Greetings, and welcome to the IRIDEX Corporation 2015 Third Quarter Results Conference Call. At this time, all participants are in a listen-only mode. A brief 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, Will Moore. Please go ahead, sir.

Thank you, operator. Good afternoon and thank you for joining us as we discuss the results of the third quarter of 2015. My name is Will Moore, and I am the CEO of IRIDEX. I'm joined by Romeo Dizon, our Corporate Controller. I will be delivering some prepared remarks and then open the floor for some questions. 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. Forward-looking statements, include statements with respect to sales of products in future periods and market acceptance of our new products including the Cyclo G6 product system, the timing and outcome of any steps that we may take to address supply chain issues, and the impact of these issues and corrective measures on production and operation, changes to our business model including any plans to increase sales of consumable products and develop greater procedure revenue streams, future product developments including plans to introduce additional probes for use with the Cyclo G6 product system, the size of the market for our products, including the Cyclo G6 product system, our financial outlook and performance in the fourth quarter of 2015, fiscal year 2015 and future periods; including margins, revenues, expenses and sales, associated with the Cyclo G6 system, trends in the healthcare marketplace, our growth strategy and growth opportunities including acquisitions, technology investments and strategic relationships, product pricing, operating expense controls and cost reduction programs and the impact of these controls and programs on our financial results, changes in personnel, marketing initiatives including our plans in relation to the AAO conference, our share and repurchase program, regulatory development and approval for our products, the impact of sales cycle, tax rates and cash requirements related to tax obligations in future periods and other industry wide factors affecting our 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, 2015, 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. I'm pleased to say we had a very productive third quarter. As we discussed on the Q2 call, certain challenges had arisen within our supply chain that required corrective action, and which consumed a lot of energy. We now have the technical issues resolved, although production is still ramping back to normal as those fixes are being fully integrated. I'm also happy to report that we saw real progress on the commercial side. Building on a successful launch for our Cyclo G6 platform featuring MicroPulse. This is the centrepiece of IRIDEX's push into the glaucoma market, which is a game changer for us. In addition to the G6, we've began releasing other important programs in glaucoma that further our drive for more recurring revenues. Correcting the supply chain disruption was obviously a big focus during the quarter, with the work beginning in the second quarter and carrying through the third quarter, we are pleased to report that we have largely put this issue behind us. As most of you know, dealing with these challenges, slowed down our operations, had an impact on revenue and added some expenses as we put in place more stringent quality systems. The short-term impact of these efforts resulted in, for the first time in 16 quarters, missing our guidance in the second quarter, but we made our adjusted numbers for Q3 return to profitability and see our operations largely back on track going forward. As I said last quarter, I consider our recent production challenges to be a growing pain. It was never a demand issue, or even a safety issue. These issues had no apparent impact on order cancellations, which were consistent with historic levels. The demand for our products remain very strong. In fact, we were not able to fill…

[Operator Instructions] Our first question comes from Larry Haimovitch with HMTC. Please proceed.

So, a couple of different questions. One on the current ops, it seems to me, you had really two headwinds in Q3, one was the supply issues you referred to, the second was currency. Are you in any position to give us a little quantification on what that might have cost you? Is there any ballpark number you'd say, gee, we lost X number of sales because of currency and also the supply issue?

Well, as I said in the call, we didn't notice any cancellations of orders. The supply chain -- the issue really had to do with the IQ system, not the legacy or the disposable probe. We didn't see any pricing issues on the disposable probes internationally, but we did see pricing pressure on the IQ systems with that. Now, when it got outside of the U.S. predominantly what happened is the distributors just stopped ordering while we were dealing with the supply issues. So, there was a slowdown on that regard. It'd really be hard for me to put that quantity on there, but I think the supply issue probably has cost us a delay in orders of maybe upwards of 1.5 million. Something like that.

Okay, and asking the question a little differently, obviously from past history, we know that you've had some success with tenders in India and China and other places. Your two principal competitors have a real currency advantage on you in those markets. Did you notice any loss of business to either Quantel or LX or anyone else you had a currency advantage --?

I didn't notice anything with LX. I did notice there was an uptick in Quantel's activity and that affected us, because we really couldn't respond as we'd like to because of the quality issue. It wasn't really pricing. It was really that we couldn't deliver in the time they needed.

