Greetings, ladies and gentlemen, and welcome to the IRIDEX Corporation’s First Quarter 2016 Earnings Conference. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] It is now my pleasure to introduce your host Mr. Will Moore. Thank you, sir. You may begin.

Thank you, operator. Good afternoon and thank you for joining us as we discuss the results of the fourth quarter of 2016. My name is William Moore, and I'm the CEO of IRIDEX and I'm joined by Romeo Dizon, our Vice President and Controller. I will be delivering some prepared remarks and then we'll open up the floor for 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, relating to the effect of currency exchange rates and other global and domestic market conditions on the company’s business, the product mix composing sales in future periods, demand for the company’s products and market acceptance of the company’s new products, sale levels, continued developments, pricing model and contribution to earnings in future periods of the company’s Cyclo G6 product platform, the impact of these and other new products on the company’s business, 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 acquisitions, technology investments, and strategic relationships, pricing of the company’s products, the company’s operating expense controls and cost reduction programs, and the impact of these controls and programs on the company’s financial results, the company’s clinical 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 share repurchase program, the company’s financial outlook and performance in the second quarter of 2016, fiscal year 2016, and other future periods, including future revenues, sales, gross margin, operating expense and pricing levels, the company’s business and sales model, regulatory developments and approval for company’s products, the impact of sales cycles, tax rates and cash requirements related to tax obligations in future periods, any health risks associated with the use of the company’s products, and other 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, 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 now turn the call back over to Will. Will?

Thank you, Susan. Those of you who have been following us closely know how excited we are about our business. It’s a very compelling time at IRIDEX. Our commercial outlook today is probably the most promising it has been in a more than a decade and definitely the most promising it has been since I became CEO three years ago. Total revenue for the first quarter was $11.9 million, compared to $10.8 million a year ago. We closed out 2015 very strong and I’m glad to report that the first quarter of 2016 saw the continuation of that momentum. The revenue number was good, the highest ever for our first quarter. But that does not begin to show why we are so excited. As compelling as our story is, our real commercial progress and growth isn’t really reflected in the top line revenues, not just yet. To explain, our business today has principal elements, the largest bringing in the majority of our revenues is our legacy laser consoles and our disposable EndoProbe business. While we still sell into a steady replacement cycle in US and receive and win tenders across the globe, we anticipate this hardware and EndoProbe business will remain a stable to slow growth business in the coming periods. The other elements of our business are and will continue to solid growth engines built upon our core MicroPulse technology. The first is MicroPulse for retina conditions like, diabetic macular edema. This is a stable, growing global business that continues to gain penetration and acceptance and is delivering growth through market share gains. We currently have more than 650 MicroPulse lasers installed and have treated an estimated one million patients in 61 countries. We are investing in this space and expect to continue to do so. It is the…

Thank you, Will. As we noted in our press release and in Will’s comments, our revenues for Q1, 2016 were $11.9 million compared to $10.8 million in Q1 2015, an increase of 11%. The increase is due mainly to the increase in our international system sales which increased $1.0 million or 30% from $3.5 million to $4.5 million. This was primarily a result of an increased sales to the Asia region. Our domestic sales increased $0.1 million or 6.3% from $2.1 million to $2.2 million. The increase in our domestic system sales was fueled mainly by the sales of our Cyclo G6 laser systems which more than offset the decrease in the sales of our legacy products. Recurring revenues, which include sales of our consumable products, service and royalties were flat overall at $5.2 million. Sales of our proprietary Cyclo G6 MP3 probes and G-Probes increased in the quarter from the prior year, but were offset by decline in royalties and sales of our legacy EndoProbes. The growth in part was due to launching of the Cyclo G6 system which we introduced as a starter package consisting of the laser console and MP3 probes for a number of procedures. As Will had indicated, we sold 5000 MP3 probes in Q1 2016, over and above the bundle [ph] probes included in initial purchase. Gross margin in the 2016 first quarter came in at 44.4% compared to 50.1% for Q1 2015. The decrease in gross margin was attributable primarily to the special introductory prices for the Cyclo G6 glaucoma system, to sales mix both in terms of product and geography and to the impact of the foreign currency exchange rates in our international sales. For the remainder of 2016, we see opportunities for margin improvement through volume efficiencies with anticipated revenue increases…

