Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2019 IRIDEX Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Leigh Salvo. Thank you. Please go ahead, ma’am..

Thank you, and thank you all for participating in today’s call. Joining me are Dave Bruce, Chief Executive Officer; and Romeo Dizon, Vice President of Finance. Earlier today, IRIDEX released financial results for the quarter ended September 28, 2019. 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, the markets in which we operate, our guidance for 2019 and our plans to provide public updates on any of these matters.

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 10-K and Form 10-Q filings with the SEC.

IRIDEX disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, November 7, 2019.

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

First, drive deeper physician adoption of our MicroPulse transscleral laser glaucoma therapy. Transitioning this procedure to a mainline tool for managing long-term outcomes in glaucoma patients; second, identify and execute on strategies to support our retina laser business; and third, reduce our cash burn.

During the third quarter, we made progress on each of these priorities, and I’d like to share some of the highlights during our call today.

As I noted on our last call, our immediate market opportunity is with the 4 million worldwide diagnosed glaucoma patients that have moderate to advanced disease and need to consider moving from eye-drop medications to direct therapies and surgeries.

Our MicroPulse procedure directly addresses this significant segment of the market with the only non-incisional and repeatable alternative to manage intraocular pressures.

Our initial focus is on leveraging our significant worldwide Cyclo G6 system installed base, which has now grown to more than 1,600 sites worldwide to drive increased adoption and utilization, ultimately, long-term sustainable growth for IRIDEX. During the quarter, Cyclo G6 product family revenue was $3 million, a 3.6% year-over-year increase.

As we signaled on our last call, we did experience flattening of growth in this segment of our business following the discontinuation of discounted and bundled systems and pro packages.

As a result, we saw a reduction in G6 system shipments, coupled with the reduction in the associated volume of initial probe shipments that were recognized with those systems. Encouragingly, we still posted a 12% increase in probe shipments, and we’re pleased that new users and reorders compensated for lost package volume.

However, the combination of reduced volume packages and current inventory usage in anticipation of rollout of our improved glaucoma probe has temporarily impacted overall probe growth. Accordingly, we’ve adjusted our full year probe shipment guidance downward to 53,000 to 56,000, which at the midpoint reflects year-over-year growth of 20%.

We maintain our previous guidance for Cyclo G6 systems and for total 2019 revenue of $41 million to $44 million, and we expect the end of year performance of the retina business will make up for any reduction in probe revenue. In the third quarter, we introduced our new glaucoma sales process focused on physician adoption and procedure growth.

We’ve started tracking initial sales process activities.

And while it’s too early to assess sales metrics, our sales team has initiated numerous validations and are beginning to complete them, demonstrating patient result data that are convincing doctors to move forward with conversion to our MicroPulse transscleral laser therapy in their appropriate patient base.

We have high confidence in our ability to convert physicians to MicroPulse therapy. And as a result, capture significant share of the target patient base. In large part, this is because the body of clinical evidence continues to expand. Studies to date have been conducted worldwide.

Accumulatively, there are more than 70 poster and presentations at global industry society meetings and 19 peer-reviewed publications that provide evidence of the benefits of the technology’s strong efficacy, durability and safety profile in treating a broad variety of glaucoma severities and patient types.

One was published this quarter in the Journal of Glaucoma. The first specifically assessing use on patients with good vision and a range of mild-to-severe glaucoma, demonstrating that our MicroPulse laser therapy delivered large reductions in intraocular pressure without significant loss in visual acuity at every postoperative follow-up point.

And concluded it was an effective alternative that could be offered to patients prior to incisional glaucoma procedures. This study demonstrates the effectiveness in benign safety profile of the technology, validating potential use on earlier stage glaucoma patients.

Other recent clinical highlights include seven presentations centered around the efficacy and safety of MicroPulse therapy at the recent ESCRS meeting in Paris.

And during that meeting, IRIDEX also hosted a seminar that drew 340 attendees with five key opinion leader speakers who discussed a variety of patient profiles treated in their practice with consistent successful results using MicroPulse transscleral laser therapy.

We did something a bit different at last month’s American Academy of Ophthalmology Annual Meeting in San Francisco. 15 key opinion leaders volunteered to cover nearly the entire open exhibit hours of our booth, each spending an hour answering physician questions.

It was encouraging to see the steady flow of interested physicians and gratifying to hear the depth of topics and true commitment to our product benefits during these conversations. Also in the third quarter, we completed the initial clinical experience with our improved version of the MicroPulse P3 probe.

