Good day ladies and gentlemen. And welcome to the Q2 2016 IRIDEX Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder this conference is being recorded. I would now like to turn the conference over to your host, Susan Bruce. You may begin.

Thank you. And thank you all for participating in today’s call. Joining me are Will Moore, Chief Executive Officer; and Atabak Mokari, Chief Financial Officer. Earlier today we released financial results from quarter ended December 31, 2016. A copy of the press release is available on the Company’s website. Before we begin I’d like to remind you that management will make statements during this call that include forward-looking statements within the meaning of Federal Securities Laws which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that are not statements of historical fact including statements concerning future demand and order levels for the Company’s products, future operating expenses, changes in personnel, product development and intellectual property related matters, the adoption and effect of Company products on its results, the markets in which the Company operates, usage and efficacy of the Company’s products, the Company’s future financial results, and the Company’s strategic plans and objectives should be deemed to be forward-looking statements. All forward-looking statements are based upon our current estimates various assumptions. The statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a list and description of risk and uncertainties so associated with our business please see our filing with the Securities and Exchange Commission. IRIDEX disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements whether because of new information, future events or otherwise. This conference call contains time sensitive information and it’s accurate only as of the live broadcast today, March 8, 2017. And with that I’ll turn the call over to Will.

Thank you, Susan. Good afternoon everyone and thank you for joining us. 2016 was a strong year for IRIDEX, marked by continued growth of our G6 platform for the treatment of glaucoma. During the year, we grew both system placements and disposal probes utilization, broadened our platform offering, saw compelling clinical outcomes and continue to increase our global presence. In short, our success in 2016 with the G6 has given us the confidence that the G6 platform represents a significant opportunity to transform our business for many years to come. As we enter 2017 our focus is on executing on a plan to expand our commercial infrastructures so we have adequate resources to pursue this opportunity and to develop new products and enhance means to existing products so we can continue to stay ahead of any potential competition from a product feature and cost perspective. These are crucial investments that are key to our long-term success. In the fourth quarter we did an equity offering and put in place a credit facility putting us in a much stronger position to fully pursue these initiatives. Turning to the fourth quarter financial results, total revenue was a record $12.5 million, up from $12.1 in the comparable quarter last year. Our G6 platform continues to exceed our expectations with revenue growth of 67% in the fourth quarter. As a quick reminder, we have three primary business segments. First, our Cyclo G6 system targets the global glaucoma market with more than $5 billion spent annually on pharmaceutical and device treatments. This is our fastest growing segment and accounts for roughly 25% of our revenues. Second, is our medical retina product line for the treatment of diabetic macular edema or DME and other retinal diseases. This market for treating diseases of the retina is estimated…

Thank you, Will. Revenues for the fourth quarter of 2016 were $12.5 million compared to $12.1 million in the prior year period. Revenue growth in our G6 platform for glaucoma, which increased 67% compared to the fourth quarter of 2015 was partially offset by lower revenues and our surgical retina product revenues. Our medical retina product revenues were flat year-over-year. In the fourth quarter of 2016, domestic system sales decreased 19% to $2.9 million from $3.6 million in the fourth quarter of 2015, while our international system sales increased 17% to $4.1 million from $3.5 million in the comparable quarters. On a global basis increased revenues from our Cyclo G6 laser system were offset by lower revenues from our retina laser systems. Our business generates recurring revenues through sales of consumable products, predominantly single use laser probe devices and other instrumentation, as well as repair, servicing, and extended service contracts for our laser systems. Recurring revenues in the fourth quarter of 2016 increased 12% to $5.6 million from $5.0 million in the prior year period. The increase is mainly attributable to an increase in the sales of our proprietary G6 and P3 probes that are offset to decline in the sales of our legacy EndoProbe in our surgical retina business. Gross margin in the fourth quarter of 2016 was 44.4% compared to 45.3% in the fourth quarter of 2015. Gross margin was impacted by geographic and product mix, as well as continuing pricing pressure of our retina products in international markets, due to the strength of the U.S. dollar and increased competition. Operating expenses for Q4 2016 were $6.6 million up from $5.0 million in Q4 2015. The level of our operating expenses met our expectations as we have made investments to support our commercial infrastructure including increased sales and…

Thank you, Atabak. I believe that we are only just starting to scratch the surface of the potential of our MicroPulse base products to change the landscape of treatment for sight-threatening eye conditions, such as glaucoma and retinal diseases. Our breakthrough products and procedures particularly on the G6 system are transforming our business. We are fortunate to pursue this opportunity with an established base of revenues in our medical and surgical retina businesses. While we expect some lumpiness from the next couple of quarters as we transform our business I’m confident that we have the right products, the right people to execute on our strategy that will deliver long-term sustainable and profitable revenue growth. I want to personally say thank you to all of our employees for good job, well done. With that, I’d like to turn the call over to the operator for questions. Operator?