Thank you, Romeo. In conclusion, as I stated earlier, this is an incredibly compelling time at IRIDEX. While we have a steady, stable legacy laser and disposable EndoProbe business, a strong MicroPulse retinal [ph] business which we will continue to invest in, what has us all excited is the interest in our huge global glaucoma market. Glaucoma is a chronic, global and rapidly expanding disease that’s meant [ph] to affect more than four million people in the US and approximately 60 million people worldwide. An estimated 9.4 million glaucoma patients are currently on medications and compliance with these medicines is extremely low compared to other areas of healthcare. We believe all these people are potential customers, all looking for a better option, an option like our Cyclo G6 laser featuring MicroPulse, it’s safe, effective, minimally invasive, and virtually, limited-to-no side effects. Sales of G6 platform have already ramped beyond our internal expectations. The disposable probe has created for us a new razor, razorblade model that will compound in the coming months and years, providing both revenue and margin growth. Based on the marketplace dynamics, we are investing in that growth adding to our domestic sales force at measured pace, signing additional international distributors and preparing operationally for the exciting runway ahead. As I said, our prospects for growth at IRIDEX have never been better and we look forward what we believe may be our best period of growth and performance yet. With that, I’ll turn the call over to the operator for questions.

Thank you. [Operator Instructions] Our first question comes from Lisa Springer with Singular Research. Please proceed with your question.

Good afternoon. Will, I believe you’ve said in the past that there are something along the lines of 300 high volume glaucoma accounts in the US. How many of those accounts do you feel that you penetrated at this point?

That’s correct. There is approximately 300 that account for 50% of the business. At the end of Q1, we were over 40 of those.

Okay, great. And did you have any sales upside the US, of the G6 system?

We did, in the Q1, just a few, I think they went to Australia, the UK and Switzerland, I believe.

Okay. And in terms of the sales mix for G6, was it mostly new customers, or did you see a lot of customers coming back to buy an additional unit?

So, obviously, outside the US, they were all new. In the US –

Great. Yes.

We are seeing repeat orders from approximately 40% of the accounts that have purchased product. The issue we run into in there is to analyze – some of those had a starter pack of 60 and some of them had a starter pack of 30. I think that the number is a little difficult to give to you at this point, but I believe we were well over 40% of the customers that have had it for six months, are buying product again. The issue that we have with that is, Lisa, we think – in the initial packages, they had 60 probes, we said [ph] if they did 10, we look at them at 10 per month, we’d look at them at the six month model. What we began to discover was the product that once it was shipped out the door, many times, it wasn’t used for a week or two until that was in service. There’s a little bit of variance in that. But we are satisfied with that rate moving towards a 50% level already.

Okay, great. And the increase in sales and marketing expense year over year, was that mostly related to the G6 and what does your sales force look like now as compared to at the end of last year?

It’s not related to the G6, it’s just related to growing our sales department, we’ve added a territory or two, we’ve elevated a person to become a Field Manager, so we have two of those now. That’s really the expense.

Okay. Thank you, Will.

All right, thank you.

Thank you. Our next question comes from the Larry Haimovitch with HMTC. Please proceed with your question.

Hi, good afternoon. Well, congrats on the progress.

Thank you, Larry.

So I think you said you shipped 84 Cyclo G6s in Q1, did I catch that right?

You did.

Okay. Were constrained from a manufacturing standpoint? Would you or could you have shipped more if you had split [ph] more manufacturing supply?

We could have shipped more. I am not going to say it’s a manufacturing, supply, all these things depend upon when the order comes in in the cycle. And in this type of business, 60% of our quarterly revenue comes in the last month of the quarter, about 60% of that comes in the last two weeks.

Right.

Sometimes [ph] we just can’t get them out the door, and I would say there were a few that didn’t get out the door.

So based on Q1, would you say that if we multiplied at least by four or more that that could be what you could do for this year? Should we think of your run rate at 80%-plus per quarter as a reasonable run rate?

Well, I think that’s a reasonable way to think about it. We haven’t given out a number which we’ll do for the year. But I think that the idea is by the end of the year, we should be doing at least four times the first quarter.

Okay. And then I think you mentioned international or maybe Romeo mentioned international was up $1 million, is that sort of one-time tender offer or is that indicative of greater strength in international that you’ve had in past years?

I think it is not a one-time order. It’s greater strength on international standpoint, but predominantly, we had a couple of large orders from China and Japan. And the China was predominantly around what we talk about before which was a Beijing remote project which they were trying to treat people in the rural areas, they are looking at other parts of the country now and we’ve seen those. And then on the Japanese side, we started a couple of studies around MicroPulse in Japan that have begun to pay some dividends and the sales into Japan were all on the MicroPulse retina side.

Okay. And one more question and then I’ll jump back in queue, and that’s on the gross margin. Reading between the lines, my interpretation of the decline in gross margin was perhaps a little bit of was discretionary in that you had an opportunity to get some more business and you were able to do it or willing to do it at bidder [ph] lower price to getting it installed – install the larger install base, did I read that right, or did I misunderstand?

I am going to try to clarify, because as Romeo said, there was a geographical mix issue which we had a large amount of business coming from international.

I see.

