Ladies and gentlemen, thank you for standing by, and welcome to the IRIDEX Fourth Quarter 2019 Earnings Call. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Leigh Salvo, with Investor Relations. Please go ahead, ma'am..

Thank you, Catherine, and thank you all for participating in today's call. Joining me are David Bruce, Chief Executive Officer; and Romeo Dizon, Vice President of Finance. Earlier today, IRIDEX released financial results for the quarter ended December 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 and the markets in which we operate. All forward-looking statements are based upon our current estimates and various assumptions.

These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place reliance on these statements.

For a discussion of the risks and uncertainties associated with our business, please see our most recent Form 10-K and Form 10-Q filings with the SEC.

IRIDEX disclaims any intention or obligation, except as otherwise 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, March 12, 2020.

With that, I'll turn the call over to Dave..

Thank you, Leigh. Good afternoon, everyone, and thank you for joining us today. The team at IRIDEX has made significant progress in our strategic shift to emphasize physician adoption of the MicroPulse transscleral laser therapy in their glaucoma practices.

In the second half of 2019, we realigned our sales processes, launched our revised MicroPulse P3 device and made operational improvements to significantly reduce costs and increase efficiencies.

I'm confident we will continue to build on these achievements and working with physicians to grow adoption of our unique non-incisional glaucoma therapy, which has been proven in over 140,000 procedures to date and over 20 peer-reviewed publications.

In the fourth quarter of 2019, our Cyclo G6 product family revenue grew 18% year-over-year to $3.7 million or 31% of total revenue. As we transition our sales model to drive probe utilization and simultaneously launched our revised MP3 probe, we shipped over 13,700 probes that quarter, representing an 11% year-over-year increase.

In the quarter, we also shipped 107 Cyclo G6 Glaucoma Laser Systems. This was a decline from 122 shipped in 2018, but in line with our expectation based on the shift in sales focus to probe utilization.

Our growth initiatives remain concentrated in expanding our share of the glaucoma treatment market with our unique non-incisional therapy and disposable probe business. Our execution of a shift in selling includes a validation process that drives physician confirmation of efficacy through their own experience.

We've launched over 120 validations targeting firsthand customer experience and the resulting outcomes and safety profile. This approach has been very well received in the clinical community as a means to gain confidence in the therapy and as a step valued toward true adoption.

Coupling this with a branding shift of our treatment name to MicroPulse transscleral laser therapy helped broaden the physician perceived applicability from its origins as primarily a later stage treatment option toward more moderate-staged glaucoma patients.

Our users are telling us they're very pleased with the results across the spectrum of moderate to advanced glaucoma patients. The launch of our revised MicroPulse P3 device is progressing well. We began commercial rollout of this probe in October 2019 and converted 100 doctors by the end of the year.

We're now passing the 50% conversion point in the U.S. and targeting completion by midyear. We publicly announced the rev 2 probe availability at the American Glaucoma Society meeting in Washington, D.C. last month as well as through a series of advertisements, e-mail promotions and social media. Reception of the probe has been very encouraging.

Thanks to the ergonomic improvements in procedure simplification embodied in this revised probe, we're seeing heightened interest by the glaucoma and comprehensive ophthalmology community in our therapy and that is confirming to us there is a significant need for this effective, safe and durable non-incisional approach to manage the runway of their glaucoma patients.

We believe continued physician education, training and the opportunity for hands on validation of the procedure benefits will result in broader adoption of our therapy by ophthalmologists across the full range of moderate-to-severe glaucoma patients. Turning to our retina business.

Our comprehensive medical and surgical platform continues to hold a leadership position in the treatment of a broad range of retinal diseases. However, that market remains competitive and price sensitive. Revenues in the fourth quarter increased approximately 8% over the third quarter and decreased 5% compared to the prior year.

We remain committed to allocating appropriate resources and investments to maintain this segment.

For example, in Q4 and earlier this quarter, we launched improvements to a few of our key delivery devices in response to user feedback to maintain the preferred position IRIDEX has enjoyed through decades at the forefront of retinal disease laser treatment.

We would like to take a minute to discuss the COVID-19 outbreak and its potential impact on our business. We entered 2020 with great momentum, generating confidence in our long-term growth opportunity. That has not changed despite the turbulence caused by the COVID-19 virus and numerous business environments where we operate and sell today.

Here's what we do know. We have a stable supply chain to meet anticipated demand and the operational efficiencies and capital resources to support our business during this period.

