Ladies and gentlemen, thank you for standing by and welcome to the First Quarter 2020 IRIDEX Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session.

[Operator Instructions] I would now like to hand the conference over to your speaker today Leigh Salvo, Investor Relations. Please go ahead ma'am..

Thank you and thank you all for participating in today's call. Joining me are David Bruce, Chief Executive Officer; and Jim MacKaness, Interim Chief Financial Officer. Earlier today IRIDEX released financial results for the quarter ended March 28, 2020. 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 does not place 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 live broadcast today May 11 2020.

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

Thank you, Leigh. Good afternoon and thank you all for joining us. Our last earnings call was only 60 days ago, but during that short time so much has changed. The COVID-19 pandemic has affected us all in many ways.

We are especially appreciative of all who have been working tirelessly to deal with the COVID-19 incursion and continue to be inspired by their dedication, skills, and compassion of everyone from first responders to the medical staff to care facility workers who selflessly take on the personal risk of returning to the front lines every day.

I would also like to thank the IRIDEX team as we all reacted quickly in March to shift our headquarters operation to function remotely our sales and marketing activities to be effective in a virtual environment and coming together as a team showing dedication and flexibility under extraordinary circumstances.

For today's call I'd like to flip the order of discussion. I'd like to introduce to you Jim MacKaness who rejoined IRIDEX in March as Interim CFO who will start with a brief review of our first quarter performance. Jim was previously the company's Chief Operating Officer from 2012 to 2015 and also served as CFO from 2008 to 2012.

We're happy to have him back and value his expertise in these unprecedented times. Following Jim's remarks, I'll comment on our response to the pandemic and our commitment to supporting physicians in glaucoma patients and current trends in our business plus our positioning for the long-term. With that, I'd like to turn the call over to Jim..

Good afternoon everyone and thank you Dave for the warm welcome. We find ourselves in very unusual circumstances with the advent of COVID-19, but I'm excited to be part of the IRIDEX team again.

I've always thought the Cyclo G6 product line represents a great opportunity for the company and have been impressed by the steps Dave and the team have taken in driving adoption and explaining the associated patient benefits to glaucoma physicians around the world. With that said, I'll now turn to our Q1 results.

Despite a strong start to 2020, as the COVID-19 pandemic began to spread rapidly throughout the world and many regions began implementing strict guidelines for deferrable procedures consistent with many other medical device companies, we too were impacted.

Total revenue was $9.0 million, down from $10.6 million or 15% from the first quarter of last year. However, we should point out that revenues from our G6 probes increased $0.2 million over the comparable period last year.

We shipped 13,050 Cyclo G6 probes in the quarter and although that is lower than the 14,000 number shipped in Q1 last year, repeat customer sales were up as growing physician adoption offset the bulk discount placements offered last year.

We have previously mentioned that the move away from bulk discount placements towards probe utilization was part of our change in sales strategy and this shift has impacted our G6 system sales.

We shipped 38 G6 systems in the quarter compared to 114 in the prior year period, the reduction being partially due to the shift in sales strategy and partially due to the COVID-induced capital purchase deferrals. Overall, revenues for the Cyclo G6 product family was $2.9 million down 6% compared to the first quarter of 2019.

The majority of the decline in total revenues compared to last year was experienced in our retina business down 25%. It should be noted that a large portion of our retina business is for the sales of capital equipment and these purchases tend to be back-end loaded in a quarter and a significant portion were deferred due to COVID-19.

Other revenues, which include royalties, service and other legacy products, increased 4% to $2.0 million in the first quarter of 2020 compared to 2019. Gross margin in the first quarter of 2020 was 43% compared to 40% in the first quarter of 2019.

The increase in gross margin was primarily attributable to a favorable shift in product mix to per procedure products and discontinue the bulk discount placements of the Cyclo G6 product offering, which is our long-term strategy; and a decrease in manufacturing overhead spending partially offset by an increase in manufacturing overhead variances.

Operating expenses for the first quarter of 2020 decreased 24% to $5.6 million compared to $7.3 million in the same period of the prior year. The decrease in operating expenses was the result of significant cost-saving measures implemented in the second half of 2019.

