Welcome to the IRIDEX Corporation Q1 2013 Earnings Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time. (Operator Instructions) I would like to remind everyone that this conference call is being recorded today, May 02, 2013. I will now turn the conference over to Will Moore, Chief Executive Officer. Please go ahead, sir.

Thank you, Angel. Good afternoon and thank you for joining us as we discuss the results for the first quarter of 2013. For those of you who have not met me or listening to past calls, my name is Will Moore and I’ve been serving as the CEO of IRIDEX since August of last year. Today, I am joined by Jim Mackaness, our CFO and COO. Jim and I will both be delivering some prepared remarks related to the quarter and the business and then we’ll open the floor for questions. But before we get started, Susan Bruce, our Executive Administrator 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 global and domestic condition, demand for the company’s products and market acceptance of the company’s new products such as MicroPulse Enabled Laser devices, development of new products, the company’s growth strategy including acquisitions, technology investments and strategic relationship, including the anticipated benefits of the company’s relationship with Peregrine Surgical Limited, pricing of the company’s products, the success of the company’s operating expense control, the company’s margin goal, the company’s share repurchase program and the company’s financial outlook and performance in the remainder of fiscal 2013 and future periods. 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 29, 2012, 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. And I would like to start today by reiterating the most immediate goal I set when I took over as CEO last fall. IRIDEX needed to become a market focused company. Our company’s DNA needed to change with a clinically driven scientific (inaudible) to a commercially minded company that directly responses to the challenges of mildly healthcare marketplace. I am glad to report that we are making progress, the company’s leaner decisions are faster and accountability at all levels have improved and we are no longer satisfied until we see our products shipping and our earnings rising. The first quarter was another record revenue quarter for IRIDEX. During the period ending March, typically a seasonally soft quarter for a capital equipment; we posted revenue of $8.9 million that approximately 8% f over the first quarter 2012. More evidence, we are making progress, OpEx during the quarter was reduced and this occurred despite the first quarter being a very active period in sales and marketing in strategic areas. What is most exciting about our quarter was witnessing a growing evidence and excitement surrounding our unique technology. IRIDEX has developed proprietary technology we call MicroPulse which is (inaudible) therapy for treating serious ophthalmologic conditions like glaucoma and Diabetic Macular Edema or DME. Our MicroPulse based products and therapies are not only safe and effective, but they eliminate the side effects of older laser modalities or drug based therapies in a much more competition which is important consideration particularly in today's economic and healthcare environment. Our sales in the first quarter demonstrate how MicroPulse is gaining traction in the marketplace. The percentage of customers already had new IQ lasers with MicroPulse more than doubled in the year-over-year. Furthermore, there is growing interest in MicroPulse at Ophthalmology Conferences. A total of…

Thanks Will. As Will indicated, we had a solid first quarter as revenues hit $8.9 million, up 8% from $8.3 million in Q1 2012. The total revenue system sales to Q1 2013 were $4.3 million, up from $3.9 million in Q1 2012 driven in part by the growing adoption of MicroPulse enabled units. To characterize the revenue mix in the quarter, we had a strong international systems sales that were aided by the launch of the TxCell systems. Domestic system sales were also up year-over-year, but slightly down versus the record Q4 domestic system sales. Recurring revenues in the first quarter 2013 represented the balance of the revenues, up $0.2 million or 4% from Q1 2012 and up $0.4 million or 9% sequentially. Recurring revenues represented approximately 50% of the total revenue mix which is down as a percentage from last year’s first quarter representing a shift in product mix towards system sales, but up from the Q4 percentage which was even more heavy weighted to system sales. We continue to benefit from consumable sales from our distribution partner Alcon and as Will mentioned we are looking at a number of ways of getting additional consumable products to market, both directly and via partners as illustrated by our agreement with Peregrine. Gross margins were 47.3% for the 2013 first quarter, down from 48.0% from the last year’s comparable period, but a slight improvement from gross margins of 47.0% for Q4. We are steadily working to improve our margins on recently released products while capturing supply and manufacturing cost opportunities in areas where we can find them to improve margins in the near term. While the majority of the margin impact is the result of the product mix with high levels of system sales being sold through our international distribution channel,…

