Visioneering Technologies, Inc. (VTI) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Visioneering Technologies Quarterly Investor Conference Call. [Operator Instructions] I would now like to hand the conference over to Dr. Stephen Snowdy, CEO. Please go ahead.

Thank you, and good morning, everybody. Hello to you. This is Stephen Snowdy, CEO of Visioneering Technologies, and I'm joined by Brian Lane, our Chief Financial Officer. And unfortunately, Tony Sommer, our Senior VP of Sales and Marketing, is traveling today and is unable to join the call. But we welcome you to our quarterly investor call for the quarter ended December 31, 2019. As usual, we'll open the call today with some financial and operational recaps for the business, and then we'll open the line to answer your question. All dollar amounts we will discuss today are U.S. dollars, and VTI's fiscal year is coincident with the calendar year. Investors are also reminded that the financial metrics reported here are not yet audited. VTI is in the business of business correction, and we sell contact lenses. These are not just simple contact lenses, though. Our flagship product, our daily disposable soft contact lenses called NaturalVue Multifocal. NaturalVue Multifocal is a revolutionary and patented contact lens targeted at 2 patient populations with high clinical needs, the first being people over the age of 45 who have difficulty seeing things that are close enough to touch. This condition is called presbyopia. And unfortunately, almost everyone over the age of 45 suffers from presbyopia. The other patient segment being prescribed the exact same lenses as our over-45 patients is composed of children who are nearsighted and getting progressively worse, a condition called myopia progression. These children can see things that are close but have compromised distance vision, which can affect academic and athletic performance, of course, and other daily tasks. Myopia progression affects 1/3 to 1/2 of U.S. children, which is double what it was 30 years ago. It affects 80% to 90% of children in many Asian countries. We estimate the myopia progression market for soft contact lenses just in China alone to be around USD 10 billion. Even Australia, which historically has enjoyed one of the lowest rates of myopia in their children, has seen a sharp uptick in the percentage of children who are nearsighted. And unfortunately, for these kids, poor distance vision and new glasses every year are not the only part of the story. These children are exposed to a lifetime of significantly elevated risk for blindness and other serious ocular diseases. So minimizing the severity of nearsightedness as they develop in childhood is very important. In a study of 141 children that was released earlier in -- that would have been last year now, we're in 2020, January of last year, NaturalVue Multifocal was shown to slow the worsening of nearsightedness in children wearing the lenses by 90%, which is why NaturalVue Multifocal is being adopted by practitioners and parents around the world. And in addition to selling our multifocal contact lenses, we also sell lenses called NaturalVue Spheres, which are 4-day correction of uncomplicated distance vision in adults. In the United States, we have a direct sales force that visits with eye care professionals or what we call ECPs for short. VTI sells the lenses to fulfillment companies, though. So VTI's revenue represents sales to our fulfillment partners. Our fulfillment partners then sell our products to the ECPs, who then sells the products to patients. For the U.S., in order to provide a view of the company that is not impacted by changing inventory levels at the fulfillment companies, we report shipments to the U.S. ECPs in addition to net revenue. Shipments to U.S. ECPs represents the lenses that are shipped from our fulfillment companies to the U.S. ECPs at the dollar pricing per lens that we charge to fulfillment companies, thus shipments to U.S. ECPs is a gross revenue equivalent. Outside the United States, VTI has no direct sales infrastructure. Instead, we team up with companies that can provide both the sales and fulfillment functions, and we sell lenses to those companies. Shipments information is generally not available from our international partners outside the U.S., which is why we only provide that information for our partners inside the U.S. And with that, I'll hand the call over to our CFO, Brian. And Brian, can you recap the December quarter and how the year went for us?

