IRIDEX Annual Report 2012

Plain-text annual report

Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington D.C. 20549 FORM 10-K Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934for the fiscal year ended December 29, 2012or ¨Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934for the transition period from to .Commission file number 0-27598 IRIDEX CORPORATION(Exact name of registrant as specified in its charter) Delaware 77-0210467(State or other jurisdiction ofincorporation or organization) (I.R.S. EmployerIdentification Number)1212 Terra Bella Avenue, Mountain View CA 94043-1824(Address of principal executive offices)(Zip Code)(650) 940-4700(Registrant’s telephone number, including area code)Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on which RegisteredCommon NASDAQ Global MarketSecurities registered pursuant to Section 12(g) of the Act:Common Stock, par value $0.01 per share Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933. Yes ¨ No Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”). Yes ¨ No Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the Registrantwas required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No ¨Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  No ¨Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’sknowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer,”,and smaller reporting company in Rule 12b-2 of the Exchange Act. Large accelerated filer ¨ Accelerated filer ¨Non-accelerated filer ¨ Smaller reporting company Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No The aggregate market value of the voting common equity held by non-affiliates of the Registrant was approximately $17,970,861 as of June 29, 2012 the last business day of the Registrant’s most recentlycompleted second fiscal quarter, based on the closing price reported for such date on the NASDAQ Global Market. The registrant did not have any non-voting common equity outstanding. For purposes of this disclosure,shares of common stock held by each executive officer and director and by each holder of 5% or more of the outstanding shares of common stock have been excluded from this calculation, because such persons may bedeemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.As of March 14, 2013, Registrant had 8,553,550 shares of common stock outstanding.DOCUMENTS INCORPORATED BY REFERENCECertain parts of the Proxy Statement for the Registrant’s 2013 Annual Meeting of Stockholders (the “Proxy Statement”) are incorporated by reference into Part III of this Annual Report on Form 10-K. Table of ContentsTable of Contents Page No. Part I Item 1. Business 3 Item 1A. Risk Factors 15 Item 1B. Unresolved Staff Comments 27 Item 2. Properties 27 Item 3. Legal Proceedings 27 Item 4. Mine Safety Disclosures 27 Part II Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters, and Issuer Purchases of Equity Securities 28 Item 6. Selected Financial Data 29 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 29 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 37 Item 8. Financial Statements and Supplementary Data 37 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 68 Item 9A. Controls and Procedures 68 Item 9B. Other Information 68 Part III Item 10. Directors, Executive Officers and Corporate Governance 69 Item 11. Executive Compensation 69 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 69 Item 13. Certain Relationships and Related Transactions, and Director Independence 69 Item 14. Principal Accountant Fees and Services 69 Part IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 70 Signatures 73 2Table of ContentsPART IThis Annual Report on Form 10-K contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, asamended, and Section 21E of the Securities Exchange Act of 1934, as amended, such as statements relating to levels of future sales and operatingresults; gross margins; leveraging our core business and increasing recurring revenues; broadening our product lines through product innovationand new treatments; general economic conditions; levels of international sales; market acceptance of our products; expectations for and sources offuture revenues; our marketing programs and trends in healthcare; our ability to take advantage of economies-of-scale in product development andmanufacturing; our current and future liquidity and capital requirements; efforts to decrease costs and manage cash flows; levels of future investmentin research and development efforts; our ability to develop and introduce new products through strategic alliances, OEM relationships andacquisitions; the availability of components from third-party manufacturers; results of clinical studies and the status of our regulatory clearance; theimpact of regulatory actions and determinations; and risks associated with bringing new products to market. In some cases, forward-lookingstatements can be identified by terminology, such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,”“predicts,” “intends,” “potential,” “continue,” or the negative of such terms or other comparable terminology. These statements involve known andunknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to differ materially from thoseexpressed or implied by such forward-looking statements. The reader is strongly urged to read the information contained under the captions “Item1A. Risk Factors - Factors That May Affect Future Results” in this Annual Report on Form 10-K for a more detailed description of these significantrisks and uncertainties. The reader is cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysisonly as of the date of this Form 10-K. We undertake no obligation to update such forward-looking statements to reflect events or circumstancesoccurring after the date of this report.Item 1. BusinessGeneralIRIDEX Corporation is a leading worldwide provider of therapeutic based laser systems, delivery devices and consumable instrumentation used to treatsight-threatening eye diseases in ophthalmology. In February 2012, we sold our aesthetics business to Cutera, Inc. We view this as a significant step forwardin our strategy because it allows us to focus solely on our ophthalmology business which is our core strength. Management believes that this path affords theCompany with the best opportunity for long term profitable growth. In accordance with accounting principles generally accepted in the U.S. (“GAAP”), wehave recast our financial information disclosed within this Form 10-K to show the results from our ophthalmology business as continuing operations and theresults from our aesthetics business as discontinued operations for all periods presented. Our ophthalmology products are sold in the United Statespredominantly through a direct sales force and internationally through approximately 70 independent distributors in over 100 countries. Revenues fromcontinuing operations in 2012, 2011 and 2010 were $33.9 million, $33.2 million and $32.3 million, respectively and we generated net (loss) income fromcontinuing operations of $(0.2) million, $2.1 million and $1.7 million, respectively. Total net income including income from discontinued operations for2012, 2011 and 2010 was $1.4 million, $2.6 million and $3.0 million, respectively.Our ophthalmology products consist of laser systems, delivery devices and consumable instrumentation including laser probes, and are used in thetreatment of serious eye diseases, including the three leading causes of irreversible blindness: diabetic retinopathy, glaucoma and age-related maculardegeneration (“AMD”). In addition, our ophthalmology products are often used in vitrectomy procedures (used to treat proliferative diabetic retinopathy,macular holes, retinal tears and detachments) which are generally performed in the operating room and require a consumable single use intraocular laser probe(“EndoProbe”) to deliver light to the back of the eye together with other instrumentation. Our ophthalmology business includes (i) a recurring revenuecomponent, consisting of sales of consumable products, predominantly single use laser probe devices and other instrumentation, combined with the repair,servicing and extended service contracts for our laser systems; and (ii) a capital component, consisting of the laser systems combined with durable deliverydevices. 3Table of ContentsOur laser systems consist of our IQ products which include IQ 532, IQ 577 and IQ 810 laser photocoagulation systems; and our OcuLight productsincluding OcuLight TX, OcuLight Symphony (Laser Delivery System), OcuLight SL, OcuLight SLx, OcuLight GL and OcuLight GLx laserphotocoagulation systems. Certain of our laser systems are capable of performing traditional continuous wavelength photocoagulation and our patented Fovea-Friendly MicroPulse laser photocoagulation. Towards the end of 2012 we introduced the TxCell Scanning Laser Delivery System which saves significant timein a variety of laser photocoagulation procedures by allowing physicians to deliver the laser in a multi-spot scanning mode, a more efficient method for theseprocedures than the traditional single spot mode. Our current family of laser probes includes a wide variety of products in 20, 23 and 25 gauge forvitreoretinal surgery and glaucoma surgery.Ophthalmologists typically use our laser systems in hospital operating rooms (“OR”) and ambulatory surgical centers (“ASC”), as well as their officesand clinics. In the OR and ASC, ophthalmologists use our laser systems with either an indirect laser ophthalmoscope or a consumable, single use EndoProbe.Since our first shipment in 1990, more than 10,000 medical laser systems manufactured by IRIDEX have been sold worldwide.IRIDEX Corporation was incorporated in California in February 1989 as IRIS Medical Instruments, Inc. In November 1995, we changed our name toIRIDEX Corporation and reincorporated in Delaware. Our executive offices are located at 1212 Terra Bella Avenue, Mountain View, California 94043-1824,and our telephone number is (650) 940-4700. We can also be reached at our website at www.IRIDEX.com, however, the information on, or that can beaccessed through, our website is not part of this report. As used in this Annual Report on Form 10-K, the terms “Company,” “IRIDEX,” “we,” “us” and “our”refer to IRIDEX Corporation, a Delaware corporation, and when the context so requires, our wholly owned subsidiaries, IRIS Medical Instruments, Inc. andLight Solutions Corporation, both California corporations, and IRIDEX France S.A.MarketOphthalmology is a large and growing global market. Growth is driven by the aging world population and the onset of diabetes, which is occurring at anepidemic rate, the introduction of new treatment approaches, and the realities of constrained health care system spending.Diabetic