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

[Operator Instructions] I would now like to turn the conference over to your host, Hunter Cabi, Investor Relations. Thank you, and 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 September 26, 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 made pursuant to the Safe Harbor provisions of this 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 of 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 intentions or obligations, 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 9, 2020.

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

Thank you, Hunter. Good afternoon, and thank you all for joining us. First, let’s acknowledge that these past quarters dealing with COVID-19 have been challenging for everyone, and I appreciate your continued support and interest in IRIDEX.

I’d like to start our call with a brief review of our strategic priorities for the year and highlights the recent progress toward those goals. 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.

In mid-2019, we identified several key strategies we were confident could lead us to significant improvement in our business for 2020 and beyond. At that time, no one foresaw the dramatic and widespread impact of the COVID-19 pandemic.

And while we necessarily made a number of adjustments to our operations and short-term resource allocation, we have continuously kept an eye on our longer-term growth plan and not wavered from those initial goals.

In short, those goals included the implementation of structural changes to reduce operating cost and cash preservation measures to extend our financial runway.

Also adjustments to our sales and marketing processes to expand adoption of our non-incisional MicroPulse transscleral laser therapy, both with new customers and by reengaging our significant installed base. And lastly, to pursue judicious product development investments that would strengthen our competitiveness and improve gross margins.

I’m encouraged by the progress we’ve made on each of these objectives while we reacted to and mitigated the challenges presented by COVID-19. And I would like to take the next few minutes to share with you some of our recent highlights. Overall, the positive recovery trends we began to see as we exited Q2 persisted throughout Q3.

While we continued to experience some impact from capacity restrictions, from reduced throughput of ophthalmic practices and surgery centers, our business substantially improved from the trough we experienced in early second quarter. Top line revenue improved sequentially to $8.8 million from $6.2 million, a 42% increase over Q2 2020.

We experienced the strongest rebound in our glaucoma probes to the point that we exceeded sales in last year’s third quarter by 6%, with over 10% outperformance in the U.S.

We’re seeing a slower bounce back in capital systems sales, particularly with international customers, as they have largely remained financially conservative throughout the duration of the pandemic.

To mitigate the inevitable revenue impacts from deferred or delayed procedures and capital purchases, we made it a top priority to significantly reduce spending with a shift to web-based sales and marketing activities and gradually increased direct customer contact as access opened in the third quarter.

This enabled us to limit operating losses to be in line with our third quarter 2019 results, despite the lower revenue this quarter. These shifts, coupled with improved balance sheet management, led to a sequential increase in our cash position at the end of the third quarter by approximately $300,000.

And year-to-date, our cash balances declined by only about $700,000. This is a meaningful accomplishment by our team in a volatile environment and sets us well positioned with operating runway as we work toward full recovery of our business to pre-COVID levels and beyond.

As you recall, in the second half of 2019, we redirected our sales and marketing focus to drive adoption of our unique non-incisional glaucoma therapy, both with new customers and by reengaging our significant installed base Cyclo G6 System owners.

Prior to the onset of the pandemic, we saw renewed customer engagement with improving top line results in the fourth quarter of 2019 and the first two months of 2020. In March, as I noted, our team responded quickly to the challenges that emerged as a result of the pandemic.

Since then, we’ve continued to maintain full organizational capacity through a combination of work-from-home capabilities and wherever possible, daily on-site operations for those groups that work from our facilities and the use of virtual online tools to facilitate sales, marketing initiatives and provide clinical support and training to our customers.

Our teams have adapted well to the new environment, and we’ve been able to support our operations and our customers while keeping everyone safe. We’re proud of what’s been accomplished by IRIDEX under extraordinary circumstances.

We experienced favorable improvement month-to-month in the third quarter as our surge in customers and hospitals continue to reopen in patients scheduled procedures. In terms of geography, sequentially, U.S. sales improved 66% and outside the U.S. increased 16%. On a year-over-year quarter basis, our U.S.

business recovered to within 10% of 2019 and our outside the U.S. business within 27%, reflecting the impact of slower recovery and COVID resurgence in some regions around the world. Throughout this new business landscape, the biggest beneficiary has been U.S.

glaucoma probe adoption, with growth driven by increased recognition of our TLT non-incisional effective IOP reduction benefits and conversion to our revised MicroPulse P3 probe. Feedback continues to be very supportive, with customers praising its improved ease of use, which we believe will continue as a catalyst for increasing utilization.

