IRIDEX Corporation

Ladies and gentlemen, thank you for standing by and welcome to the ERADx third quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone keypad. If you require any further assistance during the conference, please press star zero and an operator will be happy to assist you. I would now like to turn the conference over to your host, Hunter Cobby, and the rest of the 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 McInnis, Interim Chief Financial Officer. Earlier today, IRDX 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 or 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 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 FCC. 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 highlight the recent progress toward those goals. Then Jim McInnes, 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 costs 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 transcleral laser therapy, both with new customers and by re-engaging 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 balance has 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 users and with our large installed base of 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 Aerodex under extraordinary circumstances. We experienced favorable improvement month-to-month in the third quarter as our surgeon customers and hospitals continued 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 a 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% of 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 attracted 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 McInnes, 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. BouHab'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.