Okay, and then on a happier note, I'd like to ask a little bit about the glaucoma, and the G6. Obviously, you're very pleased with it. It's going very, very well. Are there any metrics or any way we can kind of gauge the progress of this business? It's obviously doing well, 71 placements already, and you only started shipping, I think in, real earnest, I think you told me one point, late second quarter if I'm not mistaken. So, it's done very, very well. Can you try to give us some more quantity on the quality of hey it's going great?

Yeah, what I'm going to do, I'm going to break that up into two parts if you don't mind. One, I'll give you a couple of cases that were reported to us what gets the hospitals excited about what we're doing and then I'll give you a few other facts which I think are important. One, we had a report on a 52-year old male neovascular glaucoma, and had elevated risk for incisional surgeries. So, they used the MP3 probe. Preoperatively, he had a pressure of 32 and he was on four meds. Postoperatively, one week later, he had 19 IOP on two meds. Another case was a moderate glaucoma patient, female 80 years of age, preoperative pressures were 36 on three meds, postoperative, one week later, 12 no meds, postoperatively six months later, 12 no meds, and another one where we did the -- where we were doing the clinical studies, we now have longer-term data that one patient that was in advanced glaucoma preoperatively 28 millimetres pressure and four meds, one year later 10 millimetres of pressure, one med. Those are kind of things that get people really excited, and I think that starts to lead us into this point, which I'll give you in the next part, which is a little more color on the device. The first case was not on a commercial basis. It was not done until March 30 this year. Since then, we've delivered over 70 units. Six accounts have purchased more than one laser, 10 accounts have had their G6 for more than six months and of those, four of those accounts have already repurchased probes and those were at 60 units each. We've had six other accounts that have already repurchase probes in less than six months. We've had one account, use more than 240 probes. There's roughly 300 accounts that account for the top 20% of all accounts doing 50% of the cases. Of that, we've already sold 12 accounts in that. We've done more than 1,000 cases and I think, what it gets down to are a couple of very simple things. The doctors tell us it's titratable to the patient's condition in this era of personalized glaucoma therapy. It's non incisional. It's repeatable. It's minimal and there's no inflation or the eye is really quiet postoperatively, and the patient downtime or recovery time is significantly lower than anything else they've done. That's the part that gets us really excited, and I think we're really solving this problem as we've talked about in the past, which was let's get into this, what we call compliance war between the patient, not taking their meds on time and the physician trying to get them to take their meds. This is a real solution for that.

And, as I recall Will, the reimbursement for the doctors is quite favorable too, which I'm sure is helping the demand as well, I'm assuming.

The reimbursement is quite good. The procedure takes about two minutes and there's a fee for both the facility and the physician.

Let me ask just more question and I'll jump back in queue. When you ship an initial order, I think you're shipping the laser and is it a 100 probes with the initial order?

60.

And for that they pay -- about 18,000, you said about the ASP?

Yeah, it goes between 18,000 and 22,000.

Okay, so an average of 20,000 and for that to get the laser plus 60 probes, when they run out of their probes, obviously they order more?

That's correct.

And the probe price, $175-ish?

We've increased the price. We're up over $200 a probe now.

Okay. Well, let me jump back in queue, I have a couple of other questions, but I can come back later. Thanks.

Our next question comes from Raymond Myers with Benchmark. Please proceed.

I want to ask two questions and maybe you can relate them a little bit, because one flows into the next. The first one is, with the G6 launching and the manufacturing issues now behind you, why is the Q4 revenue guidance basically flat to slightly down from last year? The second question is, can you describe the G6 opportunity and how much, and the timing of when you anticipate that contributing meaningfully to results?

Okay, so the question on the first part, as I said in the very beginning of the prepared remarks, we think we have this pretty much behind us. I didn't say it was completely behind us. So, there may be a difference between what we book and what we ship is one thing, and then last year Ray, if you look at those numbers, that was produced off of one extra week in the quarter. Last year we had how many weeks?

14.

