Hello. Thank you for standing by, and welcome to the IRIDEX First Quarter 2022 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] Please be advised that today's conference maybe recorded. [Operator Instructions] I would now like to hand the conference over to Hunter Cabi. Please go ahead.

Thank you all for participating in today's call. Joining me are David Bruce, Chief Executive Officer; and Fuad Ahmad, Interim Chief Financial Officer. Earlier today, IRIDEX released financial results for the quarter ended April 2, 2022. 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 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 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 and future events or otherwise. This conference call contains time sensitive information and is accurate only as of live broadcast today, May 12, 2022. And with that, I'll turn the call over to Dave.

Good afternoon and thank you all for joining us. While it's only been a few months since our last call, the IRIDEX team has continued to make progress in expanding awareness and gaining share in the market for our non-incisional approach to glaucoma and retinal disease treatments. Record first quarter results reflected an encouraging start to the year. Despite the Omicron related impact to our business seen early in the quarter, we were able to rebound in the later half to achieve year-over-year total revenue growth that set a new first quarter record exceeding our prior record set in Q1 of 2021. In short, our momentum continues to be driven by consistent operational and commercial execution. Despite the unique and varying challenges presented by the pandemic, our team has delivered increased Cyclo G6 probe utilization through an improved sales process and dedicated commercial teams augmented by our investments to support physicians with peer-to-peer training and increased clinical data. As a result, our physician customers are experiencing improved outcomes and durability from our MicroPulse TLT treatment further expanding confidence in the procedure and we expect that to drive broader utilization. In addition, we've seen upside from the Topcon collaboration, which has improved our competitive position by delivering a more robust portfolio, a broader distribution network and cash from the transaction for investment in our future growth. In terms of our traction in the retina market, we've seen turnaround from a slowly declining business to levels exceeding the overall market growth rate, specifically our PASCAL platform, new U.S. sales team and a new OUS distribution network have been key contributors. Lastly, our focus on cash management and well funded operating runway have delivered stability to invest in growth vehicles of product launches, targeted clinical data and publications, physician training and recently inventory…

Thank you, Dave, and good afternoon, everyone. I will review our financial performance for the first quarter of fiscal 2022 starting with revenue. Total revenue for the first quarter was $13.4 million, up 12% from $12 million in the first quarter of last year. We sold 14,700 Cyclo G6 probes in the quarter, up 8% from the prior period and 56 Cyclo G6 systems in the quarter compared to 64 in the prior period. This decline in system sales is consistent with the international softness seen in the first quarter. Overall product revenue from Cyclo G6 product family was $3.5 million, up 6% compared to the first quarter of 2021. Our retina product revenue improved significantly in the first quarter to $7.3 million, an increase of 10% compared to the prior year period. Note that the first quarter included $2.1 million of PASCAL revenue. Other revenue which includes royalty, services and other legacy products increased 31% to $2.5 million in the first quarter of fiscal 2022, compared to the same period in 2021. The substantial increase is a result of inclusion of PASCAL service revenue and amortized revenue recognition from the sale of distribution rights to Topcon. Gross profit up $6 million in the first quarter, was up 21% from the same period last year. Gross margin was 44.6% compared to 41.3% in the first quarter of 2021. The increase in gross margin is attributable to favorable product mix, continuing pricing discipline, and inclusion of amortized revenue from the sale of distribution rights to Topcon. Operating expenses for the first quarter were $8.3 million compared to $6.8 million in the same period of prior year. The increase was a result of increased R&D spend on plan investments in new product development and an additional R&D capability from the acquisition of…

Thank you. [Operator Instructions] Our first question comes from Tom Stephan with Stifel. You may proceed with your question.

Great. Good afternoon guys. Thanks for the questions. Dave, if I can start with Topcon, maybe if you can just talk to the collaboration and kind of where we stand today relative to expectations? Maybe if you can talk to areas of surprise, learnings, maybe if you can also touch on kind of the bundled tender program opportunities you've talked about, maybe some additional color there would be helpful.

Sure. Hi, Tom. So the Topcon deal is about a year old now, most of the distribution shifts occurred in say the first six months of that, so through about the third quarter last year and then the last shift was in Japan itself and that was completed probably end of the first quarter of this year. So it's fully transitioned to the Topcon distribution and generally went very smoothly. I think there is still work to do in training the teams and working with those teams to sell in our key product areas. I think picking up the retina piece was more straightforward since they had been selling the PASCAL product line already and adopting and selling the glaucoma piece with disposable sales process involved is probably an ongoing activity. So we're pleased with their engagement with us and continuing to try to drive those activities and be sure that they're very successful with that adoption of that selling process and driving that big penetration opportunity for us, for us together.

Yes, that's helpful. So maybe just as a follow up there, it sounds like glaucoma kind of on the G6 side, the Topcon, there are opportunities to improve growth there and penetration and utilization it sounds like.

