IRIDEX Corporation (IRIX) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. My name is Desiree, and I will be your conference operator today. At this time, I would like to welcome everyone to the IRIDEX Conference Call. [Operator Instructions] I would now like to turn the conference over to Trip Taylor, Investor Relations for IRIDEX. You may begin.

Thank you, and thank you all for participating in today's call. Joining me from the company are Patrick Mercer, IRIDEX's Chief Executive Officer; and Will Moore, a member of the company's Board of Directors, 1 of 2 new directors recently appointed following the strategic investment made by Novel Inspiration International. Before we begin, I'd like to remind you that the company will make statements during this call that include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements made during this call that are not statements of historical fact, including but not limited to, statements concerning our strategic goals and priorities, product development matters, sales trends and the markets in which we operate. All forward-looking statements are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place reliance on these statements. For a discussion of the risks and uncertainties associated with our business, please see the most recent Form 10-K and Form 10-Q filings with the SEC. IRIDEX disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, April 16, 2025. And with that, I'll turn the call over to Patrick.

Good afternoon, everyone, and thank you for joining us. Today, we will be discussing 3 important topics with the intention of providing stockholders with information relating to the current and much improved state of IRIDEX's business and our path forward working with our new strategic investor, Novel Inspiration. The 3 topics are: first, A review of the operating changes and improvements we have made over the last 2 quarters, particularly the significant cost cuts that we have made to bring our spending in line with continuing revenues. This has very quickly led to breakeven or better adjusted EBITDA and cash flow operations. Second, I will speak briefly on the company's preliminary Q1 2025 results. And third, Will Moore and I will provide color around the recent strategic investment in the company and the resulting partnership between IRIDEX and Novel Inspiration. After that, we will invite questions for call participants. So let me begin things by reviewing the material changes we have made to our business operations since I took over as CEO at the beginning of October last year. Starting in the fourth quarter of 2024, we have aggressively executed a number of significant cost reduction programs designed to bring our operating expenses in line with our revenue. As highlighted in our earnings call last month, we quickly accomplished our goal, delivering positive adjusted EBITDA in the fourth quarter and reporting a 10% sequential increase in revenue. Our top line results totaled $12.7 million in the fourth quarter with Cyclo G6 Glaucoma product sales growing 9% year-over-year. And as we communicated via a press release this week, our strong fourth quarter results were followed by first quarter 2025 results that demonstrated continued operating momentum and financial discipline. For the second consecutive quarter, we reported year-over-year revenue growth and expect positive adjusted EBITDA. We are very encouraged by the speed and continuing progress from our efforts. Demand for our Cyclo G6 product line remains strong, supported by improving commercial performance in the glaucoma segment, consistent with our expectations following the LCD reimbursement change which we believe favors our non-MIGS treatment offering. On March 19, 2025, we announced a $10 million investment in IRIDEX by Novel Inspiration. This transaction was done at a price of $2 per share on an as-converted to common basis. Inferring a valuation premium for the company of nearly 2x where the stocks have been trading in the weeks leading up to the transaction. The ophthalmic sector in which the company operates is currently engaged in a very involved, and therefore, very slow-moving consolidation. The latest example came only 9 days following the Novel investment when on March 28, 2025, Topcon Japan announced a management buyout to be supported by KKR. As we have been discussing since our recent strategic announcement, the Novel investment must be considered in the ongoing industry consolidation. Rather than continue to wait and definitely for the larger players to find room in their schedules to complete a transaction with IRIDEX, we have partnered with Novel who sees the significant value of the IRIDEX franchise and the potential to enhance that value by becoming a more active participant in the ongoing market reshuffle. Starting in October 2024 in reaction to recognition that our strategic process was not proceeding on the path and time line originally intended, we began taking steps to position and strengthening our business for the longer term. This led in March 2025 to Novel's investment, and this call where we will discuss why Novel invested $10 million at a premium valuation of $2 per share and why they negotiated the opportunity to invest an additional $10 million to support further growth and product development initiatives. This new partnership rebuilds a shared vision for innovation and long-term value creation. Novel is not a passive financial investor. It is an active investor in our space with the ability to not only recognize the significant value inherent to our business, but also to add sector experience and the interest and ability to add additional growth capital as our value creation plans and opportunities to develop. To speak more about the strategic rationale and what this partnership means for IRIDEX moving forward, I'll now turn the call over to Will Moore, a former CEO and a past and present member of our Board of Directors, who also identified the opportunities present for IRIDEX right now and who brought us together with Novel. Will?