Yes, Stephen. Just as a reminder and consistent with several previous mentions from the company, the December quarter typically is the weakest quarter in the year in terms of quarter-over-quarter growth in the contact lens industry in general, with contraction of 10% to 15% from the September quarter revenue not unusual. For the quarter ended December 31, our cash received from customers grew 9% over the previous quarter and 77% over the prior corresponding period in 2018 to USD 1.8 million. Cash received from customers deviated from the revenue due to the timing -- due to timing differences between the booking revenue at the end of the quarter versus the timing of cash received related to that revenue with some revenue still in accounts receivable at year-end. Cash received from customers for the full year of 2019 was $6 million, a 76% increase over cash received from customers in 2018. Net revenue in the December quarter was $1.9 million, which represented a 31% growth over the previous quarter and 81% growth over the same period in 2018. Net revenue for the full year 2019 was in line with expectations of $5.7 million, which represented a 74% growth over the full year 2018. Shipments for domestic ECPs in the December quarter were $1.4 million, a 15% contraction in the September quarter, but 37% growth over the same period in 2018. Shipments to ECPs in the U.S. for the full year 2019 were $5.6 million, which was 77% growth over that of 2018. The number of active accounts, which are accounts that purchased product within the quarter, remained relatively steady from the September quarter at 1,997 with a 91% repurchase rate. Both cash received from customers and net revenue for the December quarter benefited from our new relationship with Menicon. Menicon purchased and we delivered $476,000 worth of NaturalVue Multifocal lenses packaged in Menicon's Bloom Day packaging. These lenses will be marketed and sold by Menicon in Europe, specifically for myopia progression control and on Menicon's initial stocking order. We expect further purchases in 2020 from Menicon but not likely in the first quarter of 2020. We are working with them to forecast 2020 but are not quite there yet in the planning process. Gross profit in the quarter was 34.4%, which was impacted by the lower margin of the private label purchases by Menicon. Gross margin for the year -- full year was also 34.4% versus 22.5% for the full year 2018, exclusive of an inventory write-down we recorded in 2018. Gross cash outflows for the quarter were approximately $4.8 million. And tax received from customers were $1.8 million, resulting in net cash used in operations of approximately $2.9 million. We ended the year with approximately $1.9 million in cash. Subsequent to the year-end, we raised in a private placement approximately another $1.9 million in cash, which will fund the company's current level of operations through April of 2020. That's it for the financial wrap-up. Back to you, Stephen.

Thanks, Brian. One thing I think that is worth noting from that analysis is that VTI had similar gross cash outflows in the year 2018 and 2019 despite having grown revenue by 74% and having laid the foundations in those 2 years for international growth into several OUS territories. That included Europe and Australia, New Zealand, Hong Kong, Singapore and soon, Canada. Getting all those regulatory clearances and getting those infrastructure set up is not inexpensive. But we did manage to hold cash outflow steady while increasing revenue quite a bit. I think if you look at the revenue dollars per non-inventory expense dollars of running a company, of regulated medical device companies, you'll find us to be a very efficiently run medical device company. For additional commentary on the quarter, all of our financial metrics in the United States continue to be negatively impacted by performance-related attrition in the U.S. sales force. 30% of our previously covered territories are now uncovered, up from 25% at the end of the September quarter, which means we've lost a couple of more people to performance-related attrition. Fourth quarter contraction of shipments in uncovered territories was double that of covered territories, just to give you a sense of how important sales staff are. We expect to backfill uncovered territories or to start new territories as the cash position of the company improves with future financing activity. And attrition and regrowth, of course, are natural evolutions of sales force. And ultimately, we feel that the natural printing of the sales force will result in increased strength. But in the short term, we'll continue to be impacted positively on the expense side, negatively on the growth side until these open positions are backfilled, which again will happen when the company's balance sheet is in a better position. In other business news, we recently received our registration in Singapore, you may have seen, for myopia progression control which is, of course, important. Singapore was one of the first countries to declare myopia progression in children to be a national epidemic and has very high rates of myopia in their children. So a great place to have received a registration. We expect to log first sale there in the first quarter of 2020. Initially in Singapore as in Hong Kong, we'll be launching on our own with a select few accounts without a sales and marketing presence or a local distribution partner. And we'll fulfill orders for Singapore through our Australia, New Zealand distribution fulfillment partner as we're already doing in Hong Kong. Longer term, of course, we'll need to partner up with somebody who's already established in Hong Kong and Singapore to take on the day-to-day sales and marketing. And we're exploring partners now. In Hong Kong, where we launched in a few accounts only very recently, of course, it's very early, but we're quite encouraged by the initial enthusiastic uptake there. And again, Hong Kong is another territory where we are looking to partner up for fulfillment and for sales and marketing functions. As we've mentioned previously, China represents a very large market for myopia control products. It is, however, a very unique regulatory and commercial environment in which local partnership, both for product development, clinical development and for sales and marketing and distribution, are -- it's important to have local partners for all of that. And so we are looking for partnership in China. There are deals that we could do in China, a product of the work that we put in over the last couple of years. But we're being very deliberative in China as we want to make sure to maintain maximum flexibility with regard to other partnering and business development activities. In Canada, we finally received the initial certification that we needed to submit to the regulators there and expect to launch in Canada in the first or second quarter of 2020. This is a particularly exciting territory because we get the efficiency of being able to service the sales and marketing and fulfillment using our direct sales force out of the United States and with our United States fulfillment partners. More broadly in the industry, it's been an exciting few months for myopia progression control with some of the large players finally jumping into the area. Menicon has started an entire new brand around myopia control called Bloom, under which our NaturalVue Multifocal will be a key offering in Europe as we discussed previously. Menicon also sought and received approval of their orthokeratology lenses in the U.S., which are used for treating some people with myopia and are used by some practitioners for myopia progression control in children. Essilor, the largest eye care company in the world, has formed a task force to guide the company's efforts in myopia research. And CooperVision, one of the major contact lens companies, recently received FDA clearance to market MiSight lenses in the United States. And at least according to a call that they did, a quarterly update call, they plan on large global expenditures to educate parents and practitioners, obviously, expenditures that will benefit other industry participants who have products that are used for myopia control. The recently formed industry collaborative Global Myopia Awareness Coalition or GMAC, of which VTI is a founding member, has started its own efforts in educating practitioners and families on the importance of managing myopia in children. So obviously, quite a bit of momentum in the myopia progression, myopia treatment space, which is something that we've really been waiting for, for a very small company with just a handful of sales reps in the United States and no large sales presence outside the United States. And we were one of the only ones talking about myopia in children. And so obviously, we have limited effectiveness given our size. But having a company as large as CooperVision help now, talking about how important it is to manage this debilitating disease is incredibly helpful, we think, for the industry, including for VTI. In summary, it was a year of healthy and efficient growth for VTI. Our U.S. penetration increased. We set up an international regulatory foundation from which to springboard internationally. We signed our first strategic deal with a major industry player in Menicon. And our industry participants and practitioners are finally opening their eyes to the importance of myopia in children. And of course, we look forward to 2020 with great excitement. And with that, we can open it up to questions. But just a quick note, there's quite a bit of latency or delay. So when you do ask your questions, do give it time to make it all the way over to the United States before we respond. Thank you.