retinopathy is a common complication of diabetes which impairs vision over time and if left untreated can lead to blindness. According to theWorld Health Organization (“WHO”) – Vision 2020 The Right to Sight 2007 report – at least 171 million people worldwide have diabetes, and this figure islikely to more than double by the year 2030. According to the WHO, after 20 years duration more than 75% of patients will have some form of diabeticretinopathy. Laser photocoagulation is currently the standard treatment for this disease, although there has been increased use of pharmaceuticals in recentyears. A single treatment of continuous wavelength laser photocoagulation has been shown to stabilize the patient’s vision over the long term. Continuouswavelength laser photocoagulation treatments typically take several months to be fully effective and have been demonstrated to last for many years. Thistreatment presents a very cost efficient model, and presents a risk of varying degrees of vision loss to the patient. Pharmaceuticals can stabilize vision in thenear term, as treatments typically take a few days to be fully effective and have been demonstrated to last for weeks. However, patients receivingpharmaceutical treatment for diabetic retinopathy require repeated injections. The injections are painful and the patients may experience side effects includingincreased risk of eye infections. Furthermore, a regimen of repeated injections is very costly to both the physician, in terms of time, and to the healthcaresystem, in terms of dollars spent on treatment. The short comings in treating this disease have led to a renewed interest in alternative approaches that mayprovide better patient outcomes.Glaucoma is a leading cause of blindness in the world. WHO estimates that approximately 60.5 million people had glaucoma in 2010 and given theaging of the world’s population, this number is anticipated to increase to nearly 80 million by 2020. Currently, glaucoma is not curable, and vision lossresulting from glaucoma currently cannot be regained. Often, glaucoma is chronic and must be monitored for the duration of the 4Table of Contentspatient’s life. Most cases of glaucoma can be controlled and vision loss slowed or halted by treatment. Pharmaceuticals are typically the first treatment methodprescribed for glaucoma. These pharmaceutical treatments are commonly self-administered in drop form by the patients. Patients often have difficultiesapplying the pharmaceutical drops properly and may fail to appropriately or timely apply the medication, which may significantly reduce the effectiveness ofthe pharmaceutical. Even when administered correctly, pharmaceuticals have demonstrated reduced efficacy over time. When pharmaceuticals lose theireffectiveness, laser treatment is often performed, and ultimately surgery may be required. The short comings in treating this disease have led to a renewedinterest in surgical approaches that may allow treatment earlier and may result in better patient outcomes.AMD is a disease that affects the aged. WHO indicates that, in 2006, 3 million people had lost their sight due to AMD and that the number affected isexpected to double by the year 2020. Unfortunately, although pharmaceuticals are used to delay vision loss there is currently no cure for AMD.Pharmaceuticals require repeated injections in the eye every six to eight weeks, which are painful, increase the risk of adverse side effects, are costly, and theirlong term viability is unproven. Continuous wavelength laser photocoagulation can also be used to treat AMD, although it is used less frequently because thedisease often requires the laser to be applied to the area of the retina responsible for central vision and the likelihood of significant loss of visual function is toohigh. The short comings in treating this disease has led to a renewed interest in investigating alternative approaches that might allow treatment earlier whichwould result in better patient outcomes.The IRIDEX StrategyWe are one of the worldwide leaders in developing, manufacturing, marketing, selling and servicing innovative medical laser systems and associatedinstrumentation for the treatment of serious eye diseases. With the sale of our aesthetics business we can now focus exclusively on our ophthalmologybusiness. At the end of 2012, the Company had $11.9 million in cash and no debt. Although we incurred a net loss from our ophthalmology operations infiscal 2012, for the preceding three years prior to fiscal 2012, we generated net income and it is our goal to operate our business profitably going forward.Our strategy is to leverage our existing brand and distribution channel in the ophthalmology market to introduce a broad array of products that: 1.Improve therapeutic outcomes for patients suffering from sight-threatening eye diseases. 2.Improve the efficiency of physicians and reduce their costs, and 3.Provide economic benefits to healthcare systems.To achieve these goals we are pursuing a number of organic initiatives which we anticipate will be supplemented from time to time by acquisitions. Weanticipate that the successful execution of this strategy will lead to profitable growth and enhanced shareholder value.See Item 1A. Risk Factors - Factors That May Affect Future Results - “Our Future Success Depends on Our Ability to Develop and SuccessfullyIntroduce New Products and New Applications.” and “Efforts to acquire additional companies or product lines may divert our managerial resourcesaway from our business operations, and if we complete additional acquisitions, we may incur or assume additional liabilities or experience integrationproblems.”Laser PhotocoagulationWe produce laser photocoagulator systems. Laser photocoagulation is the standard-of-care for the treatment of many sight-threatening eye diseases, themajority of which are diseases of the retina and glaucoma. Photocoagulation delivers laser light to carefully targeted eye tissue and generates a local healingresponse. Laser photocoagulation has been demonstrated to be a safe and effective therapy with long-term benefits. 5Table of ContentsThe traditional method of performing laser photocoagulation uses a mode which delivers continuously-on laser light, which is referred to as continuouswave (“CW”) mode. Use of this mode typically leads to local tissue damage under the belief that tissue damage was necessary to generate the beneficialresponse associated with laser photocoagulation and can cause loss of visual function.We have developed a new method of performing laser photocoagulation using a mode which chops the CW beam into short, microsecond long, laserpulses, which we call MicroPulse mode. Studies have demonstrated that MicroPulse therapy can generate the beneficial response associated with CW laserphotocoagulation with no detectible tissue damage. We refer to this as Fovea-Friendly because it is tissue sparing laser photocoagulation which is intended topreserve visual function.Ophthalmic ProductsWe utilize a systems approach to product design. Each system includes a console, which generates the laser energy, and a number of interchangeableperipheral delivery devices for use in specific clinical applications. This approach allows our customers to purchase a basic console system and addadditional delivery devices as their needs expand or as new applications develop. We believe that this systems approach is our distinguishing characteristicand also brings economies-of-scale to our product development and manufacturing efforts because individual applications do not require the design andmanufacture of complete stand-alone products. Our primary equipment products range in price from $1,000 to $60,000 and consist of laser consoles andspecialized durable delivery devices. Our line of consumable products range in price from $12 to $250 and consist primarily of cannulas and laser probes.ConsolesOur laser consoles, which are identified below, incorporate the economic and technical benefits of solid state and semiconductor laser technology.Visible (Yellow) Photocoagulator Console. In 2009, we introduced the industry’s first solid state 577-nm (yellow) photocoagulator - the IQ 577. Thisproduct utilizes state of the art user interface technology and delivers a 577 wavelength which is at the peak of oxyhemoglobin absorption and allowsophthalmologists to obtain optimal results with lower power (more tissue sparing) compared with green wavelengths. The IQ 577 console weighs 18 pounds,has dimensions of 7.5”H x 12”W x 14”D, draws a maximum of 250 Watts of wall power, requires no water cooling, and has a remote control and wirelessfootswitch.Visible (Green) Photocoagulator Consoles. We have a family of solid state and semiconductor-based photocoagulator consoles used in ophthalmologythat deliver visible (Green - 532nm) laser light. In 2010, we introduced the IQ 532nm photocoagulator. This product utilizes a user interface and productplatform based on the IQ 577, as more fully described above, as well as our OcuLight TX, OcuLight GL and OcuLight GLx Photocoagulators. The OcuLightTX/GL/GLx have dimensions of 6”H x 12”W x 12”D, draw a maximum of 300 Watts of wall power and require no water cooling.Infrared Photocoagulator Consoles. The OcuLight and IQ 810 photocoagulator consoles used by ophthalmologists are available in two infrared(810nm) output power ranges: the OcuLight SL at 2 Watts and the IQ 810 and OcuLight SLx at 3 Watts. The OcuLight consoles weigh 14 pounds and havedimensions of 4”H x 12”W x 12”D. The IQ 810 console weighs 11 pounds and has dimensions of 7”H x 12”W x 12”D. Neither requires external air norwater cooling.MicroPulse Enabled Consoles. MicroPulse mode is offered as an option on some of our infrared and visible laser photocoagulator systems.Multi-wavelength Laser System Configurations. When used in conjunction with specific IRIDEX laser consoles, our Symphony slit lamp adapterscan deliver multiple laser wavelengths from a single slit lamp 6Table of Contentsinstallation. Our laser consoles, together with our Symphony slit lamp adapters, combine the clinical versatility and convenience of multiple wavelengthdelivery into one delivery device for retinal and glaucoma procedures. Currently, our compatible consoles are the OcuLight GLx and the OcuLight TX greenlaser consoles and the OcuLight SLx and the IQ 810 infrared laser consoles and the IQ 577 yellow laser console.Ophthalmic Delivery Devices and Other ProductsOur versatile family of consoles and delivery devices has been designed to accommodate the addition of new capabilities with a minimal incrementalinvestment. Typically users of our consoles can add capabilities by simply purchasing new interchangeable delivery devices and utilizing them