Today, we're faced with challenges of a highly variable and changing business landscape, including travel restrictions, limited hospital access and cancellation of industry and physician meetings. As a result, the duration and any sustained impact on our business is very difficult to predict with any degree of confidence.

Our development and manufacturing partner for new laser systems is in Wuhan, China. And has experienced shutdowns and project delays as the Chinese government has acted to restrict transmission of COVID-19.

They have come back online this week, and we're working closely on plans to mitigate delays with a goal to achieve product launches later this year. Historically, IRIDEX has offered full year guidance at this time of the fiscal year.

As our Board and management team assessed the timing and range of possible outcomes from impacts of the COVID-19 outbreak and related uncertainties, it became clear that various scenarios would result in guidance ranges too wide to be meaningful. Therefore, we've made the decision to defer full year 2020 guidance.

We remain as confident as ever in our long-term growth opportunity, and we'll continue driving operational excellence.

During this outbreak period, with a priority on limiting risk for our customers and employees, we are actively adjusting our business methods to remain in close contact with our customers, employing more digital and virtual meetings, selectively visiting customers where accessible in order to continue to drive forward the momentum we achieved in the later part of 2019.

We believe normalcy will eventually return to the world as it works through the COVID-19 outbreak. And we will accelerate our strategic activities to increase demand for our non-incisional glaucoma therapy and deliver long-term growth for IRIDEX as that emerges.

Now I'd like to turn the call over to Romeo to discuss our fourth quarter financial results in more detail.

Romeo?.

Thank you, Dave, and good afternoon, everyone. I'll begin with an update on the G6 business. In the fourth quarter of 2019, G6 revenues increased approximately 18% compared to the fourth quarter of 2018. We shipped 107 G6 systems in the quarter compared to 122 in the prior year period.

During our previous call, we disclosed that we have discontinued the laser advantage program in the second quarter, and as a result, a reduction in G6 system shipments and the associated volume of initial probe shipments recognized with those systems.

Despite the reduction of 12% in G6 system shipments, we recognized an increase in G6 system's revenues of 15% due to higher ASPs. On the G6 probe side, we shipped 13,700 probes in the fourth quarter of 2019 compared to 12,300 probes in the prior year period, an increase of 11%.

The probe ASPs decreased slightly on a global basis compared to the third quarter due to a higher portion of sales for distributors outside the U.S. For our retina business, revenue in Q4 was approximately 46% in the U.S. and 54% outside the U.S. This compares with 51% in the U.S. and 49% outside the U.S. in the prior year Q4.

Total revenues for the fourth quarter of 2019 were $11.8 million, an increase of 3% compared to the fourth quarter of 2018. The increase is due primarily to the increase in our G6 revenue offset by a decrease in our retina products. In the fourth quarter of 2019, retina product revenues decreased 5% from 2018 to $6.2 million.

Other revenues, which includes royalties, services and other legacy products increased 3% to $1.9 million in the fourth quarter of 2019 compared to 2018, mainly due to an increase in services and royalty revenue. Gross margin in the fourth quarter of 2019 was 41.2% compared to 41% in the fourth quarter of 2018.

Improvement in gross margin was due primarily to a decrease in manufacturing overhead spending offset by the increase in manufacturing variances and a shift in geographic mix. Operating expenses for Q4 2019 decreased 15% from $7.6 million to $6.5 million compared to 2018.

Operating expenses in the quarter reflected a reduction in costs associated with lower headcount and a reduction in our sales and marketing programs, offset by an increase in development expenses and commissions.

Higher revenue and lower expenses combined to reduce our operating loss in the fourth quarter of 2019 to $1.6 million versus $2.9 million in the prior year. From a balance sheet perspective, we ended the fourth quarter of 2019 with $12.7 million cash and cash equivalents, and we continue to carry no debt.

We believe our existing cash and cash equivalents, plus our available line of credit will be sufficient to meet our anticipated cash needs over the next 12 months. With that, I'd like to turn over the call to the operator for questions.

Operator?.

[Operator Instructions]. Our first question comes from Jon Block with Stifel..

Dave, just the first one, taking more of a clarification, the 50% and 100% conversion, I believe, that you alluded to for P3, can you run back the timing on that? I sort of missed you when you called out the timing of those conversion rates?.

Sure. We started in October of 2019 with a goal by the end of the year of achieving conversion with our first 100 doctors, and we achieved that. Now we're at about the 50% point of conversion here, virtually as we speak today. And the goal is to carry that through and complete conversion to, say, the 95% level by the end of the second quarter..

Okay, great. And then can you give us sort of the base for that? In other words, when you're talking about 50% today, 95% by the end of the second quarter.

