Ladies and gentlemen, thank you for standing by, and welcome to the Second Quarter 2020 IRIDEX Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers’ presentation, there’ll be a question-and-answer session.

[Operator Instructions] I would now like to turn the conference over to your speaker today, Hunter Cabi, Investor Relations. Please go ahead..

Thank you, and thank you all for participating in today's call. Joining me are Dave Bruce, Chief Executive Officer; and Jim MacKaness, Interim Chief Financial Officer. Earlier today, IRIDEX released financial results for the quarter ended June 27, 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 the federal securities laws which are pursuant of 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 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 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, August 6, 2020.

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

Dave?.

Thank you, Hunter. Good afternoon, and thank you all for joining us. We hope you're all staying safe and healthy as we continue to face unique challenges as this pandemic progresses. I'd like to start the call by providing an overview of our recent operational performance and business commentary.

Then Jim MacKaness, our Interim Chief Financial Officer, will provide additional color on our financial results for the quarter. After that we'll open the call for questions.

Total revenue in the second quarter was down by approximately 40% versus last year's second quarter, largely due to the worldwide closure of ophthalmic practices and surgery facilities, intended to check the spread of COVID-19. This impacted both our glaucoma and retina product lines of single-use disposables as well as our capital equipment.

However, due to the significant adjustments we made to our operating expenses late last year and throughout Q1, coupled with further variable expense adjustments in Q2, we held our net loss in the second quarter within 15% of last year's second quarter.

And while we are navigating this challenging and uncertain environment, I'm very proud of the IRIDEX team for their resilience and commitment to our customers and their patients.

When we reported the first quarter results on May 11, we had already begun to see the impact of the shutdown phase, as we called it, and noted that the second half of the quarter would likely be driven by reopening and capacity expansion in surgical suites and physician offices.

And similar to many other medical technology companies, our business in the quarter largely followed that trend. However, during the initial shutdown environment we experienced in March and April, our MicroPulse transscleral laser therapy was recognized as a preferred option for many physicians treating urgent glaucoma cases.

MicroPulse delivers a safe, easy-to-perform, effective option compared to incisional surgery.

Because it can be performed in an office or surgery center setting rather than a hospital and requires minimal follow-up visits, it gained recognition as an ideal solution, and while revenue in April was materially impacted by deferred and significant slowdown of nonemergency procedures, attention to our platform within the ophthalmology community gained significant awareness.

As ophthalmology offices and associated surgery centers began to reopen, encouragingly, we saw improvement in our glaucoma probe business in May and a steep uptick in June, with Cyclo G6 probe shipments rebounding to over 80% of pre-COVID levels. We've been especially pleased with the successful rollout in the U.S.

of our revised MP3 probe, which has expanded the interest of glaucoma physicians in our nonincisional MicroPulse laser therapy. We've seen an increased number of previously dormant customers reengaging, attracted to the improvements embodied in the revised probe.

We've essentially completed customer conversion to our revised probe in the U.S., and we were able to accelerate the rollout internationally, taking advantage of the shift to the now widely accepted virtual sales and training environment to speed both distributor and physician training, case proctoring and conversion to the revised probe.

Our initial target was 75% conversion by the end of the third quarter, and we are ahead of that plan currently.

To summarize our second quarter, while results undoubtedly reflected the business challenges of the macro healthcare environment brought about by the pandemic, we're confident that our actions are driving a long-term uptrend in our glaucoma business.

The tactical shifts we made in the second half of 2019 and continue to execute toward advancing adoption of MicroPulse transscleral laser therapy, specifically broadening market awareness, redirecting our sales process and improving training and follow-up support, all continued throughout the pandemic environment.

We also saw a rebound in our capital equipment segments; however, our confidence remains guarded around the rate of recovery, especially as the recent resurgence of COVID-19 cases in many regions of the U.S. and around the world leads to uncertainty around the pace of economic recovery.

We are hearing that, on average, physician offices and surgery centers are operating at approximately 75% capacity to allow extended time for safe patient management and equipment cleaning, and this implies that improvements in capacity needed to address the patient backlog could continue to drive the demand rebound we've seen.

