IRIDEX Corp (IRIX) 2007 Q2 法說會逐字稿

Good afternoon ladies and gentlemen, thank you for standing by. Welcome to the IRIDEX Second Quarter 2007 Conference.

During today's presentation, all parties will be in a listen-only mode. Following today's -- following the presentation, the conference will be open for questions.

(OPERATOR INSTRUCTIONS)

This conference is being recorded Tuesday, August 14, 2007. I would now like to turn the conference over to Doug Sherk with EVC Group. Please go ahead sir.

Thank you, operator and thank you everyone for standing by this afternoon. We apologize for the late start, but our comments today are limited so that we should be able to finish well within the hour.

Thank you for joining us for IRIDEX's conference call and webcast to review the financial results for the second quarter, which ended June 30, 2007.

The news release announcing the second quarter of 2007 results was issued this afternoon and is available on the IRIDEX Web site or by calling our office at 415-896-6820.

Before we get started, during the course of this conference call, the Company will make projections or forward-looking statements regarding future events, the Company's beliefs about its overall outlook for 2007, its growth strategy and prospects, revenues, gross margins, earnings, expenses, integrating the aesthetics business acquired from Laserscope and realizing efficiencies and synergies relating thereto, obtaining alternative financing, and addressing our liquidity and capital resource needs.

Actual results could differ materially and adversely from those projected in the forward-looking information contained in our Quarterly Reports on Form 10-Q filed for the period ended March 31, 2007 and the Annual Report on Form 10-K for the fiscal year ended December 30, 2006, which are filed with the SEC. Forward-looking statements contained in this announcement are made as of this date and will not be updated.

Now, I would like to turn the call over to Barry Caldwell, President and Chief Executive Officer of IRIDEX.

Thank you, Doug and good afternoon everyone. As you know, it's been a very busy second quarter here at IRIDEX and -- as it has been since we announced the acquisition of Laserscope in mid-January.

I think though now we are showing some of the promise and potential we believe existed when we combined the Laserscope products with our Company in mid-January as I said.

We grew revenue during the quarter for both top lines, domestically and internationally. We rebuilt the Laserscope product order pipeline. We additionally made some progress on our gross margins and we will talk more about all that.

While we have had several challenges ahead -- while we do have several challenges ahead of us, and during the remainder of the year, we will continue to operate in this transition mode, we believe that our strategy to build shareholder returns will yield results.

Since we issued the new release this afternoon, let me focus on some of the highlights from second quarter.

Our second quarter revenue was up 21% or $2.7 million over the first quarter of this year and 73% higher than the second quarter of 2006. And obviously, the comparison to prior year is skewed by the acquisition numbers from Laserscope.

First of all on the ophthalmology side, during -- our ophthalmic sales didn't perform up to our expectations first quarter, but we did see a nice increase across the board of 9% during the second quarter of '07 compared with the second quarter of '06. In total, our ophthalmic sales versus the first quarter, increased by $1.2 million or 17%.

Our U.S. ophthalmic sales increased 9%, as I said and our domestic sales of deposable products exceed $2 million for the first time in the history of our Company.

I think this shows signs in the U.S. of the enhanced organizational changes we made in sales and that's beginning to take shape and beginning to illustrate the capabilities that we have in the domestic market.

On the international side, we are very pleased to see that this component of the ophthalmic business was returning to a healthy growth rate and it had a 9% growth rate over prior year quarter, as well as a 9% growth rate over first quarter of this year.

If we turn to the aesthetics side of our business, we are beginning to show promise of combining the Laserscope products with IRIDEX product lines across the board.

And as you know, we have said during first quarter, we went through a lot of cross training for the entire organization and also reinvigorating the sales organization and the distribution channels.

We rebuilt our U.S. order pipeline for Laserscope products, which was essentially zero when we made the acquisition in mid-January.

By the end of the first quarter, our pipeline had shown that it had grown and at the end of second quarter it had continued to grow. Our sales during the second quarter of aesthetics products versus the first quarter of this year of aesthetics products increased by $1.5 million or 28% overall.