The benefits of these cost-saving measures showed up in the narrowing of our operating loss even with reduced revenues. In the first quarter of 2020, we recorded a loss of $1.7 million versus $3.0 million in the prior year and the cash used in our operations for Q1 2020 was $1.5 million for the quarter compared to $3.8 million this time last year.

From a balance sheet perspective, we ended the first quarter of 2020 with $11.1 million in cash and cash equivalents and we continue to carry no debt. Subsequent to the quarter end, we received a $2.5 million loan under the U.S. Treasury Department's Paychecks Protection Program.

We welcome the intended purpose of the program, which has enabled IRIDEX to retain our team on payroll during the severe activity dislocation brought on by COVID-19 and we intend to use these funds for payroll to bridge the period until activities begin to recover and we will monitor and adjust our business activities as the U.S.

and countries worldwide emerge from the pandemic. Which brings us to guidance. We continue to believe that with COVID-19 outbreak and related uncertainties create a broadly variable business environment for us and as a result we are unable to provide a meaningful guidance range for 2020. And with that I'd like to turn the call back to Dave..

Thanks, Jim. Prior to the onset of COVID-19, we saw a very encouraging momentum in the first couple of months of 2020 as the U.S. rollout of our revised MP3 probe expanded the interest of glaucoma physicians and our non-incisional MicroPulse laser therapy.

As we noted in our Q4 earnings call in early March, interest at the American Glaucoma Society meeting doubled versus last year's meeting. Previously, dormant customers were reengaging with us attracted to the improvements embodied in the revised probe and we had surpassed the 50% conversion of sites in the U.S.

and we're well on our way to reaching our goal of completion by mid-year. It's important to keep in mind that glaucoma is a progressive disease without a cure whose treatment paradigm requires a sequence of increasingly invasive approaches to slow the rate of disease progression.

Therefore, the glaucoma procedures deferred because of COVID-driven restrictions still need to be performed and within an acceptable timeframe before incremental permanent damage could occur to patients' vision.

The interest in our non-incisional glaucoma therapy that effectively lowers IOP and extends the runway before patients need more complex incision-based surgeries remains intact despite the limits on current procedure volume and patient visit.

Given this dynamic, we are confident in our intermediate and longer-term growth potential remaining very promising.

Late in Q1, measures began to be implemented to stop the spread of COVID-19 such as mandated shelter-in-place orders, recommendations for non-COVID patients to avoid hospitals, recommendations by the medical societies and governments to defer all non-urgent procedures and most ophthalmology offices closing and staffing furloughed or reduced to minimal activity for only urgent patient visits and procedures.

This resulted in our physician customers experiencing significant short-term limitations to conducting procedures and they also made decisions to defer capital equipment purchases in the second half of March that persisted through April.

In fact in our outreach to existing G6 accounts during this period, approximately 25% were closed and the remainder were solely treating emergency cases. IRIDEX has also taken steps to mitigate the impact of COVID-19 to our business operations and limit risk for our customer's, employees.

We made adjustments to our business methods to remain in close contact with our customers employing more digital and virtual meetings and selectively visiting customers who were accessible and needed in order to continue to drive forward the momentum we achieved in the beginning of this year.

We are located in the San Francisco Bay Area and as such followed the recommendations from county government and health care agencies, in mid-March IRIDEX quickly transitioned almost all employees to a remote work environment.

A small number of our team continues to support essential operations at our facilities after we instituted social distancing and other recommended measures to ensure their safety. We'll continue to follow local and national guidelines to determine the appropriate time to resume in-office functions.

Our sales organization has largely shifted to virtual sales activity and encouragingly has been able to continue strong engagement with customers.

While not a replacement for global industry conferences, face-to-face meetings and on-site clinical training, we have effectively shifted to a broad virtual program, hosting a number of widely attended sales events and maintained continuity with key accounts as closely as possible.

One opportunity of the clinic and surgicenter closures is that physicians and staff are more available to engage with us.

We've conducted over a dozen grand rounds in clinical training with eight to 15 physicians engaging in these virtual sessions, many more than we could typically engage at one-time when their clinical and surgical schedules were full. As we speak today near the midpoint of the second quarter, we see two phases of activity within the quarter.