Thank you, Patrick. I'm very pleased to be participating in this call with the opportunity to provide insight and context for Novel's strategic investment in IRIDEX. As part of this, I'd first like to share some information on my professional background and experience. I have over 30 years of executive management experience in the captive disposable med tech market. This experience involves both public and private company. I've been involved in 2 initial public offerings involving medical device companies, one with Goldman Sachs and the other with Cowen Inc., now TD Cowen. As an entrepreneur and operating company executive, I've raised capital from venture investors, private equity and with the help of investment banks. I'm a co-founder of Natus Medical, a medical device company that saw great success leading to an exit value of greater than $1 billion. I've served on multiple public Boards of Directors, and my career has largely been focused around identifying small public companies despite having great brands, have fallen out of favor and are discounted by the market. Often these companies that have gone through periods where they lack fiscal discipline, having been pursuing poor strategies fail to execute or all of the above. IRIDEX and Novel Inspiration are 2 entities well known by me, and I have complementary ambitions. It seems to me an obvious opportunity to make the introductions that led to Novel's investment in IRIDEX. Novel's strategy is simple, to invest in companies that are undervalued with the loyal base of global customers, stable revenue with clear opportunities to improve operations. Novel's long-term objective is to create shareholder value, increasing market valuations via simple approaches, most often based around improved strategies, more accountable operations and often small, accretive and synergistic acquisitions. IRIDEX is a well-established ophthalmic laser company with a great brand, global physician recognition stretching back 35 years. It has thousands of loyal customers and an installed base of product that must be counted in the tens of thousands. The company has continuing business potential that is currently being greatly and [ improperly ] discounted by the public investment community. IRIDEX's prior cash burn has likely had an effect of discounting its market value. That was a result of an overly ambitious product release strategy and has not played out as originally expected. IRIDEX's recent actions and its greatly improved operating results over the last 2 quarters demonstrate that the company can execute and its new leadership has financial discipline necessary to secure a future that Novel believes will lead to continued growth and greater profitability. Going forward, we think [ successfully ] will be a product of several things. One is optimizing gross margin; and two, better and faster responsiveness to customers, especially those working with IRIDEX through an international distributor. One of the governance and oversight changes that we've put in place to address these areas of focus is a new strategy and Budget Committee for the Board of Directors. The plan is for this committee to increase accountability, more quickly identify departments that are not meeting the objectives and goals and thereby improve short-term and long-term operating execution. The strategic Budget Committee will also seek to drive the identification of revenue growth opportunities, both in IRIDEX's historic business segments, customers where the company's strong international distribution platform can be quickly and effectively leveraged. We expect this effort will involve pursuing some small accretive acquisitions, and this thinking is the rationale for Novel having negotiated the ability to invest an additional $10 million in the company. The first $10 million is intended to be more than sufficient for the company's normal operations given its new financial discipline. The second $10 million is intended to help finance growth and acquisition opportunities. We believe the Novel investment and the prior operational improvements have greatly decreased the risk of IRIDEX's business model, and we are confident that Novel working with the company, validates IRIDEX's potential to create value through improved operations and global distribution of its leading technology and others. In the coming days, I hope to be part of an effort to reach out to the company's largest shareholders to discuss our strategy and garner support for our go-forward business. Operator, please begin the question-and-answer portion of this call. Thank you.

[Operator Instructions] And our first question comes from the line of Aaron Warwick with Breakout Investors.

Am I understanding correctly, I guess, from what you're saying that you are now interested in potentially having -- making an acquisition yourself, but also at the same time, not just what you said today, but also on the Q4 call, it sounds like you're still open to transactions that might involve selling some of your assets, even though the official strategic review has completed. Is that accurate, you're interested in both making acquisitions and possibly selling assets as well?