with theirexisting console. We have developed both consumable and durable delivery devices and expect to continue to develop additional delivery devices.TxCell Scanning Laser Delivery System (“TxCell”). TxCell was introduced in the second half of 2012. It allows the physician to perform multi-spotpattern scanning for efficient retinal photocoagulation, confluent laser patterns for tissue-sparing MicroPulse protocols and allows for standard single spotphotocoagulation.TruFocus Laser Indirect Ophthalmoscope (“LIO”). The indirect ophthalmoscope is designed to be worn on the physician’s head and to be used inprocedures to treat peripheral retinal disorders, particularly in infants or adults requiring treatment in the supine position. This product can be used in bothdiagnosis and treatment procedures at the point-of-care. The IRIDEX LIO is recognized as the “standard of the ophthalmic industry”.Slit Lamp Adapter (“SLA”). These adapters allow the physician to utilize a standard slit lamp in both diagnosis and treatment procedures. Physicianscan install an SLA in a few minutes and convert standard diagnostic slit lamps into a therapeutic photocoagulator delivery system. SLAs are used in treatmentprocedures for both retinal diseases and glaucoma. These devices are available in a wide variety of spot diameters. Our standard SLAs have a single fiber anddeliver laser light from a single laser console. Our Symphony SLA has multiple fibers and can deliver laser light from two compatible laser consoles.Operating Microscope Adapter (“OMA”) . These adapters allow the physician to utilize a standard operating microscope in both diagnosis and lasertreatment procedures. These devices are similar to SLAs, except that they are oriented horizontally and therefore can be used to deliver retinal photocoagulationto a supine patient.EndoProbe. Our EndoProbe fiber optic delivery devices are used for endophotocoagulation, a retinal treatment procedure performed in the hospitaloperating room or surgery center during a vitrectomy procedure. These sterile disposable probes are available in tapered, angled, stepped, aspirating,illuminating, and adjustable styles. The EndoProbe is offered in a wide variety of gauges.G-Probe. The G-Probe is used in procedures to treat medically and surgically uncontrolled glaucoma, in many instances replacing cyclocryotherapy, orfreezing of eye tissues. The G-Probe’s non-invasive procedure takes approximately ten minutes, is performed on an anesthetized eye in the doctor’s office, andresults in less pain and fewer adverse side effects than cyclocryotherapy. The G-Probe is a sterile consumable multi-use product.DioPexy Probe. The DioPexy Probe is a hand-held instrument which is used in procedures to treat retinal tears, and breaks non-invasively through thesclera, as an alternative method of attaching the retina. Our DioPexy Probe results in increased precision, less pain and less inflammation than traditionalcryotherapy.GreenTip™ Soft Tip Cannula. The GreenTip cannula allows surgeons to effectively visualize and access the proximity of the retina while performing afluid air exchange during a vitrectomy procedure. Benefits include optimal contrast against the retina, maximized visualization and greater protection of theretina with its unique atraumatic silicone tip. The GreenTip cannula is a sterile disposable single-use product. 7Table of ContentsMoistAir™ In-Line Air Humidifier. The MoistAir Humidifying Chamber connects to the air line and provides humidified air to the eye during fluid airexchange. Studies have shown that the use of humidified air can substantially reduce the dehydrating effects, delay lens feathering, protect cornealendothelium, and may prevent visual field loss defects after macular hole surgery. The MoistAir Humidifying Chamber is a sterile disposable single useproduct.Ophthalmology TreatmentsThe following chart lists the procedures for treating ophthalmic diseases that can be addressed by utilizing our ophthalmic laser systems. Theseprocedures typically are performed in an OR, ASC or clinic/outpatient settings and are non-elective and covered by insurance. Procedure Console Delivery Devices and Other Product ModeAge-related MacularDegeneration RetinalPhotocoagulation Infrared & Visible Slit Lamp Adapter CWDiabetic Retinopathy Macular Edema Grid RetinalPhotocoagulation Infrared & Visible Slit Lamp Adapter &Operating Microscope Adapter, CW or MicroPulse Focal RetinalPhotocoagulation Visible Slit Lamp Adapter Proliferative Pan-RetinalPhotocoagulationVitrectomy Procedure Infrared & Visible Slit Lamp Adapter, Operating Microscope Adapter,Laser Indirect Ophthalmoscope, EndoProbe*GreenTip cannula* CW or MicroPulseGlaucoma Primary Open -Angle Trabeculoplasty Infrared & Visible Slit Lamp Adapter CW or MicroPulseAngle-closure Iridotomy Infrared & Visible Slit Lamp Adapter CWUncontrolledGlaucoma TransscleralCyclophotocoagulation Infrared G-Probe* CWRetinal Tears andDetachments Retinopexy RetinalPhotocoagulationVitrectomyProcedure Infrared & Visible Slit Lamp Adapter, Laser Indirect Ophthalmoscope,Operating Microscope Adapter, EndoProbe*GreenTip cannula*, MoistAir HumidifyingChamber* CW Transscleral RetinalPhotocoagulation Infrared DioPexy Probe CWRetinopathy ofPrematurity RetinalPhotocoagulation Infrared Laser Indirect Ophthalmoscope CWOcular Tumors RetinalPhotocoagulation Infrared Slit Lamp Adapter, Operating Microscope Adapter,Laser Indirect Ophthalmoscope CWMacular Holes Vitrectomy Procedure Visible EndoProbe* CW *Consumable and disposable productsResearch and DevelopmentWe have close working relationships with researchers, clinicians and practicing physicians around the world who provide new ideas, test the feasibilityof these new ideas and assist us in validating new products and new applications before they are introduced.Our internal research and development (“R&D”) activities are performed by a current team of 15 engineers, scientists and regulatory professionals withexperience in various aspects of medical products, laser systems, delivery devices and clinical techniques with a focus on introducing innovative productswhich satisfy the unmet and emerging needs of our customers. The core competencies of the team include: mechanical engineering, 8Table of Contentselectrical engineering, optics, lasers, fiber optics, software, firmware and delivery devices. The R&D process integrates all of the necessary disciplines of theCompany from product inception through customer acceptance. This process facilitates reliable new product innovations and a consistent pipeline ofinnovative products for our customers.Our research activities are managed internally by our R&D staff. We supplement our internal R&D staff by hiring consultants and/or partnering withphysicians to gain specialized expertise and understanding. Research efforts are directed toward the development of new products and new applications for ourexisting products, as well as the identification of markets not currently addressed by our products.We believe that it is important to make a substantial contribution to improving clinical outcomes. For instance, we have made substantial investments inresearching and improving the treatment of serious eye diseases such as AMD, diabetic retinopathy and glaucoma. The objectives of developing new treatmentsand applications are to expand the potential patient population, to more effectively and more economically treat diseases, to treat patients earlier in the treatmentregimen and to reduce the side effects of treatment.We spent $4.4 million on R&D in our continuing operations in 2012, $3.9 million in 2011 and $3.8 million in 2010.We consider clinical projects to be a component of our R&D efforts and they may or may not result in additional commercial opportunities. See Item 1A.Risk Factors - Factors That May Affect Future Results - “While We Devote Significant Resources to Research and Development, Our Research andDevelopment May Not Lead to New Products that Achieve Commercial Success” and “The Clinical Trial Process Required to Obtain RegulatoryApprovals is Costly and Uncertain, and Could Result in Delays in New Product Introductions or Even an Inability to Release a Product”.Customers and Customer SupportOur products are currently sold to ophthalmologists specializing in the treatment of eye disease in the retina, glaucoma and pediatrics eye diseases. Othercustomers include research and teaching hospitals, government installations, surgical centers, hospitals, and office clinics (outpatient). No single customer ordistributor accounted for 10% or more of total revenues in fiscal years 2012, 2011 and 2010.We seek to provide superior customer support and service and believe that our customer service and technical support distinguish our product offeringsfrom those of our competitors. We provide depot service at our Mountain View facility for our ophthalmology products. Our customer support representativesassist customers with orders, warranty returns and other administrative functions. Our technical support engineers provide customers with answers totechnical and product-related questions. We maintain an “around-the-clock” telephone service line to service our customers. If a problem with a depotserviceable product cannot be diagnosed and resolved by telephone, a service loaner is shipped overnight to domestic customers under warranty or servicecontract, and by the most rapid delivery means available to our international customers, and the problem unit is returned to us. The small size and ruggeddesign of our products allows for economical shipment and quick response to customers worldwide.Sales and MarketingWe sell and market our products in the United States predominantly through our direct sales force and internationally through approximately 70independent distributors into over 100 countries. Currently we have a direct sales force of 11 employees who were engaged in sales efforts within the UnitedStates and 5 employees engaged in managing our distribution sales efforts internationally. Our sales are administered through our corporate headquarters inMountain View, California. See Item 1A. Risk Factors - Factors That May Affect Future Results - “We Rely on Our Direct Sales Force and Network ofInternational Distributors to Sell Our Products and Any Failure to Maintain Our Direct Sales Force and Distributor Relationships Could Harm OurBusiness.” 