Well, it's hard to allocate to the different potential categories being there have been some significant shutdowns, delays, access limitations internationally compared to U.S. with COVID and other things. Travel was restricted. And so, it's hard to overlay that with the activities themselves, but we're quite optimistic. We don't see a cause for concern there. We just – I'm just being honest in addressing the ramp up of those activities. We did see as we reported some international softness in the glaucoma side of the business, but we think most of that is attributable to the COVID restrictions.

Makes sense. And if I can move to China G6, I think, you said approval potentially later this year, and maybe if you can just discuss what the opportunity could mean if it's possible the size up the TAM or just talk about Topcon's presence there, any color there would be helpful.

Yes. China is a focus for Topcon in general and so they have a sizeable team there that they have to learn the glaucoma sales process. We're actively working with them on rollout plans now to launch at key opinion leader sites and get a broad footprint started when approval comes. Approval is a very squishy thing in China in terms of timing. You don't really get good visibility on that, but most of the questions and all the process elements we think have been completed and it's in the government's hands to get that over the finish line.

Got it. That's helpful

In terms of – sorry, you asked about the size of the market opportunity. So, obviously, Tom, China is one of the largest markets available in the world. That said, you have to start essentially from scratch and the plan would be to see the key opinion leader sites in the Chinese marketplace, bring them up to speed with our techniques, get them to have some experience and be able to start presenting to the broader medical community in China. So it's a ramp up, but it's a very large opportunity in terms of population tiered by those with glaucoma and able to receive, call it, advanced care in centers around China.

Got it, makes sense. If I can just pivot to R&D, if I'm thinking about kind of long-term R&D initiatives, maybe on the glaucoma side in particular kind of how far down the road they may be or how close they may be, is there any innovation you might be working on internally with G6 or TLT that you can just give us a flavor of whether it's product iterations or maybe something bigger, I guess, for lacking the better term?

Well, we haven't discussed our R&D pipeline publicly to any great detail. Obviously, there is some competitive reasons to keep those ideas close to invest. But if you think about the opportunity to deliver a dose of energy, heat, a tissue target, one methodology obviously is the sweeping method with a certain power setting that we use today. There are other methods to broaden the capability of a device to take on more of that task from the physician I'll say. One analogy and I'm not telegraphing that this is something we're working on, but you look at refractive surgery in the case of LASIK, those machines you program, essentially you program a prescription and the machine does the computation and delivers the energy to the different areas necessary to achieve the ablation of corneal tissue and create a new curvature of that cornea. I am not saying we're going to go that far, but there are opportunities to look at delivering our energy in a more standardized way. And we're exploring a number of things in that area. In terms of the short term, however, we think the – both the science and the technique around sweeping at a very consistent sweep speed and updating our systems to facilitate an accurate sweep speed and provide the feedback to the clinicians on the speeds that they're achieving. We do it with an audible tone and they should be able to recognize the progress points and be consistent in their sweeping of a sector and hear a tone consistent with that location. And they know they're sweeping on speed. That standardization seems to be very well received in the market as we roll out that software. And I think it's helping greatly for people to understand a targeted sweep speed, and then accurately deliver that sweep speed.

That's great color. And last one for me, just on OpEx, you guys have done a great job kind of managing spend and I guess when I'm thinking about just the balance between that OpEx management and potential areas of increased investments to drive accelerating growth, do you feel like there would be an opportunity to sort of step a little bit on the gas pedal on the investment side? And if so, kind of what would be the potential catalyst? So I know you talked about potentially selectively expanding the sales force, but I'm just curious Dave, at a high level, how you're thinking about that balance again, between OpEx management and sort of growth investments. Thanks for your time.

Sure, sure. Spending more money can drive faster growth. I think that's pretty established. The broader footprint with sales reps is a step in that direction on our part and our investments in clinicians studies and the consensus committee where this group independently came to call it a state of TLT in terms of where should – what patients should be used on? What is the technique? What about preop, postop? And the market has been hungry for that kind of information. So we think that's a very cost effective way to send that information worldwide, frankly. And then the last place is in the promotional activities. And we have consistently conducted a stream of webinar events, targeting, specific KOLs, maybe a specific topic around say pre incisional patients. And those have typically been quite well attended. There's opportunity to broaden the spend in what I'd call online and direct advertising. And we basically weigh those decisions based on driving the growth, but also being sure that we preserve the runway. So we aren't faced with a capital endpoint and be forced to raise when it may not be attractive timing. And we think that the plan that we have in place allows us to be moderately aggressive in our marketing and sales efforts, control our burn and continue to have an extended runway. And if we see other opportunities, it gives us a chance to incrementally invest in those opportunities. I've heard from investors that there's a new focus on cash on hand and not needing to go to the marketplace and the kind of environment that, the public markets are seeing currently and with ending the quarter with over $20 million in cash, it gives us comfort that we've got the runway. And we intend to keep a clear runway in front of us, particularly in a tougher capital environment.

Very helpful. Thanks again.

Thank you. And I'm not showing any further questions at this time, I would now like to turn the call back over to David Bruce for any further remarks.

Thank you, operator. And thank you all for attending the call. We look forward to reporting good results next quarter as well. Thanks for your attention.

Thank you. This concludes today's conference call. Thank you for participating. You may not disconnect.