Good day, ladies and gentlemen, and welcome to the IRIDEX Q2 2019 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to introduce your host for today's conference, Ms. Leigh Salvo, Investor Relations. Ma'am, you may begin.

Thank you, and thank you all for participating in today's call. Joining me are David Bruce, Chief Executive officer; and Romeo Dizon, Vice President of Finance. Earlier today, IRIDEX released financial results for the quarter ended June 29, 2019. 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 fact, including but not limited to statements concerning our strategic goals and priorities, product development matters, sales trends, the market in which we operate, our guidance for 2019 and our plans to provide public updates on any of these matters. 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 undue 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, 2019. And with that, I'll turn the call over to Dave.

Thank you, Leigh. Good afternoon and thank you all for joining us. I'm pleased to be participating in my first call as CEO of IRIDEX. As many of you know, I served on the IRIDEX Board for a year before taking the role of CEO 2 months ago. I was initially attracted to IRIDEX because I was impressed with the company's long history as a leader and innovator in ophthalmology. Strong reputation in the industry and unique technology offerings around MicroPulse treatments for both retina and glaucoma therapy. In the past year, I've been gaining confidence in the company's significant value potential, particularly as we continue to expand in the glaucoma space. When the Board began to consider CEO succession, I raised my hand as to be considered for the role. I believe my background managing medical device companies in early market penetration and adoption was directly applicable to the company's situation, and I was confident in my ability to provide the leadership needed for IRIDEX to realize its potential. Since joining the executive team, I focused the company on areas I believe are the keys to our future success. These include: First, shifting our sales team activities to drive deeper physician adoption of our MicroPulse glaucoma therapy, transitioning the procedure to a mainline tool for managing long-term outcomes in glaucoma patients and thereby driving recurring revenue from disposable probe sales. Second, execution on product strategies to stabilize our retina business. And third, reducing our cash burn. The higher value potential of the company is clear and compelling. However, these are necessary adjustments we're making to set us on the path to achieving that value. The company's biggest opportunity is in glaucoma, with our MicroPulse transscleral laser therapy, it's been repeatedly and consistently demonstrated to provide a significant reduction in…

Thank you, Dave, and good afternoon, everyone. Total revenues for the second quarter of 2019 were $10.4 million compared to $10.3 million for the comparable period of the prior year. Revenue growth continues to be driven by our Cyclo G6 products. In the second quarter of 2019, Cyclo G6 product revenue was $3.4 million, an increase of approximately 11% compared to the second quarter of 2018. As Dave noted, during the quarter, we shipped a record high of 14,200 probes and placed 85 systems, reflecting our strategic shift towards probe adoption. Revenues for the retina business were $5.2 million, a decrease of approximately 6% compared to the second quarter of the prior year, reflecting the continuous pressure in our medical retina business. Looking more specifically at our second quarter 2019 revenues geographically, approximately 58% of our Cyclo G6 revenue was in the U.S., 42% outside the U.S. This compares approximately 60% of our Cyclo G6 product revenue in the U.S. and 40% outside the U.S. in the second quarter of 2018. In our retina business, approximately 48% was in the U.S., 52% outside the U.S. in Q2 compared to approximately 44% in the U.S. and 56% outside the U.S. in the prior year quarter, Q2. Other revenues, which include royalties, services and other legacy products, were $1.8 million in the second quarter of 2019, an increase of approximately 7% as compared to the same quarter of the prior year. Gross margin in the second quarter was 43.6%, improved from 41.4% over the second quarter of 2018. The higher gross margin was primarily attributable to a decrease in manufacturing overhead spending, partially offset by the increase in manufacturing overhead variances that included an adjustment to warranty expense. Operational expenses for Q2 2019 declined to $7.0 million from $7.6 million in Q2…

[Operator Instructions] And our first question comes from Jon Block with Stifel. Your line is now open.

Hi. This is Trevor on for Jon. How do you balance preserving the balance sheet as opposed to attacking the market a little bit more aggressively in order to drive sales products for G6? And then I have a follow-up.

We're trying to balance that by making the push in the sales and clinical teams and not backing off from that but controlling expenses in other areas. We've done outsourcing. We're looking at our staffing levels and programs in marketing, for example, to make sure that all these spend are cost-effective. So we keep that burn down under control while we're building up the user base and the average usage of customers.

Okay. Great. I think you mentioned earlier that you expect the P3 to roll out in Q4, how do you expect this product to impact cogs once it's on the market?

It'll be a little bit cheaper to manufacture than the existing probe, few percentage points we believe, possibly better than that. But the real driver is if it delivers more consistent outcomes and less dependency on the specific technique of the physicians, higher outcomes, better durability, safety profile is going to increase the confidence, so people will feel they can use and drive a broader set of patients. So we think it's as much a confidence builder as it is a cost reduction.

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

Thank you and good afternoon. A couple of questions. I guess starting on the G6. 11% growth, it's not bad, but certainly not where I think you want to get to turn profitable. When do you think we might see an inflection point? I imagine that would be twofold, 1 growing units but then also higher utilization. Just trying to get a sense of where you think that inflection point will be? And what kind of growth you aspire to for that division?

