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

Thank you for standing by, and welcome to the Visioneering Technologies Q3 2020 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 hello to all of you. This is Stephen Snowdy, the Chief Executive of Visioneering Technologies, and I'm joined by Brian Lane, our Chief Financial Officer; and our Senior Vice President of Sales and Marketing, Tony Sommer. We welcome you to our quarterly investor call for the quarter ended September 2020. The usual format today will open the call with financial and operational recaps from Brian and Tony. And after their comments, we'll go to provide some additional color on the status of operations and, of course, open the line to answer any questions you may have. 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 recorded today and in our Appendix 4C are not audited. VTI, in case you're new to the story, is in the business of correcting vision with contact lenses. Our flagship product is the daily disposable soft contact lens called NaturalVue Multifocal. NaturalVue Multifocal is a revolutionary and patented contact lens targeted at 2 patient populations with high clinical needs. The first being children with nearsightedness that becomes worse over time is a condition called pediatric myopia progression, which affects 80-or-more-percent of children in many Asian economies. The other patient population being prescribed our contact lenses are people over the approximate age of 45 who have difficulty seeing things within arm's reach, a condition called presbyopia. Presbyopia affects almost everyone over the age of 45 to 50. Our addressable markets in presbyopia and pediatric myopia are large: $5 billion in the U.S., more than $10 billion in Asia as well as large markets in Europe and elsewhere. VTI has clearances or registrations to sell its products in the U.S., Europe, Australia, New Zealand, Singapore, Hong Kong and now Canada. With that introduction out of the way, Brian, would you mind giving us a recap for the quarter's financial metrics?

Sure, Stephen. As you noted, the second quarter was impacted negatively by COVID-19 pandemic. April and May were extremely weak, and we started seeing improvement in June that continued into the third quarter. That enabled us to achieve record results in most key metrics in the third quarter, even though restrictions remain in place in many of our jurisdictions. Net revenue in the third quarter was $1.6 million, which represents an increase of 139% over the previous quarter, and 11% over the same period in 2019. This level was our second highest quarterly net revenue performance, which was exceeded only by the fourth quarter of 2019 that included the $0.5 million Menicon initial stocking order. Shipments to US ECPs in the third quarter were a record $1.7 million, which was an increase of 79% over the previous quarter and 6% over the same period in 2019. The shipments exceeded the previous record set in the first quarter of 2020 by over 4%. Cash received from customers in the third quarter were a record $1.9 million, an increase of 74% over the prior quarter and 12% over the same period in the prior year. The number of active accounts, which are accounts that purchased product within the quarter were a record 2,173 accounts compared to 1,803 accounts in the prior quarter. This change included 155 new accounts that purchased from us for the first time in the third quarter. Typically, we have accounts that purchase in 1 quarter but skip a quarter or 2 before purchasing again. We call these recovered accounts. We met the accounts that purchased in the prior quarter, but not in the current quarter with the recovered accounts to derive a net change, excluding new accounts. The third quarter is the first time in our history that the net change, excluding new accounts, was a positive number, with a net 215 customers purchasing in the third quarter. Along with the 155 new accounts, our active accounts increased 370 in the quarter over the end of the second quarter of 2020. The repeat customer percent was a record 111.9% in the third quarter due to the 215 net change, excluding new accounts. Gross profit in the quarter was also a record. We hit 46.1% of net revenue in the current quarter compared to 40.8% in the prior quarter and 36% -- 36.4% in the same quarter of 2019. We continue to sell down the higher-cost FIFO layers and see a small shift in product mix towards the multifocal product, which has a higher product margin -- or higher gross profit margin than our Sphere product. Similar to the second quarter, we experienced higher direct-to-patient deliveries that increased our shipping costs and offset some of the margin improvements, but the impact in the third quarter was less pronounced than in the second. Now to cash flows. We are very pleased to report that for the first time in our history, excluding cash expended on inventory purchases, VTI achieved positive cash flow in the quarter. Net cash used in activities was $0.1 million in the quarter, which included $0.4 million of cash used for inventory purchases. Excluding the inventory purchases, net cash provided by operating activities was $0.3 million. We had some cash expenses in the quarter related to the financing we completed in the second quarter that lowered the net cash provided by -- excluding inventory purchases to $0.1 million. Gross cash outflows in the quarter were approximately $2.0 million, down $0.9 million from the second quarter and down $2.1 million from the first quarter of 2020. Cash received from customers were a record $1.9 million compared to $1.1 million in the prior quarter. And then we completed the quarter with $3.8 million in cash and cash equivalents. In connection with the placement and the security purchase plan we completed in June 2020, we issued 218 million free options, with an exercise price of AUD 0.028 that may be exercised on the last day of each month through their expiration June 2022. No options were exercised in July or August, but 4.8 million options were exercised in September 2020. We received $0.1 million in cash on October 2 related to those exercises. So that cash was not in the third quarter. It hit in the fourth quarter. We may receive up to an additional $4.3 million if all of the remaining options are exercised before their expiration in June 2022. We currently forecast our cash on hand to be sufficient to carry us into the third quarter of 2021, so 1 year from now. This forecast assumes that we continue to delay new clinical projects and product launches, and there are no significant changes to the macro environment or other factors that cause us to miss our revenue projections. Conversely, the significant number of new option exercises could extend the runway for our cash forecast and/or enable us to consider resuming new clinical projects and product launches. Back to you, Stephen.