Thank you. [Operator Instructions] And our first question comes from the line of Chris Lewis from ROTH Capital Partners. Your line is now open.

Hey guys good afternoon. And thanks for taking the question today.

Hi Chris.

Hi Chris.

Just wanted to start on the revenue guidance outlook for the year, just initially it seems like a pretty wide range with implied growth of about 4% to 13% if our math is correct. So can you help us just understand maybe the key levers that are embedded within that outlook this year that kind of bridges the gap from that the low-end and the high-end of the revenue range for the year?

Sure. So as we mentioned on the call, the G6 continues to be our focus. And as we detailed some of the key metrics on the G6 side where we see most of the growth coming from. So that’s the primary driver. And then you’ve got the other the surgical and medical retina businesses that are more flat to slightly declining businesses in aggregate. And I think that as we look at the range that we provided it varies based on how we expect those we’re within the sort of flat to declining. The retina business has come in, as well as where we think how well the G6 products end up growing.

Okay, great. And then on the G6 business, can you talk about just what you’re seeing in terms of kind of the reorder trends for those customers that maybe have had the G6 system for some time now. I believe you batch an initial set of pros with that. So maybe for those customers that have kind of kind of work through the initial batch of probes talk about what you’re seeing in terms of reorder trends and rates?

Sure. So we’re getting more and more data as each month goes by just because as you know the bulk of our systems have been placed over the last six months or so, of the 500 systems that we have had out there the couple of 100 of them were in the second half of last year. So I think we – and there’s a bit of a lag by the time that that the doctors get a system and then start to have a install them and by the time they reorder. So there’s still a fair amount of noise in the data that we have. But the early indications are that we have a couple of buckets of users what I call the high volume users are those that are performing well above our ten probes per system per month target. And here we’re seeing that there’s several of the customers that are well north of that ten. I mean they’re – and these customers tend to be at higher volume places, as well as those that are using the MP3 probe earlier in the continuum of care. So how that’s trending is we’re seeing more of – or I guess more come into that pool the higher volume folks and then we’re seeing that overall utilization within that group be somewhat stable. And part of that is that as you grow your volume with that particular system, you end up ordering another system because you end up maxing out capacity within that system. So in terms of utilization for that system could looks like it’s going down but that’s because that same practice decided to add another system, so they wouldn’t let the system be a constraint in their utilization. So that’s the high volume user group.…

Okay that’s helpful. Thanks for the color. And just one question we get off from investors is kind of how G6 compares to MIGS and Glaukos’ iStent product I guess that product is still kind of restricted in terms of its label. But over time how do think G6 kind of fits with or without kind of eye stand? And do you think it’s more complimentary or more competitive to MIGS overtime?

Yes we think that we are very complimentary to all the MIGS players iStent included. In that we view the treatment of glaucoma as a complex fight for the physician and that there’s not really one tool that ultimately will win. And we think given our value proposition that we can be used across the full continuum of care and that we don’t limit any other future procedures that can be done before any kind of procedure, after any kind of procedure, or in conjunction with other procedures. So that as the doctor manages the patient there’s the MIGS opportunities don’t really present any kind of hindrance. If anything we think the MIGS players are a good thing for us overall, because they are raising awareness to the doctors that there is a solution to treating glaucoma patients other than pharma, which is exactly where we want to try to position ourselves as a true alternative to pharma, to eyedrops to be specific. And so that physician education is something that we think is a good thing and as an industry as a whole benefits from the work that each of the several players are undertaking. Go ahead Will.

So Chris, to add to that what out of boxing we both of us, as well as a company believe there are complementaries. So where there’s really not a competition here. I think the one thing people miss on this is that the cost of our system we get to approximately $200 for a pro versus the $1,000 that they get for an iStent. The difference is they are one time and done. We may treat the patient anywhere from four times to six times over their glaucoma life if you will. So we’re just getting started and as the number of people that use it, expanding substantially and as Atabak was talking about the earlier call that bi-model distribution he was mentioning, we’re not only looking at expanding the number of usages per doctor, as well as we expand the number of doctors that use the system, which I think if you look at it on a per patient basis, Chris ideally we’d like to see ourselves up into that $1,000 plus per patient over a period time they have glaucoma. So we’ll compare fine with them over time. We just believe that we have a very compelling story at a lower cost and providing better value based medicine today than other modalities.

Okay. And then Will you mentioned in your prepared remarks the expectation for some additional clinical data for G6 is year any additional color you can provide on what our expectation should be I know the ASCRS in early May kind of any early kind of previews of what to expect that week and over the course of the rest of the year in terms of clinical data for G6?