[Operator Instructions] Your first question comes from Martyn Jacobs with Canaccord.

Just one question for me. The sales and marketing infrastructure you've got in the U.S. is costing you about $8 million a year. And I was just wondering whether at your stage of development, if you've given much thought to outsourcing that to sort of a large distribution partner.

Yes. So outsourcing to a large -- first of all, we're -- I guess the total between the 2, sales and marketing, that would be about right. So every company when they first start out in medical devices goes through this decision of whether and how much to outsource to third-party companies with regard to sales. And it generally doesn't work very well. It's an experiment that we tried early on, and we didn't get great results from that. These -- the sales reps that work for distribution companies aren't attached to any particular product. They just sell whatever is going to make them the most money that day. And so what I think nearly all medical device companies early in their development find out is that with limited market awareness of a particular product, it's really important to have a dedicated sales force that is out there only selling your product. The distributors tend to not do a great job. And we see that internationally as well. So internationally, that's exactly what we do. We get sales as a service from our fulfillment and distribution partners. And they're just much less effective than a direct sales force. But I think the good news is that a large portion, a good portion of our sales reps are getting to the point of paying for themselves. And that's a pretty positive place to be. So while obviously, sales didn't grow, I think as fast as any of us thought it would over the past couple of years, it is going well enough that the sales reps are starting to break even. And that's a pretty positive thing for us, and it's taken a while and a lot of investment, but they're getting there.

Your next question comes from [ Ian Moore ], a private investor.

Could you just recap on how many sales rep you had on 30th of June, 30th of Sep and 30th of -- 31st of December?

Brian, do you have access to that in front of you? And maybe we could also address, for Martyn, the cost of the sales force itself.

Stephen, I don't have exact numbers, but I can tell you that we were down -- we were at about 20 sales reps -- 20 outside sales reps at the end of the year. We were at 22 at the end of September, and I believe we're close to 25 at the end of June. So it has trailed down over the past 6 months. We've replaced a couple of the reps, and we are obviously looking to replace others. As Stephen said, we're waiting for financing to make sure that we have the funding to do that.

Okay. And so if...

The sales reps run us about $200,000 all in per year. So 20 outside sales reps, the cost of that is about $4 million, Martyn, just -- I know you can't respond, but just to give you a more clear picture of what a direct sales force is costing us. Okay. Ian, did you have -- I'm sorry. Was there another...

So if the spend is $8 million and the reps are $4 million, so that's marketing is the other $4 million. Can you just go through what that $4 million in marketing is?

Yes. Brian, do you want to -- if there -- if that number is not quite right, maybe correct that and provide a little more insight into what else we put into sales and marketing.

Right. So the -- what Stephen referred to is just the sales reps themselves. And then we also have sales management and then we have marketing. So the entire group is what makes up that number. So it's not that it's $2 million or $4 million in marketing because marketing is less than $2 million a year. And some of it is also -- we do pay for a dedicated sales force in the U.K. that is not part of our sales force, but we are paying for their sales reps, and that's part of what goes into the sales and marketing as well. So there are some international aspects of sales and marketing that does get charged to that $8 million. There's the direct sales reps themselves and then the sales management. We've got the VP, we've got about 5 district managers. All of them go into that cost.

[Operator Instructions] There are no further questions at this time, and that does conclude our conference for today. Thank you for participating. You may now disconnect.