Thanks, Brian. That is quite a positive quarter that Brian has reported, both in terms of revenue shipments and in terms of cash use. Tony, can you tell us a little bit about what's going on out there in the marketplace and some of the things, at least on the sales side, that contributed to the very efficient use of cash this quarter?

Absolutely, Stephen, and thank you. Good morning, and good evening, everyone. In quarter 2, the sales and marketing focus was on stabilizing the business in an economic climate of severe uncertainty, while maintaining the health and safety of our colleagues and eye care practitioners, our customers. As we're exiting June, however, it became apparent that there were some tailwinds in the market and that green shoots were occurring in the United States and key VTI markets worldwide. We're pleased that those green shoots manifested into record positive results, as Brian has detailed. The sales team spent quarter 3 relentlessly engaging with our customers, whether it was in person, over the phone, e-mail, text or Zoom. Simultaneously, our marketing and professional services teams provided content and a steady drum beat of communication that kept VTI at the forefront of our customers' minds. This is very critical for us. Finally, as a founding member of the industry consortium, Global Myopia Awareness Council, we leveraged a very successful summertime marketing campaign worldwide through our social media and digital efforts. Strategically, we also adapted to a no travel, limited physical environment internationally with the opening of our Asia distributor, Oculus, and the launch of VTI in Canada. Both initiatives have been done virtually. This is a marked departure from what we have done previously, and we're pleased with the very early results that we've seen. In the United States, we're also seeing that ECPs continue to employ physical practices for health and safety that has not changed. PPE, plexiglass installations, no or minimal physical contact with patients, increased sanitation and rigorous scheduling are among the strategies and tactics that our customers are employing. This is the new normal for optometry, and these small business owners want to serve their communities and stay in business. Back to you, Stephen.

Well, thanks, Tony. Obviously, VTI had a very strong quarter, beating the same period last year by 11% and setting records in our key financial measures. This success occurred against the backdrop, of course, of an ongoing pandemic and which consumer markets around the world are still vacillating between open and shut, in which optometrists are throttling patient flow through their offices and VTI is operating with a fraction of our previous staffing levels and the related expenses. Our performance in the third quarter raised several obvious questions, such as why was the quarter so strong? What does it mean for the future? Could the company have cut its staffing levels and expenses much sooner? And can the company continue to grow under this new operational paradigm? To the question of the source of the strength we saw in the third quarter, we don't have complete visibility, given the blurry noise of the pandemic, but there are several likely contributors. First, one must start with a product that is sold into a large addressable market with high medical need and NaturalVue Multifocal contact lenses are certainly in that category. Second, there's a global swelling of interest occurring in pediatric myopia, with rapidly expanding efforts to educate practitioners and parents on the importance of treating myopia as the progressive disease that it is versus viewing it as just an inconvenience requiring glasses. Third, there may have been some back demand that we saw in the third quarter, representing sales that would have or may have occurred in the second quarter had we not been under stay-at-home orders. Lastly, if you've been following VTI for a while, you'll know that the third quarter of the year is generally the strongest quarter of the year in terms of quarter-over-quarter growth. So there may have been a contribution there as well, but we can't be certain. As we enter the fourth quarter, we would normally expect a pullback of shipments and revenues. As we've communicated many times before, the contact lens industry generally sees a pullback between 10% and 20% in the fourth quarter compared to third quarter. However, given the uncertainty of the times, we cannot predict whether this historical trend will hold or which way any deviation may go. Internationally, we continue to see a market dampening of the industry, and we are not unaffected by this industry-wide headwind. We and our partners have recently launched in Canada, Hong Kong, Singapore and Europe, though the pandemic will likely continue to throw cold water on all commerce fields well into 2021. As reported over the past couple of quarters, the company took many actions to minimize its use of cash, such as cutting staff, reducing cash salaries, slowing inventory purchases, delaying new products and delaying clinical projects. While putting us in a position to survive the pandemic and achieve positive cash flow, excluding inventory purchases, some of these cuts may impact our ability to grow. At the moment, we have a total of 9 outstanding salespeople and a record number of active accounts spread over those 9 people, probably near a point of saturation. So for the time being, we'll be focused on getting more out of the accounts that we have versus trying to rapidly build new accounts as one would with new sales representatives. Interesting looking back, we would not have likely seen the success we are seeing right now without first having built our active accounts list over the past 3 years, accounts that have allowed us to thrive in a pandemic with far less resources and expenses. As we emerge from the fog of the pandemic, we will very cautiously evaluate the catalysts that will provide our future growth, new products, generating additional clinical data, which is always required of medical companies and starting new accounts, and, of course, supporting our international partners and their sales efforts. In closing, we are very proud of the VTI team for an excellent quarter, one that was achieved in the middle of a pandemic and with a profound reduction of resources. We will continue in a cash conservation mode and will very cautiously activate other growth initiatives as the economies around the world continue to recover. Thank you. And now we can take some questions.