In the first half there was widespread shutdown; and in the second half, we expect to see staged reopening. In the shutdown environment, only urgent procedures were performed in our transscleral laser therapy was a desirable choice for patients with high intraocular pressure that urgently needed treatment.

Early in April, we conducted a webinar discussing treatment choices and the role of IRIDEX procedures as a tool for that environment. We attracted over 300 registrants, 150 attendees and hundreds of follow-on viewings that demonstrated to us position interest in exploring the solution.

Customers are telling us they were selecting our therapy for those urgent procedures, because the short procedure time and non-incisional effective IOP reduction was a solution that minimized exposure risk and especially important required only minimum patient follow-up. The reopening phase is starting now.

Surveys show 30% to 50% of surgery centers plan to reopen in May and many of the rest plan to reopen in June. And in a recent survey of ophthalmologists nearly half indicated they anticipated rescheduling patient cases before the end of second quarter.

But our customers are also telling us to expect initially to be operating under reduced capacity to allow extended time for safe patient management and equipment cleaning. Some are estimating capacity at 50% initially and grown to 75% over a couple of months.

In this environment, we're encouraged to hear our customers saying the simplicity of our procedure and minimal patient follow-up are highly valued.

So, while we've been promoting these value elements all along to drive adoption of extended non-incisional runway for progressing glaucoma patients, the importance and attractiveness has increased in this COVID environment.

We are engaged and ready to support our customers in the new environment by conducting remote proctoring for cases, web-based physician certification and educational seminars supporting customers and prospective customers. For example, in the U.S.

we've conducted more than 60 virtual physician trainings often with multi-doctor participation, including large groups at several major top-tier teaching institutions. We are encouraged by the engagement with our customers and progress that's achievable through these methods.

Our international sales in glaucoma are primarily through premier distributors around the world. Our plans were to roll out the revised version of our MP3 probe internationally, but had to be adjusted in the restricted COVID world.

In April, we conducted a worldwide virtual training for distributors with over 240 attendees, which was a record online meeting for us. We followed that up with direct virtual detailed training with individual country distributors, staff and key opinion leaders in that country.

Again, we're encouraged with the engagement and focus indicating the intermediate and longer-term potential remains very strong.

In the U.S., we're getting updates from our field team and are monitoring the news and market reports to determine the actual return of elective surgeries state-by-state and are encouraged by our strong presence in many states that are easing restrictions or plan to use such restrictions in the near term.

In regions outside the U.S., procedure recovery is progressing at various rates with Asia Pacific leading; the European Union showing limited recovery is starting, but still uncertain capacity or pace of opening; and Latin America and other regions are still evolving.

Therefore, at this stage, there are simply too many variables to quantitatively predict procedure volumes, which type of procedures will be prioritized and in which markets. Summarizing glaucoma, for all the reasons I've discussed, we believe IRIDEX is well positioned to recover and grow our volume as various regions of the U.S.

and worldwide begin to expand patient visits and procedure volumes. Our team is eager to move forward where it's safe and appropriate to do so, to support our customers and continue expanding the role for effective, durable, non-incisional glaucoma procedures. 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.

Customers are also experiencing significant economic impacts from the deferral of procedure revenue, so we expect but can't yet quantify their shift in appetite for capital purchases. Some deferrals are clear, because of the shutdown periods at offices and surgery centers, and we experienced that at the end of the first quarter.

How laser system purchase volume recovers and to what degree short-term and longer-term is still uncertain. However, it's important to note that a significant portion of sales in a mature segment, like our retina and surgical laser systems, is replacement of old or failing equipment and tends to be more resilient.

We expect that business to reflect the overall economic recovery of the practices. An additional important segment of our retina business is disposable surgical EndoProbes. That is likely to follow a similar recovery for ophthalmic surgeries as we've discussed for our glaucoma probes.

In 2019, the combination of retina EndoProbes and glaucoma probes made up about half our overall revenue, and we're well positioned in both procedures for volume recovery to drive sales recovery. However, so much variability in how recovery progresses makes forecasting difficult.

What we control is our efforts to support and promote the benefits we deliver to which our team is fully committed.