The updated probe is more ergonomic and intuitive, resulting in simplified technique and consistent energy delivery. Initial users of the probe reported very positive experience in their cases during the quarter. As a result, we are moving ahead with a broader commercial rollout in the U.S.

with careful attention by our team on training users on the enhanced features, techniques and benefits. This also gives us an opportunity to update customers on recent clinical publications supporting broader patient selection criteria and expanded utility.

I believe the introduction of our ergonomically-improved probe will be a key factor in driving physician utilization. Turning to our retina business. Revenue in the third quarter grew 10% over the second quarter and were consistent with the prior year after adjustments for unusual items in that quarter, which Romeo will cover in his remarks.

While it’s a price-competitive and lower margin segment of our total revenue, the retina business remains more than half of our overall revenue and a significant contributor to scale and covering our operating expenses.

Importantly, our strong historic reputation in that market still allows us to achieve premium pricing and preferred vendor status among our large worldwide customer base, and we’re committed to continued judicious investments and resource allocations to preserve this franchise.

We continue development of our new laser systems and are targeting initial launch in mid-2020. And we’ve identified and are implementing improvements to our delivery devices attached to those laser systems that’ll be rolled out in the next couple of quarters. Finally, our priority of addressing cash burn.

In the third quarter, we made substantial progress toward improving cost efficiencies that we are confident will provide us with additional flexibility to achieve our growth objectives in 2020.

We carefully examined each area of our business to achieve cost savings, but still fully support our growth initiatives with the goal of significant spending reduction going forward to 2020 and beyond.

The 20% year-over-year reduction in operating expense shown in our third quarter results demonstrate the success and clearly extends our operating runway. We’ll continue to implement targeted savings in coming quarters. In summary, the value potential for IRIDEX remains clear. Our team executed our initial objectives.

First, refocus our sales process on adoption and procedure growth; second, continue enhancements to our retina franchise; and third, significantly reduce our operating expense to assure our ability to execute the growth plan. Now I’d like to turn the call over to Romeo to discuss our third quarter financial results in more detail.

Romeo?.

Thank you, Dave. Good afternoon, everyone. IRIDEX reported total revenues of $10.7 million for the third quarter of 2019, up 10% from the second quarter but down 5.8% from $11.3 million during the same period a year earlier.

Modest growth in sales of our G6 products and other revenues was offset by a decrease in sales of our retina products impacted by non-recurring revenue items last year. In the third quarter of 2019, as Dave noted, Cyclo G6 products revenue was $3.0 million, an increase of approximately 3.6% compared with third quarter of 2018.

This increase in revenue was driven primarily by growth in our G6 probe shipments, which more than offset the decline in our G6 systems placement. During the third quarter of 2019, we shipped approximately 11,600 probes and placed 82 systems. This compares with 10,400 probes and 117 systems in the same period a year earlier.

As we noted on our last call, we ended the discounted sales incentive programs in the second quarter of 2019, and as a result, experienced an anticipated decline in G6 systems placements.

The revenue associated with these system placements, however, declined only 12% because of the average selling prices improved significantly compared to the prior year. Revenues from our retina business in the third quarter was $5.8 million versus $5.2 million in the prior quarter and versus $6.7 million in the third quarter of 2018.

As I indicated earlier, the relative decline in revenue was driven primarily by unusually higher sales of our retina products during the third quarter of 2018. We booked approximately $1.3 million in orders from our Chinese distributor, ahead of the pending U.S. tariff increases compared to approximately $0.4 million in the third quarter of 2019.

In addition, last year’s third quarter retina revenue also included significant backorders volume following the FDA clearance of the voluntary recall of our LIO products. Looking more specifically at our third quarter 2019 revenues geographically, approximately 59% of our Cyclo G6 product revenues was in the U.S.

and 41% outside the U.S., consistent with third quarter of 2018. In our retina business for the third quarter of 2019, 52% was in the U.S. and 48% outside the U.S., also the same as last year. Other revenues, which includes primarily services and royalties, was $1.9 million versus $1.8 million in the same period of the prior year, an increase of 7%.

Moving down to income statement. Our gross profit for the third quarter of 2019 was $4.3 million, a 40.2% gross margin compared to $4.6 million, which is a 40.4% gross margin in the same period of the prior year. The small decrease in gross margin is primarily due to lower manufacturing overhead absorption.

Reducing operating expenses has been a focus of management, and in the third quarter, decreased to $6.1 million compared to $7.6 million in the same period of the prior year.

The decrease is attributable to a reduction in headcount-related costs, lower administrative expenses, and efficiencies-gaining adjustments to our sales, marketing and engineering programs, while we continue to manage and reduce our operating expenses.