14 and this year we have 13 in our quarter. The second part of your question comes with the G6. When does it start to produce meaningful revenue? I think you'll start seeing meaningful revenue sometime as we move into the mid part of next year. We're still -- understand we produced less than 100. So, there's going to be a few bugs in those as we go through that process as we get it geared up. We're not ready to open the spigot completely yet, meaning, turning it over to everyone to sell. This has only been sold in the U.S. and as we went through that process in the first number of months, it was only handled by Tim Buckley and Mike Scott our marketing people. Then there was a training session in June, late June something of that nature, which the sales force from the U.S. started delivering it. We hope to start rolling it out in next year internationally, and I think why we we're doing it in this pattern is there is a possibility that there could be what I'll call a cockpit error, meaning the physician could undertreat by going too fast during the procedure. The physician could not hold the angle of the probe perfectly to get the right distribution of light on the eye in the right way, therefore, we wanted to go on at a very controlled slow launch to make sure we had a community of users that were incredibly happy before we started running into people using it and not listening to what we're saying. For example, you go into a hospital and there might be 10 physicians and you train two. You want to make sure those other eight know that the other two are using it and it's working appropriately. So, we're taking it very slow, because the opportunity is pretty strong.

Okay, and then leading into my next question, which is, if you look out two to three years, how large of an opportunity do you think this is for IRIDEX?

Okay, so the way we've looked at it is taking -- there's roughly between 1,500 to 1,800 accounts that are billing to this type of procedure today. That doesn't include office space, and we believe this can be performed in the office later and it does not include cataract surgeries, which we believe cataract surgeons would probably do this as well because many patients who have cataracts have glaucoma as well. We modelled it out to be approximately 1 to 4 lasers per site or location, which gives us upwards between 3,500 to 5,000 lasers, with approximately 10 procedures per month at a revenue of between $200 and $250 a probe. The new probes, the additional probes will be coming out within '16 have illumination. So, they'll be a little more expensive, and so you do that, so you're looking at 10 probes per month times 12 times the number of lasers, you start talking about an annualized market of some place between 150 million to 300 million on probes. So, it's a pretty big market. You can go down through the number of patients on meds. There's 9.4 million of them, and there's almost 2 million laser procedures done a year for glaucoma, and if you do that -- take those numbers, $200, $250 a probe, you have massive market. So, I think the market's quite strong.

That's great. Well, that sounds exciting and just before I sign off, do you have any comments about your partial competitor Synergetics being acquired by Valeant, which means that it's combined with Bausch & Lomb, does that change the competitive dynamics in any way for you?

Well, Ray, I'd say in two terms, in short and long term. Short term, I might see some pricing pressure as the distributors who were handling Synergetics -- this is all speculation by the way, so, the Synergetics distributors might sell their probes out to get out of that business, because it's predominantly direct with Bausch & Lomb. Once that process is done. I see Bausch & Lomb as a very solid business who has great pricing discipline. So, I think the prices of the probes will inch up a bit, and the other side of that is, I don't think Bausch & Lomb salespeople are -- probe or disposal, salespeople as much as they are heavy equipment. So, I think the exposure is going to be less and the prices will be a little bit higher, which should, I believe in the long-term help us.

Our next question comes from Stan Mann with Mann Family Investors. Please proceed.

Will, I just have some kind of questions that continue the discussion of the benchmark, the gentleman asked you. You feel there's a market of 150 million to 300 million. So, my question to you, it seems like somehow we should have a plan to gear up. That's pretty big number and if we took 30% of it or 40% for just the probes alone, it seems that we're not geared or set up to really grow rapidly once you get your 2016 pilot -- your detailed work to make sure the laser and the probe and everything works together to get it launched big time. So, we have a lot of cash on the sheet and I guess, my question is, how are we going to take advantage of this opportunity which is a big opportunity before 20 other people jump in that are more geared to take the business and move with it?

