Greetings, and welcome to the IRIDEX Second Quarter 2016 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded. I would now like to turn the conference over to your host, Mr. Will Moore. Thank you. You may begin.

Thank you, Operator. Good afternoon and thank you for joining us as we discuss the results of the second quarter 2016. My name is Will Moore, and I am the CEO of IRIDEX. Before we get started, Susan Bruce will read the required Safe Harbor statement. Susan?

This conference call will contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as amended relating to the company's financial outlook and performance in the third and fourth quarters of 2016, fiscal year 2016, and as of future periods; including future growth rates, revenues, sales, gross margin, operating expenses and pricing levels, the company's business, demand for the company products and market acceptance of the company's new products, the product mix comprising sales in future periods and the company's product pipeline, trends in the global healthcare marketplace with respect to the treatment of eye diseases such as diabetic macular edema and glaucoma, the company's growth strategy and growth opportunities including acquisition, technology investments and strategic relationships, pricing of the company's products and reimbursement rates for procedures performed using the company's products, the company's operating expense controls and impact of these controls on the company's financial results, the company clinical data and other marketing initiatives, the availability or results of future clinical studies relating to the company's products, the company's changes in personnel, the company's business and sales model, regulatory developments and approval for company products, the impact of sales cycles, tax rates and cash requirements related to tax obligations in future periods, the effect of currency exchange rates and other global and domestic market conditions on the company's business, any health risks associated with the use of the company's products and other macro economic industry wide factors affecting the company's business. These statements are not guarantees of future performance and actual results may differ materially from those described in these forward-looking statements as a result of a number of factors. Please see a detailed description of these and other risks contained in our Annual Report on Form 10-K for the fiscal year ended January 2, 2016, and our quarterly reports on 10-Q for subsequent financial quarter each filed with the Securities and Exchange Commission. Forward-looking statements contained in this conference call are made as of this date and will not be updated. I'll turn now back over to Will.

Thank you, Susan. Before we start today I'd like to introduce and welcome our new CFO and Vice Present of Corporate Development Atabak Mokari, who joined the team a few weeks ago. Atabak has an ideal background to help guide the company to the next level. He has a strong finance and strategy experience in our industry, and has worked with me from the outside of the company for several years demonstrating his understanding of how to create longstanding shareholder value. Over the past year, I've mentioned on a number of occasions that our new glaucoma platform as a pathway to rapid revenue growth and margin expansion. The continued robust adoption of the G6 system and its growing utilization in the field now has us convinced that this opportunity is proving out. So it is great to have a financial executive of Atabak's caliber on Board at this important time. He has spent his career working with medical technology companies, especially in the ophthalmology industry, helping to build, fund and expand their businesses, specialized in strategic growth. So welcome Atabak.

Thanks, Will. I am very excited to joint the IRIDEX team. While I am new to the team I've closely tracked the ophthalmic industry and IRIDEX in particular for many years, which has enabled me to get off to a bit of a running start. Over the last few weeks, I've had a chance to meet with the broader team and have come away with a following two initial observation: One, we have a significant opportunity before us; the G6 platform for glaucoma is certainly at the top that list, but we have a broad range of pipeline projects underway that are very compelling. And two, IRIDEX has a very talented and hard working team that is dedicated to the company's success as we transform ourselves over the next few years to high growth, high margin business. We know we must execute and I believe we have the appropriate building blocks to meet our objectives. Lastly I will be taking an active role in our Investor Relation activities and look forward to meeting many of your in the coming months. I'll turn the call back over the Will.

Thanks, Atabak. I am also pleased to say Romeo Dizon our Vice President and Controller who stepped in very actively [ph] and filled the top financial role for almost a full year, will continue play a leadership role of the finance and accounting team and he will be reviewing the financial results on the call today. Now on to the second quarter, the last time we spoke at the end of the first quarter I told you how excited we all were about the business momentum. I said it was a compelling time at IRIDEX and that our commercial outlook was the most promising it's been since I've been here. Today, I am pleased to say that the commercial outlook continues to translate to sales in the field so that excitement continues to grow in the second quarter. Revenue for the quarter was $11.9 million, which is a record, and comes in at the top end of our guidance and represents a growth rate of 32% from last year. Our growth was driven by continued momentum in gaining glaucoma market share. The market has discovered the G6 platform and number speak for themselves; G6 platform revenue in the quarter increased 66% over the first quarter in 2016 so really nice sequential growth that was driven by both systems sold and probe sales. We sold 115 G6 systems in the first nine months it was on sale in 2015 another 72 in the first quarter of 2016 and 124 systems in Q2. This was clearly a great result. However, I want to be a bit cautious on the implied ramp trajectory as some of these orders were placed by distributors which will take some time to work through before we see reorders. We shipped 7,000 MP3 probes in the first nine…

Thank you, Will. As we noted in our press release and in Will's comments, our revenues for 2016 second quarter were $11.9 million compared to $9.0 million in the prior year period, an increase of 32%. The increase is due mainly to sale of the Cyclo G6 systems and probes which increased 66% over the first quarter of 2016. Note that revenues for the second quarter of 2015 were impacted by the previously recorded supply chain issues that forced us to slow shipments of laser systems in the second quarter of 2015. Our domestic sales increased 38% from $2.2 million to $3.0 million. The increases in our domestic systems sales was fueled mainly by the sales our Cyclo G6 laser systems. Our international systems sales increased 39% from $2.1 million to $2.9 million. The international sales were marginally impacted in the quarter by the Brexit situation in Europe as systems orders anticipated to close at the quarter end were delayed in the UK and other EU countries due to exchange rate uncertainty but we expected the impact to be a temporary as the situation normalizes. Our recurring revenues, which include sales of our consumable products, service and royalties increased 26% to 6.0 million from $2.8 million in the prior year period. The increase is mainly attributable to an increase in the sales of our prior period Cyclo G6, MP3 probes and G probes which offset the decline in the sales of our legacy EndoProbes. Gross margin in the in the 2016 second quarter came in at 48.2%, compared to 46.7% for the Q2 2015. Gross margin was positive impacted in 2016 by improved product mix especially higher mix of the MP3 probe revenue. Operating expenses for Q2 2016 were $6.1 million, up from $5.0 million in Q2 2015. The increase in operating expenses was attributable primarily to a nonrecurring expenses related to termination and severance expenses of $0.6 million; approximately one-third of that number of non-cash expenses. Consequently, our operating loss in the 2016 second quarter was $0.4 million compared to an operating loss of $0.7 million in the prior year second quarter. The net loss of this year's second quarter was $0.3 million or $0.03 per share compared to $0.7 million or $0.07 loss per share for the prior year period. Lastly in terms of guidance we're maintaining our guidance for the full year of 2016 of low double-digit revenue growth. For Q3 2016 we anticipate revenue of $11.0 million to $11.3 million which represents a growth of approximately 14% at the mid point compared to Q3 2015. We anticipate higher revenues in the fourth quarter rollout through the first quarter due the typical seasonality in our business. With that I'll turn the call back over to Will.

Thank you, Romeo. I hope you can tell how excited we are. We're building a rapidly expanding global company whose aim is to server the growing demand for durable economically feasible solution for glaucoma and other conditions and we know we have a very powerful tool and treatment option for glaucoma market which is very large and only going to get larger. Today there are 5 million people worldwide that are on multiple medications for glaucoma keeping the mind the dramatic cost of that clinical pathway as well as the dismal level of compliance that is our core target patient population. We consider all 5 million of those people to be potential G6 patients. Driving that statistics are the roughly 17 million people worldwide that have been diagnosed glaucoma and the 65 million who have the disease and don't know it. It's a massive population and we can have them. We can treat these patient multiple times, reduce ALP [ph] anywhere from 20% to 40% and keep those pressures at bay for months if not years, preserve their eyesight and save the healthcare system of the world billion of dollars without invasive implants or surgery. Today we know more than ever that our MicroPulse and G6 technologies have a vital role to play in the battle against glaucoma global epidemic. With the cost of glaucoma therapies increasingly straining the resource of healthcare in the U.S. and around the world our effective durable products deliver the best medicine at the lowest possible price. With that I'd like to turn the call over to the operator for questions. Operator?

Thank you. [Operator Questions] Our first question comes from the line of Lisa Springer with Singular Research. Please state your question.

Good morning [ph] and congratulations on a good quarter, Will.

Thank you, Lisa.

My question is regarding the breakdown of the Cyclo G6 sales during the quarter of new customers versus existing customers, and also is this group of initial units primarily going in the hospitals and research facilities?

While Romeo picks up the exact number between the new and existing customers, predominantly, these are going to glaucoma specialty locations such as ASCs and hospitals.

Okay. Okay. And you also mentioned investments in your operating footprint. Could you give us a sense of what type of investment you are talking about and over what period?

So I think right now as, Will mentioned, we're talking about increasing the sales force from 12 to 18 reps, I think it's going to be staged over a number of quarters, partly dependent on their continued traction in the field. So it's hard to give you a specific timeline because it's dependent on the reads that we continue to get from the field.

Okay, thank you.

Lisa, Romeo will answer your question on the earlier part.

Yes, Lisa on the G6 probe new customer accounts for the quarter was 124.

Oh, great. Thank you. Okay, thanks gentlemen.

Our next question comes from the line of Larry Haimovitch with HMTC. Please state your questions.

Good afternoon gentlemen, and Atabak, congrats and look forward to seeing you soon.

Thank you, Larry.

So I had a couple of question. Will, you mentioned in the prepared remarks that some of the 124 went to international distributors. Can you break that down between domestic and international and do you think that means that international will have lower shipments in Q3 because of the stocking in Q2?

I think the number in the U.S. versus international is 115 total and what was it 50; 124 total in the quarter and it was 50 in international Romeo?

International we've got 67.

Sixty seven were international, the remainder U.S. The international piece really is dependent on how fast we can get the registrations done in each country. We will be adding a few countries such as Germany shortly and so I think what we've done also is the order for distributor they had to place an order for a minimum of three products, three G6 bundles so that we could then send our person there for training. So those distributors will buy three a couple of them will be demos and they'll maybe have one on stock or something of that nature. Our U.K. distributor for example purchased five couple of them what was in a couple of stock. But it won't take that long to work through but I think what we're doing in the prepared remarks is just being cautious on the projected trajectory this gives you. I am not comfortable of saying we're going to do another 124 instruments next quarter.

And so I am going to ask a follow-up question on that and that is I think in Q1 you had minimal to no internal shipments, is that correct, I mean if there was it was very small?

That's correct.

Okay, so if I back out the 67 from the 124 that means it's 57 domestically, 67 internationally?

Correct.

In the first quarter you did 77 in total?

72.

72.

So I think we had 20 units internationally on Q1.

We had 22.

22.

Okay. So, but it looks like domestic was more or less flat in the second quarter in unit shipped, I am not saying that's the exact number but it looks like it was somewhat of a flat quarter?

Yes.

And that is surprising to me and confuses me because I know that momentum in the U.S. market is tremendous so why it would be that the second quarter would be flattish with the first quarter U.S.

I think, yes, U.S. wise I think this is a time issue and why we're talking about expanding the sales force. There is only so much time and our 12 guys have to be able to sell in-service and train and some of these institutions may have anywhere from one to 15 different doctors or 20 doctors and so an install can take a day or to or it can take an entire week.

So strictly a manpower issue, if you will, that the sales reps just didn't have enough time to in service more than they did?

That's in my opinion, yes.

Okay. I have another question. Let me jump back in queue, I'll let someone else go and I'll come back in the queue.

Thank you.

Our next question comes from the line of Stan Mann with Mann Family Investments. Please state your questions.

Good afternoon. The question, you have a gigantic market, you used the word that you are going to are going to add based on ramp. Well you've not going to get a ramp unless you add the people and it seems like we need to think about a little more expansion the build growth rate and I guess I kind of puzzled, it seems like we're trying to hold back and be careful, we have plenty of cash, we know the market exists and the only way you're going to get ramp is by adding the people or resource to get the ramp including increasing training and other. And could you kind of talk to this, I think we've chatted about this before?

We've chatted about this before Stan, that's correct. I think the comment that we talked about is we will continue to add people, we're not going to add six at once. We said we're going to add up to six people that will include another Sales Manager. We will be also adding people internationally. The point we talked about was we will continue to add people as long as the numbers show that it's proving to do so. And I think that's where we are. I mean, I suspect that we will probably never satisfy your rate of adding of sales of sales people but on the other side I were a venture back business I would have added a lot more by now. I will continue to stabilize the position that I am going to be prudent with money and we could have a discussion in regards to whether it's prudent to add five, 10, 15 people today or add them as they go along sequentially.

Okay, I have one last comment. It seems to me we should be targeting for 20% or 30% increase in our top line. We're very really small potatoes. So I would like you to think about that and we can talk about it off line but I don't say I can never be satisfied, I am not satisfied at these levels because I think we're missing an opportunity by kind of holding back what we're doing and I'll move on. Thank you.

So Stan, I think we did 32% this quarter. The thing I would like to do is I would like to grow faster but I can't just flip a switch and have product come up here on my doorstep that gives me enough supply. I cannot deliver G6 boxes and have no disposal for ship to them. So it's always a balancing act between the number of people and the production and the supply of the goods. And I'll be happy to have a conversation with you anytime to discuss.

Okay.

Our next question comes from Jamie DeYoung with Goudy Park Capital. Please state your questions.

Hi. Will, good afternoon. Good progress in the quarter. I just wanted to followup and just confirm some number we've been tossing around. So given the strength in the international shipments to distributors they are it's suffice to say that next will be down sequentially is that correct?

I am going to say, it's possible, Jamie, it's just putting cost from there, it really depends on how fast and how rapid the regulatory side can get registrations through.

Okay. And in terms of the ramp in the U.S. can you just – what the number again for the amount of reps you'd like to have existing the year?

We have 12 now and we've put in place that we will add another six in the coming months.

And what was the quota going to be expectation for those?

Well, we've had in the past a number that says -- I'll put like this, there is a certain number that says it's profitable, it's not profitable and what we look at is we will take and divide territories and make them become profitable as rapidly as we can. I am going to deliver the number of the exact dollar amount we need for that but the idea is to say we take a territory and split it down and one territory is profitable and other one is slightly, maybe slight under and it becomes profitable shortly.

Understood. So given the ramp that's required with brining on some of these new sales reps particularly in the U.S. and the acceleration you had with into international that won't be sustained in the back half of the year. What gives you the confidence to be able to hit that 12% growth number for the remainder of the year that 12% to 14%?

I think it's a couple of things. One is as we expand and receive these registrations we'll countries that help. Other product is that with the growth rate of the disposable probes the G6 problems give us a far more predictable view of the future and these users are averaging between six to eight probes per month and we can look at that and start to give some kind of mindset of what growth rate is going to be. I think the other part is when we can get these other reps on I want to see a continuation of the positive product mix between retina business and glaucoma products. The retina business in average sales there runs between $50,000 to $70,000 per laser and whereas the glaucoma is about $20,000 per system. So if we can get back into what we were doing with on the growth rate on MicroPulse retina and the people are not stretched as thin as they are right now by taking care of just G6 I think you'll see a product mix that is more to what we like which will also give us a higher revenue piece for it. Longer term I am particularly happy with selling G6s on the disposables. But I want to maintain that a healthy mix for a while.

So I see the path to revenue acceleration in '17 and '18 I should get a higher installed base for recurring revenue, you get more reps ramped. I am just not convinced with the slowdown in the MicroPulse and some challenges you alluded to there in the near term and the slower ramp with G6 in the U.S. that growth might still be a little bit slower and challenged for the rest of this year before it ramps up next year.

Just to clarify our comments, G6 was not and I wouldn't as you talk about slowing growth. I would say that it's still ahead of our plan and we're very pleased with how G6 has progressed so I wouldn't characterize it as slowing and then the MicroPulse for retina business that business is it's growing nicely for us, it's just we think that growth has been impacted by the G6 and the reps don't have enough focus to be able to focus on both products. So we didn't mean that implied that the retina business was not growing, it's just we think that it could be growing at a faster rate and so the sales investment that we're talking about making has a dual pronged intention of driving both of those businesses to an accelerated growth.

Thank you.

Our next question comes from Paul Spets [ph], Private Investor. Please state your questions.

Hello, yes, thank you. In the interest of trying to give us a feeling on this expansion of the sales force, and I'll get back in line for the additional question. First of all, of the incremental addition which I guess will eventually be six, what percent are you targeting at the U.S., how long does it take to orient and train one in a new reps before they are productive not necessarily profitable and lastly do the international distributors do the customer training presently?

Okay, I am trying to recall everything you asked in that question.

First, are they U.S. focused, how long should it take and with the international guys.

I got it. The U.S. – all six are coming in the U.S. that I was talking about.

Okay thanks.

And the second part is, the training on the G6 is much faster than the training on the IQs or the retina business. So when become proficient they can become proficient quite rapidly on the G6 for a couple of reasons. One, the doctors are calling for demonstrations on that at a rapid rate so that's why they get stressed. The retina business not only is there a laser, there is a pattern scanner, there is talking to doctors of getting through this what I'll call cognitive dissonance between having a laser doesn't burn and having a MicroPulse laser. So there is that kind of eduction. And I think you're probably looking at -- with our reps we're hiring you are probably looking at 90 days to six months max.

That's helpful.

Because the reps we're hiring all are familiar with the doctors they are calling on and they are already in the ophthalmology pace. They might not understand how our lasers work but they understand the anatomy, they understand the physician and they understand how to get to them, so that's why there can be an acceleration. I think Mr. Buckley and his team do a great job of training these people and it doesn't take us that long to get them going. Now the last part of that question was on international basis it's a combination between our people that are located throughout the world and the distributors. But the reason why we ask distributors to buy a certain number of Cyclo G6 to start with is to make certain that distributor is making an investment into our business as a partner and therefore, they will schedule with our reps, our employee for a training session and we have what are called Cyclo G6 academy and the distributor will be bring in a number of KOLs and physicians to be trained by our person to begin with and then our person will work with their product specialist to start so that the training stays consistent with what we have in the U.S.

