanged at 225-250 units. 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, simply press star one one on your telephone. One moment while we compile the Q&A roster. Our first question comes from the line of Thomas Stephan with Stifel. Please proceed.
Great. Hey, guys. Thanks for the questions. If I can just start on G6 guidance, you maintain the system's placement guidance, which I would think would be the impacted portion from inflation and macro, which I think on the retina side you said may be impacted. With G6, I think the probe shipments is where guidance came down somewhat meaningfully for 2H. I guess on the probe side, what else are you seeing beyond macro? Because I guess wouldn't at least procedure volumes be a bit more resistant to macro? Just trying to make sense of this dynamic. Is it competition? Just any color there, Dave, would be helpful?
Sure. Hi, Tom. Yeah, I would say that macro is a factor, and then as we shifted distribution, you know, some of the softness in the second quarter was inventory shifts, for example, in Japan, as I mentioned. Going forward, we think we'll recover on those items and reestablish the growth trajectory. Our original guidance was about 18% probe growth through the course of the year, and we've been relatively flat year to date versus last year. As we start to grow again in the second half, you know, we've got that lack of growth in the first half to carry, and that's why the numbers are down. We're gonna grow at a rate, but the, you know, we're starting at a lower base than we would have expected for the second half of the year.
I think, you know, when you do that math, you see it's sounding lower than you would expect. We're actually pretty pleased with the guidance of system sales, that it indicates the appetite is there to adopt and our visibility is such that, you know, we're feeling comfortable that there's still demand there. Those price points for that capital equipment are not too high. They're in the, you know, $20,000-$25,000 range. You know, that's an easier capital purchase to continue forward with than a retina laser system that might be, you know, between $50,000 and $100,000, depending on the feature set. Does that clarify things for you a bit?
Yeah, that's helpful. I actually think that's a really good segue into my second question. It's just on kind of the medium term for G6. I'm not gonna ask you to guide for 2023, but, you know, I'm curious how we should be thinking about next year at this stage. It sounds like, you know, some of the current headwinds are transitory.
Right.
What is your medium-term outlook? 'Cause, you know, I do think guidance implies flattish utilization in 2022 versus 2021. Again, you do think it sounds like you'll get back on the normal growth trajectory of that business. For 2023, is it fair to think about G6 kind of getting back to the 15%-20%+ growth rates, you know, as we enter next year?
I think so. You know, we thought that was gonna be the case this year, and I think COVID persisted longer than I think many of us anticipated. You know, it kept us at a level as opposed to growth in this first half of the year. We established growth in the second half of the year, and I think that continues. There are a couple of nice catalysts to accelerate that growth. You know, we really have high confidence that our newer dosing and sweep speed communication coming from papers, KOLs, and our sales teams calling on customers is really gonna capture traction and start to number one, give very consistent and durable results and cause our clinicians to start to broaden the patient base on which they use it.
You know, for the longest time, we've talked about expanding to the more moderate-stage patient. Before you get that, you've got to get that confidence in the durability, and especially the safety profile, and we think we're building that now. I think those things will come out as we move along in the second half of the year. There are also some studies that are ongoing that will demonstrate the current dosing with the current probe and the outcomes and safety profile from that. As that emerges, I think it gives a greater and greater confidence of existing users to broaden the patient selection and newer users to come on board.
Yes, we think 2023, we should be on a higher growth trajectory, you know, barring any other exogenous events that start to affect usage and ability to do procedure volumes and those kinds of things.
Got it. That's helpful. Maybe last one for me, just on the sales force. Can you remind us how large it is now between each segment? Just talk about the strategy and the rationale here, and kind of where these new reps will be focused between the different businesses?
Sure. In the US, we have a team of six territories plus the support team that adds up to about 10 on the retina side of the business. That's a capital business. It's primarily a replacement business, although there is some expansion in facilities that wanna have a satellite facility and have the same kind of equipment in that facility. But you know, overall, the doctor base is everyone has a laser and it's you know, it's really an opportunity for our new platforms to have some growth as we replace older systems with newer systems. That's the retina side in the US. The glaucoma side in the US, we have 14 territories, so we just brought us up from 12- 14.