As a result of those efforts, the international Laserscope product revenues grew by $600,000, rounding, and on the domestic side, it was by $800,000 versus first quarter. And again, that was a 28% increase over the first quarter of 2007.

We also made some progress with our gross margin during the second quarter even though it's not at a point where we would like for it to be. The gross margin for second quarter was 43.2%. That was an improvement from first quarter of 1.7 percentage points.

There was also an impact - a couple of impacts to our gross margin that we need to continue to be aware of. One is that we had amortization expenses of about $500,000 during the quarter, which goes against our cost of goods. That's about a 3 percentage point effect on gross margin.

We have also, as we have been saying, we've had about a dozen of our employees actually working within the Laserscope facility during third quarter, basically, every day down there, shadow manufacturing their products so that we can transition those to our facility here in Mountain View.

And if you factor the cost of those employees and actually not working at our plant versus that plant, that's about another 2% impact on gross margin.

We certainly, as the transition moves forward, we will be completing sub assemblies this quarter at our own facility here and during fourth quarter, all of the Gemini units that we ship will be anticipated to be manufactured here at our Mountain View facility.

Once we achieve these milestones, and in a minute I will talk to you about a final settlement agreement with AMS, we think that we will be to see continued progress in the next few quarters in our gross margin.

Turning to operating expenses, we certainly didn't make as much progress as we would like to have had during second quarter. We did decline operating expenses by about $900,000 versus first quarter.

We continued to have some integration costs in addition to the manufacturing side and several disciplines of the Company in regards to transitioning. And we are in the midst of working on expense reduction so that we can fully benefit from the synergies of the acquisition.

The bottom line result was that we generated a loss from operations of about $2.5 million, of which $1.1 million was comprised of non-cash expenses.

We did receive the first payment of the $6.5 million litigation settlement with Synergetics, which totaled $2.5 million during the quarter and that was recorded as other income.

As you may recall, over the next five years, we will receive $800,000 per year during the second quarter from this settlement.

We are also pleased to announce that we finally concluded the final settlement agreement with AMS and that was part of the reason for the delay, for which I apologize, this afternoon, but it was -- we wanted to get those documents signed before we got -- before we got on the air. And as we have been saying, there have been several areas of dispute between the two companies.

One of those goes back to the post-closing adjustment that needed to be -- needed to take place from the original asset purchase agreement. Within that post-closing adjustment, there is about a $2.8 million reduction in the purchase price of the Laserscope business.

Now, you may also recall that we had possession of about $3.9 million of cash that was left in the subsidiaries. So, as a net result of that, there is a repayment that we make to AMS of $1.1 million despite the purchase price going down $2.8 million.

You may also recall that at the end of the original product supply agreement that we entered into with AMS that we were to buythe closing inventory of work in progress -- work in process and raw materials.

And you will recall that there has been a number out there that said that it could not exceed $9 million and we have gone through that inventory and come to an agreement with AMS that the -- the value of the WIP and raw material that we will receive is about -- it will be $3.7 million.

In addition to that, there is about $350,000 from service parts that were delivered to us at the beginning of the acquisition for which we also need to pay them.

So, that's a total of $4.1 million for us to pay AMS for all of the closing inventory that we will receive plus these service parts and we have an agreement now in place with AMS that will pay that to them over a nine-month period beginning in January of 2008.

On the product development side of our business, our 510(k) submission for the new 577 nanometer ophthalmic laser is in with the FDA and we are awaiting comments or approval from them. The testing that we continue to do on this product here is going very well.

We have also said that we are working on enhancements to the current aesthetics products that we have and we have been working with some key physicians on those. And there are some new features that we intend to introduce at the American Academy of Dermatology meeting during the first quarter of 2008.

Before we get to questions and answers, I would also like to make a few comments about cash and our cash position.

I think as you know, well, if you look at the press release, our cash balance at the end of the quarter was $3.6 million. That did not include the $3.8 million of restricted cash of which we spoke several times.