I’d like to shift now to highlight the continued progress of our product development program. This quarter, we launched a new Laser Indirect Ophthalmoscope, or LIO, for the retina market. And feedback from our newest users, say it’s a major improvement over our prior offering.

In October, we received FDA clearance for our new 810-nanometer laser, the first from a new platform we’ve been co-developing with our partner in China. Though this platform development suffered delays due to COVID impacts, we continue to make progress toward launches in 2021.

As we’ve discussed before, one key benefit of the new laser platform will be reduction in manufacturing costs.

Once we have completely rolled out the anticipated three lasers on this platform, we expect gross margin improvement north of $1.5 million in the capital equipment side of our business, leading to several percentage points of improvement in our overall gross margin.

I’m encouraged by the business we’ve seen so far in the fourth quarter and anticipate that trajectory will continue through the remainder of the year as we shift our focus from reacting to the pandemic to executing our longer-term growth strategy, with adjustments as needed due to the uncertainty remaining in play given the recent surges in COVID infection rates.

In summary, we continue to make meaningful progress on the strategic objectives we established coming into this year, despite the significant short-term operational adjustments needed in the wake of COVID-19. The third quarter showed strong improvement from the second quarter, enabling us to exit the quarter at better than 80% to pre-COVID levels.

We were able to drive quarterly probe sales that exceeded the previous year in the midst of a partial recovery. And our revised probe and virtual sales and training processes have driven renewed interest from dormant customers as well as attractive new customers. Back in March, we reacted quickly to manage our costs and balance sheet closely.

And as a result, our cash position has declined by only $700,000 since the start of the year. I’m proud of our team’s success in weathering and recovering in a tough year for the ophthalmology market, but even more so in setting us up to succeed once the impact of the COVID-19 pandemic diminishes.

Before I turn it over to Jim MacKaness, I’d like to thank Jim for his service with us as he transitions to another assignment and particularly for his help in managing through a very turbulent situation over the past eight months.

I’d also like to introduce and welcome Fuad Ahmad, another partner from the FLG team who is taking over the interim CFO role. Fuad’s broad CFO experience and recent assignment with an aesthetic laser and disposables company will provide seamless and strong financial leadership for IRIDEX. With that, I’d like to turn the call over to Jim..

Thank you, Dave, and good afternoon, everyone. Our total revenue was $8.8 million, down 17% from $10.7 million in the third quarter of last year, but up 42% from $6.2 million last quarter Q2 2020. Our glaucoma product line is recovering nicely.

We sold 11,400 Cyclo G6 probes in the quarter, an increase of 6% from the 10,800 probes sold in the third quarter of last year and up 44% over the 7,900 probes sold in Q2. The increase in probes sold in Q3 of this year compared to Q3 of last year resulted in an increase of $0.1 million in glaucoma probe revenue.

We sold 37 Cyclo G6 Systems in the quarter compared to 82 in the prior year period and 42 units sold in Q2 of this year. The reduction compared to last year’s quarter was primarily due to our change in sales approach in the U.S. and ongoing capital purchase deferrals resulting from COVID.

The prior selling approach involve bundling the laser with probes and offering a deep discount on the laser. The new sales strategy does away with this practice, and we have seen a significant uptick in the ASPs for the laser. Overall revenues for the Cyclo G6 product family was $2.8 million, although down 6% compared to the third quarter of 2019.

This was a 31% improvement from $2.1 million in Q2 2020. Our retina product line continues to be the most impacted with revenues down 23%. Our retina products include lasers, various delivery devices, which we define as "capital equipment" and which are single-use per procedure product.

Sales of capital equipment tend to be back-end loaded in a quarter and are subject to being delayed at the last minute in any particular quarter. The impact of COVID-19 increases this volatility. Other revenues, which include royalties, services and other legacy products decreased 17% to $1.6 million in the third quarter of 2020 compared to 2019.