Our successful shift to virtual sales and training has proven to be a more efficient and effective approach in many situations.

In addition to significantly lowering travel cost and time, a virtual model has opened up greater international opportunity, and as I mentioned earlier, virtual training was a significant contributor in conversion to our revised MP3 probe.

I'm pleased to see the continued successful shift to virtual sales and training approach, which has enabled us to remain close to current accounts and expand awareness among potential new customers as we expect to continue this practice going forward.

With physicians spending more time at home during the isolation period, we took the opportunity to ramp up virtual marketing opportunities and increase the number of our virtual events. During the second quarter, we hosted eight webinars involving 31 surgeons highlighting their experience with our transscleral laser therapy.

They discussed treating a wide range of glaucoma disease levels, various experiences from around the world, adoption of the Rev 2 probe and value drivers during the COVID-19 environment.

We were delighted by the global interest, with over 2,500 live attendees to these events and thousands more clicking through on our website and through social media promotions on a variety of platforms. We're especially pleased with the level of interest achieved without the availability and the expense of trade shows and associated travel.

On the clinical front, the body of evidence continues to grow supporting our MicroPulse therapy, confirming the safety and efficacy of the procedure in a wide variety of glaucoma types and severities. In the second quarter, 15 abstracts and four new studies were presented, including the largest cohort to date with 342 eyes in 214 patients.

IRIDEX has now been included in 23 peer-reviewed publications on this topic. In our retina business, we're seeing rebounding laser system capital purchase demand, but to a lesser degree than sales of our endoprobes used in retinal surgery cases, which are tracking closer to the glaucoma probe recovery pattern.

Customers are clearly experiencing significant economic impact from the deferral of procedure revenue and patient visits to their practices, so we can't yet quantify their shift in appetite for capital purchases. We continue to expect the capital equipment segment of our retina business to reflect the overall economic recovery.

In conclusion, we remain confident in the large opportunity to provide a nonincisional laser-based therapy that allows moderate to severe glaucoma patients to extend their runway before they need invasive incisional surgeries or drainage implantation.

Though the pandemic has thrown a curve in the road, we're seeing demand from existing and potential new customers for our revised MP3 probe and increasing efficiencies brought about by a significant component of virtual sales and training that have enabled us to keep our cost structure under control while significantly improving our time and reach for customers.

We remain focused on effectively managing our cash position and operating expenses to sustain our long-term growth trajectory. With that, I'd like to turn the call over to Jim..

Thank you, Dave, and good afternoon, everyone. Similar to other med-tech companies, our second quarter results were significantly impacted by COVID-19, although as Dave has mentioned, the majority of the impact was in April and May, with June showing positive signs of recovery.

Total revenue was $6.2 million, down from $10.4 million, or 40%, from the second quarter last year. Revenue from our G6 probes decreased $1.2 million over the comparable period last year.

We shipped 7,866 Cyclo G6 probes in the quarter, and although that is 45% lower than the 14,200 shipped in Q2 last year, we saw a notable improvement during the quarter, which has continued into the first stages of Q3.

We've previously mentioned that the move away from bulk discount placements towards probe utilization in the second half of 2019 was part of our change in sales strategy, and this shift has impacted our G6 system sales.

We shipped 42 G6 systems in the quarter, compared to 85 in the prior year period, up sequentially from the 38 units sold in Q1 of this year. The reduction compared to last year's quarter was partially due to the shift in sales strategy and partially due to COVID-19-induced capital purchase deferrals.

Although unit shipments were down over 50% year-over-year, revenue system sales was down only 4% thanks to stronger ASPs. Overall revenues from Cyclo G6 product family was $2.1 million, down 37% compared to the second quarter of 2019.

The largest part of the decline in total revenues compared to last year was experienced in our retina business, down 50%. Our retina business is made up of sales of capital equipment and endoprobes, which are single-use, per-procedure products.

Endoprobe sales were significantly impacted by the worldwide shutdown in April, with rebounding sales occurring in May and June, and similar to G6 probes, this trend has continued into the first stages of Q3.