As I previously said, during the second quarter, we used about $1.4 million in cash prior to the Synergetics legal settlement payment. Our goal during the third quarter is to reduce our actual cash burn below the $1.4 million rate.

But it's obvious, if you look at this point in time, we do expect that our current cash and cash equivalents and cash flow to be sufficient to meet our operating requirements over the near term, but obviously, that would not last for a period of 12 months or maybe not even a period sufficiently less than 12 months.

So, in order to address this issue, and I think we have made some comments on most of these in the past, there are several things that we are attempting to do.

First, we are working very hard to integrate the aesthetics business as quickly and as efficiently as possible and therefore maximizing the potential benefits that we believe we can -- that will be realized from the acquisition.

Secondly, we are continuing to focus on our operating expenses and get those to a level to which we can at least be cash flow negative at these revenue rates per quarter.

And third, as we have said, we are looking at additional financing options for the Company, which would be further restructuring or replacing our current credit facilities and/or seeking to raise additional capital through equity or debt financing.

So, with those things said, I would certainly like to take the opportunity, first, again thank you for being here, I apologize for being late and open this up, operator, to any questions that we may have.

Thank you sir. We will now begin the question-and-answer session. (OPERATOR INSTRUCTIONS).

Our first question comes from [Paul Chung] from Jefferies & Company. Please go ahead with your question. Mr. Chung, if you are using speaker equipment, if you could please lift your handset.

Our next question comes from Larry Haimovitch with HMTC. Please go with your question.

Good afternoon, Barry.

Hi, Larry, how are you?

Good. How are you doing? Barry, just to review on the Laserscope acquisition. Now that you have settled everything, or at least I understood that you have, and I know you have been working very hard at it, what ends up being the final purchase price?

Okay. Good question, Larry. If you go through the initial announcement, the purchase price was at $28 million, of which $26 million was in cash and $2 million in stock equivalents and that's without any of the cost of doing the deal. And so, I think you subtract about $2.8 million from that number.

And the $2.8 million, Barry, is the -- the adjustment that you are making, that you are just announcing now?

That's correct, yes. That's -- from the closing balance sheet that we have been in negotiations for the last several months regarding.

And that's net of everything, so really we are looking at roughly a $25 million purchase price?

I think that's correct. And depending upon how, Larry, you view the purchase at the end of the WIP and raw materials that we have.

Yes. Okay, and then, and how much do you owe Laserscope, which you are going to start paying January 1, is that $4.1 million? Is that what you are said you owe them over the nine months beginning January '08?

Yes, well, there is a couple of things, couple of pieces to put together here. First of all, the $4.1 million, which is for the closing inventory and those service parts. That will be paid over a nine-month period from January to September timeframe, nine months.

We do also have the $1.1 million, $1.150 million it is, because we had the $3.9 million in cash from the subs that we are to repay to them, and we will repay that to them over a period of 12 months.

Okay. So, now you have $4.1 million that starts being payable January 1, so that's a ninth of $4.1 million every month for the first nine months of '08. And then, you said $1.1 million in cash, is that payable right away?

That's payable over the next 12 months.

Payable over the next 12 months, okay, great. So, we are done now, Laserscope, is a done deal signed, sealed, delivered?

The reason the call was delayed is we were signing the agreement papers.

Okay, and you have a long signature, I know. Barry, next question, you talked a little bit about financing options, et cetera. Last time you reported you were out of compliance with, I guess, it's Mid Valley Bank's covenants.

Can you update us at all on any negotiations, discussions, or attempts to get them to rewrite that agreement or whatever?

Yes. Larry, if I could, I would like to go back to your other question, just to make sure there isn't a point we miss here on payments to AMS.

Please.

There is also still product from the product supply agreement that we are buying from them, and there is about $1.3 million in product I think that we are still -- we still owe them.

So, you owe them three pieces; $1.3 million for product, $1.1 million for the difference between the final purchase price and the cash, and $4.1 million for the inventory. So, $4.1 million and $1.3 million is $5.4 million and $1.1 million. So, you owe them a total of $6.5 million?