Well, I think there's a couple of answers I'll give you Stan. Whenever you have a great market, there's always a threat of competitors jumping in. we do have very good IP around the MicroPulse both in the trademark and then in the IP on the probes and the way we're manufacturing these probes with RFID tags going to the installed base, no one, no one can touch -- put their probe into ours and make it work. So, we are on a real estate grab for boxes, which would assure us the long-term viability of the product. We've done a few things differently on this than we have on others and we've priced it to market and we're selling the G6 box in a bundle for $20,000. That's kind of unheard of for a laser business with 60 probes. If you did the math backwards, you're talking about a laser that's in the $9,000 to $10,000 range, which is going to be hard for people to do, and then on the other side how do we position ourselves for growth? Well, we've expanded our sales force. We've just added another -- put it this way, adding another regional manager, we're adding a few more territories. We've got plans on the books for putting in clinical specialists to do the teaching and the follow-up education. So, when a hospital buys a G6 with the MP3 probes, somebody can follow-up and train the other doctors and start teaching them how to use the other five probes. That's all on the books. That's all forth for our 2016 plan, and then if we end up with 14 salespeople, we might end up with more than that. On top of that we still have our 20 independents.

What concerns me is the opportunity and our ability to staff and build to move to a $100 million a year company. I don't get the feel and I've been a stockholder forever. I don't get the feel that we're ready for a real acceleration to what I would call the big time. So somehow --

Yeah, I think you have to -- I'm sorry, keep going.

No, somehow I think, you know, I've invested in growth companies that grow 20%, 25% per year, and I don't get the feeling that we're moving toward the $100 million type company in a -- as fast as we can to protect our asset and to make the company what I call significant. As you know, below $100 million is not great significance in the equity market, and we're sitting with $10 million, $12 million on balance sheet, minimum with no borrowings. So, can you kind of convince us that we're going to be ready and we have a plan to move to $100 million or more per year?

Sure. I mean, I could just say yes, but I'll give you a little more detail. So, I've been through those growth companies and been a part of them and I understand what has to be done. This Company was stable at $30 million for years, and take that and move it to $100 million, you just can't step on the gas and say, let's go. There's all kinds of procedures and policies that you have to put in place to be able to leverage your business. One of those is looking at how do we go from manufacturing 1,000 lasers to 2,000 lasers in the same place, and that just says you have to tighten up your specs and get it outsourced, so you can have other people manufacturing the devices for you, as you keep coming out with new products. That's being done. We started outsourcing last year. We've got a few products that are doing it now. I think, if we hadn't had the six-month delay on the current quality, we would've had more lasers being outsourced. All our probes are made outside now. We have five people involved with making probes that do half our business. It's all been outsourced. So, that's the kind of leverage that's been going on the production side. The other side, on the sales side, we went from having 8 sales people direct and now looking at 14. We went from having no independents to 20 and we're now putting together the model for a clinical specialist to follow up on the training. I'm looking at areas around the world where I can go and start building a direct operation to where I can take care of the currency issue and improve ourselves on some tax structures. All those things are ongoing. I'm kind of a conservative guy. I don't really a talk a lot about stuff that is in the planning stages until which time, I can pretty much show it to you, but there are plans.

I'm worried about -- somebody once told me that your vision kind of limits what you're going to do, and I need to be convinced that we do the $100 million, $200 million, because I've seen what we've done, which is a miracle, going from bankruptcy to where we're profitable and solid, and what I'll looking o kind of feel and understand is, how are we going to go from that to what I call big time, over $100 million in sales a year, and I think, I'd like to, as we move out in the next six months a year, I'd like to kind of hear some washout of looking down the road two, three, four years and kind of trying to put a frame around it, so we understand that.

Okay. So, it's always hard as a public company talking about goals versus guidance, but I'll answer the question in a different way, Stan. I don't like doing anything that's boring and having a company doing $50 million a year's boring to me. I didn't step in to take over a company to take it to $50 million. So, I was comfortable living the way I was and I love a challenge and this is a challenge and I see an opportunity in what we're doing now that makes it exciting for me to be here every day. You can look at other things that I've done in companies and I have the same plans and intention. I have to have the right team in place, I'd have to have the right people, with the right character that like each other and can support each other from the back versus having a great individual contributor that nobody trusts. The team is together. They're tight and they're all looking at ways to make the business more efficient and faster and better, and it's one of those things where you've got to spend time taking people that are used to doing $30 million a year and talk to them and let them know that we're going to be taking it to $100 million or $200 million and have them look at you like you're crazy and they don't believe it until they start seeing the growth. Well, they're seeing the growth and they're believing it and I think I'm comfortable. I may not be the best at explaining from my conservative nature to say how we're going to do it all the way through. I'm more comfortable telling you when we're getting close to it and give you an idea where I'm headed.