Historically, our entrances in the fourth quarter comes in higher as a result of exhibiting at major trade shows, such as the American Academy of Ophthalmology and the European Society of Cataract and Refractive Surgeons and also higher sales commissions at year-end.

Our operating loss in the third quarter of 2019 was $1.9 million compared with operating loss of $3.1 million for the same period of the prior year. Now turning to the balance sheet. We had cash and cash equivalents of $12.9 million, no debt and working capital of $21.9 million. Turning to our guidance for the full year of 2019.

To summarize Dave’s commentary earlier, we are reducing Cyclo G6 probe shipments from 58,000 to 63,000 down to a range of 53,000 to 56,000, which at the midpoint, reflects a year-over-year growth of 20%.

The reduction in guidance reflects the impact of our sales transition towards reorder growth and acquiring new customers, along with customer inventory adjustments resulting from the rollout of updated glaucoma probes in the United States. We confirm our expected Cyclo G6 system shipments in the range of 375 to 425.

We also reiterated our revenue guidance of $41 million to $44 million for the year and anticipate retina revenue will offset reduced revenue from the lower probe shipments. With that, I’d like to turn the call over to the operator for questions.

Operator?.

[Operator Instructions] And our first question is from Jon Block from Stifel. Your line is now open..

This is Tom on for Jon. Thanks for taking my questions.

So how is the initiative with moving G6 throughout the continuum of care going? And can we maybe talk about where you are with moving into more moderate and mild procedures?.

Sure. Tom, this is Dave. The bulk of the clinical evidence that’s coming out now is much more oriented toward the moderates, those people who are pretty incisional, as we call it, people who are failing drops and pressures are rising. And that also is reflected in the conversations that we were having at the trade shows that I referred to.

There’s this perception now that there really is an opportunity with this benign safety profile to treat patients and even manage them with multiple treatments over a multiyear period.

And our opportunity really is to cement that, deliver that message to our existing users who maybe started off in more advanced stage, and are looking for the evidence to come further forward.

But it’s a process where we’re using the clinical evidence, key opinion leaders, presentations and just the experience that the individual sites are having and a benign safety profile and urging them to move forward. We don’t see barriers to that other than the conservative and the need to convince with evidence that it makes sense.

And then people have that experience and are happy with the outcomes and start selecting a broader set of their patients..

Great. That’s really helpful color.

And I guess, on the G6 consumable growth, can you talk about what you’re seeing from a same-store sales basis versus that of the new accounts?.

Yes. We focus on identifying the incremental opportunity, and that is with both existing customers, but also new opportunities. So those people that already have systems, obviously, are easier to engage and move forward, but the process is similar with both in that.

And our goal is really to work with them to validate on a broader set of patients and let them see the data from patients and experience in their own hands and conclude that, yes, the results are what they expected and desired to see and then start selecting patients in that broader pool in earlier stage.

And it really is a balance of both existing and new customers. The new customers we target really around who’s receptive to these benefits, and then we will focus on doing that validation process with them.

So we’re seeing relatively equivalent, I guess, would – is the short answer to your question, relatively equivalent response from existing users who might be later stage and new users who are interested in evaluating the technology..

Got it. And I guess, just quickly shifting gears a bit to OpEx. You made really good progress reducing it year-over-year.

Can you maybe just provide some additional color on where exactly those savings might have come from?.

Yes. As we talked about, we looked across the different areas of the business. Starting with what do we need to execute the growth process, and are we fully supporting that? And then in what areas can we reduce those expenditures? And we obviously looked at staffing, and we made some adjustments there.

We made adjustments to infrastructure, and we continued to outsource production of certain elements in our product line, and we had headcounts associated with those. That production reduced and went across all the functional areas. So it really wasn’t specific to any one area. I mean, we looked at our marketing budget.

We are looking at what does it take in the years going forward. As much as we enjoy trade shows and the doctor flow through those and our ability to interact with them, frankly, the attendances have gone down at the various meetings and our need, for example, in size of booths is something that we can look at.

So I mean, all the areas where you’re spending dollars were looked at, and we’re comfortable that we’ve made adjustments that get us the runway we’re looking for, but also still fully support the growth opportunities..

Great, thanks..

Thank you. Our next question is from Scott Henry from Roth Capital. Your line is now open..

Thank you and good afternoon. A couple of questions. I guess, first, on the G6 probes in the quarter.

Do you think there’s much impact from customers holding off purchases awaiting the new product?.

These transitions are difficult to forecast accurately. We don’t have or haven’t had detailed data around customer inventory.