What would base of active accounts are you running that off of?.

In the U.S., there's approximately 500 active accounts. And so we've been moving through that group. It moves - we're looking at it in terms of probe volumes. There's obviously different probe volumes spread across that user base. And so we're focusing on moving everyone there eventually by the middle of the year.

And based on the number of sites, plus their average usage, we're passing the 50% point in probe volume..

Okay, got it. And maybe if you can talk about it at a high level, because I know it's still early to your point on the conversion, but what are you seeing in those accounts? Are you able to put any numbers to it? Hey, before their utilization was X, now it's Y, or even anecdotally, you're seeing more cases for mild to moderate.

Maybe if you can just provide some color around that?.

Sure, Jon. So it is too early to try to get quantitative in terms of - before it was this and now it's that. The typical process is the order probes, and we'll do the conversion, and they'll have some number of probes. And then at some point, they will use those up and reorder.

And so it really is a bit too early to try to look at that order rate data, and say, "look, here's the result of that." Anecdotally, we are finding universal acceptance and preference for the improvements that come with that probe, and that just drives confidence in a physician's ability to perform and get consistent results.

And those are the things that will lead to greater usage. The average user looks at approximately 30 days post-op before they decide what is the outcome that I expect from this. And so to get a number of patients over that threshold and have a look at a true representative sample, it just takes time. And so we're still early in that.

But anecdotally, it's a big success and numerous sites are saying I can - a combination of the access and the consistency makes it just an easier procedure to perform. And therefore, they express the willingness to do more, and we'll keep a close eye on the numbers and try to confirm that.

Now at the same time, we're taking the opportunity to try to educate them on clinical studies and evidence that is in the literature now on more moderate stage patients.

And so that, coupled with an easier probe to use and what we believe will be improvements in consistency of outcome, we think will help drive that adoption and broaden the profile of patients..

Okay. And maybe just a couple more for me.

Romeo, is there anything to call out on an ASP basis or gross margin from a gross margin perspective on the new probe? Or is it just more about ease of use? I just want to make sure we're level set on any ASP or gross margin benefits associated with P3?.

No, the market we've been selling is the same. It's just generating the same comparable margins as the rev ones..

Okay. And Dave, last one, just to take a step back, and it's been quite a whirl in few days and a few weeks with COVID-19. Maybe, if you can just talk about the running in the past 2 to 3 weeks, the world just seems to be a very different place today versus even where we were 7 or 10 days ago.

So were you seeing any headwinds in early to mid-February? Has the problem just started to become more acute in the past week or two? And I'm curious, is the issue today with the ASCs? Or is it more around some of the other items that you alluded to, i.e., travel restrictions for sales reps or symposiums and conferences being canceled? If you're able to detail the difference..

Yes, it is really a moving target. The - as we - as I expressed in the comments, the run end to the year gives us a lot of confidence. We had momentum. We had very positive response to the new probe. And even at the AGS meeting toward the end of February was well attended.

The booth was well attended, and our opportunity to have conversations and really establish a commitment to do validations with new customers, lead count was up by 100% compared to prior AGS. So in that time frame, there was still a fair amount of activity. And obviously, that demonstrated the interest and demand for the new probe.

It literally probably started later in February, where there was starting to be some talk about restrictions on travel beyond the China connection. South Korea started to exhibit more cases and restrictions kicked in there.

And then obviously, as Italy and Iran kicked up, other places started to add first travel restrictions, and then shortly after everything from nobody but doctors and patients exiting hospitals to if you travel to regions in the last two weeks or exhibit any disease symptoms, you're not able to come in. Less so in the United States.

And - but it's - I would say, right now, it's probably more focused in hospitals and hospital chain institutions as opposed to ASCs. But it's all anecdotal at this point. There's not a lot of statistical information around it.

We've continued with conversations, and we see business activity continuing even in hard hit places orders and activity is continuing. It's just hard to have much prediction around at what rate, and more importantly, how long that suppression of activity continues and how fast it comes back..

And our next question comes from Scott Henry with Roth Capital..

I guess I'll just follow-up quickly on the COVID-19 line of questions. Just curious your take since you're closer to it than I am.

I guess for starters, do you think there's any changes, and I guess it's all in realtime, in patient flow? I mean, are we seeing the same number of patients coming through the offices? Or is perhaps that's pulling back a little bit as people are staying away from more elective procedures? And I don't know if it's quite elective, but just curious to get your thought on that..

We don't have very good data on it. These glaucoma procedures are - they're necessary, but they're not urgent, in the way, say, cardiac intervention for a stent would be.