9Table of ContentsInternational sales represented 45.4%, 44.4% and 44.8% of our sales in 2012, 2011 and 2010, respectively. We believe that our international sales willcontinue to represent a significant portion of our revenues for the foreseeable future. Our international sales are made principally to customers in Europe, Asia,the Pacific Rim, the Middle East, Russia, Africa and Latin America. Our distribution agreements with our international distributors are generally exclusiveand typically can be terminated by either party without cause with 90 days notice. International sales may be adversely affected by the imposition ofgovernmental controls, currency fluctuations, restrictions on export technology, political instability, trade restrictions, changes in tariffs and the economiccondition in each country in which we sell our products. See Item 1A. Risk Factors - Factors That May Affect Future Results - “We Depend on InternationalSales for a Significant Portion of Our Operating Results.”In the past, we maintained two wholly owned subsidiaries, one located in the United Kingdom (UK) and the other in the France, both were exclusivelyengaged in supporting our aesthetics business. In June 2008, we transitioned the responsibility for the sales and service of our aesthetics products in the UK toan independent distributor and during 2011 we deregistered the legal entity. Upon closing the sale of the aesthetics business in February 2012, we transitionedthe responsibility for the sales and service of our aesthetics products in France to Cutera, Inc. We do not currently maintain any operating subsidiaries.To support our sales process, we conduct marketing programs which include: our website, clinical education, email marketing, trade shows, publicrelations, market research, and advertising in trade and academic journals and newsletters. We typically participate in over 85 trade shows worldwide on anannual basis. These meetings allow us to present our products to existing and prospective buyers.Through marketing, we collaborate with our customers to identify new products and applications which help meet their unmet needs, which in turnprovides us with new product concepts, enhances our ability to identify new applications for our products and validates new procedures using our products.Customers include key opinion leaders who are often the heads of the departments in which they work or professors at universities. We believe that theseluminaries in the field of ophthalmology are key to the successful introduction of new products and the subsequent acceptance of these new products by thegeneral market. Acceptance of our products by these early adopters is key to our strategy in the validation and commercialization of our new products.OperationsThe manufacture of our visible light and infrared photocoagulators and the related delivery devices is a highly complex and precise process. Completedsystems must pass quality control and reliability tests before shipment. Our manufacturing activities consist of specifying, sourcing, assembling and testingof components and certain subassemblies for assembly into our final product. Currently we have a total of 37 employees engaged in manufacturing activitiesfor these products.The medical devices manufactured by us are subject to extensive regulation by numerous governmental authorities, including federal, state, and foreigngovernmental agencies. The principal regulator in the United States is the Food and Drug Administration (“FDA”). In April 1998, we received certification forISO 9001/EN 46001, which is an international quality system standard that documents compliance to the European Medical Device Directive. In February2004, we were certified to ISO 13485:2003, which replaced ISO 9001/EN46001 as the international standard for quality systems as applied to medicaldevices. In August 2008, we received FDA 510(k) clearance on our family of IRIDEX IQ laser systems. This clearance covers the IRIDEX IQ 532, IQ 577,IQ 630-670, and IQ 810 laser systems and their associated delivery devices to deliver laser energy in either CW-Pulse, MicroPulse or LongPulse mode. Theselaser systems are intended for a wide range of specific applications in the medical specialties of ophthalmology. See Item 1A. Risk Factors - Factors That MayAffect Future Results - “We Are Subject To Government Regulations Which May Cause Us to Delay or Withdraw the Introduction of New Products orNew Applications for Our Products.”, “If We Fail to Comply With the FDA’s Quality System Regulation and Laser Performance Standards OurManufacturing Operations Could Be Halted, and Our Business Would Suffer.” and “If We Modify One of Our FDA Approved Devices, We May Needto Seek Reapproval, Which, if Not Granted, Would Prevent Us from Selling Our Modified Products or Cause Us to Redesign Our Products.” 10Table of ContentsWe rely on third parties to manufacture substantially all of the components used in our products, although we assemble critical subassemblies and thefinal product at our facility in Mountain View, California. Some of these suppliers and manufacturers are sole source. We have some long-term or volumepurchase agreements with our suppliers but currently purchase most components on a purchase order basis. These components may not be available in thequantities required, on reasonable terms, or at all. Financial or other difficulties faced by our suppliers or significant changes in demand for these componentsor materials could limit their availability. Any failures by our third party suppliers to adequately perform may delay the submission of products for regulatoryapproval, impair our ability to deliver products on a timely basis or otherwise impair our competitive position. See Item 1A. Risk Factors - Factors That MayAffect Future Results - “We Depend on Sole Source or Limited Source Suppliers.”International regulatory bodies often establish varying product standards, packaging requirements, labeling requirements, tariff regulations, duties andtax requirements. As a result of our sales in Europe, we are required to have all products “CE” marked, an international symbol affixed to all productsdemonstrating compliance to the European Medical Device Directive and all applicable standards. In July 1998, we received CE mark certification underAnnex II guidelines, the most stringent path to CE certification. With Annex II CE mark certification, we have demonstrated our ability to both understand andcomply with all applicable standards under the European Medical Device Directive. This allows us to CE mark any product upon our internal verification ofcompliance to all applicable European standards. Currently, all of our released products are CE marked. Continued certification is based on successful reviewof the process by our European Registrar during its annual audit. Any loss of certification would have a material adverse effect on our business, results ofoperations and financial condition.CompetitionCompetition in the market for laser systems and delivery devices used for ophthalmic treatment procedures is intense and is expected to increase. Thismarket is also characterized by technological innovation and change. We compete by providing features and services that are valued by our customers such as:enhanced product performance, and clinical outcomes, ease of use, durability, versatility, customer training services and rapid repair of equipment.Our principal competitors in ophthalmology are Alcon Inc., Carl Zeiss Meditec AG, Nidek Co. Ltd, Synergetics, Topcon Corporation, Ellex MedicalLasers, Ltd., Quantel Medical SA, and Lumenis Ltd. Most of these companies currently offer a competitive, semiconductor-based laser system forophthalmology. Also within ophthalmology, pharmaceutical alternative treatments for AMD and DME such as Lucentis/Avastin (Genentech), Eylea(Regeneron) and to a lesser extent Visudyne (Novartis), Macugen (OSI Pharmaceuticals) and Ozurdex (Allergan) compete rigorously with traditional laserprocedures.Some ophthalmic competitors have substantially greater financial, engineering, product development, manufacturing, marketing and technical resourcesthan we do. Some companies also have greater name recognition than us and long-standing customer relationships. In addition, other medical companies,academic and research institutions, or others, may develop new technologies or therapies, including medical devices, surgical procedures or pharmacologicaltreatments and obtain regulatory approval for products utilizing such techniques that are more effective in treating the conditions targeted by us, or are lessexpensive than our current or future products. Our technologies and products could be rendered obsolete by such developments. Any such developments couldhave a material adverse effect on our business, financial condition and results of operations. See Item 1A. Risk Factors - Factors That May Affect FutureResults - “We Face Strong Competition in Our Markets and Expect the Level of Competition to Grow in the Foreseeable Future.”Patents and Proprietary RightsOur success and ability to compete is dependent in part upon our proprietary information. We rely on a combination of patents, trade secrets, copyrightand trademark laws, nondisclosure and other contractual 11Table of Contentsagreements and technical measures to protect our intellectual property rights. These are either developed internally or obtained from acquisitions such asRetinaLabs and Ocunetics. We file patent applications to protect technology, inventions and improvements that are significant to the development of ourbusiness. We have been issued 26 United States patents and 17 foreign patents on the technologies related to our continuing products and processes, whichhave expiration dates ranging from 2014 to 2027. We have nine pending patent applications in the United States and seven foreign pending patent applicationsthat have been filed. Our patent applications may not be approved.In addition to patents, we rely on trade secrets and proprietary know-how which we seek to protect, in part, through proprietary information agreementswith employees, consultants and other parties. Our proprietary information agreements with our employees and consultants contain provisions requiring suchindividuals to assign to us, without additional consideration, any inventions conceived or reduced to practice by them while employed or retained by us,subject to customary exceptions. See Item 1A.Risk Factors - Factors That May Affect Future Results - “We Rely on Patents and Proprietary Rights toProtect our Intellectual Property and Business.”Government RegulationThe medical devices marketed and manufactured by us are subject to extensive regulation by numerous governmental authorities, including federal,state, and foreign governmental agencies. Pursuant to the Federal Food, Drug, and Cosmetic Act, as amended, and the regulations promulgated thereunder(“FDA Act”), the FDA serves as the principal federal agency within the United States with authority over medical devices and regulates the