Ladies and gentlemen, thank you for standing by and welcome to the First Quarter 2020 IRIDEX Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today Leigh Salvo, Investor Relations. Please go ahead ma'am.

Thank you and thank you all for participating in today's call. Joining me are David Bruce, Chief Executive Officer; and Jim MacKaness, Interim Chief Financial Officer. Earlier today IRIDEX released financial results for the quarter ended March 28, 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 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, 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 does not place 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 live broadcast today May 11 2020. And with that I'll turn the call over to Dave.

Thank you, Leigh. Good afternoon and thank you all for joining us. Our last earnings call was only 60 days ago, but during that short time so much has changed. The COVID-19 pandemic has affected us all in many ways. We are especially appreciative of all who have been working tirelessly to deal with the COVID-19 incursion and continue to be inspired by their dedication, skills, and compassion of everyone from first responders to the medical staff to care facility workers who selflessly take on the personal risk of returning to the front lines every day. I would also like to thank the IRIDEX team as we all reacted quickly in March to shift our headquarters operation to function remotely our sales and marketing activities to be effective in a virtual environment and coming together as a team showing dedication and flexibility under extraordinary circumstances. For today's call I'd like to flip the order of discussion. I'd like to introduce to you Jim MacKaness who rejoined IRIDEX in March as Interim CFO who will start with a brief review of our first quarter performance. Jim was previously the company's Chief Operating Officer from 2012 to 2015 and also served as CFO from 2008 to 2012. We're happy to have him back and value his expertise in these unprecedented times. Following Jim's remarks, I'll comment on our response to the pandemic and our commitment to supporting physicians in glaucoma patients and current trends in our business plus our positioning for the long-term. With that, I'd like to turn the call over to Jim.

Good afternoon everyone and thank you Dave for the warm welcome. We find ourselves in very unusual circumstances with the advent of COVID-19, but I'm excited to be part of the IRIDEX team again. I've always thought the Cyclo G6 product line represents a great opportunity for the company and have been impressed by the steps Dave and the team have taken in driving adoption and explaining the associated patient benefits to glaucoma physicians around the world. With that said, I'll now turn to our Q1 results. Despite a strong start to 2020, as the COVID-19 pandemic began to spread rapidly throughout the world and many regions began implementing strict guidelines for deferrable procedures consistent with many other medical device companies, we too were impacted. Total revenue was $9.0 million, down from $10.6 million or 15% from the first quarter of last year. However, we should point out that revenues from our G6 probes increased $0.2 million over the comparable period last year. We shipped 13,050 Cyclo G6 probes in the quarter and although that is lower than the 14,000 number shipped in Q1 last year, repeat customer sales were up as growing physician adoption offset the bulk discount placements offered last year. We have previously mentioned that the move away from bulk discount placements towards probe utilization was part of our change in sales strategy and this shift has impacted our G6 system sales. We shipped 38 G6 systems in the quarter compared to 114 in the prior year period, the reduction being partially due to the shift in sales strategy and partially due to the COVID-induced capital purchase deferrals. Overall, revenues for the Cyclo G6 product family was $2.9 million down 6% compared to the first quarter of 2019. The majority of the decline in total revenues compared…