[Operator Instructions] At this time, we are showing no questions. That does conclude our conference for today. Thank you for participating. Pardon me, we now have a question. Your first question comes from Martyn Jacobs from Canaccord Genuity.

Just one question for me. September looked like it was a little bit softer than July, August. Can you confirm whether that was the case? And how things are looking in the current month?

Brian, do you want to take that one on? We probably don't have enough history in the current month. We just started it, and we do have a data lag, but we can certainly speak to anything that occurred in the third quarter.

Right. Yes. I think, Martyn, the typical trend is for August to be the strongest month. And then September start, as Stephen mentioned, fourth quarter is typically a pullback from the third quarter. Well, that starts in September and then goes through October and November, and then we pick back up in December. So what we're seeing is tracking historically the right way. And so while there was a little bit of a pullback in September from August, it tracked very well with what was happening in 2019, and it was not unexpected.

Right. And how are the optometrists operating at the moment? Are they still operating at 50% capacity? Or is there scope for them to increase that? Or is there a downside risk if the election goes in favor of the Democrats?

I think the downside risk on the optometry side is more around weather or by to what extent the pandemic starts to go back up again. So as you know, in the Northern Hemisphere, we are headed back into winter, which is expected to exacerbate the positivity rates and put more people in the hospitals. And I think the downside that we see coming up in the next 2 quarters is really where the pandemic has from where it is today. Tony, do you want to talk to how our optometrists are operating, where they are with respect to capacity at the moment?

Yes. Absolutely, and that's a great question, Martyn. It does vary across the United States to a large geography, physically as large as Australia, but with different regional variations on this pandemic. But what we found is most practitioners who are open, and not all of them are, have increased their throughput. They are not at 100% pre-pandemic levels, but they have increased their number of bookings per hour and many of the better operated practices have continued this booking pattern into the month of October, and that they're full for appointments into October. And those are anecdotal but we are seeing them in the better operated practices in the United States.

Okay. And just turning to Asia, is there any breakout of the volume you sold in Asia versus the U.S. you can share?

Not -- so I would say outside the U.S., sales at this point are still not large enough to break out. So we've not been breaking them out quite yet. Oculus, our new partner for Singapore and Hong Kong, has just started signing up accounts. The pace of that sign-up again will pace along with the severity of disease in those countries. Menicon as well in Europe, for that matter, is just getting started there as well. And its foot on gas, foot on break, foot on gas, foot on brake as the severity of the pandemic pulses. And we expect that to continue to be the case until this thing starts to recede.

And Canada?

Canada is starting to progress actually pretty strongly. Tony, do you want to comment on Canada real quick? Just general strokes.

Certainly. Yes, general strokes on Canada. So again, we've started that market virtually, which is strange for Americans since we're used to cross-border Canadian travel. But we just started. And what we've seen, particularly in the last few weeks, is an increased appetite activation in sales pace out of Canada. Still too small to be broken out, as Stephen and Brian have spoken to, but very, very encouraging, even given the restraints that we have.

