Thank you for standing by and welcome to the IRIDEX Third Quarter 2021 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]. As a reminder, today’s conference call is being recorded.

I would now like to turn the conference over to your host, Mr. Hunter Cabi, Investor Relations. Sir, please go ahead..

Thank you, and thank you all for participating in today’s call. Joining me are Dave Bruce, Chief Executive Officer and Fuad Ahmad, Interim Chief Financial Officer. Earlier today, IRIDEX released financial results for the quarter ended October 2, 2021. A copy of the press release is available on the company's website.

Before we begin, I would 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 facts, 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, November 11, 2021.

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

Good afternoon and thank you all for joining us. This quarter we saw strength in both our glaucoma and retina markets. Thanks to sales execution from market focused reps, and our expanded global distribution network, Cyclo G6 probe utilization, growth and retina sales meaningfully improved following our Topcon collaboration and PASCAL acquisition.

Turning to our third quarter highlights. We achieved a significant year-over-year top line improvement and encouraging sequential results. Revenue grew 51% year-over-year and was only slightly below our high watermark posted in the previous quarter, despite the third quarter's typically softer seasonality in the ophthalmic business.

And we achieved solid gross margin improvement and limited cash usage. In our glaucoma market, despite the worldwide COVID surge, leading to some degree of procedure volume restriction and limitations to accessing physicians Cyclo G6 probe volume grew 18% versus last year. In retina, our new dedicated U.S.

sales team continued to build up the strong momentum from the second quarter. And our top line also benefited from a smooth transition in our international distribution network including solid PASCAL orders.

More specifically in our glaucoma business Cyclo G6 product family revenue increased 13% year-over-year, we sold 13,400 Cyclo G6 probes holding firm in the U.S. and growing nicely in our OUS segments. While Cyclo G6 system placements increased year-over-year and helped to drive probe usage in the third quarter.

It lagged our initial expectations, which we largely attribute to COVID restrictions worldwide dampening customers decisions to expand investments and adopt new treatments. We believe this will recover as the pandemic subsides.

In our efforts to drive expanded Cyclo G6 probe utilization IRIDEX supported an arm's length assessment by 10 key opinion leaders from around the world to assess the current situation for MicroPulse DLT and determine proper dosing levels and settings to optimize results.

Last week in advance of AAO we hosted a webinar titled MicroPulse DLT consensus an international expert panel where these KOLs presented their conclusions. We were delighted to see strong positive response to the webinar with over 1000 views so far.

The conclusions were very supportive of the efficacy and safety profile of MicroPulse DLT and included clear broad patient selection recommendations and effective treatment protocol parameters.

The panel operated independent of IRIDEX influence to achieve an objective assessment, based on literature review, surveys of the group's direct clinical experience and feedback from other clinicians to create a consensus conclusion for clinical indications and treatment parameters.

In addition, the panel intends to submit a paper for peer review publication later this year, which can serve as a definitive guide to MicroPulse DLT clinical application.

We are very optimistic this type of peer-to-peer documentation will encourage greater confidence and adoption among a broader base of physicians who may be slower to adopt and seek further endorsement of newer technologies.

Turning to our retina business, we saw retina product revenue growth 76% year-over-year, of which 24% came from sales of PASCAL products acquired from Topcon earlier this year. Our U.S. retina focused sales team is exceeding targets. And new OUS distributors are coming up to speed following broad sales rep training programs in the second quarter.

We maintain high confidence in our sales collaboration with Topcon as we look to expand our focus from successful transition to broader joint sales opportunities. Part of the international strength in retina last quarter was from PASCAL inventory building in Japan ahead of temporary import limitations as we shipped product manufacturer registrations.

We've filed this registration in Q3 and expect about one quarter of import limitations during Q4. Turning to U.S. reimbursement news, CMS released its final 2022 payment schedules for ophthalmic procedures. As it historically has done they again reduced physician reimbursements for most glaucoma surgical procedures.

The largest reduction was received in the mix space by stent placements concomitant with cataract surgery, effectively reducing the incremental payment to physicians for placing the mix device by about 75%. Canaloplasty took a 22% hit; SLT was reduced 20% and our CPC and TLT procedures by 15%.

We think the upshot is that our TLT procedure becomes incrementally more attractive from an economic standpoint, to complement our clinical advantages of 30% IOP reduction and strong safety profile from a non-incisional five minute procedure. As we enter the final quarter of the year, we continue to improve our positioning in the markets we serve.