research, clinicaltesting, manufacture, labeling, distribution, sale, marketing and promotion of such devices. Noncompliance with applicable requirements can result in,among other things, warning letters, fines, injunctions, civil penalties, recall or seizures of products, total or partial suspension of production, failure of thegovernment to grant pre-market clearance or approval for devices, withdrawal of marketing approvals, and criminal prosecution. The FDA also has theauthority to request repair, replacement or refund of the cost of any medical device manufactured or distributed by us.In the United States, medical devices are classified into one of three classes (Class I, II or III). The class to which the device is assigned determines,among other things, the type of pre-marketing submission/application required for FDA clearance to market. If the device is classified as Class I or II, and if itis not exempt, a 510(k) pre-market notification will be required for marketing. Under FDA regulations, Class I devices are subject to general controls (forexample, labeling, pre-market notification and adherence to Quality System Regulations (“QSRs”) requirements). Class II devices receive marketing clearancethrough a 510(k) pre-market notification. For Class III devices, a pre-market approval (“PMA”) application will be required unless the device is a pre-amendments device (on the market prior to the passage of the medical device amendments in 1976, or substantially equivalent to such a device) and PMAshave not been called for. In that case, a 510(k) will be the route to market. A 510(k) clearance will be granted if the submitted information establishes that theproposed device is “substantially equivalent” to a legally marketed Class I or II medical device, or to a Class III medical device for which the FDA has notcalled for a PMA. The FDA may determine that a proposed device is not substantially equivalent to a legally marketed device, or that additional information ordata are needed before a substantial equivalence determination can be made. A request for additional data may require that clinical studies of the device’s safetyand efficacy be performed.Commercial distribution of a device for which a 510(k) notification is required can begin only after the FDA issues an order finding the device to be“substantially equivalent” to a previously cleared device. The FDA has recently been requiring a more rigorous demonstration of substantial equivalence thanin the past. Even in cases where the FDA grants a 510(k) clearance, it can take the FDA between three and six months from the date of submission to grant a510(k) clearance, but it may take longer.A “not substantially equivalent” determination, or a request for additional information, could delay the market introduction of new products that fallinto this category and could have a materially adverse effect on our 12Table of Contentsbusiness, financial condition and results of operations. For any of our products that are cleared through the 510(k) process, such as our IQ 810 system,modifications or enhancements that could significantly affect the safety or efficacy of the device or that constitute a major change to the intended use of thedevice will require new 510(k) submissions.We have obtained 510(k) clearances for all of our marketed products. We have also modified aspects of our products since receiving regulatoryclearance, but we believe that new 510(k) clearances are not required for these modifications. After a device receives a 510(k) clearance or a PMA, anymodification that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, will require a new clearanceor approval. The FDA requires each manufacturer to make this determination initially, but the FDA can review any such decision and can disagree with amanufacturer’s determination. If the FDA disagrees with our determination not to seek a new 510(k) clearance or PMA, the FDA may retroactively require usto seek 510(k) clearance or pre-market approval. The FDA could also require us to cease marketing and distribution and/or recall the modified device until a510(k) clearance or a PMA approval is obtained. Also, in these circumstances, we may be subject to significant regulatory fines or penalties.Any products manufactured or distributed by us pursuant to FDA clearances or approvals are subject to pervasive and continuing regulation by theFDA, including record keeping requirements and reporting of adverse experiences with the use of the device. Device manufacturers are required to register theirestablishments and list their devices with the FDA and certain state agencies, and are subject to periodic inspections by the FDA and certain state agencies.The FDA Act requires devices to be manufactured to comply with applicable QSR regulations which impose certain procedural and documentationrequirements upon us with respect to design, development, manufacturing and quality assurance activities. We are subject to unannounced inspections by theFDA and the Food and Drug Branch of the California Department of Health Services, or CDHS, to determine our compliance with the QSR and otherregulations, and these inspections may include the manufacturing facilities of our subcontractors.Labeling and promotion activities are subject to scrutiny by the FDA and in certain instances, by the Federal Trade Commission. The FDA activelyenforces regulations prohibiting marketing of products for unapproved uses. We and our products are also subject to a variety of state laws and regulations inthose states or localities where our products are or will be marketed. Any applicable state or local regulations may hinder our ability to market our products inthose states or localities. Manufacturers are also subject to numerous federal, state and local laws relating to such matters as safe working conditions,manufacturing practices, environmental protection, fire hazard control and disposal of hazardous or potentially hazardous substances. We may be required toincur significant costs to comply with such laws and regulations now or in the future. Such laws or regulations may have a material adverse effect upon ourability to do business.Export of our products is regulated by the FDA and is covered by the Export Amendment of 1996, which greatly expanded the export of approved andunapproved United States medical devices. However, some foreign countries require manufacturers to provide an FDA certificate for products for export(“CPE”) which requires the device manufacturer to certify to the FDA that the product has been granted pre-market clearance in the United States and that themanufacturing facilities appeared to be in compliance with QSR at the time of the last QSR inspection. The FDA will refuse to issue a CPE if significantoutstanding QSR violations exist.We are also regulated under the Radiation Control for Health and Safety Act, which requires laser products to comply with performance standards,including design and operation requirements, and manufacturers to certify in product labeling and in reports to the FDA that their products comply with allsuch standards. The law also requires laser manufacturers to file new product and annual reports, maintain manufacturing, testing and sales records andreport product defects. Various warning labels must be affixed and certain protective devices installed, depending on the class of the product. 13Table of ContentsThe introduction of our products in foreign markets will also subject us to foreign regulatory clearances which may impose substantial additional costsand burdens. International sales of medical devices are subject to the regulatory requirements of each country. The regulatory review process varies fromcountry to country. Many countries also impose product standards, packaging requirements, labeling requirements and import restrictions on devices. Inaddition, each country has its own tariff regulations, duties and tax requirements. The approval by the FDA and foreign government authorities isunpredictable and uncertain. The necessary approvals or clearances may not be granted on a timely basis, if at all. Delays in receipt of, or a failure to receive,such approvals or clearances, or the loss of any previously received approvals or clearances, could have a material adverse effect on our business, financialcondition and results of operations.Changes in existing requirements or adoption of new requirements or policies by the FDA or other foreign and domestic regulatory authorities couldadversely affect our ability to comply with regulatory requirements. Failure to comply with regulatory requirements could have a material adverse effect on ourbusiness, financial condition and results of operations. We may be required to incur significant costs to comply with laws and regulations in the future. Theselaws or regulations may have a material adverse effect upon our business, financial condition or results of operations.ReimbursementThe cost of a significant portion of medical care in the United States is funded by government programs, health maintenance organizations and privateinsurance plans. Our ophthalmology products are typically purchased by doctors, clinics, hospitals and other users, which bill various third-party payers,such as government programs and private insurance plans, for the health care services provided to their patients. Government imposed limits onreimbursement of hospitals and other health care providers have significantly affected the spending budgets of doctors, clinics and hospitals to acquire newequipment, including our products. Under certain government insurance programs, a health care provider is reimbursed for a fixed sum for services renderedin treating a patient, regardless of the actual charge for such treatment. The Center for Medicare and Medicaid Services reimburses hospitals on aprospectively-determined fixed amount for the costs associated with an in-patient hospitalization based on the patient’s discharge diagnosis, regardless of theactual costs incurred by the hospital or physician in furnishing the care and regardless of the specific devices used in that procedure.Private third-party reimbursement plans are also developing increasingly sophisticated methods of controlling health-care costs by imposing limitationson reimbursable procedures and the exploration of more cost-effective methods of delivering health care. In general, these government and private measureshave caused health care providers, including our customers, to be more selective in the purchase of medical products. In addition, changes in governmentregulation or in private third-party payers’ policies may limit or eliminate reimbursement for procedures employing our products, which could have a materialadverse effect on our business, results of operations and financial condition. See Item 1A Risk Factors - Factors That May Affect Future Results - “OurOperating Results May be Adversely Affected by Uncertainty Regarding Healthcare Reform Measures and Changes in Third Party Coverage andReimbursement Policies.Doctors, clinics, hospitals and other users of our products may not obtain adequate reimbursement for use of our products from third-party payers.While we believe that the laser procedures using our products have generally been reimbursed, payers may deny coverage and reimbursement for our productsif they determine that the device was not reasonable and necessary for the purpose used, was investigational or was not cost-effective.Backlog and SeasonalityWe generally do not maintain a high level of backlog. As a result, we do not believe that our backlog at any particular time is indicative of future saleslevels. Our quarterly results have been, and are expected to continue to be, affected by seasonal factors. For example, our European sales during the thirdquarter are generally lower due to many businesses being closed for the summer vacation season. 