Thank you, Jim. To summarize, we are getting much closer to commercially focused company we need to be. We executed well in the first quarter increasing revenues and profits and successfully launching TxCell. We are investing in our products that our customers want we can deliver in to the market in a reasonable amount of time and are aligned with growing clinical trends and (inaudible). I would also like to thank our employees for their continued dedication, flexibility and support during our period of transition. With that, I would like to thank each of you for listening and for your interest in IRIDEX. At that point, I would like to turn the call over for questions. Angel?

(Operator Instructions) And your first question comes from Joe Munda from Sidoti. Please go ahead.

Real quick, couple of questions here. In regards to, you made reference that 12 papers were produced on MicroPulse, I am curious how many of those papers included MicroPulse with injection?

Are you talking about the one we just mentioned regard to the upcoming meeting?

Yeah.

I haven’t seen those papers at this point in time, that information all we have is the agenda of what's being presented, that is I believe next weekends when the show was out and I doubt very seriously, many of them have a combination.

Okay. But that seems to be a point of emphasis in the investor presentation that’s why...?

Okay. So our view point is that we think what will happen is that there will be a - doctors will do an injection and a laser treatment in the beginning.

Okay. Yeah now I am just wondering because Doc I spoke who had never, he sighted the fact he explains me that he hasn’t seen that research paper with these or MicroPluse with injection. So I was just curious if may be upcoming ones included that as well. But as far as TxCell is concern Jim, can you give us a little bit of a break out there of what the revenues were in the quarter?

Well we don't normally go into that unit detail; just let’s put it this way. We had a target for the year and we are having to put a extra buy-in because we think we are going to exceed the annual target. So we are very happy with the unit sell through that we are seeing

Okay. As far as, Will I know we spoke the last time we had talked about getting the MicroPulse into the classroom settings I am just curious to see how that process is going on your end?

Our sales force continuous to work through that and we are talking about the class and we are talking in regards to the…

Teaching them.

Right, and we are talking about George Washington University and how they were teaching the MicroPulse before they were teaching residents to do injections. That process is ongoing and I think I would like to have an opportunity to get back there and what the numbers are if any more. I know they have been talking to the number of different universities but I don’t have the exact number at this point.

Okay, and then as far as Peregrine is concerned Jim, can you give us some sense of what their contribution if there was one across to the overall gross margin was?

We started selling them as of April, so they will come online in Q2.

Is that where the bump in the gross margin comes from or is it more of the product mix?

For the Q2 forecast you mean or..

Yeah, for the Q2 as well as for the year. I mean, it is part of the mix but I am just wondering is it more the benefit from Peregrine or is it more the benefit from shift to consumables?

It will be a combination of both, the Peregrine branded products will just be absorbed into our overall consumable product portfolio, so they will basically align alongside existing consumable products we have and as a combination they all have good margins, so it will be accretive to the over margin.

And they are OEM-ing it for you as I understand, that?

They will continue to manufacture the Peregrine branded product and we are the distributor of that, and then they will also ultimately become part of the supply chain for the IRIDEX branded products, so they will also supply us those over time.

And then my final question, you touched on the recurring revenue is right around 50% now, I missed the part I don't know if you mentioned it, what was it first quarter of ’12.

First quarter of ’12 I have it at 52.7%.

Okay. Now how should we look at that going forward or would we expect it to drift more.

I think as we said the longer term goal is we want to drive that percentage up. But in the short term we recognized that with sort of the system sales drive that we got at the moment it’s going to be a little more volatile. Will mentioned to this lumpy phenomenon that we see for the system sale. So as we work our way through that, it will continue to move around. But I think its going to move around plus or minus on the 15% but ultimately we are looking to drive it further north by bringing more products into the mix.