Sales of capital equipment tend to be backend-loaded in the quarter and are subject to being delayed at the last minute in any particular quarter, and the impact of COVID-19 increases this volatility.

Other revenues, which include royalties, service and other legacy products, decreased 18% to $1.5 million in the second quarter of 2020 compared to 2019. Gross margin in the second quarter of 2020 was 39%, compared to 44% in the second quarter of 2019.

The decrease in gross margin was the result of fixed overhead expenditures being absorbed over a lower sales volume. End user pricing and component material costs remained consistent with prior periods. Operating expenses for the second quarter of 2020 decreased 26% to $5.2 million, compared to $7.0 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 and a reduction in variable expenses as COVID-19 resulted in reduced business activity in the second quarter.

The significant revenue reduction in the second quarter was offset by our prudent expense management and resulted in a loss of $2.8 million, or a net loss of $0.20 per share, versus $2.4 million, or a net loss of $0.18 per share, in the prior year.

For the first six months of 2020, although revenues were down 28% compared to 2019, due to the impact of this focus on expense management, our net loss reduced by $1.1 million, from $5.5 million to $4.4 million.

Cash used in operations amounted to $2.0 million for the quarter, and with the benefit of receiving $2.5 million under the government's PPP loan program, our cash balance ended at $11.6 million for the quarter, up approximately $0.5 million from Q1 2020. Which brings us to guidance.

We continue to find that the COVID-19 outbreak and related uncertainties create a broadly variable business environment for us, and as a result, we remain unable to provide a meaningful guidance range for 2020. With that, Dave and I would like to turn the call over to the operator for questions.

Operator?.

Thank you. [Operator Instructions] Our first question comes from the line of Jon Block with Stifel..

Hey guys, this is Tom on for Jon. Thanks for taking my questions. Maybe starting off on trends in G6, it was good to see those run rates on probe shipments in June.

Would you be able to provide some additional color on how those trends progressed in July and into August? And maybe how to think about the rest of 2020?.

Sure. Hi, Tom, it's Dave. We've seen the trends continue. Most of the capacity has remained open. There are pockets where there have been additional restrictions; for example, in the U.S., Texas had some restrictions on elective or deferrable procedures reimplemented.

So at the margin, there are some capacity restrictions, but in general, capacity has stayed high and the demand flow has continued at reasonably strong levels and we've been able to spend a lot more time with customers, a lot more in person. And so we're comfortable that that recovery path is continuing..

Got it, okay.

And then maybe on the revised probe, any specific insights or data you might have, just around utilization among, maybe, the early adopters? And then, for new customers, are there any sort of objectives or goals, just around onboarding?.

In general, the adoption of the new probe has really increased the confidence level of the users, and at the margin, they're using it on more cases. It's hard to see it in the data when you have to overlay it with the restrictions that occurred with COVID.

And so it's hard to quantify that, but anecdotally, we're hearing extremely positive comments and renewed interest, and the intent, at least, for broader utilization.

In terms of bringing on new customers, we have a process to drive a validation of the performance of the device in their hands, so they can see firsthand outcomes and have the confidence in that as they then move to what we call conversion.

And that is them selecting a broader set of patients to use or recommend the procedure, and then follow-through, and we'll support those cases or support that decision-making. And in general, our objectives are to get a steady usage. Our average is going up as we progress.

We look at it on kind of a four week moving average, and we're seeing those averages increase. And part of that is higher average usage of new customers and part of that is higher average usage of existing customers..

Got it, that's very helpful. Maybe lastly, just to shift gears a bit, what's the latest on some of the product innovations on the retina side of the business? Thanks, guys..

Yes. We talked last time about how the COVID shutdown first affected our partner in China, and then as they were coming back from their restrictions, we went out on isolation here in California. And so we did take some of – somewhat of a hit in the development project timing.

We see the opportunity to deliver that product in the second half of this year, and we're – actually, given the fact that events like American Academy of Ophthalmology and some of the bigger meetings around the world have now gone virtual, it's a much more restricted opportunity to announce and commercialize new things, so we're trying to figure out, actually, the best timing for that.