Thanks, Jim. Prior to the onset of COVID-19, we saw a very encouraging momentum in the first couple of months of 2020 as the U.S. rollout of our revised MP3 probe expanded the interest of glaucoma physicians and our non-incisional MicroPulse laser therapy. As we noted in our Q4 earnings call in early March, interest at the American Glaucoma Society meeting doubled versus last year's meeting. Previously, dormant customers were reengaging with us attracted to the improvements embodied in the revised probe and we had surpassed the 50% conversion of sites in the U.S. and we're well on our way to reaching our goal of completion by mid-year. It's important to keep in mind that glaucoma is a progressive disease without a cure whose treatment paradigm requires a sequence of increasingly invasive approaches to slow the rate of disease progression. Therefore, the glaucoma procedures deferred because of COVID-driven restrictions still need to be performed and within an acceptable timeframe before incremental permanent damage could occur to patients' vision. The interest in our non-incisional glaucoma therapy that effectively lowers IOP and extends the runway before patients need more complex incision-based surgeries remains intact despite the limits on current procedure volume and patient visit. Given this dynamic, we are confident in our intermediate and longer-term growth potential remaining very promising. Late in Q1, measures began to be implemented to stop the spread of COVID-19 such as mandated shelter-in-place orders, recommendations for non-COVID patients to avoid hospitals, recommendations by the medical societies and governments to defer all non-urgent procedures and most ophthalmology offices closing and staffing furloughed or reduced to minimal activity for only urgent patient visits and procedures. This resulted in our physician customers experiencing significant short-term limitations to conducting procedures and they also made decisions to defer capital equipment purchases in…

Thank you. [Operator Instructions] Our first question comes from Jon Block of Stifel. Your line is now open.

This is Tom on for Jon. Thanks for taking my questions. Maybe to start off --

Hi, Tom.

…any update on – how's it going? Any update on what percent of the G6 installed base is trained on the new P3 probe? I think, pre-COVID, the thought was to have 95% of the base trained by the end of 2Q, 2020, but now are there any new expectations as to when you might be able to train the majority of the installed base?

Yes. So we were about 50% of the way there, before the COVID restrictions kicked in. We have been conducting virtual training sessions, as I described and we're making progress. It's tough to quantify right now whether we're going to hit that 95% by the end of the second quarter. But the interest is extremely strong and so the ability to proctor cases and move from virtual education to real case support virtually is still there just -- it may be delayed slightly, but we don't see it as a significant extension to the time to get that introduced and people converted over. And then, internationally, we've shifted to a virtual approach as opposed to an in-person approach. And we're encouraged both with the participation by our distributor partners, but also our ability to reach through in conjunction with them on these virtual meetings to engage directly with key opinion leaders and leading customers. So we think that's going to progress very close to, as planned, and we're still thrilled with the response we're getting from users of the revised probe.

Got it. And maybe to stick with the revised probe. Is there any early data or any reads on utilization of it, so maybe from the doctors, you converted early on in the rollout sort of late last year? And maybe have any reorders kicked in yet from early adopters, or did COVID kind of throw a wrench on that?

No, they're absolutely reordering. Once someone converts over, they're typically very pleased with how much easier the procedure is to perform. And they're looking at their patient data outcomes to confirm consistency of outcomes and such. But remember that's a 30-day period before they do their first, call it, read on what the outcome is expected to be. And then, I think, they also, in their mind, want to see three months, six months experience. So they are converting and continuing with the volume or more that they had done before. And we fully expect that they see the consistency that that same-store sales growth can continue upward, as they gain confidence in the procedure.

Got it. Okay. And then, last one, just switching gears to capital. Can you share with us how placements of the system trended in the first two months of the year, so just pre-COVID?

Yes. I mean, most of the system placements were in those first two months of the year, but typically capital equipment is backloaded. So you expect a higher portion of your volume in the last month and often in the last couple of weeks, which is right in the timing where COVID came along and deferred cases. So we're optimistic that it's solely a short-term economic impact and it's not a reduction in the interest. And in fact, we think the contrary that there's stronger interest in our procedure, because of its benign profile in this environment. But capital equipment is going to experience some deferrals. Most of the information is anecdotal so far, so it's hard to quantify impact. But we expect there to be some and we're not quite sure how long that will last.

Great. Thanks, guys.

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

Thank you. Good afternoon. I've got a few questions. First, I think, I've missed the retina number for the quarter. Could you give me that again?

I'm looking down here. I don't know, if we called it out. We just called out 25%. Let me come back to you with the absolute number, yeah?

Okay. It was down 25%? I see.

Yeah. From Q1 of last year.

Okay. I think I can estimate it at least from there. Second, when I look at spending in Q1 G&A in sales and marketing were down pretty good certainly from one year ago not as much from the second half of 2019. The question is do you think those are sustainably low rates, or will those bounce up? How should we think about spending going forward?