14Table of ContentsEmployeesCurrently, we have a total of 106 full-time equivalent employees engaged in our ongoing ophthalmology operations, including 54 in operations andservice, 25 in sales and marketing, 15 in research and development and 12 in finance and administration. We also employ, from time to time, a number oftemporary and part-time employees as well as consultants on a contract basis. At December 29, 2012, we employed 19 such persons. Our future success willdepend in part on our ability to attract, train, retain and motivate highly qualified employees, who are in great demand. We may not be successful in attractingand retaining such personnel. Our employees are not represented by a collective bargaining organization, and we have never experienced a work stoppage orstrike. We consider our employee relations to be good.Available InformationOur annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to reports pursuant to Section 13(a)or 15(d) of the Securities Exchange Act of 1934, as amended, are available, free of charge, on our website at www.IRIDEX.com, as soon as reasonablypracticable after such reports are electronically filed with the Securities and Exchange Commission, however, the information on, or that can be accessedthrough, our website is not part of this report. Additionally, these filings may also be accessed through the SEC’s website at www.sec.gov. Further, a copy ofthis Annual Report on Form 10-K is located at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operationof the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.Item 1A. Risk FactorsFactors That May Affect Future ResultsIn addition to the other information contained in this Annual Report Form 10-K, we have identified the following risks and uncertainties that may have amaterial adverse effect on our business, common stock price, financial condition or results of operations. You should carefully consider the risks describedbelow before making an investment decision.In February 2012, We Sold our Aesthetics Business Unit and Our Operating Results Will Be Adversely Affected in the Near Term as a Result ofthis Sale.In February 2012, we completed the sale of our aesthetics business. Prior to the sale, our aesthetics business covered its direct costs and thereforecontributed to the profitability of the overall company to remain profitable. In addition, we provided the purchaser typical indemnification provisionsassociated with this type of transaction, and there is a risk that an adverse event may occur that requires us to fulfill our indemnity obligation. In the near termthese factors will have a material adverse effect on our business, financial condition and results of operations.Our Operating Results May Fluctuate from Quarter to Quarter and Year to Year.Our sales and operating results may vary significantly from quarter to quarter and from year to year in the future. Our operating results are affected by anumber of factors, many of which are beyond our control. Factors contributing to these fluctuations include the following: • general economic uncertainties and political concerns; • the timing of the introduction and market acceptance of new products, product enhancements and new applications; • changes in demand for our existing line of ophthalmology products; 15Table of Contents • the cost and availability of components and subassemblies, including the willingness and ability of our sole or limited source suppliers to timelydeliver components at the times and prices that we have planned; • our ability to maintain sales volumes at a level sufficient to cover fixed manufacturing and operating costs; • fluctuations in our product mix within ophthalmology products and foreign and domestic sales; • our ability to address our liquidity issues should the need occur; • the effect of regulatory approvals and changes in domestic and foreign regulatory requirements; • introduction of new products, product enhancements and new applications by our competitors, entry of new competitors into our markets, pricingpressures and other competitive factors; • our long and highly variable sales cycle; • changes in the prices at which we can sell our products; • changes in customers’ or potential customers’ budgets as a result of, among other things, reimbursement policies of government programs andprivate insurers for treatments that use our products; and • increased product innovation costs.In addition to these factors, our quarterly results have been, and are expected to continue to be, affected by seasonal factors. For example, our Europeansales during the third quarter are generally lower due to many businesses being closed for the summer vacation season.Our expense levels are based, in part, on expected future sales. If sales levels in a particular quarter do not meet expectations, we may be unable to adjustoperating expenses quickly enough to compensate for the shortfall of sales, and our results of operations may be adversely affected. In addition, we havehistorically made a significant portion of each quarter’s product shipments near the end of the quarter. If that pattern continues, any delays in shipment ofproducts could have a material adverse effect on results of operations for such quarter. Due to these and other factors, we believe that quarter to quarter andyear to year comparisons of our past operating results may not be meaningful. You should not rely on our results for any quarter or year as an indication ofour future performance. Our operating results in future quarters and years may be below expectations, which would likely cause the price of our commonstock to fall.Our Stock Price Has Been and May Continue to be Volatile and an Investment in Our Common Stock Could Suffer a Decline in Value.The trading price of our common stock has been subject to wide fluctuations in response to a variety of factors, some of which are beyond our control,including quarterly variations in our operating results, announcements by us or our competitors of new products or of significant clinical achievements,changes in market valuations of other similar companies in our industry and general market conditions. In addition, the trading price of our common stockhas been significantly adversely affected by our recent operating performance and by liquidity issues. For fiscal year 2012, the trading price of our commonstock fluctuated from a low of $3.10 per share to a high of $4.48 per share. There can be no assurance that our common stock trading price will not sufferdeclines. Our common stock may experience an imbalance between supply and demand resulting from low trading volumes and therefore broad marketfluctuations could have a significant impact on the market price of our common stock regardless of our performance. 16Table of ContentsWe Rely on Continued Market Acceptance of Our Existing Products and Any Decline in Sales of Our Existing Products Would Adversely AffectOur Business and Results of Operations.We currently market visible and infrared medical laser systems and delivery devices to the ophthalmology market. We believe that continued andincreased sales, if any, of these medical laser systems is dependent upon a number of factors including the following: • acceptance of product performance, features, ease of use, scalability and durability; • recommendations and opinions by ophthalmologists, other clinicians, and their associated opinion leaders; • clinical study outcomes; • price of our products and prices of competing products and technologies particularly in light of the current macro-economic environment wherehealthcare systems and healthcare operators are becoming increasingly price sensitive; • availability of competing products, technologies and alternative treatments; and • level of reimbursement for treatments administered with our products.In addition, we derive a meaningful portion of our sales in the form of recurring revenues from selling consumable instrumentation including ourEndoProbe devices and service. Our ability to increase recurring revenues from the sale of consumable products will depend primarily upon the features of ourcurrent products and product innovation, the quality of our products, ease of use and prices of our products, including the relationship to prices of competingproducts. The level of our service revenues will depend on the quality of service we provide and the responsiveness and the willingness of our customers torequest our services rather than purchase competing products or services. Any significant decline in market acceptance of our products or our revenues derivedfrom the sales of laser consoles, delivery devices, consumables or services may have a material adverse effect on our business, results of operations andfinancial condition.We Face Strong Competition in Our Markets and Expect the Level of Competition to Grow in the Foreseeable Future.Competition in the market for devices used for ophthalmic treatment procedures is intense and is expected to increase. Our competitive position dependson a number of factors including product performance, characteristics and functionality, ease of use, scalability, durability and cost. Our principalcompetitors in ophthalmology are Alcon Inc., Carl Zeiss Meditec AG, Nidek Co. Ltd., Synergetics, Topcon Corporation, Ellex Medical Lasers, Ltd., QuantelMedical SA, and Lumenis Ltd. Most of these companies currently offer a competitive, semiconductor-based laser system for ophthalmology. Also withinophthalmology, pharmaceutical alternative treatments for AMD and DME such as Lucentis/Avastin (Genentech), Eylea (Regeneron), and to a lesser extentVisudyne (Novartis), Macugen (OSI Pharmaceuticals) and Ozurdex (Allergan) compete rigorously with traditional laser procedures. A number of thesecompetitors have substantially greater financial, engineering, product development, manufacturing, marketing and technical resources than we do, includinggreater name recognition, and benefit from long-standing customer relationships. Some medical companies, academic and research institutions, or others, maydevelop new technologies or therapies that are more effective in treating conditions targeted by us or are less expensive than our current or future products. Anysuch developments could have a material adverse effect on our business, financial condition and results of operations.Our Operating Results May be Adversely Affected by Uncertainty Regarding Healthcare Reform Measures and Changes in Third PartyCoverage and Reimbursement Policies.The recent decision to uphold the Patient Protection and Affordable Care Act means that we will be required to pay a 2.3% tax on our products sold in theUS. If we are not able to pass this tax onto our customers, our profits will be significantly reduced or losses significantly enlarged. 