Aaron, this is Patrick. Thanks for the question. Yes, to both. We are -- one of the reasons we came to -- one of the things we liked about working with Novel on the transaction is they had a shared strategy. And one of those strategies where we were open to folding other companies into IRIDEX, bringing those assets in-house. Also, though, obviously, any offer that the company gets if it makes sense for the shareholders would be considered. I mean we're not in the same place we were back in Q4 where we were low on cash. We're in a much better cash position now, but of course, any offer that was brought before the company if it made sense for the shareholders, the Board of Directors would consider it. But we -- just to reiterate on first part for your question, we do share the strategy that we will look at opportunities to acquire assets that are accretive to our business.

Okay. And are you -- I mean, in terms of the growth that you're talking about and the Novel seems to have identified some opportunities for you as well, should we expect that on both the retina and glaucoma side? Or is it just going to be more one side than the other?

I'll let Will take this.

Yes. So yes, this is Will. The issue that we look at doing investments, our strategy all along follows a model that was built underneath the [ Martinus ] Medical. And that is -- we have to reach a point where we have a valuation that's reasonable. I mean, currently, we're valued at roughly $16 million to $18 million. With a stable business of $48 million to $50 million and $10 million in cash, we think it's clearly undervalued. So we've got to pick that up so that our stock has some value to it. And then we can look at acquisitions that are undervalued and roll those into our business, and that's how you're getting the accretive situation. Now having said that, the cost of doing business in opening up new distribution channels, calling on new doctors is very expensive. So we will focus on companies that provide product to the customer base we have, so we can utilize the current distribution channel and leverage our distributors on a global basis.

Excellent. Is it okay for me to ask one more question or do I need to find if I can?

Sure. Yes.

Yes. So especially when we're talking about international stuff, and I know you guys have been involved in that for a while. What kind of impact are you thinking there could be with the tariff policy? I know there's a lot of uncertainty around that, but how much do you see that potentially impacting you? And how much can you mitigate it?

Yes, I'll take that. Look, while we do rely on some outsourced components globally, particularly around precision or electronic components, these are only between about 10% to 15% of our system components. We feel that one of the advantages is that 90% of our manufacturing is already done in the U.S. And that would put us in a stronger position than many of our competitors, particularly those that are dependent on overseas production. We'll still see an impact because of some of those components, raw materials that we do have to procure that are outside. But again, those are small and we're far less exposed to the cost and logistics disruptions than some of our competitors are when they start importing finished devices. So we actually see this as a competitive advantage, especially in the U.S.

Yes. Good to hear. So the 10% to 15% is that in China, Japan? Where is can you say perhaps it's in your...

Yes, I mean I would say probably a lot of it -- I would say probably 7% of that, I would say, half is China and others is all over, quite frankly.

Our next question comes from the line of Jason Stankowski with Clayton Partners.

I guess, you mentioned that the Board and management was disappointed with the strategic process and you couldn't get people's attention. And obviously, the new product rollouts and the money losing that's happened at the company has also disappointed shareholders as well. Can you talk a little to the recent results maybe and how they might lead to a different path now that we have this new partner? Are there other efficiencies that can be brought that just weren't acted upon because of sort of legacy thinking? Or like how different is it going to be going forward? Because there's been a lot of restarts at this company for a long time. We were investors probably 15 years ago when there was a restart and it kind of petered out. So maybe some context on why this can work right here right now and what you're willing to do to make it different and enduringly different, I guess, going forward?

Jason, look, we want you back. If you were an investor, we want you back first, I'll say that. Listen, let's start -- your question, you said a lot there. So I'm going to break it down a little bit and then if you need to follow up if I miss something. Look, we were in a strategic process and it wasn't a complete failure. We had many interested parties. We were really close with 2 of them. We're really at the altar with one of them. And quite frankly, those parties entered a strategic process and themselves got acquired. So that was last year. Since we were spending too much money last year, and we took action, we reduced our spend dramatically. We got ourselves financially healthy. We're going to -- we're reporting positive EBITDA 2 quarters in a row. So you're asking what's going to be different. I mean, the difference is we're not burning cash. We're trying to first prove that we can be good stewards of money financially, that's number one. And we've taken the action internally. We looked at every line item of expense. We cut people, we cut processes, we cut waste. We did -- we looked at everything. We're running lean and mean now as an organization, but we are turning things around it, and we feel good about it. You asked, we did this partnership. The reality was we were getting low on cash. That's no secret when we went into this relationship. And now we're not looking at that as a negative anymore. We're okay in that position. We still have -- IRIDEX has still a strong brand recognition, particularly on the retina side. We have -- we've gotten good news from the LCD announcement on reimbursement. We got a potential to fold companies in the IRIDEX if that's what we want to do, and we have the opportunity to still explore other options for strategic partners, but we're very happy with the relationship -- go ahead.