Yes. So put in perspective, historically, I think the focus was on placing a large footprint of systems with customers as quickly as possible and believing that the clinical evidence and the initial results that users got would drive usage. And our actual experience showed that it takes more clinical support and technique and learning curve for physicians to consistently achieve those results and get confidence to use it on a broader set of patients. So that's really what we think is the shift that will drive better utilization. It's a combination of more physicians getting confidence and using it on patients, but also our users broadening to earlier stage. The initial product was -- historically, a continuous wave cyclo photocoagulation was a late-stage therapy. And since it's a similar type of technique and we call it MicroPulse version, we've tended to have physicians initially think, okay, that's where I should start with this. And as the safety profile and experience base is built up, it's clear that with a benign safety profile that we have, evidence that people have managed over an extended period of time with a few repeat procedures, we think that, that's just a much broader swap of patients. And we don't think we can get the broader adoption unless we're really accomplishing that in the hands of the actual users. So that's the shift in focus and what go with that are maybe a little bit fewer systems placements. But we're going to target those people who would have the volume that justifies adopting and using on their patients. So we think we'll get a higher average usage for new systems placements.

Okay. But now given all of that, when do you think you would start to see the return on that strategy? Would you expect it kind of beginning of next year when it really becomes more apparent? But just trying to get a sense of that.

Yes. Whenever you start with a customer and you take them through a process where they believe in the benefits that you are describing would be applicable on their patients, we want to talk about a validation process on a representative set of patients, not a couple of patients and try out the probe and see what they think. We know that it works. We have the history and the studies behind that. And so as you take them through that and patients typically get initial results but the final results really take a month. So by the time you get through that process, you are several weeks down the line, months down the line plus, so it will take a little bit to get through that process and then have them start ordering and using on patients. So we do think it's going to take a little bit of time for this to show up in the outcomes. But in the meantime, we'll be able to look at how many of these kinds, how many validations, how many new ongoing customers are we signing up per territory in the U.S. and really focus on productivity of that sales team. Internationally, we go through distributors and we do some of the same efforts in training on the process and how to bring end users along to a broader set of patients, we have less visibility to the end users there.

Okay. Great. And shifting gears to retina. Last year, retina was strong in the second half of the year. But given the dynamics that you spoke about, should we think of revenue up-ticking in second half of 2019? Or should we think about maybe that $5.2 million as a new base for that segment of the business?

Well, last year's second half was strong because we had a -- there was a voluntary recall, where we held back shipments. And we had some orders in the backlog that we were able to ship once we ended the recall. So that shifted some revenue from the early part to the later part and made it look stronger. It's a competitive marketplace, and we're looking at ways that we can improve our competitive position there, obviously systems with better margins will help us be more aggressive in pricing and still gain incremental gross margin and reduce cash burn. But it's a more mature market. And while we have a strong name in that space, we need to do some development and work on some of our delivery devices to enhance their appeal for customers. We think it's still a reasonable opportunity, but we think we can enhance the value of that business by improving the margins and modernizing those systems and make them more appealing for customers as well.

Okay. And then just a couple of final ones. When I look at sales and marketing, $3.5 million down about $0.5 million sequentially, $600,000 year-over-year, are those -- I know you talked about cost savings, is that $3.5 million for that line item? Is that reflective of what we should think about going forward?

Yes. We're trying to be sure that we put effort behind this process of spending time with customers, that's manpower in the field at customer sites. We do want to focus on the productivity of that sales team. And one of the ways we'll know we're making progress there is as we sign up new ongoing customers in each territory at some rate and have a larger and larger sustaining base of customers, the revenue per territory will grow and the average cost of selling in that territory will go down as a percentage of the total revenue. We're -- we have been more judicious and we'll continue to be judicious on the marketing spend, the trade shows and other areas while we try to leverage things like webinars and regional seminars, which can be quite cost-effective.

Okay. Great. And it looks like -- the final question. It looks like the burn went down in 2Q from Q1, continues to go in that direction. How do you think about when you would target cash flow breakeven? And are you comfortable, you have the cash resources currently to get there in your opinion?

Yes. We're coming off a quarter with a nice reduction, down to $1.6 million. It's a bit early to try to set a breakeven prediction. We're optimistic of the growth in our higher-margin MP3 probe business, but reductions in our expectations for retina, China launch, push -- counters the timing for that. And so it's just difficult to give you a concrete answer on that right now. We're maintaining a focus on reducing the cash burn rate and growing the margins to stretch our existing cash. End of Q&A

Ladies and gentlemen, this concludes our question-and-answer session. I would now like to turn the call back over to David Bruce, Chief Executive Officer, for any closing remarks.

Thank you. And thank you all once again for joining the call today. I'd also like to thank the IRIDEX team stepping in and joining this team, I've been welcomed and the efforts are strong and we're all targeting a successful growth for the company. And finally, let me thank the shareholders for your continued investment in the opportunities of the future. I'm focused and the team is focused on it and looking forward to delivering progress updates in the future.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program, and you may all disconnect. Everyone, have a wonderful day.