Something like that, that's correct.

Okay. So, now, I'll go to my -- the bank question please.

I'll go to Mid-Peninsula Bank.

Yes.

Yes, we have -- we have been in discussions with the bank and the bank has been very cooperative with us and very helpful. They also played a part with the negotiations with AMS. And of course, their blessing had to be put on most of this.

So, we have really focused most of our time, Larry, on trying to get the AMS agreements put in place. So, then that gives us an opportunity to go back to the bank and talk more about our covenants, and find -- at least have the discussions with them about the $3.8 million restricted.

Are you going to have to do equity to get them off the covenants, Barry, or is the equity you talked about just to put more cash into the bank?

We are looking at all of those potential options. The $3.8 million, as we said, we had $3.6 million in cash and $3.8 million in restricted. The $3.8 million becomes a pretty big number, particularly when you compare it against that term note, it's only $6 million in total.

So, I think we will continue in the next several weeks to work with the bank and show them the progress we are making and some of the expense reductions and what our expectations are for third quarter. And we are hoping that we will be able to find some ways to get that restriction lifted.

Okay, I will jump back in queue. Thanks, Barry.

Thank you.

Our next question comes from Anthony Vendetti from Maxim Group. Please go with your question.

Thanks. Hi, Barry.

Hi, Anthony.

Can you go over a little bit more on the Laserscope revenues for this quarter relative to your aesthetic revenues for this quarter of $6.9 million in total, correct?

That's correct, of the aesthetics business, right.

What portion of that was -- was attributable to IRIDEX?

You mean of the old IRIDEX products?

Yes.

Since we don't break that out separately any more, could I try to get back to you on that one, Anthony?

Sure, sure.

Okay.

Okay. Now, in terms of the ophthalmology revenues, can you talk a little bit where you expect to see the growth coming from in the next couple of quarters? Is that -- is that continued to be driven by disposables or do you have --?

Yes, good question, Anthony.

On the ophthalmic side, part of the reason we made some enhancements in the domestic sales team, and that was adding three people, is that we felt like there were opportunities out there we were missing, both on the equipment side and the opportunity that we have in the disposables side.

And as I said, it was a real key milestone for us here in second quarter where for the first time in the history of our Company, our domestic disposables exceeded $2 million. That was -- that was a big goal that the team had.

And so, we are continuing to focus on the disposable increased opportunities that we have in addition to opportunities for our current product lines that are out there in the field.

Now, that being said, we also are waiting for the approval on the 577 laser and we are certainly expecting that will have some impact for us during the fourth quarter.

Okay. I don't know if I missed this, but so disposable revenues, domestic disposables, you said was greater than $2 million. Was that up year-over-year, how much? And also can you just talk about what it was sequentially?

That was up, maybe about 12% or 13%. I am just eyeballing the numbers here.

Okay.

But that was -- as I said, the first time we had crossed -- yes, about 13% increase. That's the first time we had crossed the $2 million threshold.

Okay. Is that -- that's year-over-year, sequentially, what was that?

That's year-over-year.

Year-over-year, okay. You don't have the sequential number handy, right at this point?

I am sorry.

You don't have the sequential.

Yes -- yes, I'll get it here for you. But sequentially it's not -- the business does have some flow through, at 10% sequentially.

Okay. All right, in terms of the integration of everything over to Mountain View, are there any unexpected or potential costs associated with completely closing down the old Laserscope office, or is this now, at this point just a matter of just bringing over the final assembly and some of -- the rest of the people?

Okay, good question, Anthony. Remember that AMS is going to continue to use that facility in San Jose for their products.

Okay.

So yes, there isn't any closure cost that we have associated with that. We have already made the improvements we have to make here in our facility.

And actually the last -- during the last quarter or longer, it's been our dozen employees down there at the AMS Laserscope facility making these products that we turn around and buy through the purchase supply agreement.