And then I guess Will just one final question, in the investor presentation the reimbursement figures that you used, are those hard and solid numbers to really use going forward or are those more projected for the macular edema projections that you gave.

Okay. So the slide that we provided, that is a hard number that comes from a specific position and that's what we use.

Okay, so it’s universal you are just saying that the Medicare reimbursement rate.

The Medicare reimbursement rates are consistent yes. We just followed up the.

Your next question comes from the line of [Larry Hamovitz].

Will what impact over the long term do you think your interest in the comprehensive ophthalmologist could have to the company, it’s been an area in the past that has not been addressed. What should we expect from this over a period of time?

Well, what it does for us as a market currently we are calling on around 1500, we are talking about the US to begin with because its easy to track of numbers, we are calling around 1500 plus retinal specialists in the US, including the comprehensive physician in this category that moves the number up to around 6000 plus customers. So you can see that the value for us is expanding our market substantially. The thesis that we started with and we can move into that space, we want to then move from that to a few anecdotal data points and then move it on before we start calling it a trend. At this point in time and only we are getting orders out of that marketplace.

So overtime that could become a very significant part of the business I am assuming given that there are so many more doctors that you haven't been serving in the past.

That's correct and I think it shouldn't give you some other information with regard to the Peregrine transaction. It allows us to pull up these extra 10 independent reps to help complement our direct sales force which allows the direct sales force to spend more time talking to both retinal and the comprehensive and allowing the independent to do a little more work on the disposables of the operating room, and on top of that we've been spending an awful lot of time and energy and developing our new sites from the web based to social media etcetera on how we are going to trust these positions that are much larger group.

And Jim the shift of manufacturing from another supplier to Peregrine is that significant in long term for gross margins?

It should be significant depends on press and mind you your view. I think significant, yes. How, whether it will contribute one or two points on the overall gross margin, too early to tell, but it is -- the purpose is to drive the cost out of a large part of our consumable supply chain.

Your next question comes from the line of [Don Maine]. Please go ahead.

Two questions. One, the $11.6 million we have, do you see any probability of using that on an acquisition that would sizably add to our business top line, bottom line?

Dan, we have cash on the balance sheet. We're going to use it in a manner that allows us to deal with acquisitions, but I don’t see us spending any we're close to as a matter on a particular acquisition at this time.

Okay, the increase in diluted shares because options become viable?

Yes, the two pieces would be that if you are comparing it versus Q1 of last year when we are in a loss situation, we used the basic number both for the basic and the diluted calculation. This year being profitable, we're adding as you comment the options and other diluting elements. And as the price, the stock goes up, we will find more of those options in the money and they will add more to it, yes.

Last question, several years ago, when I asked the question about the ultimate direction of gross profitability, I remember being told that the possibility of moving to the upper 50% range was distinctly possible. So I ask you will with all the efficiency improvements, do you see that as a ultimate goal, moving in just 50% or moving to the mid to upper 50% gross margin range?

I like you putting determine goal, Jim and I, I think Jim’s really comment where we are targeting the 50% range by the end of this year and the target over the long term that’s 55 plus.

So that is right, I think possible in the reasonable period of time?

Well, I am not sure what you mean by reasonable, if you want to give me a little more definition I can answer.

I think I have been investor for I don't know 8 year so I guess that’s the reason.

I think there are efficiencies we still can bring out. There are products, I mean part of the problem what we have today is with the IQ series and the TxCell are relatively new products and it takes some time to get the bugs worked out and move it through the system to get the cost improvements we need. On top of that, we are looking at more and more disposable products that coming out which have higher margins versus the system sales. So with that, we are moving with the target of 50% this year and I will use your term in a reasonable time reaching up to 5% range.

The next question comes from the line of (inaudible). Please go ahead.