17Table of ContentsChanges in government legislation or regulation or in private third-party payers’ policies toward reimbursement for procedures employing our productsmay prohibit adequate reimbursement. There have been a number of legislative and regulatory proposals to change the healthcare system, reduce the costs ofhealthcare and change medical reimbursement policies. Doctors, clinics, hospitals and other users of our products may decline to purchase our products to theextent there is uncertainty regarding reimbursement of medical procedures using our products and any healthcare reform measures. Further proposedlegislation, regulation and policy changes affecting third party reimbursement are likely. We are unable to predict what legislation or regulation, if any, relatingto the health care industry or third-party coverage and reimbursement may be enacted in the future, or what effect such legislation or regulation may have onus. However, denial of coverage and reimbursement of our products would have a material adverse effect on our business, results of operations and financialcondition.Our ophthalmology products are typically purchased by doctors, clinics, hospitals and other users, which bill various third-party payers, such asgovernmental programs and private insurance plans, for the health care services provided to their patients. Third-party payers are increasingly scrutinizingand challenging the coverage of new products and the level of reimbursement for covered products. Doctors, clinics, hospitals and other users of our productsmay not obtain adequate reimbursement for use of our products from third-party payers. While we believe that the laser procedures using our products havegenerally been reimbursed, payers may deny coverage and reimbursement for our products if they determine that the device was not reasonable and necessaryfor the purpose used, was investigational or was not cost-effective.We Depend on International Sales for a Significant Portion of Our Operating Results.We derive, and expect to continue to derive, a large portion of our revenues from international sales. For the fiscal year ended December 29, 2012, ourinternational ophthalmology sales were $15.4 million or 45.4% of total revenue. We anticipate that international sales will continue to account for a significantportion of our revenues in the foreseeable future. For our continuing ophthalmology business, none of our international revenues and costs has beendenominated in foreign currencies. As a result, an increase in the value of the U.S. dollar relative to foreign currencies makes our products more expensive andthus less competitive in foreign markets. Our international operations and sales are subject to a number of risks and potential costs, including: • impact of recessions in global economies and availability of credit; • impact of international conflicts, terrorist and military activity, civil unrest; • fluctuations in foreign currency exchange rates; • foreign certification requirements, including continued ability to use the “CE” mark in Europe, and other local regulatory requirements; • performance of our international channel of distributors; • longer accounts receivable collection periods; • differing local product preferences and product requirements; • cultural differences; • changes in foreign medical reimbursement and coverage policies and programs; • political and economic instability; • reduced or limited protections of intellectual property rights in jurisdictions outside the United States; • potentially adverse tax consequences; and • multiple protectionist, adverse and changing foreign governmental laws and regulations. 18Table of ContentsAny one or more of these factors stated above could have a material adverse effect on our business, financial condition or results of operations.As we expand our existing international operations we may encounter new risks. For example, as we focus on building our international sales anddistribution networks in new geographic regions, we must continue to develop relationships with qualified local distributors and trading companies. If we arenot successful in developing these relationships, we may not be able to grow sales in these geographic regions. These or other similar risks could adverselyaffect our revenues and profitability.Our Future Success Depends on Our Ability to Develop and Successfully Introduce New Products and New Applications.Our future success is dependent upon, among other factors, our ability to develop, obtain regulatory approval or clearance of, manufacture and marketnew products. Successful commercialization of new products and new applications will require that we effectively transfer production processes from researchand development to manufacturing and effectively coordinate with our suppliers. In addition, we must successfully sell and achieve market acceptance of newproducts and applications and enhanced versions of existing products. The extent of, and rate at which, market acceptance and penetration are achieved byfuture products is a function of many variables, which include, among other things, price, safety, efficacy, reliability, marketing and sales efforts, thedevelopment of new applications for these products, the availability of third-party reimbursement of procedures using our new products, the existence ofcompeting products and general economic conditions affecting purchasing patterns. Our ability to market and sell new products may also be subject togovernment regulation, including approval or clearance by the FDA and foreign government agencies. Any failure in our ability to successfully develop andintroduce new products or enhanced versions of existing products and achieve market acceptance of new products and new applications could have a materialadverse effect on our operating results and would cause our net revenues to decline.We Depend on Collaborative Relationships to Develop, Introduce and Market New Products, Product Enhancements and New Applications.We depend on both clinical and commercial collaborative relationships. We have entered into collaborative relationships with academic medical centersand physicians in connection with the research and innovation and clinical testing of our products. Commercially, we currently have a distribution andlicensing agreement with Alcon for our GreenTip SoftTip Cannula. Sales of and royalties from the GreenTip Soft Tip cannula are dependent upon the salesperformance of Alcon, which depends on their efforts which is beyond our control. Historically, we have collaborated with Bausch & Lomb to design andmanufacture a solid-state green wavelength (532nm) laser photocoagulator module for Bausch & Lomb, called the Millennium Endolase module. Bausch &Lomb has introduced a new product to replace the product that included the Millennium Endolase module and as such we have seen sales to Bausch & Lombdecline and we anticipate that sales will continue to decline. The failure to obtain any additional future clinical or commercial collaborations and the resultingfailure or success of such arrangements of any current or future clinical or commercial collaboration relationships could have a material adverse effect on ourability to introduce new products or applications and therefore could have a material adverse effect on our business, results of operations and financialcondition.While We Devote Significant Resources to Research and Development, Our Research and Development May Not Lead to New Products thatAchieve Commercial Success.The Company’s ability to generate incremental revenue growth will depend, in part, on the successful outcome of research and development activities,including clinical trials that lead to the development of new products and new applications using our products. Our research and development process isexpensive, prolonged, and entails considerable uncertainty. Due to the complexities and uncertainties associated with ophthalmic research and development,products we are currently developing may not complete the development 19Table of Contentsprocess or obtain the regulatory approvals required to market such products successfully. The products currently in our development pipeline may not beapproved by regulatory entities and may not be commercially successful, and our current and planned products could be surpassed by more effective oradvanced products of current or future competitors. Therefore, even if we are able to successfully develop enhancements or new generations of our products,these enhancements or new generations of products may not produce revenue in excess of the costs of development and they may be quickly rendered obsoleteby changing customer preferences or the introduction by our competitors of products embodying new technologies or features.Efforts to Acquire Additional Companies or Product Lines May Divert Our Managerial Resources Away from Our Business Operations, and IfWe Complete Additional Acquisitions, We May Incur or Assume Additional Liabilities or Experience Integration Problems.Since 1989, we have completed 6 acquisitions. As part of our growth strategy we seek to acquire businesses or product lines for various reasons,including adding new products, adding new customers, increasing penetration with existing customers, adding new manufacturing capabilities or expandinginto new geographic markets. Our ability to successfully grow through acquisitions depends upon our ability to identify, negotiate, complete and