So, two last questions. One, will you be comfortable giving us some goals or framing over the next six months to one year? Framing, goals, not forecast, framing and goals?

Well, I think I'm very comfortable at this point in time to say to you, I have every intention to be growing at a rate that's better than 10% over the next number of months. That's about as far as I'll go on that. I explained earlier, to Ray and to Larry about the model and I don't have any intention of creating a market for somebody else to have.

Okay, so I have at last the easiest question. Somebody -- it seems that somebody has a large position in our company, I think 27%. Is that correct, Will?

Yeah, 25%.

25%. Okay, but there seems to be more accumulation from what I can see, just as an investor in IRIDEX. So, is there something going on that we got another accumulator that you're aware of?

We've had accumulation. It's been public knowledge that Paragon in Dallas has bought more shares over the last number of months. They own about 11% now.

Okay, so that's public knowledge, but that's the only thing that's public. It seems like --

I continue to go out and talk to small boutique funds and they do their buying. I don't go to New York and try to talk to somebody to buy $3 million or $5 million worth. Wasting my time. I can't get it.

You can't find it, but anyway I appreciate what you've done and hopefully we'll get to over $100 million significant [indiscernible] sooner than later.

Well, I think so and all I can say to you, Stan is I appreciate your support and just have a little patience with your passion.

[Operator Instructions] We have a follow up question from Larry Haimovitch with HMTC. Please proceed.

Hey Will, I just wanted to clarify one thing. The impression I had with the G6, it was much more office-based. I thought I heard you say a little bit earlier on the call that it was more hospital-based. So, I was wondering if you could clarify that for me.

Well, I think that, what I was going to say is it can be done in either place, but I do believe at this stage, we're going to see more in the ASCs or the hospital because the patient's either going to have a block or maybe some slight anaesthesia or it is an infrared laser. So, there is some slight pain to it. The other part Larry is that the reimbursement codes are quite good for an ASC, especially if a physician owns the ASC.

Our next question comes from George Monk, private investor. Please proceed.

Hi, can you explain to me how you've made the glaucoma probes so they're not reusable?

How we've made the probes so they're not reusable?

Correct.

Okay, well, we haven't. We've got them cleared through the FDA as single use. There is what we'll call -- what is a clock which allows for that probe to be used for a certain period of time and that is 90 minutes before it would be no longer usable. So, that really becomes the physician's -- once the physician or hospital take title to the equipment, I can't do anything about it, what they do with it, all we can tell them is it's licensed for use as a single use device. If they ever had a problem and they've used it on more than one patient, then that'd be their problem to deal with, but it's not a -- so George, it's not a situation where they plug it in once and it disintegrates like in Mission Impossible. They could use it again if they wanted to, but at this stage, we don't have anybody doing that.

So, these things could be hacked and be used multiple times?

No, they couldn't be hacked from that regard. Now, I said that as an absolute, I'm not an engineer, but the way I understand at this point in time, is once that device is plugged into our system, the RFID communication system identifies that probe, what it is, what procedure it's going to and it starts a time clock for that probe's use. Once it reaches the end of that timeframe, that probe is dead.

Okay, thanks very much. I'm a long term investor and I am looking forward to the future. Thanks very much.

We have a follow up question from Stan Mann with Mann Family Investors. Please go ahead.

Yes, I am wondering on M&A, do you see any bolt on or additional technology add-ons in glaucoma that could help accelerate our growth and build our potential?

Well, both in glaucoma and retina, there's always a number of small companies like IRIDEX that are foreign ventures. The issue I have at this point in time is I really want to be careful at taking our team's eye off the ball selling G6s and getting that installed base up. So, whatever we would find would have to be a product that would be what I will call [indiscernible], not a product that requires education. So, that we can stay focused on the G6 and expanding that market, but they're out there. I just have to have the time to do it.

There are no further questions at this time. I would like to turn the floor back over to Mr. Moore for closing comments.

Thank you, operator and thank you all for attending this call today. Hopefully, we answered your questions and provided you information to make your investing strategies work. Thank you. We look forward to talking to you next quarter.

This concludes today's teleconference. You may disconnect your line at this time, and thank you for your participation.