With regards to our product development projects, we reported to you in March that our development and manufacturing partner for new laser systems in Wuhan, China, had experienced shutdowns and project delays as the Chinese government acted to restrict transmission of COVID-19.

They came back online in mid-March about the time IRIDEX became subject to shelter-in-place orders and began to work remotely. However, we are effectively working closely and making good progress toward a goal to achieve product launches later this year.

As we reported in March, we remain confident that we have a stable supply chain to meet projected demand and the operational efficiencies and capital resources to support our business during this period.

We believe normalcy will eventually return as the world works through the COVID-19 outbreak and we will accelerate our initiatives to drive demand for our glaucoma therapy.

We are optimistic we have newfound recognition in the glaucoma community for the enhanced role of our non-incisional effective and durable lowering of intraocular pressure that requires minimal patient follow-up.

We continue to see the opportunity for significantly increasing our share of the treatment for the millions of moderate to severe glaucoma patients worldwide. With that, I'd like to turn the call over to the operator for questions.

Operator?.

Thank you. [Operator Instructions] Our first question comes from Jon Block of Stifel. Your line is now open..

This is Tom on for Jon. Thanks for taking my questions. Maybe to start off --.

Hi, Tom..

…any update on – how's it going? Any update on what percent of the G6 installed base is trained on the new P3 probe? I think, pre-COVID, the thought was to have 95% of the base trained by the end of 2Q, 2020, but now are there any new expectations as to when you might be able to train the majority of the installed base?.

Yes. So we were about 50% of the way there, before the COVID restrictions kicked in. We have been conducting virtual training sessions, as I described and we're making progress. It's tough to quantify right now whether we're going to hit that 95% by the end of the second quarter.

But the interest is extremely strong and so the ability to proctor cases and move from virtual education to real case support virtually is still there just -- it may be delayed slightly, but we don't see it as a significant extension to the time to get that introduced and people converted over.

And then, internationally, we've shifted to a virtual approach as opposed to an in-person approach. And we're encouraged both with the participation by our distributor partners, but also our ability to reach through in conjunction with them on these virtual meetings to engage directly with key opinion leaders and leading customers.

So we think that's going to progress very close to, as planned, and we're still thrilled with the response we're getting from users of the revised probe..

Got it. And maybe to stick with the revised probe.

Is there any early data or any reads on utilization of it, so maybe from the doctors, you converted early on in the rollout sort of late last year? And maybe have any reorders kicked in yet from early adopters, or did COVID kind of throw a wrench on that?.

No, they're absolutely reordering. Once someone converts over, they're typically very pleased with how much easier the procedure is to perform. And they're looking at their patient data outcomes to confirm consistency of outcomes and such.

But remember that's a 30-day period before they do their first, call it, read on what the outcome is expected to be. And then, I think, they also, in their mind, want to see three months, six months experience. So they are converting and continuing with the volume or more that they had done before.

And we fully expect that they see the consistency that that same-store sales growth can continue upward, as they gain confidence in the procedure..

Got it. Okay. And then, last one, just switching gears to capital.

Can you share with us how placements of the system trended in the first two months of the year, so just pre-COVID?.

Yes. I mean, most of the system placements were in those first two months of the year, but typically capital equipment is backloaded. So you expect a higher portion of your volume in the last month and often in the last couple of weeks, which is right in the timing where COVID came along and deferred cases.

So we're optimistic that it's solely a short-term economic impact and it's not a reduction in the interest. And in fact, we think the contrary that there's stronger interest in our procedure, because of its benign profile in this environment. But capital equipment is going to experience some deferrals.

Most of the information is anecdotal so far, so it's hard to quantify impact. But we expect there to be some and we're not quite sure how long that will last..

Great. Thanks, guys..

Thank you. And our next question comes from Scott Henry of Roth Capital. Your line is now open..

Thank you. Good afternoon. I've got a few questions. First, I think, I've missed the retina number for the quarter.

Could you give me that again?.

I'm looking down here. I don't know, if we called it out. We just called out 25%.

Let me come back to you with the absolute number, yeah?.

Okay. It was down 25%? I see..

Yeah. From Q1 of last year..