Gross margins in the third quarter of 2020 was 41.5% compared to 40.2% in the third quarter of 2019. Gross margin percentage improved despite the lower sales volume as a result of a shift in product mix towards the higher margin per procedure products and improved pricing of Cyclo G6 Laser consoles.

Both derived from continued execution of sales strategy we introduced in the second half of 2019. And an increased weighting of U.S. sales that are sold with a higher gross margin through our direct sales force compared to international sales sold with a lower gross margin through distribution.

Operating expenses for the third quarter of 2020 decreased 10% to $5.5 million compared to $6.1 million in the same period of the prior year. The decrease was the result of cost-saving measures implemented in the second half of 2019 and a reduction in variable expenses as COVID-19 resulted in continued reduced business activity in the third quarter.

Consequently, the revenue reduction in the third quarter was offset by our prudent expense management and resulted in a loss of $1.7 million or a net loss of $0.12 per share, an improvement over the loss of $1.8 million or a net loss of $0.30 per share in the prior year.

For the first nine months of 2020, although revenues were down 24% compared to 2019, due to the impact of this focus on expense management, we were able to reduce our net loss by $1.1 million to $6.2 million from $7.3 million.

And our cash balance ended at $11.9 million for the quarter, up approximately $300,000 from Q2 2020 and down only $700,000 from the year-end 2019, as Dave noted earlier.

We’re very pleased with the management of our capital resources during these tough times and believe this, together with our expense management, puts us on a firm foot to weather the existing COVID headwinds and to execute on our business strategy for the long-term, which brings us to guidance.

We continue to find that 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. And with that, Dave and I would like to turn the call over to the operator for questions.

Operator?.

[Operator Instructions] Our first question comes from the line of Jon Block with Stifel. Your line is open..

Hey guys, this is Tom on for Jon. Thanks for taking my questions. I want to begin with trends. Just for a clarification to start off, I think you noted in the prepared remarks that you exited the quarter at better than 80% of pre-COVID levels.

Was that for total company sales or G6 probe shipments? And if it was total company sales, could you maybe talk to G6 trends in the quarter?.

Sure, Tom. This is Dave. Yes, so the overall number was down 17% compared to last year. And I think we just summarized it as within 80% of pre-COVID. The trends are more reflected in the comments around improvement in the G6 glaucoma probes.

Those were actually up against the third quarter last year and up significantly against the trough in the second quarter. So we’re seeing that disposable probe business recovering quicker than the capital equipment business, strongest in the U.S. and secondly, outside the U.S. Capital equipment was hit in both segments a little harder.

And so that brought the overall average recovery down to closer to the 80% level of pre-COVID. So that’s something that we see continuing here as we’re partly through the fourth quarter and seeing some resurgence in COVID around the world, which is affecting certain areas and in terms of their access.

And we’ll see at the end of the quarter, but it may affect their appetite as well. So we’re a little more circumspect in forecasting that recovery..

Got it. Okay. That was super helpful. And maybe just sticking with trends, you did know international has been impacted by some of the recent surges in COVID. Any pauses in the recovery recently in specific U.S.

markets that maybe experience second waves?.

It’s always hard to draw conclusions in the short term on order flow in any given week or to a certain extent, even a month. And there have been times, for example, in the third quarter, Texas had some restrictions in place in the major metropolitan areas and several other sections of the country.

And when you try to bore in on that, you can see – possibly see some effect. But in general, it was transient and we haven’t seen anything significant in the short term given the new highs that are being experienced in daily cases. So it’s a little early to predict that.

That said, our customers have told us they intend to try to continue to provide services in a safe manner and unless truly instructed that capacity will not be restricted significantly..

Got it. Okay. And then shifting gears a bit. Congrats on receiving clearance of the new laser platform. I think the press release noted and you said in the prepared remarks that the family would be introduced next year.

Any additional color around the timing there? And maybe when we could expect more meaningful contribution to the top line and margins? And maybe I can tack on a follow-on there. Gross margins were solid, a bit above our estimate.