Yes. Thank you very much. Good job compared to our Maine and Boston you have guys are moving a pace. Couple of questions, one, is, what was the number of employee count in the quarter?

I think the 108 is about.

And what was the free cash flow generation?

I am going to go with - I broke down the EBITDA for you which you get is pretty close, so $1.2 million.

And that was approximately EBITDA. And a couple of questions on the TxCell product and it’s designed, is that product, a standalone product or is it designed to accept added modules in the future for other applications?

I will take it first and Will can follow up, so that you one purchase the laser console, first utilize in the sense to make a buying decision on the laser console, and then you decide on what delivery device options you wish to select to go with your laser counsel, the TxCell is a delivery device that gives you the high efficiency through giving you patent generation and scanning capability. So it’s a standalone durable device that is used in conjunction with the laser console.

So it is a platform and there will be an upgrade track in the future.

I said think you can imagine there will be more text, I would say its product family category and you expect more products in it, is that what you are thinking in lines of the platform that has more than one SKU, I don't think if it is a product that in of itself can receive upgrades.

Okay, I understand, it’s very quick. Couple of other things, one, is, you have an education process and I assumed the penetration of the TxCell platform is very -- it’s a very low amount at the moment. You have an education process to commence that this is causing much less scar tissue and that's a difficult process. So I assume that there's some kind of cycle for educating the base and commencing them that they should go with the laser versus the injections. Do you have any kind of timed cycle that you are thinking of for that penetration?

Well, I think I'm going to answer the question as I think I have heard it, but currently what we've done is, we put just about 59 papers that goes through the process of educating the marketplace on the scientific benefits of our laser system with (inaudible). That's step one. Step two is the start to deal with the scientific research side which is going on vis-à-vis this upcoming study or upcoming presentations at this Congress this next month. That has been going on. We have training sessions where we will have as well as on-site conventions such as we had at the Hawaiian meeting. We will have webinars which we are having one in another couple of weeks with couple of doctors that this has to do with glaucoma. On top of that we have the webpage that gets into lots of education providing information. How long it takes? The education these doctors know how to use the laser. There's no question about having to teach them how to use the laser. The information that comes to us is there is a cognitive difference between going from using a laser that's supposed to burn to a laser that doesn't burn. And that education process comes about by selecting a number of doctors which we believe are key influential in the marketplace, having their comfort level and those begin to produce papers which are going out on a regular basis now. And I think that's why we said in the call that’s coming up in September it will be the first time that the Congress is sponsoring their own MicroPulse training session. We have nothing to do with it other than the fact they are bringing in three other doctors that have been doing research on our work and are using it clinically. Those are TxCell, how long this takes to get this tipping over to where everybody wants to do it, I can't really answer yet. It is moving in that direction, how fast I can't respond.

Who is sponsoring the conference?

It is not, the conference is an annual meeting between the Society of Retinal Specialists of Europe. And so there will be hundreds and hundreds and hundreds of doctors probably in the thousands.

It sounds like you are making good progress.

We hope so and we think so.

Lastly who do you consider the two direct competitors to TxCell?

TxCell I would say TxCell. Do you mean MicroPulse or you mean TxCell?

MicroPulse.

Okay. Well, at this point in time we have the IP, we've licensed it to one person, that's it. So I think the real competition has to do with whether it’s a continuous wave laser and injection, other than that we own in the market the space around MicroPulse.

And the next question comes from the line of [Jason Stankowski]. Please go ahead.

I like the progress looks great. I wanted to make sure I understood the Peregrine deal. So Jim, are you saying that sort of a run rate of $1 million is kind of what you see coming out of Q2, you will have it rolling and then building over the next, what year or two, to try to get $2 million revenue run rate from that relationship, is that the right way to think about it?

That’s the way, yes.

Okay. And then, maybe, you know, with regard to the comprehensive docs, do you guys have any new customers in the quarter and is that something you tracked, just people that have never ordered a laser from you in the past?