Okay, okay. Anything else that you could just -- just following up a little bit on the -- on the restrictions that -- that you hope to get lifted from Mid-Peninsula Bank?

Can you talk a little bit about your relationship with them over the life of that relationship and their desire to work with you and why you feel confident in the successful conclusion of those negotiations?

Right. That's a good question, Anthony. And though nothing can be guaranteed, IRIDEX has had a long history with the Mid-Peninsula Bank. It's been a very good working relationship over the years.

It's primarily key reason we went to them at the time of the acquisition to make this kind of deal, and as it turns out, during the middle of all this, an announcement was made that Wells Fargo is acquiring Mid-Peninsula Bank. So, we have been working with them through this. They have been very cooperative.

Of course, they expect us to perform against what we say we will. And so, I think continuing to show progress, both top-line and cost reductions will be important to them as we move forward.

Okay, great. All right, thanks.

Thank you. Our next question comes from [Joshua Jennings] from Jefferies & Company. Please go ahead with your question.

Good afternoon.

Hi, Josh.

I'm in for Marko Kozul who is traveling today.

The first question is, your top-line improved sequentially in both the ophthalmic and the aesthetic businesses, and can you give us a little bit more color on what you attribute that to [as well as] give us some specifics?

Okay, yes, well, I think first of all, the aesthetics business, you really can't compare to a year ago because we didn't have the Laserscope business, but I think you can certainly compare it to the first quarter.

And getting through -- when a company is acquired, people are wondering, are they going to stay, are they going to go, they go through a lot of emotions, a lot of thought process. But it was really, really clear to us, particularly in the U.S. market what we saw was, because AMS had announced in the middle of 2006 that they were going to divest of this aesthetics business.

And it was very tough for these sales guys to continue to sell product when it was announced the company was for sale. So, there was a lot of incentives on closing business, the third and particularly fourth quarter.

And so, these guys were really, really focused on closing fourth quarter and not looking forward to the next quarter as they typically would, as they run their own business in their territory.

So, as we got the business in mid-January, these -- the reps were getting large checks at the end of January, they are trying to decide if they want to stay, if they want to go. The aesthetics market for sales reps is very competitive and we lost several of these reps.

But, what we saw progress in was at the end of first quarter despite being disappointed with our first quarter sales, we saw the pipeline growing.

And as encouraging was second quarter. As we continued to work that pipeline, the pipeline even got stronger now as we enter into third quarter. So, I think that's -- all of those factors have had a lot to do on the aesthetics side, Josh.

On the ophthalmic side, as you know, last year, we were disappointed in the international ophthalmic business. But, we have been focused on getting that back on track. First quarter was kind of flat to prior year.

But, we got the 9% increase in second quarter, which is kind of what we are looking for, or maybe a little bit more than that. And in the U.S. side, I think the sales reps, we hired two new sales reps and a manager in January.

So, they got up and trained and accustomed to their territory, and they started becoming productive. So, I think all of those factors had to do with the increase in revenue from second quarter to first quarter.

Great. The -- in terms of your SG&A expenses lower sequentially as well, they did lower sequentially, how was that achieved and do you see that trend continuing in Q3 and Q4, continuing to lower those?

Yes. It is a real focus that we have. Now, even though we did lower those by about $900,000 as I said, we weren't happy with that and we did expect those to decrease more than that.

We are however, there is a lot going on here with the integration really in every discipline of the Company, and that's required more time, more focus and to some degree more expenses. Remember though, first quarter we had legal expenses from the Synergetics litigation.

And most of that -- the vast majority of that was out, we didn't have that in second quarter and we will have none in third quarter. So, those -- all of those were impacts I think in our spending. But, again to reiterate, our spend level needs to be less than what it was during second quarter.

Great. And can you give us a little bit of an update on the aesthetics business relationship with Henry Schein and has it been fruitful in generating unit sales or leads for your direct sales force?

Very good question, Josh. Henry Schein relationship, they have about 200 sales reps out there in the field and they have about 300 folks on the telephone. We have been building that relationship since the acquisition.