Right. And just finally, those options, what was the date that you were referring to the 4 million?

Brian?

Yes, that 4.8 million were exercised as of September 30, and then we received the cash on October 2.

No, I mean the next round of options. I think you were saying June, is it '21 or June '22?

That's the same options. So the options that we -- right. June of 2022 is the expiration date. The options that we issued in June of '20 had a 2-year life.

Yes, okay. Okay. So it's 4.8 million for June '22.

Well, not so -- just for clarity there, Martyn. People can exercise the options on a monthly basis. So every month, up until June of 2022, we can see exercises of options and the related cash from those exercises.

[Operator Instructions] Your next question comes from Alex Anastasiou from Telstra Super.

Hi. Can you hear me?

Just fine, Alex.

I just -- a good result this quarter. I just wanted you to distinguish between direct sales and distributor sales and how the company impacts direct sales or facilitates it.

So sure, in the United States and Canada, Visioneering operates its own sales force, and that would be the direct. So the sales professionals, the VTI employees, talk to optometrists, trains them up on the product, tells them why they should be using it, handles making sure that they have sample lenses and that sort of thing. We actually sell our lenses to a distributor in the United States, who then sells the products to the optometrists, who then in turn sells the product to the patient. But the distributor in the United States is really just a fulfillment company. They don't take on any actual sales function of interacting with the optometrists other than the optometrist buying and ordering lenses. Outside the United States, employing a model like that would obviously be prohibitively expensive. So outside the U.S., such as in Europe or in Hong Kong or Singapore, we have a broader relationship with the distributors that includes sales. So their salespeople are visiting with the optometrist and training them and making sure they have product to sell to their patients. Canada is also a direct sales territory for us, where the -- some of the folks who operate out of the United States directly for VTI serve the optometrists in Canada as well, given the proximity. Does that answer your question, Alex?

Yes. Can I ask a further question to that? As I understand, all contact lenses have to be prescribed by an optometrist, that's correct?

Correct. That is correct. Yes.

Secondly, are there large optometry groups where you can sell instead to individual practitioners but sell to the group head, who sanctions it across a wider network of optometrists?

Absolutely. And that could be in our future plans. As a smaller company, though, we have started off with a focus directly on small independent optometrists for the time being. And at some point, we may grow to the point of wanting to service the larger chains. But right now, I think that we're better served focusing on the small independents, where the economics are less of an important item for them and we can more intently focus on their training, and making sure that they have good success with product.

That's great. And also with the client base, do you have any contact whatsoever with the client base? And therefore, understand whether repeat orders or whether a client is stopping their uptake or not?

When you say client, do you mean the patient or the optometrist?

The patient.

Yes. So in the United States, we have health privacy laws that really limit or outright prohibit our knowing anything about the end user of the product. And when a contact lens is sold, and I should emphasize that the exact same contact lens, the exact same SKUs, are used between adults and children. So when a contact lens is sold, we do not know whether that is a child or an adult, and we also do not know whether it's a repeat order or whether it's a first-time purchase by that particular patient. So when we talk about repeat purchases, we are talking at the optometrist level. For us to get the granularity down to the patient level would require us to actually go into a clinical trial protocol, which is very expensive and time-consuming to do and not something that we would take on without really good reason.

And could you give us any feedback in the recent symposium you attended?

Yes. So recently, we presented new data at the Global Myopia Symposium. Just the fact that there was something called the Global Myopia Symposium really tells you that this is an area that is swelling in interest. It was the inaugural conference of the Global Myopia Symposium, and we presented our 5-year data there, which is a retrospective look at a group of -- for this one, it was 153 patients wearing NaturalVue lenses, 153 children wearing NaturalVue Multifocal lenses in the United States over 13 optometry practices. And what was important about this data is, first of all, it's a larger number than we've previously published. It was over a larger number of practices. It included new data on how fast the eyes were growing in length in these children. And the importance of that is that the reason a person becomes nearsighted is that their eye grows in length from front to back. And so slowing that growth is tantamount to reducing the amount of nearsightedness they develop over childhood. So all of that was new data to the market being presented at a conference that was being held for the first time. And all of that puts together, to say that, there's a lot of interest in this area. VTI is a very active participant in this area, if not a front leader in this area.

Thank you. There are no further questions at this time. That does conclude our conference for today. Thank you for participating. You may now disconnect.