And it’s predominantly hardware which is if you look at multiple – our components, the hardware sales has lowest margin whether it’s in the US, international and disposable, a little [ph] higher, but international sales in general are lower. So, we had a couple of large orders out of our distributors overseas which pulled it down – and that is not from a situation of reducing the cost. Those were just as a factor of the size of the business. And then we –

So, it’s mainly mix, it’s mainly mix, the mix was larger internationally and that’s a lower gross margin business.

Correct. And the mix is both in regional and product. And what Romeo said in his call is appropriate that the bundled price for the initial thing on the G6 is a temporary piece where it’s lower now and they will be replaced by higher margin disposables as we move forward.

Right. Got that. Okay. Thank you very much, Will.

All right, thanks.

Thank you. Our next question comes from the line of George Monk a Private Investor. Please proceed with your question.

Hi, Will.

Hi, George.

Hi. The last conference call, you said in your experience, if a doc has a bad experience the first time they use a machine, then they don’t come back a second time, and you said was the reason you are doing a measured roll-out for the G6, do you have any statistics on how successful you are in teaching – in performing [ph] doctors, how many of them have [ph] come back for the second time?

Your call is very static. [ph] I am going to repeat the question. You can tell me whether I got it right or not, but I think your question has to do with, the mention of it [ph], if we don’t train doctors correctly, then their ability to get patients possibly positive results, they may not come back a second time and do a second treatment, is that where you are going?

That’s correct. And what statistics do you have on how [ph] successful you are? [indiscernible]

Okay. So, here is how I look at that. We are very successful, people are reordering, people are reordering not only probes, but additional boxes. Now, let’s put that into a qualification with statistics. The studies that we have both in the Asian market, Canadian and US markets that are being published and coming out in presentations, support a position of 72% to 84% of the patients they treat, they are successful. The other 20% some odd, we are not saying they are failures, that we are saying they are outside of the realm of patients that should be or could be treated with our device. So, we have to be doing a little, I’ll say a little better at identifying that population and our new product that’s understandable. And if a physician was trained correctly and did those patients, the outliers [ph] that were not deemed to be in that success rate, they probably wouldn’t have a good experience or opinion of our product. So, it’s up to us to make sure they understand how to use and what patients to treat.

Interesting. Thank you.

All right.

Thank you. [Operator Instructions] Our next question comes from the line of Paul Seth who is a Private Investor. Please proceed with your question.

Hi, thank you. And Will, thanks for the good progress. Previously, you stressed the importance of training and the introduction of the new products in the US, and looking forward, international lies ahead and I am – I was also looking at that gross margin change. The expense burden per dollar on incremental revenue must be higher in the international markets, and can you entrust your distributors to do that training, is the burden on you to expand, how do model this expense ratio out there?

Well, the sales price of our products to our distributors is obviously lower than we sell it one a direct basis. But then we have a smaller sales cost associated with that. The distributors we have – there’s a couple of things we are doing to try to mitigate what you are asking. No distributor can get our product, the G6 product, until they’ve gone through and they have agreed to hire, or promote or create a product specialist in their region. The next part is they cannot just by one. So, the distributor has to commit to us that they are going to have somebody we can personally train and certify who is response [ph] for the G6 in their territory and then they must buy an equivalent amount of G6s which we think is an appropriate investment to make sure they are doing it correctly. The next part of that is we have our own people located, for example, in Europe and when we say we release to Europe, he can only release to a few countries at a time to make sure that our manager, along with that product specialist are working with the hospitals on a one-by-one basis until we have that community put together in that country. Once we are comfortable that country has got the basis there, that if somebody has a problem – for example, we’ll talk about the UK, we picked the top two hospitals in England, Moorfields and I am trying to remember what the other one was, and said those two are – they are starters. They had to buy a product before we put anything else in, because – why because they do a large volume of patients. Two, they have the prestige and other hospitals and doctors will call on them for answers. Those two hospitals are trained and up and running and buying product. We did the same thing in Switzerland and then we were doing the same thing in the other countries. So, it’s not – I wanted to be cautious that it’s not a free for all [ph]. We are not releasing this product on a open across the world at this time. So, the growth rate has its own set of governor on there, if you will, to make sure that the users are well trained, well documented and they are willing to work on a community basis of helping other people and that’s what we are doing at this time.

And the expenses associated with that process then, would you say they were a greater burden than what you’ve experienced so far in the US?

No, no.

Thank you.

Okay.

Thank you. Ladies and gentlemen, at this time, there are no further questions. I would like to turn the floor back to Mr. Will Moore for closing comments.

Okay, thank you, operator. And thank you all that have listened today and I appreciate your time and look forward to speaking with you again at the end of Q2 conference call.

Ladies and gentlemen, this concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.