Are you still manufacturing lasers in Mountain View, California?

We are manufacturing some -- not -- we're manufacturing some in Mountain View and some elsewhere, other places in the U.S.

And so like when we moved on from the investment, it boggles my mind that the Board and who wants -- who can afford to manufacture commodity products in like the most expensive town in -- probably in the world or nearly right next to Google's offices? And like has that been -- is that something that's on the table to actually -- it can't be efficient. I didn't think it was 15 years ago or 12 years ago when we exited, but it seems like an obvious thing that just has never been done.

Right. Yes. So Jason, this is Will. I'm glad to hear your voice. We do something that we're -- as an investment with Novel, things will not be the same. There will be changes. We understand -- I mean there's things going on with tariffs, we don't have control over. But what Patrick has done is control over the cost. At this point in time and he's rightsized the business. He and I have been talking about this for a while. He's done a good job. The next thing he is an expert when it comes to operations and transferring technology. I'm sure he's going to do a good job with doing that because we totally agree with you that we are in one of the highest-priced areas to manufacture product, which is fine if you have high-margin products and you can afford to pay a lot of money to people. But that's not this business. We're in a commodity competitive marketplace. So we realize that. And luckily, we have connections with Costa Rica from Patrick and to Asia with me, that we were looking at all avenues. Now the other piece to answer your question, and I think where it really comes into play, this company was developed by an engineer to design and build product. We are now a company that's more of a marketing company. And what we will be doing is outsourcing as much as possible. And then we will be doing accretive acquisitions to add to the profile. And you're being a financial genius you are as you're going to understand that when we do accretive acquisitions, if our multiple, it's like 1.5x, 2x sales, we find somebody that's at onetime sales, we drop their money, their revenue inside of our business, we get leverage that way. And the other part is we're on a path to move the company up substantially in revenue, not just a slow growth, but what will happen in the first phases that we're dealing with is Patrick will work with getting this outsourcing done. We've put together the strategic committee on the Board, which will allow us to identify when we're not meeting certain goals more rapidly, and we will work as a team to be able to come up with where these acquisitions are. And those will depend on whether we -- tariffs are there or not there, which might put into where we have locations we go to.

Okay. Yes. So I guess I'll just leave it with it would be great to hear a commitment that there's -- forget the manufacturing location, but just company-wide that there are no sacred cows to sort of beholden to. You'll take a fresh look at everything and optimize sort of regardless of the internal inertia, you'll bring a sense of the shareholders a sense of urgency to the plan, not just -- I understand there's a lot of constituents. But in this company, the shareholders have really seemingly not been kept at the table the whole time as is evidenced by stock price, the cash burn. And then I guess one more thing that I'll leave you with or ask you about, you mentioned revenue multiples. And hopefully, that ends up attracting growth investors and different types of investors. I think right now, where you're valued, your Achilles' heel is the lack of any cash generation. Are you committed to -- in the development of growth, are you committed to staying cash flow neutral or positive? Are you looking to be positive while we go on that journey with you? Kind of how do you think about that? Because revenue doesn't do much for a company that's having to go out and look for money at low valuations. I'm just curious how you're thinking about that.

Sure, Jason. I always love your questions. So here's no sacred cows. You have to look at what Patrick has done and what the Board has done. The Board has changed -- been reshaped with myself and Nick Chen. And then Patrick has taken and controlled the [ expense ]. He basically follows the model. I have so much revenue. I have to produce so much profit. And that's the first phase. It's stabilized and then he's got to show you that he can manage money. That is the case. And right now, the only people that we think we can talk to are really deep value investors. And that's what we will focus on. And as we get better, we'll continue to move up that line to people that are more in the momentum or other areas. This is a slow process, but it's not -- and it's complicated. It's not trial, but it's straightforward. And we've done it a couple of times in my career, and it's clear that it's been done here a couple of times, too. So the real piece is getting the multiple on this company up, and that's going to come with some growth and some increased profitability. And Patrick has given us the commitment that he under normal circumstances, which is not what we're in right now with tariffs and things. We'll maintain profitability on a go-forward basis. So hopefully, that answers your question. And if it didn't, you know how to find me.