Okay. I think I can estimate it at least from there. Second, when I look at spending in Q1 G&A in sales and marketing were down pretty good certainly from one year ago not as much from the second half of 2019.

The question is do you think those are sustainably low rates, or will those bounce up? How should we think about spending going forward?.

Spending in the first quarter was really the result of the significant adjustments, we made in the second half of last year. And we've talked about those and primarily reflective of those adjustments in the first quarter. If sales are down somewhat, there are incremental areas of sensitivity like commissions.

Toward the end of the quarter, there was some reduction in travel and travel-related expenses.

But by and large that's the run rate that we tried to set in place in advance of all this, not in anticipation of it but to put our cost structure in a position where our cash burn was under control as we grew the glaucoma business into breakeven and profitability.

Going forward, there are incremental savings in things like trade shows that can't be – that have been canceled and won't be attended. There's virtually been no travel quarter to date. We'll see how that opens as access improves in the second part of this quarter.

But we think those reductions are sustainable and there are other incremental things that I've just mentioned that can help us keep the expense rate under control as we drive the recovery..

Okay. Thank you. I appreciate that color. And I know you're not giving guidance so this isn't meant to gauge any specific projections.

But I'm just wondering, how we should think about Q2 versus Q1? Obviously Q1, you had the first two months which were probably relatively un-impacted but you end up doing most of your business in the last month of the quarter. So in 2Q, you're probably not doing much business at all as far as capital equipment sales.

But then maybe in June you will or won't you? I mean, I'm just trying to think of how – what kind of lag we might see before people start buying capital equipment again? And just your thoughts on Q2 relative to Q1?.

Yeah. In Q2, obviously for the first half, it's had a significant essentially shutdown of disposables and not that, we haven't seen a flow, because of emergency procedures but that's pretty significant impact. And it's just very difficult to predict what happens in the second half with disposable procedures.

Now, we do know and hear from physicians that they're eager to get procedures back online and going both from a patient therapy standpoint, because there's only a limited amount of delay that is available for glaucoma patients in their therapies but also for their own economics to get the business back on track.

So on that we see it as really limited by their ability to come back online and what efficiency, what operating rate capacity compared to their prior call it 100% capacity. In terms of capital equipment we do think that there's going to be delays.

There has been so far in the quarter as you would expect with most practices being shut down and remains to be seen how the end of quarter order demand appears. But we think it's going to be a tough quarter for capital equipment..

Okay. And the probe sales in Q1 were strong. Certainly for the first quarter of the year and given what went on.

My question is how do you think probe inventory is at your customers? Is it normal such that probe utilization can reflect end user demand, or might there be an inventory work down out there given that nothing's really happening right now?.

I think since the introduction of the Rev two version of the probe there has been some inventory management aspects to it working off the older inventory and not ordering as much. And whether it's been worked through in the fourth quarter and the first quarter, there's more to be done in the second quarter as volumes come back.

It's hard to be precise but we expect a lot of that has been worked through at least in the United States where we have direct contact with the customers. And we think – it's hard to know when a procedure is done how long – how much inventory they burn before they order and then what their shelf stock goals are and those kinds of things.

But we think going forward be more closely representative of procedure volume even if it lags a bit..

Okay. And just a final question. You grouped revenue into the three categories G6 retina and other. How does that other tend to hold up? I mean is that a little more of a stable business line than retina and G6? Just curious as it is kind of a catch-all but – any color would be appreciated..

It's going to show a little bit of stability to begin with. It will potentially sort of have more an inflection later. The reason is these components are we have a royalty component reported from a partner which is a one quarter lag. So their Q1 report comes into our Q2.

And then it's also a lot of its service – a bit of paid service but also service contracts. So within Q2 probably holding up fairly well and then there'll be a little bit of a lag and we might see a little bit of compression in Q3 before it sort of recovers..

Okay. Great. Thank you for taking the questions..

Thank you. And ladies and gentlemen, this does conclude our question-and-answer session. I would now like to turn the call back over to David Bruce, CEO for any closing remarks..

Thank you, again and thanks everyone for joining the call today. We look forward to updating you on our progress as we continue to execute our initiatives and drive the recovery from COVID-19..

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