We have some clinical support team members as well as some management and inside support. That team totals about, just about, 20 people. That's focused on glaucoma exclusively in the U.S. Internationally, we expanded by three in both Asia Pacific as well as in Europe, to put more support in place to help Topcon and their distributors drive the business in their channels. We added what we call area sales manager as well as clinical specialists to help support cases and train sales reps in the territories. That international team now totals about seven people covering what's roughly 60 distributors and including the sub-distributors under Topcon.
Great. That's helpful. If I can squeeze in one more, just going back to glaucoma. Obviously there's a lot of new entrants from a product perspective, you know, recently and even more so on the horizon. Dave, can you just talk about your view on the competitive landscape? You know, to what extent maybe it's factored into the revised guidance? I guess just more broadly, you know, how are you thinking about, you know, ramping competition and the extent that that might affect kind of G6 utilization? Thanks.
Sure. We think that our non-incisional approach is relatively unique. We can treat the moderate stage to the later stage. You know, we don't need an incision, and we don't need the clinician to decide to make an incision in order to treat, for example, a MIGS standalone. What we're hearing from the clinicians is their preference, if they can avoid it, is to not make an incision and use our technique, you know, if they're satisfied that it that it delivers the results and the safety profile. That said, I think there is a lot of interest in understanding it and potentially trialing some of the newer entrants and new approvals for standalone. I think it's taking some mind share. I don't know at this point that it's really affecting.
We don't hear it, that, "Oh, well, I'm doing a bunch of these other things now, so I'm using yours less." We just do not hear that. I think it's out there. I think it's a distraction. I think that space has so many competitors and all of them with a large number of sales reps, that there's just, you know, a thunderous noise in that space, targeted at glaucoma specialists and comprehensives, who are doing this. We're one of the voices in one sense that they're hearing. You know, we think from a product standpoint, we're well-differentiated, but from a communication standpoint, we think, you know, it's a challenge to be heard with all the other noise.
Internationally, I think there's less of that because, I think MIGS is less eagerly adopted, or at least in the percentages internationally. We don't feel that is challenging. There are a couple of competitors out there, attempting to do what we do in our non-incisional, probe approach. You know, as we've detailed, there's so much work that has gone into getting the right configuration of the probe, the right clinical and dosing and technique and the training and support that we think, you know, we have a relatively dominant position in the actual procedure volumes going on and that we can maintain that.
Great. Thanks, Dave.
Thank you. One moment for our next question, please. Our next question comes from the line of Scott Henry with ROTH. Please go ahead.
Thank you and good afternoon. Just a couple questions. David, I guess, you know, first, and I know you've talked about it in the prepared remarks and probably in the last question as well. But I just wanted to flesh it out one more time. The G6 came in below expectations, and I've heard a lot of different things, capacity constraints. What do you think was the main driver why it came in below expectation? If you don't wanna put it on just one thing, maybe if there like, you know, how would you know if you're just trying to simplify it as much as possible, what do you think happened in 2Q that made things not turn out as much as you thought they would?
I think it's two things that you can look to that are very straightforward. Number one, you know, the COVID persistence continued to dampen procedure volume, at least in our facilities with our procedures. Secondly, you know, it was very visible to us that the latter part of May and into June, there was just procedure volume softness. You know, I was quite surprised when, you know, as we canvassed, that this concept of vacations kept coming up. I at first didn't necessarily believe it, but I've heard that, you know, other conference calls, people have observed the same phenomenon. I, you know, I think that that's a very short-term focus thing.
I think, you know, it's hard to extrapolate, and we hate to look at, you know, week by week or month by month and call it a trend. You know, we did see recovery in July that, you know, made us more comfortable that number one, there was some truth to that. Number two, that people did actually come back from their vacations. I think this.
When you say, David, when you say procedure volume softness, it sounds like you're speaking about the market, not market share as much as, you know, the denominator in the equation.
Yeah.
Is that correct?
Look, it's notoriously hard to get market share indications, but it's pretty clear that you know, our sites were saying, "Yes, we're doing many fewer procedures. Our clinicians are on vacation, or staff is on vacation or sick, or patients don't wanna come in because they know five people who had COVID, and they just don't wanna be exposed." Those are the indicators for us. We don't really have good macro visibility on you know, what was happening to cataract procedures and those kinds of things.
Okay. I mean, I guess.