Flooding the U.S. sales organizations at the beginning of the year enhanced their traction. Our new international distributor relationships are now settling into place and remaining transition disruption is subsiding.

We see growing utilization of Cyclo G6 probes, thanks to our sales efforts and support from clinical key opinion leaders driving further procedure adoption. In the past year, we have significantly reinvigorated our retina business. And we have a number of product enhancements underway for launch next year.

Finally, we are very pleased that all these increased investment costs have been covered by expansion of the business such that we sustain low cash usage. Tempering all the successes COVID resurgence continues to show signs of suppressing patient procedures and physician expansion appetites, which we look forward to recovering as COVID wanes.

And while we have been successful managing our key supply chain needs, we are addressing supply chain constraints as they continue to emerge. Nonetheless, we feel confident in our momentum and visibility as we enter this quarter.

And as such, we have raised our revenue guidance to a range of 52 million to 53 million reflecting growth of 43% to 46% over fiscal 2020. Fuad will expand on this in a moment. With that, I'd like to turn the call over to Fuad..

Thank you, Dave and good afternoon, everyone. I will now summarize our financial performance for the third quarter of fiscal 2021. Starting with revenue.

Total revenue for the third quarter of fiscal ‘21 was 13.3 million up 4.5 million or 51% from 8.8 million in the second quarter of last year, and essentially flat sequentially, despite Q3 being the seasonally weakest quarter of our fiscal year. This on particularly strong retina product performance, both in the U.S. and OUS.

Revenue from our glaucoma product family in the third quarter of fiscal '21, was 3.1 million up 13% compared to the third quarter of fiscal '20. We sold 13,486 probes in the quarter up 18% from the same period last year, and 42 Cyclo G6 systems this quarter compared to 37 in the comparable prior period.

Our Retina product revenue improved significantly this quarter posting a 76% increase compared to the same period last year. Our results included 1.9 million of revenue from PASCAL product line which we acquired from Topcon. However, even adjusting for PASCAL product revenue year-over-year growth was a strong 29%.

This clearly highlights the strength of our retina product family and points a strong execution by the go-to-market team. Other revenue were 2.3 million up 47% compared to the same period last year.

The growth was due to higher service revenue increased field activity inclusion of additional service revenue from the PASCAL product line and recognition of distribution rights revenue from the Topcon transaction. Gross margin increased 210 basis points to 43.6% compared to the same period last year.

Gross margin improvement is attributed primarily to an increased overhead absorption on over 50% increase in year-over-year revenue and continuing manufacturing cost improvements compared to last year. Operating expenses for this quarter was 7.9 million a 44% increase compared to 5.5 million in the same period of prior year.

The increase was due primarily to planned investments in sales, marketing and clinical and increases in price bands, including those acquired with the PASCAL business. We recorded a net loss of 2.2 million in the quarter, a net loss of $0.14 per share up from a net loss of 1.7 million, net loss of $0.12 per share for the same period of last year.

We ended the third quarter with cash and cash equivalents of 25.6 million reflecting cash usage of only 700,000. Turning to our outlook for the remainder of the year. Having delivered strong results for the first three quarters of the year, we are updating our guidance for the second time this year for fiscal 2021.

We now expect revenue to be in the range of 52 million to 53 million. This is up from our previously expected range of 50 million to 52 million. G6 probe unit sales guidance range of 58,000 to 60,000 is unchanged from our prior guidance range.

Glaucoma laser system sales guidance is now 215 to 230 units, reduced from 250 to 275 units for the reasons Dave discussed earlier. With that, David and I would like to turn the call over to the operator for questions.

Operator?.

Thanks, guys. Good afternoon. Well, maybe I'll start with you just on the gross margin. Certainly, good gross margin number even with some of the negative mix shifts due to the retina outperformance.

Can you just talk to gross margins going forward? How the supply chains holding up? Are there any pressure points or extra costs, like labor or shipping that you're currently seeing or experiencing? Or that might be on the horizon over the next couple of quarters?.

Yes. Let me speak to the last part of the question first. Like, all the manufacturers, we are certainly subject to the same supply chain headwinds. The team has done really well here. We've been able to ameliorate issues by planning early. So I think we feel pretty good about where we are, we certainly not out of the woods.

And I think that's something that we're going to have to deal with in the coming quarters. But I think we feel pretty good about where we are right now.