Spending in the first quarter was really the result of the significant adjustments, we made in the second half of last year. And we've talked about those and primarily reflective of those adjustments in the first quarter. If sales are down somewhat, there are incremental areas of sensitivity like commissions. Toward the end of the quarter, there was some reduction in travel and travel-related expenses. But by and large that's the run rate that we tried to set in place in advance of all this, not in anticipation of it but to put our cost structure in a position where our cash burn was under control as we grew the glaucoma business into breakeven and profitability. Going forward, there are incremental savings in things like trade shows that can't be – that have been canceled and won't be attended. There's virtually been no travel quarter to date. We'll see how that opens as access improves in the second part of this quarter. But we think those reductions are sustainable and there are other incremental things that I've just mentioned that can help us keep the expense rate under control as we drive the recovery.

Okay. Thank you. I appreciate that color. And I know you're not giving guidance so this isn't meant to gauge any specific projections. But I'm just wondering, how we should think about Q2 versus Q1? Obviously Q1, you had the first two months which were probably relatively un-impacted but you end up doing most of your business in the last month of the quarter. So in 2Q, you're probably not doing much business at all as far as capital equipment sales. But then maybe in June you will or won't you? I mean, I'm just trying to think of how – what kind of lag we might see before people start buying capital equipment again? And just your thoughts on Q2 relative to Q1?

Yeah. In Q2, obviously for the first half, it's had a significant essentially shutdown of disposables and not that, we haven't seen a flow, because of emergency procedures but that's pretty significant impact. And it's just very difficult to predict what happens in the second half with disposable procedures. Now, we do know and hear from physicians that they're eager to get procedures back online and going both from a patient therapy standpoint, because there's only a limited amount of delay that is available for glaucoma patients in their therapies but also for their own economics to get the business back on track. So on that we see it as really limited by their ability to come back online and what efficiency, what operating rate capacity compared to their prior call it 100% capacity. In terms of capital equipment we do think that there's going to be delays. There has been so far in the quarter as you would expect with most practices being shut down and remains to be seen how the end of quarter order demand appears. But we think it's going to be a tough quarter for capital equipment.

Okay. And the probe sales in Q1 were strong. Certainly for the first quarter of the year and given what went on. My question is how do you think probe inventory is at your customers? Is it normal such that probe utilization can reflect end user demand, or might there be an inventory work down out there given that nothing's really happening right now?

I think since the introduction of the Rev two version of the probe there has been some inventory management aspects to it working off the older inventory and not ordering as much. And whether it's been worked through in the fourth quarter and the first quarter, there's more to be done in the second quarter as volumes come back. It's hard to be precise but we expect a lot of that has been worked through at least in the United States where we have direct contact with the customers. And we think – it's hard to know when a procedure is done how long – how much inventory they burn before they order and then what their shelf stock goals are and those kinds of things. But we think going forward be more closely representative of procedure volume even if it lags a bit.

Okay. And just a final question. You grouped revenue into the three categories G6 retina and other. How does that other tend to hold up? I mean is that a little more of a stable business line than retina and G6? Just curious as it is kind of a catch-all but – any color would be appreciated.

It's going to show a little bit of stability to begin with. It will potentially sort of have more an inflection later. The reason is these components are we have a royalty component reported from a partner which is a one quarter lag. So their Q1 report comes into our Q2. And then it's also a lot of its service – a bit of paid service but also service contracts. So within Q2 probably holding up fairly well and then there'll be a little bit of a lag and we might see a little bit of compression in Q3 before it sort of recovers.

Okay. Great. Thank you for taking the questions.

Thank you. And ladies and gentlemen, this does conclude our question-and-answer session. I would now like to turn the call back over to David Bruce, CEO for any closing remarks.

Thank you, again and thanks everyone for joining the call today. We look forward to updating you on our progress as we continue to execute our initiatives and drive the recovery from COVID-19.

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