But that said, it's a progressive disease and the decision to take the next step to control intraocular pressures and prevent the or reduce the progression of the disease can't wait forever.

So we aren't anticipating any significant change in the demand for procedures in, call it, the longer term, but it's very difficult, and we just are trying not to speculate and anticipate on the timing of return to normalcy or the rate at which it comes back. Those are hypothetical situations, and we just can't comment on the hypothetical right now.

But to your earlier question, it is absolutely anecdotal at this point and probably regional in its impact. There are certain areas where we don't hear much impact at all, both geographically in the United States and in various countries and continents around the world..

That's helpful.

And I guess, from the other side of the equation, how about for the sales rep? Will they even let the sales rep in? Does the sales rep still want to go into these places? I mean, just what kind of interaction? And I guess, it's all short term, but curious your take on that from the reps perspective, accessibility wise?.

Yes, different - obviously, different personalities react differently. Our - I'll speak in the average.

In the average, we're still seeking ways to get to institutions and continue, for example, if we have an active validation started and there are patients scheduled, obviously, we want to be able to support those cases, subject to anything that comes up that patient cancellations or limitations on access.

And there are anecdotal situations where ASCs are limiting access for sales reps and hospitals are limiting access for sales reps.

But in general, it is more driven around trying to continue the processes and the selling processes that we execute our four step process of appropriate targeting, driving a commitment to the benefits we deliver, and then validating those benefits on representative sample of patients.

And then in the last stage, which we call conversion, is working with them, so that when they're seeing patients in the lane, they're offering this non-incisional therapy as an option or even a recommendation for a given appropriate patient..

Okay. And in the prepared remarks, you spoke a little bit about the supply chain. I just want to make sure I understood that. My net takeaway was that there don't appear to be any issues in the supply chain right now. And if anything, it should be getting better, certainly in Wuhan.

Am I interpreting that correctly?.

Yes. We don't see anything today that is causing us concern over having product to supply against demand. Our partner in Wuhan is for future products. So we aren't reliant on them for existing product.

And if there are delays associated with bringing that new product to market, we simply will increase the supply from our existing suppliers on current products. So we don't anticipate demand. We don't anticipate demand exceeding what we supply, but it is a very fluid situation.

So it's difficult to be absolute, but we have some confidence in that area right now..

Okay. And obviously, you've got the new probe out there right now. But what are some of the other new products you're looking at later this year? I don't recall you....

Well, we have talked about new laser system platforms in the past and targeting launching those this year. Our initial plans were around mid-year. We know we're experiencing some delays because the partner was basically unavailable for something on the order of 60 days as the governments in the Wuhan area shutdown activities there.

So they've worked through that. They're back at the offices, and they are opening, in general. It appears, opening up in China. It's specifically in the Wuhan area, which was ground central for the initial outbreak. And so we're optimistic that from here forward, we're in recovery of schedule mode, and we're working to figure that out actively.

So the goal would be new laser systems of - we were focusing on the various frequency systems that we offer today, 810, 532 and 577..

Okay. Great. Final question, and it's just for clarification. Did you give a retina number for the quarter? I don't think I took that down..

For the quarter, 46% was in the U.S. and 54% outside the U.S., it was....

Yes, retina product revenue in the fourth quarter was $6.2 million..

Which was a pretty good number.

How do I think about that going forward?.

Retina is capital equipment. It's concentrated toward the ends of the quarters. It's concentrated toward the ends of the fiscal year, and it's price competitive, and it's variable. And we worked hard and did a good job at pursuing and closing the business. And we were feeling confident that we're stable in that space.

We'll continue to make some judicious investments to improve products and particularly some of the delivery devices, where feedback has said, we want these improvements. And so that's what we're alluding to some of the things that we released in the fourth quarter and then earlier in the first quarter to supplement and support that.

We do have strong market position and a reputation build up over essentially the life of the company. And feel confident that we can represent a strong product offering and compete well. But it is price-sensitive and can be challenging at times, ebbs and flows. We were pleased with the fourth quarter, and we'll compete hard going forward in 2020..

Thank you. And I'm showing no other questions in the queue. I'd like to turn the call back to Dave Bruce for closing remarks..

Okay. Thank you, Jon, and Scott, for those questions. And thank you, everyone, for joining the call today. We look forward to updating you on our progress as we continue to execute on our initiatives. And hopefully, that will be short-lived impact to the entire marketplace in the world with the COVID-19 outbreak. And good luck to you all..

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day..