That's the basis of our belief that procedure volumes were significantly softer or significant enough to kinda leave us flat to down. The second piece is, you know, really in the international space, and it's something that I've been talking about since the beginning of the collaboration with Topcon is that we will see these quarterly periods where we'll have, you know, volume shifts of orders from one quarter to the next quarter just based on the timing of when they place their stocking or orders for their sub distributors or end customers. I think we saw some of that internationally, and I used the example of Japan, where, you know, that distribution shift occurred really at the end of Q1, beginning of Q2.
With that final shift over came inventory and probe inventory. The normal flow of orders from that region didn't come to us, and we expect that to come in the future. You know, that's a, you know, it's a significant market for us, Japan, and that, you know, it affects the totals. I think those are probably the two biggest. They're clearly short term. I think the macro, if I would give you a third, is that even though people are quite receptive and users understand the importance of dosing and sweep speed on outcomes, our procedure does take a while to see that outcome and durability.
Typically they will evaluate at 30 days, but then they also wanna see three- and six-month outcomes, both from reduction of intraocular pressure, percentage reduction, also safety profile. Like I said, in the comments, it's taking longer than we anticipate, but the results seem to be there. We're quite confident that adoption will be confirmed and we'll get that broadening. You know, as that plays through, I think that we can accelerate our growth and have recovery from those short-term factors from the quarter.
Yeah. I mean, I guess what I was trying to flesh out is, you know, all of this seems temporary and, you know, glaucoma is not going away. You know, barring some sort of contraction from the economic cycle where perhaps people just see the doctor less for a period of time, that should reverse at some point. You should expect to see growth return to trend, perhaps in 2023. Is that a fair assumption?
Yeah, that's a very fair assumption. It's our expectation. We've, you know, continued hiring. We're pushing our marketing programs and clinical programs to get back to that phase. Look, you can't exceed every quarter expectations every quarter. You're either under-projecting or, you know, have a rabbit to pull out of your hat each time. You know, this is one of those quarters where, you know, it became clear that, you know, these factors, you know, didn't cause significant declines, but they prevented the growth that we were expecting to achieve. Look, I think it's very short term in the sense that the specific quarter elements were clear.
That said, you know, we still have work to do to drive adoption, engagement with clinicians and expand both the clinical and the study base so that the evidence builds and the comfort level is there. That's what drives adoption. It's a multi-quarter event. We're comfortable that we're gonna recover from, you know, these headwinds. You know, we're still quite optimistic on the capital equipment opportunity as well. When you look at, you know, the reduction of our guidance was really related to the glaucoma probe reduction.
We really haven't put a significant reduction in for capital equipment in the second half of the year, and that's partly because we've got new products and some excitement coming, and partly because, you know, we feel like we've got the value proposition to continue to drive that business.
Okay, great. Just another question. You know, no real reason to ask it now, but just was on my mind. On the R&D side, the company spends a good amount, $2 million a quarter on research and development. The question is, I don't know, some of that may be sales related, but you know, what products is the company working on? And you know, where is the return from that investment? Not that there isn't one. I'm just curious if you wanna highlight any of the stuff you are working on?
Yeah. Some of the focus, a significant part of the focus of R&D right now has been getting our new platforms, in particular the PASCAL platform, through the production cycle and launched. It's a next level platform as opposed to an improvement of the current platform. It entails a higher level of investment and a longer period of time, and we're coming to the end of that. The opportunity really is to redeploy those to other areas of opportunity and look at the spend that we should be having given those opportunities. There's a whole wave of connectivity and connectivity to various clinicians and bringing images into the field. There are some smattering of offerings out there.
Our Topcon partner is quite strong in that space between their diagnostic equipment, you know, communicating between, say, automated those kinds of things. That will tie to our equipment and procedures. We're optimistic that there are equipment product feature expansion areas. Then we think there are advances to be made in the way we deliver energy for glaucoma and other applications in the front of the eye, delivering energy to create a therapeutic or some type of a clinical effect and have a delivery device that may or may not be disposable, but you know, drives incremental revenue for the company as procedure volume grows. We will invest in those things going forward. I'm not ready to disclose. It's a competitive space and no point in disclosing those things to our competitors.
Okay, great. Well, thank you for taking the questions.
Thank you. With that, we end our Q&A session for today. I will turn the call back to David Bruce for final remarks.
Thank you. Thanks everyone for joining the call. We'll continue to work on behalf of growth and strong shepherding of the assets and look forward to reporting to you next quarter.
With that, ladies and gentlemen, we thank you for participating in today's program. You may now disconnect. Everyone, have a great day.