This is something that was a little bit foreign to us because we have never, on the ophthalmic side of the business historically nor on the derm side of the IRIDEX business that we had had this kind of relationship.

So, we have been growing, we have been learning together and building this relationship. They have been participating in the symposiums that we have. And we certainly have seen signs of this relationship building and becoming stronger over time, and it helps our payables too.

I think you saw that our DSO for the quarter was under 60 days, which is a very nice improvement for us because at the end of the day, we end up selling these lasers directly to Henry Schein.

So, but I do think the relationship is good, it's getting better, and we believe that it can even be better as we move forward.

Great. Just one last question. You've talked in the past about finding and leveraging the combined business with the Laserscope acquisition, possibly finding common suppliers for ophthalmic and aesthetic products.

And can you comment on some of the efficiencies that you have realized already or that you expect to realize going forward? And thanks for taking my questions.

Yes, yes, Josh. It is exciting to see these synergies develop. And to me, the most lively example of that comes within our product innovation group.

And to see engineers working on both sides of the business, engineers who probably for the most part have spent most of their career in ophthalmology now, a new ligh'ts turned on within their head and they are thinking about the aesthetics side of the business.

So, our engineers are excited about bringing these technologies in and looking for improvements and it's the same group of engineers that we had before. We have not -- we have not really, I think we have increased by one the number of engineers that we have.

So, we are depending upon the synergies from the past knowledge that engineers have here in laser based products and delivery of light to benefit the aesthetic side.

You mentioned the suppliers. Yes, we are combining the supplier list and looking for opportunities to find joint suppliers for both sides of the business. We have had an opportunity to do that during the transition. This $3.7 million of WIP and raw materials is an initial start for us as we build products.

So, after we get this in here, we will start buying directly these parts in these components and we will be looking for all of those opportunities to synergize suppliers and get discounts.

Great, thanks a lot.

Thank you, Josh.

Our next question comes from [Jason Stan from Castle Peak]. Please go with your question.

Hi guys. I was curious if you have a number in terms of what you think you are going to need to raise regardless of the avenue you chose to raise capital. What kind of dollar figure are we talking, $5 million, $25 million, $50 million?

Well, it certainly would be on the low end of what you said there, if not lower, Jason. And a big component of that is trying to get the $3.8 million lifted because that -- that would make a big difference.

So, we are looking at both sides of that in terms of restructuring debt and/or raising some additional capital through refinancing or through an equity raise. But, we wouldn't be looking at certainly anything over a $5 million number. It would be that or less.

Okay, thanks guys.

Thank you, Jason.

Thank you. Our next question comes from Anthony Petrone from Maxim Group. Please go ahead with your question.

Thanks for just taking my questions, I have a number of them here. Just -- you mentioned the cost cutting initiatives next quarter and beyond.

Can you just shed some light on what particularly you plan on doing? I know the -- there are going to be some more synergies on the way as it relates to manufacturing, but is there anything beyond that that we could expect?

Yes, I think one of the things that happens, Anthony, during an acquisition is you take -- you take in all the employees you can at the point of the acquisition and I think that was over 60 employees that we got at the time. You know that in that as you consolidate and put things together, there will be some duplication.

And so, as a consequence, I think that total number of headcount when you combine the over 60 employees has been reduced by at least 15, if not closer to 20 in terms of the combination. So, we have been working very closely in that regard.

For example, when you put sales reps together, you may end up with three sales reps in New York. You know you don't need three sales reps in New York. So, you work through how to make realignments and changes.

And sometimes, it happens through attrition and sometimes that happens through other ways. I think also as we are looking to bring the manufacturing into our facility, in total, we are only adding about 12 to 14 employees.

So, that's from a -- from a total amount of revenue that we are bringing in here in house in terms of laser consoles, et cetera, that's a pretty low number of add of new employees.

So, we are looking -- again back to R&D, I think we are basically at about the same number or one engineer more than we had before. So, we are looking as much as we can in every area of the Company to benefit from the synergies of having both laser product lines in house instead of adding people.