And as we had both purchases in the past associated with systems or even just end of quarter bulk purchases, knowing what – where those inventory levels are and what it takes to burn those off, it’s just difficult to be very precise with those.

So that said, we are working with customers, and we’re going side-by-side in conversions to the new probe so that, as I mentioned, we can both train them on the new techniques and protocols, but also take that opportunity to update them on the clinical data that has come out since we may have spent significant time with them in the past.

And I’m sure there’s a component of let’s work off the existing probes in anticipation of the new probes. But beyond that, it’s difficult to predict, but as we looked at the usage, it became clear that our forecast to the end of the year was higher than we anticipated.

And as we looked at our guidance, during the last conference call, we brought down both the revenue guidance and the Cyclo G6 systems guidance, but left the probe guidance the same. And that might have been optimism on my part as the new guy, but as we’ve developed the experience, we refocused and made that adjustment.

But still, it’s a 20% improvement over last year’s probe shipments, and we feel that’s a pretty good performance given the comparisons to high probe counts with systems that are – were happening in the second half of last year..

Okay. And when – by my math, the implied guidance for Q4 G6 probes is I think, 13,200 to 16,200. I guess, first, is that correct? Am I using the right numbers? Second, those numbers look pretty good. And I guess – I don’t know if there’s a question involved with the second part.

And third – well, first, perhaps, can you confirm those are correct? I guess..

I mean, we didn’t do the math on the front and the back end. So – but I believe that – I believe in you, Scott. So....

Okay. Fair enough. So the third part was, that’s a pretty big range for one quarter, 3,000 probes.

Can you talk about kind of some of the levers that could push it from one end to the other, because it’s a little bit larger of a range than you would typically give for one quarter?.

Well, it’s plus or minus 10%, around the middle. And as I was mentioning, it’s just tough to predict in these transitions where inventory levels are, how much of the burn off occurs in one or two quarters versus what may carry through the full quarter. So we felt it was prudent to give a plus or minus 10% range at this point..

Okay. All right, fair enough. And I guess the final question....

Scott. This is Romeo. On your first question, we’re right on it, the 13,000 to 16,000, on the range..

All right. Great. I guess, is a final question. Expenses have already been cut back pretty well, and you’re talking about cutting them further. If the – I think the loss was about $1.7 million in Q3. If you can keep that rate, that gives you at least maybe six quarters of cash.

The question is, I mean, are you hoping to kind of making a run at breakeven with the cash you have on hand? Because when we look at the numbers, if you’re still growing and you’re still cutting costs, 6 quarters out, you might be cash flow even, you might be positive. Just curious your thoughts on that..

Well, we’re not ready to give guidance. And so I’m not going to give a specific answer to when.

But our goal in looking at the cost structure and giving ourselves the runway to execute the growth plan was specifically targeted at getting through this transition period, demonstrating attraction in a rate of adding new customers and adding same-store sales growth and not be distracted by justifying a raise of any kind.

So our goal is to execute, make the cash last, and then as the effectiveness becomes clear in our adjusted sales process, we’ll have a better idea in the future..

Okay. Fair enough. And I guess, one final question. When we look at Q4, I think you talked about some orders for retina slipping into Q3 ahead of the tariffs. Now should we look – expect a decline in retina in Q4? I mean, that would be the natural expectation..

So the comment about the tariffs, that was last year. That’s why third quarter of 2018 was so high that we got a relatively large order. So we had a 10% increase in retina revenue in the third quarter of this year compared to the second quarter of this year, and we also think that we’ll be reasonably strong with retina.

As we’ve said, we think that will offset any reduction in revenue from probes that came from the reduced guidance. And so we maintained our guidance for the full year on total corporate revenue..

Well, then perhaps I’ll ask the question in a different way. Retina looks pretty strong for Q3, and it sounds like it’s going to continue.

Anything going on there that is making that? I mean, just kind of reaching finally coming off the bottom, but how should we think about that franchise going forward?.

Well, it’s a competitive space, and we have a great name in that space and a strength, and we have opportunities to capture business. Gross margins are lower in that segment of our business.

And as I mentioned, we have some opportunities to improve some of our delivery devices that makes our offering marginally more attractive, and we’re trying to take advantage of that..

Great. Well, thank you for taking the question..

Thank you. At this time, I’m showing no further questions. I would like to turn the call back over to Dave Bruce for closing remarks..

Thanks, operator, and thank you all for joining the call today. We look forward to updating you on our progress, and we will stay focused on executing our growth plan. Thanks, everybody..

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect..