Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Second Quarter 2012 Earnings Release Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. Dominik Beck, President and Chief Executive Officer. Please go ahead, sir.

Welcome to Iridex Corporation’s second quarter 2012 conference call. I’m Dominik Beck, President and Chief Executive Officer. I’m joined by Jim Mackaness, our CFO. Before we get started, Susan Bruce, our Executive Administrator, will read the required Safe Harbor statement.

This conference call will contain forward-looking statements within the meaning of section 27-A of the Securities Act of 1933, as amended, and section 21-E of the Securities Act of 1934, as amended, relating to the company’s growth strategy including acquisitions, technology investments and strategic relationships, global and domestic market conditions, healthcare spending, market direction and trends, product demand and market acceptance of new products, gross margins, operating expense controls and the company’s 2012 financial outlook. 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 December 31st, 2011, and the quarterly report on form 10-Q for the quarterly period ending March 31, 2012, each of which are 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.

Thank you, Susan. For the second quarter, we reported revenues of 8.4 million, a shade below our guidance. However, the quarter contained numerous operational and marketing positives, as we grew our revenues compared to the same period last year and sequentially from the first quarter of this year. Revenue growth was driven by our recurring revenues, specifically our laser probes and consumables, which is indicative of growing demand for laser surgical procedures. Capital equipment results were mixed. Results in Asia Pacific, Europe and South America were good. We did see some softening in orders for domestic systems, which we attribute to customers’ uncertainty and lingering reluctance to commit to capital purchases. Our gross margins came in at 48.7%, equivalent to the same period last year and an improvement on the first quarter of this year, although just shy of where we expected it to be. We did record a couple of nonrecurring items, the major one being $75,000 of inventory reserves during the period. Without these gross margins, we would have been at 50%, which is our near-term goal. I’m optimistic with the changes that our V.P. of Operations have put in place, we will be able to achieve 50% gross margins. For example, we are focusing on a more linear build plan during the quarter, and will likely invest in carrying a little more inventory in our books to allow this to happen, resulting in enhanced labor productivity which will lower our production cost and improve our margins. As I have previously mentioned, we have been ramping our operation expenses to invest in the business and its growth drivers. Our operating expenses for this quarter were $4.5 million, compared to $3.7 million a year ago and $4.2 million last quarter. In R&D, we are working hard on bringing new…

Thanks, Dominik. Just to remind everyone, in the first quarter of this year we sold our aesthetics business to Cutera, and therefore we’re presenting our results for our continuing ophthalmology business. Revenues for the second quarter 2012 were 8.4 million, up 4% from 8.1 million from Q2 2011 and up 1% from 8.3 million reported for the first quarter of this year. System sales for Q2 2012 were 4.0 million, similar to the 4.0 million for Q2 2011 and 3.9 million for Q1 2012. Recurring revenues for the second quarter 2012 were 4.4 million, representing 52% of our total revenues. This was up 0.4 million or 10% from Q2 2011, and constant with the 4.4 million reported for Q1 2012. For retinal consumables, we are benefiting from the ramp up in sales from our distribution partner Alcon, and we’re also benefiting from the increase in sales of our glaucoma consumable products. Gross margins were 48.7% for the second quarter 2012, consistent with 48.7% for Q2 2011 and improved over 48.0% from Q1 2012. Direct margins remain steady. There were a number of nonrecurring expenses recorded, the major one being 75,000 of inventory reserves that negatively impacted our margin for this period. Excluding these, and taking into account the efficiencies we see in our production labor costs going forward, we feel confident of being able to achieve our short-term target of 50%. Operating expenses were $4.5 million for the quarter, up from $3.7 million for Q2 2011, and $4.2 million for Q1 2012. As Dominik has mentioned, the increase in expenses year-over-year is in product development, as a result of adding employees and incurring material costs for new products, notably Texel, and marketing, also due to increased headcount and also increased investment in the marketing programs Dominik described. The objective is…

Thanks, Jim. I’m excited by the uptake we’re seeing in the adoption of MicroPulse, and I think the clinical benefits to the patients are clear and we’re making inroads in a compelling economic model for the doctors. We are tracking through our internal adoption metric for the year. We see MicroPulse as a catalyst for doctors to operate their existing equipment, and we believe this has the potential to accelerate 200 million of additional capital purchases over the next 5 years. As an example, we had a doctor in Florida who purchased a green laser at last year’s Academy of Ophthalmology, and who had purchased a similar model a year earlier. We invited him to attend our webinar on MicroPulse to show the benefits to patients who were nonresponders to drugs, and also to explain the economic benefit to the doctor. Immediately after the webinar, he phoned up his sales rep and in June we closed a deal on trading in two old lasers for two new IQ 577s with MicroPulse. This is exactly what we’re looking for, a good example for our marketing program stimulating new sales and our sales team executing on a lead. We have seen good results from our licensing and distribution relationship with Alcon. The retinal lab deal is on its way to paying off itself multiple times over, and the core rationale of finding small, innovative tuck-ins remains a key part of our strategic focus. As we mentioned when we closed the Ocunetics deal, this tuck-in will take time to incubate, but we are making progress. We have generated some interesting, and what we consider valuable, IP, and are moving forward with prototyping. We believe it is important to invest in a pipeline of products that will come to market over the near and…

[Operator instructions] Our first question is from the line of Greg Kohl [ph] with Sidoti & Co.

My first question, can you talk a little bit about the economics of the trade-in program? I think you mentioned that it would generate 200 million of capital purchases over the next five years. Is that an increase in capital purchases?

Greg, no I think when Dominik was referencing that, we see that one of the principal drivers that we’re trying to unlock is a technology uplift in the market, so when we talk about $200 million of extra sales, we talk about $200 million of extra demand coming into the market, and that’s driven by taking, if you like, the average life of a laser out there, which is, say, 8 years, and having it truncate to 5- to 6- years. To stimulate that, there’s near-term projects like trade-ins and those types of things that we’re looking to do. So we’re trying to unlock sort of the market opportunity, and then participate in that 200 million.

Okay, and so are you, I mean are you offering money for people to turn in, to exchange their laser systems back in?

Typically what we do is we basically put it into the pricing as a discount off their new price, and then in the past we’ve had opportunities to also resale the refurb units out as well, into certain locations. So we will package it into the pricing of the new system in the form of a trade-in discount.

Okay, and do you have any sort of idea of how quickly this will ramp up? I mean, is most of that 200 million going to be towards the back half of those 5 years?

I think what we really expect it to certainly start to be more sizeable in the later years, yes. Because obviously what we’ve got to do is, we’re in a situation where we’re trying to get that, we’re trying to bring more and more doctors back in and assess their technology needs, and so, come back into the market earlier than they were planning, and that will take time.

Okay, and then, I think on the last call you mentioned trying to expand the sales force. I mean, do you have any further commentary on that?

So, domestically we are right now under way of doing some restructural alignments. We have added in Q2 one individual, and obviously he’s a junior individual, but we have enforced our sales force by one, and we will continue to do that, so it is our plan to continue to drive more recurring revenues, therefore we will obviously focus our hiring towards individuals who are experienced in selling recurring revenue products.

Our next question is from the line of Will Nagsovitz with Heartland Advisors.

It’s good to see that the buyback of 240,000 shares year-to-date. I’m wondering why the share count is still up, though, on a year-over-year basis.

You mean in the actual, the outstanding shares? We do have, the 240,000 is from the beginning of 2011, so you have to recall that that’s the cumulative since we’ve started engaging in the market, and then obviously working to put shares in, there is a steady stream of option exercises, so that is flowing the other way if you like. We do remain active. We obviously have SEC limitations a little bit on how aggressive we can be in the market, so that’s probably the biggest throttle at the moment on the program.

You mentioned on the prepared remarks about a new VP, in terms of operations. Can you just elaborate on what they’re doing, their background, how long they’ve been with the company, et cetera?

So the new VP of Operations just joined in April, and his background has been with operations and medical devices over the last 30 years. His target here is obviously to increase productivity, look at the best ways for us to continue to manufacture our products, to put a plan in place also that has been developed in the first quarter of this year, to drive our gross margins up. So through better ways of manufacturing, better ways of being productive, and you might recall that our previous VP of Operations was located remotely. This time, it’s a person that’s on site, and therefore his impact is much more direct.

So, similar op ex guidance for Q3. Year-to-date, first half op ex is up over 15% year-over-year, sales are up just under three. When do you anticipate getting some more traction on the sales front?

Well we do anticipate that the investments we’ve made in the first two quarters will eventually produce more sales here in the second part of the year. Obviously as we just said, we have Texel technology that will be presented into the market very, very soon, that we do believe will have quite a bit of an impact on the capital sales side or equipment side. With the programs we have put in place on driving more probes, we currently see that there is demand for that and we have a relatively good response on it. We’ll report more back in the next quarter on how successful those programs were, but these have been put in place, they will take a while to really create that traction so it’s actually showing, beyond the volatility of the current market.

I’m just back to the share count question. What was the actual ending share count, not the weighted average but the ending share count, at the end of the quarter?

So the number of shares of common stock issued and outstanding, I’ll go with July 24th, was 9,007,300.

Okay. That’s fully diluted?

Sorry, I thought you asked for the, that’s the issued and outstanding.

Okay. Do you have the fully diluted figure?

Yes, fully diluted at the end of the quarter, we reported 10,286,000.

That’s the weighted average, though? Correct? Or no?

Yes.

I’m looking for an ending share count.

All right, hang on.

I can follow up, it’s fine.

Yes, let me get back to you on that, Will. I’m checking through.

Our next question is from the line of Stan Mann [ph] with Mann Family Investors.

I guess I have a couple of questions. How many shares did you buy back in the quarter? You didn’t make that available in your write-up.

I’m getting it right here. I think it was like 25,000 or 27,000 off the top of my head, Stan.

Okay. So my basic question is, at that rate, buying in $4 million could take, in investor’s concept, forever. So you have nearly $14 million on the balance sheet, and earning very little in this environment. So, Dominik, what are we going to do with the $14 million? We don’t want to waste it, we’re growing very slowly in a difficult climate, so what, are we just going to sit with the $14 million? The share buyback, obviously, is so limiting that you really can’t buy any significant amount at these prices in a quarter or year. So can you give us some framing on what your plans are? It’s a good amount of money. I mean, the company has really been turned around, but what we now need to do is to grow and grow more profitably.

Yes, Stan, I agree with that. However, in terms of what are we going to do with the cash, what I don’t think is reasonable to do is just do an acquisition for the sake of the acquisition, so we’re actively in the market, we’re looking to make good deals. So far, the good deals have just not come across that we can report on. As I reported in Q1, we are working very actively on an alliance, and it’s just not a reportable event at this point. We will come back on that. So we’re actively looking for targets and that’s what we think is the best use for our cash.

Do we have someone hired to do that? I mean, is there someone that’s doing it for us, or are we just doing it with internal trade shows and what I would call, whatever comes along?

We do have an individual on staff whose primary objective is to identify targets that are within our realm of strategy. I mean, we’re definitely not looking and ranging outside eye care, we’re definitely not looking in getting involved, at this point at least, in an acquisition that’s outside our current focus, and in terms of our current focus, it is on retina and glaucoma, and we continue to push on that. Now, some of the development and some of the drive will eventually push us toward, specifically in glaucoma, push us towards some more clinical trial lifting, but we do have somebody right now focused on that, and we’re in, as I said, we’re actively in the market.

Okay. Alliance, you mean a joint venture? A purchase? Can you just flesh out what you mean by alliance?

Well, it could be anything between a joint venture, a distribution, a commercial relationship, in license, so there is, all of those alleys are currently open.

Okay, similar to what Alcon, do you consider Alcon an alliance, for my information?

I would.

Okay. So my last comment and question is, with that much money on the balance sheet, and where we stand, aren’t you afraid that we could be bought , you know, taken out very cheaply, since ophthalmology and this area is an area of great interest to many players?

Obviously, that situation is real. Yes, there is the potential that this can happen, and in the past we had similar situations that we faced, and we will bring it forward to the board if there would be anybody interested in purchasing Iridex. At this point, that’s what I have to say to this topic.

Okay, so, but it is a distinct possibility, since we got $1.30 or something on the balance sheet of value, that’s really not reflected in the price or valuation of our equity.

That’s correct.

Our next question is from the line of Joe Mundo (sic) [Joe Munda] with Sidoti & Co.

I’m a little new to the story. I’ve been working with Greg, I think he’s been covering you for a while, and I actually cover Synergetics, and I just had a few quick questions. You guys mentioned nonsurgical glaucoma offerings. Can you give us a little bit more color on that? What did you mean by nonsurgical glaucoma offerings?

On our end nonsurgical? No, I didn’t say nonsurgical. I think it was noninvasive.

Oh, noninvasive. I’m sorry. Can you expand on that a little bit?

Yes, so you might be aware of our technology platform MicroPulse, which is a tissue-sparing, laser delivery technology, and tissue-sparing means we’re not destroying. In glaucoma, we also currently have a laser probe that’s applied to the outside of the eye and we treat transsclerally, so through the sclera, so therefore it’s a noninvasive approach. But it is surgical, it is considered a surgical treatment approach.

Okay, I just wanted to clear that up. The other thing, bringing up the last caller, he mentioned alliances. You know, some alliance between you guys and Synergetics, is there a potential synergy there to form an alliance and do something cooperatively, like the last caller had suggested?

Well obviously, the two companies have shared the same accounts, shared the same market, we’re in competition in many, many markets or countries. And there is definitely some synergies in terms of product portfolio that could, in a logical extension, could form nice extensions in either company’s product portfolio. Now it is also the case that Synergetics has built some alliances with laser manufacturers. Obviously we’re close together in terms of serving the same markets. We do have different propositions, we do differentiate ourselves, we are more premium than Synergetics is. And in regards of a possible alliance, I think the phone lines are open, but at this point, I do not have or know of any approach that would get those two companies closer together.

Okay. And my last question, on the med device facts, how are you guys going to handle that, are you going to raise prices to offset? What’s the strategy there?

Obviously with the 2%, 3% excise is going to hit hard, and yeah, we’re not in a position to exhort that.

Okay, so then you’re going to raise prices, then?

That’s one way of addressing it, yes.

Our next question is a follow-up from the line of Stan Mann [ph].

I have, just kind of a question on details. You mentioned that your emphasis is a physician office -- I think I heard that correctly -- on placing these machines, a laser, [indiscernible] disposables. Is that correct?

For glaucoma, absolutely correct, yes.

All right. The reason I ask is that most companies find it extremely expensive to try and sell to a physician’s office with a very small sales force. So could you expand on how you’re going to grow the business working through physician offices, rather than larger hospital and glaucoma or DME centers? I’m puzzled.

So, Iridex historically has been very strong in the office, and we actually have a very good market share in the office in placing our lasers, and on the glaucoma initiatives, don’t have a real good analytical number to share with you on how many of those are used in the office versus in an operating environment, but inside the U.S. we see that they are predominately used in the office, and outside the U.S., in some of the countries, they’re predominately used in the OR. However, the sales forces, the direct sales force that we entertain, obviously is in hospital ORs as well as in offices. And if you look at offices, the difference in an office versus an OR has much more to do, where does he see the patients? In terms of expense to the sales force, I don’t see a difference. In terms of how much time do I have, dedicated time of physician interacting with the sales rep, obviously there is much more time in the OR. However, in terms of having physicians adopt to your technology, the office is a very good field for selling the equipment if it’s used there. Now obviously, if it’s used outside the office, it’s not. Now with this laser approach in glaucoma, all our slit lamp-based lasers are used in the office, and therefore it’s the logical extension of where our sales force would actually go. Most of the glaucoma patients are diagnosed in an office setup, and that’s where we will eventually, with this glaucoma initiative where we have a single use probe that will be placed on the outside of the eye, and eventually a first line treatment will be targeting right when the patient is diagnosed, we can have in-office therapy as well.

The reason I ask that, Dominik, is that it would just seem to me that the sale in a physician office, it would take many, many offices to pay, a salesman nowadays makes 100-something thousand per year, and it would seem to me that there’s a problem growing more rapidly if our primary focus is the physician’s office, and could you explain why I’m incorrect? Most device manufacturers have distributors like PSSI or Henry Shine for the offices. We’re different in that we call on the office. So, how can we grow rapidly if we’re going after a relatively small sale? And I’m trying to learn.

If you look at general ophthalmologists, about 6,000 here in the U.S., and you look at glaucoma specialists in the order of 25 to 2,500 here in the U.S., these are very distinct targets. It’s not that we’re serving 150,000 medical offices. These are very highly specialized eye care locations that, by the way are, to a large extent, are accounts already, so why would we not go back and sell to the existing accounts? The point is, those physicians are having office diagnostic time and they’re having OR time. Now, for us, it’s important to make the distinction of where will he have a better economic model? And for that glaucoma application that we target the economic model is much better for him to use it in the office than in the OR.

And the average sale of a laser unit and disposables per year would be, $50,000? The laser is $50,000 or $100,000? I guess…

Lasers are in the order of $40,000 to $50,000.

For the unit.

Per unit, yes.

And the disposables per year, approximately?

Anywhere between $5,000 and $10,000 per account.

Per account, and that’s the primary potential in the U.S. for the products that we’re producing?

Now, all our recurring revenue in terms of probes is used in a single-use, sterile environment. The one exception is our glaucoma probe that is used in different environments, some in a sterile environment, some do not have the requirement to use it in a sterile environment. In regard of selling to the OR, everything that is used in the sterile environment obviously is sold in an operating hospital or ambulatory surgical center in the OR. Applications that are used in the office need to be sold into the office by a visit of the sales individual with the physician. Now, obviously very often, these are demos that we put out, these are equipment installations that physicians are trying, using, and therefore they’re used in the office, that’s where we want to get the feedback from the physician. Now if it’s a probe, we want the physician feedback where he is using it, which is logically in the OR, and that’s how that is separated in terms of our product, and how our touches are. Now, if you look at a sales force, the model of somebody selling a piece of capital equipment is not so much a question of is it in the office or the OR, and the cost of selling it in the OR, to the sales force, or the cost of selling it into the office to the sales force, is very similar. It’s a call of a sales individual in one of the two locations. Now we’re targeting where our equipment is going to be used and how it is going to be used, so in regards of treatment for DME on the slit lamp, which are a peripheral PRP, a peripheral laser application in the eye, this is a slit lamp, therefore office treatment, and we wouldn’t go and sell and try and sell that equipment in the OR. We wouldn’t be able to sell it there. So that’s how we differentiate, when is a sales call in the OR necessary and when is a sales call necessary in the office.

You feel your potential market for DME and for glaucoma, separating them, what do you think the potential market for your products is in each area in the U.S., approximately? 50 million, 100 million, what are we talking about?

For glaucoma, it could easily be a $300 million, $400 million, or even larger for an office space, noninvasive, first line treatment, it could be somewhere in the multiple hundred million dollars. On the DME side, the market is obviously much smaller. I would guess that in the U.S., the market for DME, including probes, is somewhere in the 200, $250 million to $200 million range.

Okay, so we are a small player in these markets at this point.

Yes.

Okay. Now just one last, just clarity. You several months ago mentioned we were cleared, or the U.K. Health Commission recommended our laser use, and the sale outside the U.S. of our products is different because the government is involved. So, how do you see the market in U.K., Germany, and size and how we’re going to approach it and what we are selling, potential?

So, I think the notion that outside the U.S. the government is involved is not completely correct. It’s very, it’s dependent country by country. However, the U.K. that was the National Institute of Health that had a recommendation issued for use of drugs in treatment of DME versus lasers for treatment of DME, and their recommendation was clearly that, from a point of view cost effectiveness, lasers have to be recommended. So it’s not so much that Iridex lasers were recommended, but any laser use was recommended, and it had the recommendation impact. Now in terms of how physicians then have to follow those recommendations, again that’s different form country to country. Some payors do enforce those recommendations, others do not. In terms of an impact to us, this is an important factor that cost-effectiveness is what drives laser sales, and as long as we are capable of delivering technologies that are cost effective, it is a driver for growth.

Are we selling very many dollars in the U.K. or Germany outside the U.S., or France or Italy?

Yes, we are.

Okay, and the potential in your opinion, is it equivalent to the U.S. market if you take all these countries?

So, if we go in the DME market, or actually, if we look at the overall retina market, it’s in the order of maybe $700 million worldwide, so I don’t have any numbers here to share with you that really tell us what is our European potential for our applications. This granularity of data is not available, and it’s not available to anybody. But rough guess is, Europe has a very similar potential. Now in terms of glaucoma, Europe is, for our glaucoma products, Europe is doing at least as good in glaucoma, if not better, than the U.S. at this point.

Okay, so just a quick summary. We have these gigantic markets. What do we have to do to get double-digit, significant growth? That’s where I’m getting lost. It seems like we have potential, we have products, what is it going to take for us to kind of, at our size, break loose and get double-digit growth and significant growth, in your opinion?

The significant growth potentials lie in technologies that need adoption. Adoption is not a switch that we can flip. It is a clear, program-driven and support through programs to get to adoption. You know, I don’t have a crystal ball. I can’t tell you when everybody has adopted to a MicroPulse laser. We see growth, we put our targets out, and we see that we are on track with those targets. If you look at how many total units, lasers, are sold in the year, we clearly set ourselves to a certain market share target, and that’s the internal focus we have. Now, those programs need to be established, need to be put in place, and then we’ll -- it’s sales processes, it’s sales tools, it’s the sales force, there’s many elements that eventually will help us to get there, and capitalize on that potential.

There’s no distributor or way to buy in, since we have a tremendous amount of cash, to kind of leapfrog into these large potentials?

So if you’re referring to PSSI or Henry Shine, these are Q-tip distributors, these are not capital equipment distributors and they definitely are not in our eye care market. The eye care market is not attractive for those distributors.

That’s not what I asked. I asked, is there a leapfrog approach that -- since we have an extraordinary amount of cash, either in Europe or here, that we could take -- because I’ve seen people in device markets buy large distributors and accelerate their progress in market entry and getting share potential. Is there a way for us to leapfrog by buying a distributor or some mode of distribution in one step, using some of our cash?

In the eye care market, distribution is quite fragmented, so it is a matter of focusing on the individual markets. Now, we did make reference in an earlier earnings call that we intend to strengthen our sales force domestically as well as internationally, so obviously, looking at distribution or a more direct approach in selling in other markets is part of our intention.

Okay, because you came from, I believe, a distributor, a large distributor that was in our market. Haag-Streit?

Correct spelling, correct pronunciation. Haag-Streit here in the U.S. was a manufacturing, representation of a manufacturer, not a distribution house.

Oh, they’re not, okay. I’m just -- so you don’t see a more rapid way to penetrate or leapfrog into the market at this point?

I think we lined out quite well what our intentions are, we clearly described our programs, we have identified what next steps we’re taking, they’re multi-leveled, one is technology, the other is commercialization, and third is addressing within the commercialization, our channels, and so it is a package, and within our plan, obviously our growth targets are bigger than what we have been showing here in the past two quarters.

Our next question is from the line of Will Nagsovitz.

Yes, I’m sorry, this is just a follow-up and more of a comment than a question. Just given your outlook for MicroPulse as well as the broader opportunity within your space, it just seems appropriate to continue with the buyback where you can acquire Iridex at an EV-to-sales of .8. I think doing some type of large deal would raise the financial risk profile as well as the operational risk profile for your company. I don’t think that would be appropriate. So that’s all I have. Thanks for your time.

Thanks for your comment.

There are no further questions at this time. Please continue with closing remarks.

Thank you very much for participating in the call, and for your interest in Iridex. We look forward to sharing our progress with you in our next call. Thank you.

Ladies and gentlemen, this concludes the second quarter 2012 earnings release conference call. If you’d like to listen to a replay of today’s conference, please dial 1-800-406-7325 or 303-590-3030 with the access code of 4555596. HQ would like to thank you for your participation. You may now disconnect.