I guess on that point to quantify where, I guess, gross margin can go, where could we expect gross margin to go once these synergies have been realized?

Well, I think we certainly, once we get -- and I believe about $500,000 of amortization cost will continue to hit our gross profit line the remainder of this year, so during third and fourth quarter. Once we get these -- we get our employees back in our facility making our product, that certainly is going to help make a difference.

I think as our Head of Operations has looked at the cost of goods from Laserscope, we certainly think we are going to have an opportunity to do better than that. One of the things we liked in the acquisition was that Gemini product was a 60% plus gross margin product.

I think also, Anthony, as you know, we have worked to rationalize product lines so that we are going to be more focused on the product lines from Laserscope that offer a greater return in terms of gross margin.

So, I think all of those things combined will be factors, which I think we will see continued progress quarter-over-quarter the next several quarters in terms of our gross profit.

Final question on the manufacturing synergies, if indeed these arrangements are not completed by, say, the end of October, I know there is part of the agreement with AMS was that they would supply you guys with components on the Laserscope products through the end of October. If you are not completed with the manufacturing integration, are they still committed to supplying components beyond, say, the end of October?

Well, there are certain components, Anthony, that beyond the end of October they will continue till like the end of the year. We have a schedule out for the -- between the parties for the movement of that transition here to our facility.

Third quarter sub assemblies will be done here starting in the next couple of weeks. That got delayed a little bit, the movement as we were negotiating the final points of this final settlement agreement with AMS.

But, clearly, one of the big points for us is during the fourth quarter, every Gemini unit we sell will come from our own facility here.

And our Head of Operations is fairly confident with the amount of investment we have made in time and resources at their facility and with one or two of the folks we got from -- that we were able to acquire and has a lot of experience in these product lines that though not guaranteed, we feel pretty good about the fourth quarter and being able to produce those Gemini units here. That will make a big difference.

Okay and just moving the pipeline, you mentioned the pipeline is growing. How much of that pipeline do you consider backlog at this point?

Well, there is a couple of different components to pipeline.

One of the things that we have experienced with the aesthetics business that we really never had before, here at IRIDEX, is that once a customer signs an order, it can take anywhere from two days to maybe six weeks before the product actually ships because there are other various components they may have to do including remodeling of a room.

Certainly, the majority of these folks at least have to add some kind of electricity or make some kind of changes.

A lot of these purchases are through leases, so the financing needs to be set up. So, that's the pipeline that's most important to us, is orders that have already been started in terms of process, meaning the customer has signed a commitment and there is just additional things that need to be finished before we actually ship.

And then I think as you recall, different than Laserscope in the past, our policy is we are not recognizing revenue until the unit is actually installed. So, that's a different kind of carryover from quarter-to-quarter that we will experience from now on.

Well, exactly. So, of the pipeline, how many -- what percentage of the existing pipeline that you see so far consists of customers that have signed a commitment?

I don't think we are ready to get into what the numbers would be but I would just try to answer that by saying that we have seen substantial increase. You know, again, starting at zero in January, substantial increase at the end of first quarter and then again another substantial increase at the end of second quarter. So, we are very pleased with how that pipeline has grown.

Okay, great. Final two questions here. Just on the ENT side, what was the contribution from that during the quarter? I know disposables were up -- was most of these disposable revenue related to the ENT division.

No, most of the disposables are related to ophthalmology and we -- that is a small component of our business. The green laser is purchased in an operating room and it can be used for ENT or ophthalmology.

By far the vast, vast majority, though, is used for ophthalmology. So, we have seen an increase in our probe business for ENT, but that's a very small number at this point.

Okay, great. And then, just a final question on Mid-Peninsula, if you do know , did they have any subprime

I am sorry, do they have what?

Any subprime exposure that you are aware of?

Not that I am aware of.

Thank you very much.

Thank you, Anthony.

And our next question comes from [Dan Mann, Mandalay Investments]. Please go with your question.