And I think you have a good amount of tailwinds in the near term, just from a mix perspective and then also from the benefits of the new laser family. So how should we be thinking about potential gross margin expansion maybe throughout 2021, just coming off this latest quarter’s 42% figure? Thanks, guys..

Sure. I’ll talk about the newer products for 2021. And then maybe Jim can comment on how the gross margin ultimately can impact us and then potentially roll out next year. So we’ve been developing and talking about a platform that would be the basis for three different laser frequency products for use in both glaucoma and in retina.

And a common platform that basically has the modification specific to the applications that are the different frequencies they are used for.

That gives us a nice commonality and higher volume on the platform, plus working with our partner in a lower cost production environment like China gives us the opportunity to improve the cost position on those and realize it in gross margin or in pricing that drives higher potential volumes. So we’re very encouraged by that.

We’re not being particularly specific about exactly when we’re going to roll out or exactly what the feature set is primarily for competitive reasons.

And secondly, whenever you’re introducing new versions of products, you can end up having customers defer and wait to see the new product before they make decisions and that you don’t necessarily want to freeze up the marketplace in those situations.

So – but we see the three rolling out over the course of 2021 and getting the full impact of those gross margin improvements in, call it, in 2022.

Jim, do you want to add some?.

Yes. I think, Tom, you identified it. We are – we do feel there’s a number of things that are working to our favor. I think as you identified, obviously, the G6 probes continue to become a bigger product – part of the product portfolio. So that’s a positive.

Increased volumes will also help rebound the margins because we’ll have better overhead absorption.

There is a little bit of irony in the sense we are looking forward to having the international capital bounce back, and although that will increase in the sense of absolute gross margin dollars, it will actually come with a little bit of gross margin compression. So we just had to be a little bit sensitive to that.

And then ultimately, as you said, I think we’ll transition, as Dave said, towards those margin incretion projects that will come on stream sort of right at the end of 2021 and really start to come forward in 2022. So sort of normalizing around where we are right now and then perhaps over that period of time, we’re starting to see some uptick..

Okay. Thanks, guys..

And our next question comes from the line of Scott Henry with ROTH Capital. Your line is open..

Thank you, and good afternoon. Strong results given challenging times, Dave. A couple of questions.

First, I know you’re not looking to give guidance, but would you say you’re comfortable that based on current trends, you would expect to see a sequential increase from Q3 to Q4 in revenues?.

Well, so seasonally, Q3 is weaker than Q4. So all things being equal, the answer to that an easy yes. I would say that we were pleased with the bounce back and recovery in Q3. But the idea that, okay, for example, capital equipment, the all clear has not been sounded.

And so we’re a little hesitant to forecast how the end of year capital equipment deal close cycle goes. We’ll certainly be ready to ship product. But it’s, as I think Jim noted in his comments, most of this capital equipment or a good portion of the capital equipment is back-end loaded and it’s easy to make the decision to defer it.

And so that’s why we’re a bit circumspect. That’s true in any environment and might be a little more true here in the COVID environment. But in general, we’re feeling, yes, that the fourth quarter should be sequentially better than the third quarter..

Okay. Great. And looking through the numbers, at least kind of the raw numbers until we get to 10-Q, it looks like probes per system jumped pretty strongly off the Q2 low and almost reaching normalized levels.

Would you expect probes per system to continue towards that kind of normal steady state that if I think back to the second half of last year, although I know you’re shooting to have an even higher, just trying to get a sense of the trend in utilization..

Yes.

As we shifted from pushing systems to more and more locations and potentially going back and figuring out usage later to a model where we’re actually focusing on those customers, whether they already have a system or are looking to buy a new system, really to adopt the procedure and do more and more patients, both towards the late stage, which where our volume is pretty strong and later stage severity of glaucoma patients.

But even into the moderate stages where the combination of our safety profile and significant reductions in intraocular pressure should make it a preferred procedure, safe, non-incisional with good production.

And so as we go to customers and educate them on the papers supporting this and the peers that are practicing this, we’re driving usage, first, and system placements second.