Sure. We’re expecting to see a podium presentation from a well-known physician at ASCRS. On the other side we just finished up the meeting in Singapore with the live surgeon we talked about that was chaired by the Head of the Department of Tokyo University, UCSF and National Eye Institute of Singapore. And all of those have put out well excuse me [indiscernible] and used this app to put out publications. The Tokyo one we’re looking at working trying to work with them on a on a collaborative study with couple of other universities. And on top of that at the meeting in Singapore papers show up our posters or presentations from physicians that have purchased the device that we really don’t know they’re going to make a presentation. For example, recently in German language we had a physician by the name of Totenberg publish a paper on the G6 out of the German side of Switzerland, and those types of things will continue. So we do have concentrated effort at looking at having a collaborative study that looks at the G6. And we’ve been looking at it in a couple of things, one of which is there are needs for publications in specific languages such as U.S. English, German, Chinese and Japanese. And there’s need for collaborative effort that show a broadband use meaning. It works for us in refractive open, in highly reimbursed societies and ones that are not. So that will be continue to working on. Now whether they show up this year or not Chris I’m not I’m not certain, but I can assure you that we are working diligently to make those studies begin.

Okay great. And just one more for me in terms of the salesforce expansion plans this year. I think it sounds like you got it four net since the end of 2016. I guess one is 24 still the goal? And I guess two kind of what’s the timing expectation to get there for this year? Thanks.

Yes so the number 24 as we’ll look at is the next stop you’ll say. I don’t know what the final number is at this point time. And it’s been you’re talking about U.S. side we could have substantially more than that as we add to the direct side in Germany as well. But think what we have to do and as Atabak said, we’re looking at this in a controlled manner and we will get these people on, we’ll get them trained, we’ll watch how they do, understand how if we trained it properly or not. And when we have everything going as we’d like, we’ll add another six. And we’ll keep doing that and tell which time Atabak and I look at each other in the sales department, all right we have enough. And I don’t know what that number at this point in time, but we’re pretty comfortable that we are going to go for the 24 before we even start to slow down. And how long it takes this, really Chris is dependent upon finding the right individuals that’s fit the profile of what we’re looking for. We don’t have that myopic view point like a glauco has. What we were selling one thing, we have, as we said surgical retina, medical retina, and G6 and that’s a lot of training and then a lot of different parts of the anatomy and everything from reimbursement codes to how you set up the systems of things. So it takes us a little bit longer. Then it would be to hire one person to sell one product.

Okay. Thank you.

All right.

Thank you. And our next question comes from the line of Lisa Springer from Singular Research. Your line is now open.

Thank you. Following-up on Chris’s question about the hiring in the infrastructure. What would be some reasonable way to look at operating expenses for 2017? If I took the fourth quarter expenses would there be a reasonable level to be using for the first half of the year.

We haven’t given operating expense guidance and part of the reason for that is as we have a lot of it depends on the pace of the hiring. And so I think where you’re talking about is a reasonable way to look at it. But I think ultimately as we look at the hiring that we’re – that we’ve talked about doing in not just in the U.S., but Germany adding to our marketing infrastructure to help support that sales team. A lot of it is just somewhat timing driven in terms of when everybody comes on board.

Okay. And the decision to sell direct in Germany, what were the factors underlying there and are there other markets where you are considering selling direct as well.

So one, Germany is one of our larger markets for all of our products and in that particular case, we had a distributor that we thought that we could, that wasn’t performing up to our expectations. And so we saw some value and going direct. There’s also an element of – and it can also help support some of the nearby countries there. The other piece of it is we’re going to use that that office as a beach had to help support our international operations from a service perspective. So we think that it will – so has multiples or strategic benefits and ultimately margin improvement benefit by setting up a small beachhead over there.

Okay, thank you.

Thank you. [Operator Instructions] And our next question comes from the line of Larry Haimovitch from HMTC. Your line is now open.

Hey, good afternoon Will and Atabak.

Hey, Larry, how are you?

Great, how are you doing? So, quick one Will, on your answer to Chris, there’s a big difference between MIGS and what you are doing as well. Because MIGS is only can common into cataract surgery. You can be use without a cataract surgery and that really does mean a much broader market. I don’t know if you said that, but if you didn’t I just wanted to clarify that for you and the others.

You did clarify, I said it and probably in a manner that was in understood since you didn’t get it. When I said, we will touch a patient four to six times that’s sort of we’ll touch him early, will touch him late mid, we’ll touch him late, whether we’re looking at outflow or inflow.

Yes, okay, great.

Thank you for clarifying that.