And as we get closer to it, we'll probably talk less about it. We don't want to tip off competitive issues and we don't necessarily want to freeze up the market on customers considering purchase and holding off based on the potential of something new coming, so.

We have, additionally, just released a couple of improvements to our existing delivery devices in the retina space. There is a scanner module that we call TxCell that we released improvements to, and the laser indirect ophthalmoscope, which is a headpiece that the laser system is connected to, to deliver therapy.

We released a new version of that that we think is much more desirable in the marketplace, and we're looking forward to rolling that out here in the second half of the year..

Great. Thanks, guys..

Thank you. Our next question comes from the line of Scott Henry with ROTH Capital. Your line is now open..

Thank you. Good afternoon. And Dave, I'd like to say, it looks like you're doing a pretty good job of managing this situation. It's a challenging situation, but the expense containment is encouraging, and we'll just move forward.

That said, on the question side, could you remind me of what percent of the retina business is outside the U.S.?.

We're about 50/50 U.S. and outside the U.S. in both glaucoma and retina..

Okay.

And how would you expect 2Q for retina to be going forward? Would you expect that business to kind of snap back a reasonable amount? I mean, I'm not looking for guidance, but just trend-wise, do you think Q2 will be the low point for retina as well? I mean, you've given us some nice monthly trajectories, but I'm just curious on the retina line specifically..

Yes, we think that's a gradual rebound in capital equipment demand. As I mentioned, it's tough to quantify, as a lot of those decisions are made toward the end of quarter on capital equipment purchases. And so the economic situation at the time for an institution comes into play, and so it becomes much more difficult to predict.

But we are seeing a rebound in that demand as well and we're seeing the ability to have those conversations and work through purchasing departments and capital committees and the kind of things – the decision-making that has to get made to pull the trigger on those orders.

So we see it rebounding; we're just, as I mentioned in my comments, we're just a little more guarded on that optimism because it's too easy to defer it, and we think about procedure volume in terms of demand for our products, but it's also significant revenue drivers for the practices and the hospitals and surgery centers, and so their economics have been hit as well, and that affects their appetite.

But we do see, in general, the retina side of the business is much more replacement market, and that becomes a necessary purchase when you're faced with loss of capacity of that laser system.

So we're optimistic that yes, the second quarter was the low point, but that's probably the higher variability and predictability compared to the disposable probe businesses..

Okay.

And then on the sales and marketing front, can you estimate where you – at what level you think your productivity was in Q2 in terms of face-to-face meetings? Are reps at about 60%, 70% of productivity, or – how do you think they are right now and where could that go in Q3 and Q4 given the challenges?.

Well, I think in the middle of the second quarter, the shutdown phase, as we were calling it, virtually everything went virtual. The – but the ability to engage with physicians and administrators was high as well because they were also in isolation. So in terms of interaction, it was pretty positive, and it has stayed positive as sites have opened up.

They have significant incremental requirements to let a rep in, COVID-related – some are driving testing and some just aren't allowing – but with virtual support for cases and virtual conversations and presentations, we feel like we're able to engage quite significantly.

So we don't feel like we're significantly hurt in our ability to interact with customers because of COVID..

Okay, appreciate that color. Final question – the spending level in the quarter, that $5.2 million, is that kind of the new normal, or should we expect some snapback as – I mean, obviously travel was very limited in Q2, and that will start to come back in. Just trying to get a sense of how representative that $5.2 million number is going forward..

Sure, Scott. This is Jim here; I'll take that one. Yes, I think to your point, I would say the $5.2 million did have the benefit, if you want to phrase it that way, of limited travel and obviously some deferral on things like trade shows. So I do anticipate we'll see that move back up.

I think we'll probably see it somewhere this and $6 million on a quarterly basis for a while, so in between those two levels depending on the actual activity within a quarter..

Okay, great. Thank you for taking the questions..

Thank you. This concludes today's question-and-answer session. I would now like to turn the call back to David Bruce for closing remarks..

Thank you, operator, and thank you all for joining the call. We look forward to being on the phone with you in the future, if not directly, in our next conference call. Take care..

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