So as we’re successful driving usage, we get a higher average per site or the new sites that come on have a higher average than and the older sites and that helps drive the increase in average over the total. We still have a portion of our systems installed base that aren’t users right now.

And so as we go to them and bring them back online and increase their volumes, obviously, that helps the overall average usage as well. We see ourselves as a very small degree of penetration into the big pool of patients with moderate to severe glaucoma.

And so we think that there’s quite a large upside for adoption and, ultimately, revenue and disposable probes for us. And so that’s how we’re thinking about driving it. So our intent is to significantly increase the average usage and also, obviously, increase the total installed base..

Okay. Thank you for that color. And then retina, while down, was still a pretty good number higher than Q1 and well off the lows of Q2.

Do you think you can maintain that level of sales? Or was there anything unique that happened in Q3?.

Well, we think we’re improving our competitiveness.

So the launch of the LIO product was significant and we’ve done some improvements to performance and some of the other, we call them delivery devices, but they’re the ancillary equipment that attaches to the laser system and delivers the laser energy into the eye, whether through a scanner-type product or a headset that the ophthalmologist wears so that they can do these treatments on the retina.

And so as we improve our competitiveness, we think that those numbers should improve and that’s our intent. Now historically, we’ve seen a slow decline in that segment, a combination of capital equipment, competitiveness increasing around the world. And just, for example, just holding share, but suffering price compression can lead to a decline.

So we think we’re improving our competitive position. We’ll improve our gross margins with the newer systems in the retina space, whether we choose that to be just pure gross margin and profitability or we choose to use some of that cost improvement to be more aggressive in pricing and get a higher share.

We think we can be well positioned to compete more strongly in the future. And that’s why we’ve been spending on development of that space..

Okay. Okay. A final question. In the prepared remarks, there was some comments about ASP going up in the G6. If I recall, the system ASP increased in Q2, substantially, versus Q1 this year. Did it increase even further from Q2 to Q3? Or is that kind of just a Q3 over Q3 comparison? And how is ASP in probes trending? Thank you..

Yes, Tom, this is Jim. So definitely a significant uptick when you go year-over-year, for sure. And actually, we did see a little bit of pricing increase between Q2 and Q3 of this year. So both are very positive trends.

As far as pricing, in general, pricing is generally held very well and there hasn’t been too much fluctuation on the pro pricing really from – over the last couple of quarters..

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

Thank you. And our next question comes from the line of Paul Nouri with Noble Equity. Your line is open..

Hi. I was wondering if you could talk about capital equipment sales, whether it’s the G6 on its own or the company as a whole.

The trend this quarter, whether in Q4 we should expect, on the whole, something like we saw this quarter or if capital equipment sales might have been accelerating in the later months of the quarter?.

Hi, Paul, it’s Dave. It’s just difficult to forecast. What we’re seeing is a nice recovery in Q3 from Q2 and the trough of Q2 was – Q3 was solid when you compare it to Q1, which did see some impacts from COVID toward the end of the quarter.

And again, like a lot of medical capital equipment products, a significant percentage of the sales in any quarter for capital equipment tends to come toward the end of the quarter. The industry has, I guess, trained the buyers to wait out for the best deal.

That said, going into Q4, we’re currently comfortable with the flow of business that is potential to occur out there. But we’re mindful that in countries around the world, the restrictions have been increasing.

And you don’t know how long that’s going to last, and you don’t know if it’s going to broaden to a bigger percentage of the world market or potentially in the U.S.

And so it’s tough to forecast the quarter, but where we sit today, capital is, I’ll call it, consistent with the recovery we’ve seen in the third quarter in terms of activity and potential demand for a reasonable quarter..

That was my only question. Thank you..

Sure..

Thank you. And I’m not showing any further questions. I’ll now turn the call back over to you for closing remarks..

All right. Thank you, Bridget. I’d like to thank everyone for joining the call and for your continued interest in IRIDEX. And we look forward to talking with you in future quarters. Thanks, everyone. Goodbye..

Ladies and gentlemen, this does conclude the program. You may now disconnect. Everyone, have a great day..