Okay. So, here is my question. You provided guidance, it is conservative I understand that’s probably fine. That’s gives you plenty of leeway as the year goes on. Can you break the guidance down at all for us, I mean, you provided the – your projections for glaucoma. I didn’t figure out what that number is, but what does the growth imply for glaucoma, the glaucoma franchise or the G6 franchise in 2017 versus the rest of the business. I’m assuming rest of business probably flat to down and obviously G6 up very nicely.

So, your live statement is true, so the retina businesses five to down with the G6 up. And I think we’ve given sort of the key metrics on the G6 side that you can compared to last year to look at how that business is expected to grow. So I think we disclosed the G6 systems. So last year we sold 386 G6 systems and 27,000 probes. So, we’re – so you can compare our guidance to those numbers.

Okay. So G6, definitely up and then retina flattish to down.

Exactly.

And what did – one last question, what did the G6 business contribute, I think you gave the number I may have missed. What did the G6 business contribute as a percentage of the total company? Was it 25% that I heard.

Yeah, exactly around the quarter of our business, exactly.

Okay, so quarter of your business growing nicely 75% still sort of flat to down right now.

Yes.

Okay, great. Thanks guys.

Thank you. And our next question comes from the line of Joel Westerstrom from RedEye. Your line is now open.

Hello, guys.

Hi, Joel, how are you?

Good, thank you. I had a few questions, just to understand sort of long-term with Cyclo G6. First question, how much of the exchange rate came pass over to customers in Europe and so on.

So we sell all of our products in U.S. dollars. So I think ultimately exchange rate fluctuation is something that impact especially in competitive situations, and other competitors that might be selling in local currency. So obviously we tried to pass along as much as we can, but it’s a dynamic, where we’re limited by the – by competitive pressure.

Okay, if I’m understating it correctly there, you’re saying you might have to drop prices a little bit at certain instances to remain competitive.

Yes, I think Joel, this is Will, I think from a macro perspective on exchange rates and as the U.S. dollar get stronger. That will create some headwinds, but if you reflect back to my earlier comments about investing and looking at how to reduce cost in products that they have investment that we will deal with to be able to maintain margins over time. You may take a short-term will get hit, but I think over time we’ll be fine. And on and on the newer products with very little competition, the ability to just price in U.S. dollars and provides us the – provides to the customer a little bit of a pain as to the cost. But to the outcome of what they get and how they’re treating things compared to dealing with meds and eye drops to the single payer, system it’s a financially a better decision to use our product than they continue with the med treatment.

That was going to be my follow-up. If you see less sort of exchange rate headwind, when we speak about the Cyclo G6, I take it that’s correct then.

Correct.

Okay, and then some other questions, just doing some quick math it seems like you see the consumable or the probes growing between some 67% and 85% is this year over last year. And they would make up some 18% – 17% to 19% of your revenues for the year I guess, if you price them a $200 each. And in 2016, they would have made up about, I guess, 11% or something. How much do you see that growth coming from that already installed base and how much is coming from additional system sales? So I’m trying to sort of figure out, how it evolves over time the usage of them. And so, if you can see that it’s picking up, when they’ve been met in a while at the clinic.

Yes, I didn’t follow all the math that you did. So I apologize, but I’ll focus on the question in terms of how we expect the utilization trend – utilization to trend, which I think is your question. So as I mentioned earlier in the call, so much of it is the systems need to be, because we sell them with a package of probes. The systems need to be first installed then start of utilizing, go through that initial package of probes, before they start reordering and really get that probe utilization up. And a lot of it is physician training to make sure that we get that utilization in working into their practice. So there is a bit of that time of – from the initial sales until they start to work that into their practice and become a more high volume user. So I think that’s – so as we look at the utilization it’s going to be a lot of the utilization trends of for 2017 will come from systems that we sold in 2016 and the early parts of 2017 that the systems base in early parts of 2017 will start to impact the second half of 2017.

Okay. Thanks, that gives me some help. And then when it comes to the profit for the current year, it’s seems like you’re doing quite a lot of investments and also have some headwinds with exchange rates and so on. So would it be fair to assume that that it’s not going to turn a profit in 2017, given what you said.

No I think we stated on the prepared remarks, the 2017 we expect an operating loss.

Okay, thanks. Thanks, but it will be really good in 2018 and forward, right.

That’s the plan. That’s what we hope.

Good to hear. Thank you, guys.

Thank you. And at this time I’m showing no further questions in the queue. I would like to turn the call back over to Will Moore for closing remarks.

Thank you, operator. And thank you once again for joining the call today. We appreciate your interest in the IRIDEX and look forward to our next progress update. Have a good evening and thank you.

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program and you now disconnect. Everyone have a great day.