That is what we say we do track some of that. In regards to where we are today, I would say, we sold a few customers in the comprehensive space. I don’t have the exact number, Jason. I don’t track it to that detail. That I would like marketing do.

And I guess with regard to the international order you just announced a day or two ago, was that one particular research group or doctor group and is it particular country and I guess in that, is it, well coming quarter or is that something that kind of gets delivered over the next nine months or so?

Okay, so the order came from two different places and one was in South America and the other one is in India; they are approximately of the same size, and you say the research group, I am not sure, what you are meaning there….?

Like in NIH or some country or just curious, physician group….?

Going into clinical use. For example, the one in India; went to 12 different clinics, private clinics not to the government.

Okay. And is that then shipped in done dealers because that’s something that happens overtime?

Well as soon as we can build it and get parts and do things.

Okay. That’s great.

It's not to be shipped over year; that’s not the case.

Right. Okay, I think that’s helpful; are there any other large conferences in the next nine months other than the Hamburg, one in Europe, are there any other large conferences coming up where you think you have MicroPulse being pulled out and kind of shown to the world at a higher level may be then it has been at some of the major conferences to-date?

The next large conference would be AAO and I do not have confirmation if there a training session has been put I place yet; I do have information saying that they are talking about us.

So we are working hard to get our shot on. Great good job guys appreciate it. Thank you.

Your next question comes from the line of Joe Munda [Sidoti]. Please go ahead.

Hey guys just two quick follow-ups; Jim mostly on the OpEx line, as far as R&D and SG&A are concerned, both have come down somewhat substantially quarter-over-quarter here. I am just wondering, how we should look at that going forward, I mean it seems like sales are moderately ramping up a little bit here, and those two lines seem to reducing or coming down?

On the R&D we didn't take a little bit of headcount all this year compared with last year, so I would expect to see it reset to this lower level if you like, and we do try one of other things that we are moving towards is more sort of a shared development process where we bring skill sets and then put it back, so we can use them for specifically projects, so I think this reset is going to be, it still provides for the flexibility to work on new products as and when we need to. And then on the sales and marketing I think a little bit of that is to shake how one of the things we’ve been really doing is trying to refocus our dollars towards marketing into social and online media and a little bit away from physical footprint. So there is a little bit of sort of investment changing going on there and then also a little bit through it does get timing depending on which shows we decide that we want to go and really put a presence in, so historically we’ve always had a large Q4 because of AAO which Will mentioned. So we always just has the shows where we should have the presence. So there will be a little bit of shifting between period to period on that, but as I said there has also to be some efficiencies in just trying to move to more than online presence.

Okay, I understand that but then it looks like the G&A line cracked up here to almost like $1.2 million in the quarter?

So it was 1176 to 1186

Yeah, so I am looking sequentially it was 900,000 in fourth quarter that is above our level?

Yeah, again there is some element of timing as the new expense if you like that showed up is the medical device tax that we put into the G&A so that’s in there and some other items that helped, but it stepped it up a little bit.

But as far as following up on your comments, we shouldn't see as selling and marketing dip probably below these levels, correct.

No, as I said we are sort of thinking about in aggregate between 4% and 4.2% for Q2, so something of this magnitude would make sense.

The next question comes from the line of (inaudible).

Yeah I just had one other question, you mentioned that you are going to be going from 1500 retinal specialists to adding 4500 additional specialists, eye specialists, so my question to you is how many salesmen do we have now and how many will you add? I understand that we can do things by Twitter, etcetera, but usually a sale is face to face. So are you going to add any direct sales in these territories to expand coverage and where are you now?