Afternoon, Barry, it's Dan. How are you?

Dan, good.

I have a simple question, hopefully you will give us some insight. When do you expect to get cash flow positive, third quarter, fourth quarter? It seems like you would have a lot of work to do based on this quarter's cash flow numbers.

I think, Stan, what we are trying to do is during the second quarter, our business was at $15 million in revenue. We certainly expect it to be better than that but we are trying to model the business so that at $15 million in revenue, we are not losing any money.

Now, saying that, we certainly as you have heard us say, expect our gross margin to increase over the next several quarters. That will be a component and you also got to look at the actual cash burn versus the non-cash burn and of the $2.550 million during second quarter, $1.1 million of that was non-cash.

During the second quarter?

During the second quarter, yes, sir.

$1.1 million?

Yes.

Will that continue at that rate?

Yes, it will, at least through the end of the year. And again, $500,000 of that is in amortization. There's 123R expenses and depreciation expenses that are components of that $1.1 million.

So, your actual loss is $1.4 million on actual cash?

On cash burn from second quarter, you are correct.

Before the Synergetics?

Right.

You are not willing to guess on whether it will be third or fourth or first quarter when you will go cash flow positive?

We are continuing to work both the gross margin side of the equation and the expense side of the equation. So, we are working hard to get to that point and I would expect -- it is third or fourth quarter, we will have to wait to see the actual results.

Okay. Last question, your loan from Mid-whatever bank, is it collateralized by assets, either receivables or inventory?

Yes, it is.

It is.

Yes.

By normal standards, you really have more of a line that can be borrowed even on accounts receivable and inventory. Why are they holding back any cash?

That line does vary and remember there is two sides of that; there is a $6 million term side of which we are paying that down and then there is a $6 million side that's addressed by receivables.

Thank you. (OPERATOR INSTRUCTIONS).

Our next question comes from [Thomas Samotaki] from [Omni Investors Group]. Please go with your question.

My question was partially answered by the former - by the prior discussion. But actually it seems as if your financial condition is not as tenuous as it was based on the prior announcements that we read. In fact the numbers that are outstanding are quite, it would appear, manageable.

One of the things that I wanted to address that you've addressed partially, mostly, is in fact your financial statement, your P&L statement is a little confusing.

It is complicated by incorporating non-cash charges and while you have elaborated on it for the first quarter, it would be helpful to know what it is for the first six months and also to understand how much of this is -- these non-cash charges will continue into the balance of the year?

You obviously have opportunity to improve your operating expenses. I am sure therein you have things like severance expenses.

You have a variety of things that will not exist in the continuing operations. So, I think to sort of un-confuse the confused, like myself,I would appreciate some comments. Thank you.

First of all, Tom, I think if you read the Q which should be out tonight; there has been a long line of companies trying to file their Qs today. But, I think you will see the cash flow analysis that you are looking for; it will be available in the 10-Q.

I would further comment that one of the things that has been hanging over our head has been this up to $9 million that we might have to buy from the AMS deal on closing inventory.

So, the fact that we have now resolved that and that [we've able] to really lay out the payments that we have got to make to AMS over the next several months or next period of time over a year, now I think we can really focus our efforts on these key components of transitioning the manufacturing here to our facility and focusing on the operating expenses to get that all in line.

Yes. I surely hope so; it would seem that way and in fact have made a lot of progress in this last quarter.

Thank you, Tom.

All right. Thank you very much.

Thank you. Management, at this time, there are no further questions. Please continue with any further remarks you would like to make.

Thank you everyone for participating in the call this afternoon. Again, I apologize for being late.

Our Q has been filed, so it will be available for your review and if anyone has any additional questions, please feel free to give management a call and we will be glad to try to return your call and answer your question. Thank you very much and have a nice evening.

Ladies and gentlemen, this concludes the IRIDEX Second Quarter 2007 Conference. If you would like to listen to a replay of today's conference, please dial-in to 1-800-405-2236 or 303-590-3000 and use the access code of 11095681.

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