Our next question comes from the line of Mark Gomes with Pipeline Data.

Gentlemen, great progress there. It strikes me that you have 2 businesses, right? One that hit critical mass several years ago, a decade in fact, and another that holds great promise perhaps more so than the first but still requires great investment. Is there any sense that you can give us as to how profitable the original business is and how much of a cash drain the other is? I think what's interesting here is -- what I'm saying is that the value of the total enterprise has probably been [ obfuscated ] by the fact that you do have these 2 entities that have 2 completely different profiles in Wall Street when an enterprise like that separates into its 2 constituents, a great deal of shareholder value is unlocked. Thank you.

Yes. So I think I understand your question. So yes, we are seeing -- our retina business, as you know, it's a 3% to 4% grower every year, but it brings in -- currently, it brings in 2/3 of the revenue. Our glaucoma business, we made a bet on our glaucoma business last year and earlier. And in '23, we hired a bunch of salespeople. We went and tried to grow that business, and we weren't successful. We didn't have some of our ducks in a row as far as what setting should be used and we had to take another look at that. We've improved that. We now have settings that work and show efficacy in the marketplace. And we have -- with the new LCD and our new focus on looking at the post-MIGS category and being used earlier in the continuum of care for glaucoma, we really do believe that's the growth side of our business, and we should see that growth continue. And we're going to continue to see the 3% to 4% growth in our retina business. It is a capital equipment business that, as you know, with the inflation in the last year has taken a really big hit. But we're going to continue to focus on that. Did I answer your question? I want to make sure I answered your question first, where you were going with that.

Well, ideally, we would get a sense as to the profitability of each unit right? And in lieu of that, maybe just some qualitative sense. Just to illustrate that the retina business is sort of a cash cow sitting within the organization where there also exists the glaucoma business, which holds great promise, but requires continued investment.

Yes, we -- I mean on the retina side, as far as profitability, we are predicting flat year-over-year. And our retina business, it is relatively -- it's been 3% to 4% growing business profit-wise. Overall, we're not projecting any kind of real profit there. But we're really making -- we're continuing to grow that business because it does deliver $30 million in revenue, and we're going to focus on our higher-margin products with our reoccurring revenue on our probe site, which delivers around 80% gross margins. That's where our real focus is of the business, and that's where we really need to see the growth on that reoccurring revenue.

Right. But is there any sense you could provide with regard to how much of a cash drain the glaucoma business is?

Historically, it hasn't been a cash drain. So -- and we'll not be moving forward. So...

I'm sorry, I don't know if I...

We see it is very profitable moving forward. We don't see it as cash drain.

So this is Will. I'm going to jump in with this a little bit. You have a variety of products, and the disposables have -- as Patrick just said, have a high margin. You can't get to the disposables unless you sell some of the hardware. And so sometimes you're going to have hardware which has a lower margin and the result to deal with that is to find a way to be able to manufacture it at a cheaper location than where we are. And maybe redesign componentry to the current market conditions. But you have to sell hardware, which is always in our business because there are so many competitors, it's always competitive. But the trade-off is we can look at selling a piece of hardware for a certain dollar amount and then see the tail of disposables to last for 10 to 15 years. And so I don't want to discount the idea of not selling retina because it's -- the hardware is not as valuable. It is valuable to be the base of business for your disposal, which is the business we really want to be in. And that's the term we call, captive disposables. Once they make the investment of the equipment, they're going to buy disposables, they're going to buy it for at least 10 years because that's the amortization period they take in the hospital. So hopefully, that's a little more clarity for you.

That concludes the question-and-answer session. I would like to turn the call back over to Mr. Patrick Mercer for closing remarks.

Thank you for your time and attention today. That concludes our call. We appreciate all the questions, and we're happy to take future questions directly to us. Thank you.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.