Okay. I'm going to make a correction on the comment. There is approximately 6000 to 8,000 comprehensive ophthalmologists in the United States. That's over and above the 1500 or so retinal specialists we call on today. So your question is obvious it says how are you going to cover them. The point I'm going to make is we are not going to add any sales people at this point in time, we just added 10 independent and we are going to integrate that within our current 10 US salesmen. We have four sales people outside the United States. There is no need to push on everyone of the 6000 today, because they will slowly come around to our side. The aspect of I agree with you that in the past a sale took a face to face conversation, but we've had a few sales over recently from this comprehensive group that have spoken to people on the inside after reviewing data on the web or reviewing information about the clinical study, calling where our sales people went to that doctor’s office to do the end service, not to do the sale. Times are changing a bit and as Jim talked about changing the footprint on the exposure trade shows. We have to be smarter and use our money more efficiently and the way to address people today with webinars and the internet is an efficient manner. And I'll come back to my comment about these comprehensive doctors. It’s a group of doctors that may have a fellow that is recent graduate and that's a retinal person in the group or they may not, but the 6000 to 8000 people are probably doing [injections] and they become our target and it will take us some time but I don't see us adding another person at this point in time until after we get the other group integrated.

Okay, so you have not spoken about the Peregrine salesmen, are they retinal specialists?

No. the Peregrine sales reps are independent reps that carry a number of different lines predominantly around disposable products, calling on ASPs and operating rooms. They do call in a few doctors’ offices but not many. Their products are used and designed to be around surgery. That frees up my sales people at IRIDEX that are selling hardware to concentrate on where the MicroPulse has its best entry point which is in the clinic.

Okay, so they do not cover the retinal specialist specifically or the ocular eye treatment?

Are you talking about the independent reps?

Yeah.

The independent reps predominantly spend their time in the operating room talking with any ophthalmology surgeon, whether it's retinal or something else. That's where they spend their time.

But they are ophthalmology specialists, that’s what I am trying to get.

There are so many. Stan, we have retina guys, we have glaucoma, we have cornea, we have refractive. There is a variety of people in the ophthalmology space and that too those independents call.

And the next question comes from the line of [Sean Bergland]. Please go ahead.

A couple of questions. Was there any revenue from Alcon this quarter or and if it wasn’t, do you expect it over the next six months?

No, we've been receiving the Alcon revenue for a number of quarters now. It's been predominantly in the form of the royalty payments to-date. Our relationship and our agreement with Alcon has us working on supplying them with an IRIDEX branded product and we anticipate being able to put that in to their channel, probably in this quarter but we've had Alcon revenues in our past quarter.

So, you expect disposables coming this quarter?

Yeah, Alcon selling our disposables this quarter, yes.

Okay. In terms of international, (inaudible) just released on this $500,000 contract, how would you characterize your funnel for other clinical labs overseas?

Well, I think the international side of our business is fairly strong at its point in time. When you talk about funnel, I am assuming you are talking about our visibility into future orders. I mean that’s a tough one when you are talking about international sales, because you are dealing with tenders. You never really know when they are going to come, that leads us to having this concentration around hardware which I tell you use the term lumpy. It comes in (inaudible) whereas in U.S. we sell them one at a time, internationally lot of our orders come in clusters. And I can say that we are continuing to work a number of different transactions when they arrive, I don't really know.

And the last question, it seems you have a terrific story getting to a tipping point hopefully by the end of the year of those conferences, should we see some insider buying or we haven’t see a whole lot?

Should we see insider buying, well I bought some share long ago, correct, before the window close. The insider buying comes and goes on each individual choice, I mean that’s not a requirement from our side. I think you saw, you should have seen a small buys from one of our board members, a buy from myself, you will see sales coming and going for people’s own personal facts, issues and things. I don't really know how to respond to it by saying other than what I do. I am going to close window at this point in time.

When the window reopens, do you think you will be buying?

I am going to leave that Tim as private, okay.

It sounds good. Thank you.

And gentlemen, there are no further questions at this time. I will now hand the call back to management for any closing remarks.

I would just like to say thank you to everybody for tuning in and listening to the call. And we look forward to providing increased shareholder value as we move forward. Thank you.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.