In terms of the gross margin profile, I think the best way to kind of look at it is, over a longer term horizon, period to period gross margin changes are really subject to product mix and in quarter adjustments to inventory and so on. I think in the short run, I don't think it's a good way to measure performance.

In the long run, yes, we expect the margins to expand. Our goal has always been to get those margins up close to the 50% range, that is the longer term goal for the company state itself. And I think you will see the margin improvement from where we are in the coming quarters over a longer term horizon. So I think that's where we are..

Great, very helpful. Thank you. And then, Dave maybe this one for you, and I'll start with retina, and then maybe that's my final one on glaucoma. But currently, you referenced a solid pipeline.

And I know you're not going to give 2022 guidance today, but just at a high level, how do we think about the retina business, you're making investments, you've got a strong pipeline of the positives. But on the flip side, you're going to be lapping some pretty significant comps going into '22. And obviously, the PASCAL was all incremental in '21.

And you'll be lapping that as well. So maybe you can just talk to us about that business.

And from an investor standpoint, do we still think about that as a growth business arguably, in '22, and beyond?.

We think there's room to grow in the retina business, the worldwide growth rate is in the low single digits. And it might be flat in the U.S., it's hard to really know where the state of the market right now given the disruptions that occur because of COVID.

But we've strengthened our competitive position, we have products in the pipeline for next year that are going to help on the cost side of things which we can either use price decreases to be more competitive and gain share, or take higher gross margins.

We've also got the ability to combine the best of our IRIDEX scanning laser technology and MicroPulse with the PASCAL product line, we've been working on that since we combined the businesses, and that product will likely hit the market next year as well. So we think we've got some improvements.

And then, there are other segments where we've been working on developing applications and have some technology and potentially disposables that help drive that business on the retina side as well. And when the time is right, we'll be able to talk about those things.

So we like the retina business, and in terms of our position, as a longstanding leader in that segment, and we get the chance to see a lot of the opportunities out there. And we're in better and better position to win those. So we think we can take that from what has historically been prior to 2021.

A slow declining segment of our business to a slow growing segment of our business. And obviously we're seeking to make it a higher growth. But that's the nature of the segment as we see it, we're excited about it and the products that we have..

Got it. Great. And last one for me, and then I'll follow up offline, but maybe just to conclude with G6, certainly the probe number, but taking down G6 capital expectations. You mentioned some difficulty due to COVID. And clearly, unfortunately, that continues to exist out there and weigh on results just at a high level.

How do we think of that? In other words, do we think of these as pushes you brought down the box number, I think in and around 50 for the year? Do we think about those 50 units sort of pushing into '22 and you recapturing that once the world does a better job of fully reopening? Are there any other things that you call out from a G6 capital headwind perspective, where maybe they're not all pushes, maybe half or even less than that.

We would just love some color. Thanks, guys..

Yes. So zoom back. We think the glaucoma segment is a long-term significant grower, you need to have a laser system in place to use our probes and do procedures. And while we've got a good footprint existing already at about 2000, little over 2000 systems worldwide, about little more than half outside the U.S. little less than half inside the U.S.

There are still a lot of sites that are growth opportunities and we will drive the system placements by driving adoption. With numerous prior calls said, it's not our focus to necessarily place a system, it's our focus to bring on a user at a flow of procedures and probe utilization and when they need to buy a system, we sell on the system.

I do think COVID has created let me get through this period. I don't necessarily need to adopt some new technologies or invest in an incremental thing, but I have an interest in it and I'll pick it up afterwards. And I think that's a real factor. Again, we did our original guidance at the beginning of the year, not knowing the persistence of COVID.

I think in general, during that time, the expectation was, it was a first half of '21 thing and that turned out to persist longer. So we're not particularly concerned about it. Obviously, we'd like people to adopt sooner than later. But we do think that those are just simply pushed off in time before they start.

And, we will work toward that with our direct teams in the U.S. And then, continuing outside the U.S. partners, and then the newer parts of the Topcon distribution network as well to make that up next year and really engage that longer term growth trajectory.

And we think it also helps drive probe volume growth as well, obviously, with an incremental site. So long winded answer to your question, but I do think we make up the pace, I'll say next year, whether there's kind of an accelerated catch up for what was deferred? That's a tougher one to predict..

Thank you. [Operator Instructions] I'm showing no further questions at this time. I'll turn the call back over to Dave Bruce for any closing remarks..

Thank you, operator. Thank you all for joining today. We look forward to our conversations with you in the future. Have a good afternoon..

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day..