That's helpful. Thank you. I'll get back in line.

Thanks, Paul.

Our next question is a follow-up from Larry Haimovitch with HMTC. Please state your question.

Will, during your prepared remarks you made some reference to the legacy business and particularly the retina business and I don't quite understand what you were saying there. You touched on it with a couple of the answers you've given but are you signaling that but is mature or it just hasn't had the attention that it needs because people or sales force is very focused on the Cyclo G6, are there competitive issues, I didn't quite understand what you were communicating to us.

Okay, and I apologize if I wasn't clear on that. The signaling is on the EndoProbe business the disposable part of our old line lasers. We've had some softness in that market and that is competitive because we're in a very mature market so we've seen some of that, we've seen introduction to competitors coming in the U.S. and we've seen some other things on the international basis as Romeo talked about the UK Brexit and the U.S. dollar becoming stronger our pricing changes little bit, so we've go to deal with that. I think and Atabak hopefully clarified we separate that legacy and people tend to use that term a little loosely. To us, we're talking about when we say legacy we're talking about continuous wave lasers that use EndoProbes for retinal detachments and retinal cares and things of that nature, ROP type procedures. Then we have what we call out MicroPulse business that we separate between MicroPulse for retina and MicroPulse for glaucoma. Both of those are growing and we're perfectly happy with those. We do think as Atabak said, we do believe that the retinal business could grow at a faster rate but to do so we're going to have to give some time relief to the sales people. When you have 12 people covering the U.S. there is lot of windshield time and we need to get rid of that and get people more face to face with the customers on that piece and that will free up that ability to do that. So I hopefully that answers that but we're not signaling that we're seeing a softness in our overall business it's that he disposable probe business that we've had for 20 years.

And Will to follow-up, I mean you announced six new reps over some period of time, might sale force over time be even larger than that if these new reps are productive?

Yes.

So that could be just the beginning of even building a larger sales force.

Yes.

Okay.

And I will add to that you didn't ask the about add to that, there will probably be an expansion of the international side as well.

On selling prices of the lasers internationally what's the difference between the U.S. and the international?

Romeo is going to give you the exact but roughly we give the distributors about a 35% discount.

For the Cyclo G6 in Q2 average ASP domestic was 12,300 versus 9,500.

I thought you sell the initial ones for higher price than that is…

What Romeo gave you was the accountable sales price for the laser alone.

For the laser alone. So if you bundle the laser with the probes in the U.S. and bundle the laser and the probes overseas then it's still about 35% discount.

Yes, you are seeing a roughly $20,000 for the U.S. in that range, so that's $35,000.

Okay, great. Thank you.

Our last question is a follow-up from Stan Mann with Mann Family Investments. Please state your questions.

Yes, probably I shouldn't ask, but are we doing anything for a new product addition to our product lines in R&D?

We're making major investments in R&D yes.

So we'll have another family or set of lasers or disposables in glaucoma or retinal in the near future.

Well, we're using a lot of subjective terms that I'll have to qualify. We're making investments in glaucoma and in retina at varying eye diseases. The target market for other target is a captive disposal with a piece of hardware. Your other question is soon, I can't say soon when it has to do with FDA a variety of things. But you should feel comfortable with Romeo and Atabak both explain that we're making these investments in the R&D side. We've made many, we've made a few hires in that area and we think we have some other technologies that will be as good as if not better than what we've got.

Thank you.

Some will be big businesses and some will be just add-ons.

Thank you.

Operator?

We currently have just one more person queued up. We have a follow-up from Paul Septs again, a Private Investor. Please state your question Paul.

Yes, very brief. One of the things that you did early on was in your international distribution system had some products that didn't originate with you but were complementary to what you provided and absorb some of the overhead. Is there any effort to extend that further?

I think if you're talking about the eye care product we're not set up to be a distributor of other people's products. We've made the investments in the R&D side and I don't really see us doing much of that. I won't say we're opportunistic it may if works it will work but if it doesn't we won't do it. We're going to continue to invest our money into development on our current product line and add scientific things here. And I think basically Paul my viewpoint is that, I would rather create markets than just to add another product on to compete with somebody else.

Thank you.

Okay.

That does conclude our question-and-answer session, so I will turn it back to you Mr. Moore for closing remarks.

Thank you operator, and thank you everyone for joining the call today. I look forward to speaking with you at the end of Q3.