integratesuitable acquisitions and to obtain any necessary financings. These efforts could divert the attention of our management and key personnel from our businessoperations. If we complete future acquisitions, we may also experience: • difficulties integrating any acquired products into our existing business; • delays in realizing the benefits of the acquired products; • diversion of our management’s time and attention from other business concerns; • adverse customer reaction to the product acquisition; and • increases in expenses.Any one or more of these factors stated above could have a material adverse effect on our business, financial condition or results of operations.Furthermore, acquisitions could materially impair our operating results by causing us to amortize acquired assets, incur acquisition expenses and add debt.We Are Exposed to Risks Associated With Worldwide Economic Slowdowns and Related Uncertainties.We are subject to macro-economic fluctuations in the U.S. and worldwide economy. Concerns about consumer and investor confidence, volatilecorporate profits and reduced capital spending, international conflicts, terrorist and military activity, civil unrest and pandemic illness could reduce customerorders or cause customer order cancellations. In addition, political and social turmoil related to international conflicts and terrorist acts may put furtherpressure on economic conditions in the United States and abroad.Weak economic conditions and declines in consumer spending and consumption may harm our operating results. Purchases of our products are oftendiscretionary. During uncertain economic times, customers or potential customers may delay, reduce or forego their purchases of our products and services,which may impact our business in a number of ways, including lower prices for our products and services and reducing or delaying sales. There could be anumber of follow-on effects from economic uncertainty on our business, including insolvency of key suppliers resulting in product delays, delays incustomer payments of outstanding accounts receivable and/or customer insolvencies, counterparty failures negatively impacting our operations, and increasingexpense or inability to obtain future financing.If economic uncertainty persisted, or if the economy entered a prolonged period of decelerating growth, our results of operations may be harmed. 20Table of ContentsIf We Cannot Increase Our Sales Volumes, Reduce Our Costs or Introduce Higher Margin Products to Offset Anticipated Reductions in theAverage Unit Price of Our Products, Our Operating Results May Suffer.The average unit price of our products may decrease in the future in response to changes in product mix, competitive pricing pressures, new productintroductions by our competitors or other factors. If we are unable to offset the anticipated decrease in our average selling prices by increasing our salesvolumes or through new product introductions, our net revenues will decline. In addition, to maintain our gross margins we must continue to reduce themanufacturing cost of our products. If we cannot maintain our gross margins our business could be seriously harmed, particularly if the average selling priceof our products decreases significantly without a corresponding increase in sales.If We Fail to Manage Growth Effectively, Our Business Could Be Disrupted Which Could Harm Our Operating Results.We have experienced and may in the future experience growth in our business, both organically and through the acquisition of businesses and products.We have made and expect to continue to make significant investments to enable our future growth through, among other things, new product innovation andclinical trials for new applications and products. We must also be prepared to expand our work force and to train, motivate and manage additional employeesas the need for additional personnel arises. Our personnel, systems, procedures and controls may not be adequate to support our future operations. Any failureto effectively manage future growth could have a material adverse effect on our business, results of operations and financial condition.We Rely on Our Direct Sales Force and Network of International Distributors to Sell Our Products and Any Failure to Maintain Our DirectSales Force and Distributor Relationships Could Harm Our Business.Our ability to sell our products and generate revenues depends upon our direct sales force within the United States and relationships with independentdistributors outside the United States. Currently our direct sales force within the United States consists of 11 employees focused and we maintainrelationships with approximately 70 independent distributors internationally selling our products into over 100 countries, managed by a team of 5 people. Wegenerally grant our distributors exclusive territories for the sale of our products in specified countries. The amount and timing of resources dedicated by ourdistributors to the sales of our products is not within our control. Our international sales are entirely dependent on the efforts of these third parties. If anydistributor breaches the terms of its distribution agreement with us or fails to generate sales of our products, we may be forced to replace the distributor andour ability to sell our products into that exclusive sales territory would be adversely affected.We do not have any long-term employment contracts with the members of our direct sales force. We may be unable to replace our direct sales forcepersonnel with individuals of equivalent technical expertise and qualifications, which may harm our revenues and our ability to maintain market share.Similarly, our distributor agreements are generally terminable at will by either party and distributors may terminate their relationships with us, which wouldaffect our international sales and results of operations.We Rely on Patents and Proprietary Rights to Protect our Intellectual Property and Business.Our success and ability to compete is dependent in part upon our proprietary information. We rely on a combination of patents, trade secrets, copyrightand trademark laws, nondisclosure and other contractual agreements and technical measures to protect our intellectual property rights. We file patentapplications to protect technology, inventions and improvements that are significant to the development of our business. We have been issued 26 United Statespatents and 17 foreign patents on the technologies related to our products and processes. We have nine pending patent applications in the United States andseven foreign pending patent applications that have been filed. Our patent applications may not be approved. The acquisition of the RetinaLabs assets includedfive additional patents. Any patents granted now or in the future may offer only limited protection 21Table of Contentsagainst potential infringement and development by our competitors of competing products. Moreover, our competitors, many of which have substantialresources and have made substantial investments in competing technologies, may seek to apply for and obtain patents that will prevent, limit or interfere withour ability to make, use or sell our products either in the United States or in international markets.Patents have a limited lifetime and once a patent expires competition may increase. For example, our “Connector Patent” used to connect our deliverydevices (consumable & durable) to our laser consoles expired in 2010. Delivery devices which do not utilize our Connector Patent technology are not recognizedby our laser consoles. We derive, and expect to continue to derive, a large portion of our recurring revenue and profits from sales of our consumable EndoProbedevices. Expiration of this patent may increase competition from our competitors for our consumable EndoProbe device business and there can be noguarantees that we will maintain our market share of this business.In addition to patents, we rely on trade secrets and proprietary know-how which we seek to protect, in part, through proprietary information agreementswith employees, consultants and other parties. Our proprietary information agreements with our employees and consultants contain industry standardprovisions requiring such individuals to assign to us without additional consideration any inventions conceived or reduced to practice by them while employedor retained by us, subject to customary exceptions. Proprietary information agreements with employees, consultants and others may be breached, and we maynot have adequate remedies for any breach. Also, our trade secrets may become known to or independently developed by competitors.The laser and medical device industry is characterized by frequent litigation regarding patent and other intellectual property rights. Companies in themedical device industry have employed intellectual property litigation to gain a competitive advantage. Numerous patents are held by others, includingacademic institutions and our competitors. Patent applications filed in the United States after November 2000 generally will be published eighteen months afterthe filing date. However, since patent applications continue to be maintained in secrecy for at least some period of time, both within the United States and withregards to international patent applications, we cannot assure you that our technology does not infringe any patents or patent applications held by third parties.We have, from time to time, been notified of, or have otherwise been made aware of, claims that we may be infringing upon patents or other proprietaryintellectual property owned by others. If it appears necessary or desirable, we may seek licenses under such patents or proprietary intellectual property.Although patent holders commonly offer such licenses, licenses under such patents or intellectual property may not be offered or the terms of any offeredlicenses may not be reasonable.Any claims, with or without merit, and regardless of whether we are successful on the merits, would be time-consuming, result in costly litigation anddiversion of technical and management personnel, cause shipment delays or require us to develop non-infringing technology or to enter into royalty or licensingagreements. For example, during fiscal year 2007, the Company settled patent litigations with Synergetics, Inc., which was time-consuming, costly and adiversion of technical and management personnel. An adverse determination in a judicial or administrative proceeding and failure to obtain necessary licensesor develop alternate technologies could prevent us from manufacturing and selling our products, which would have a material adverse effect on our business,results of operations and financial condition.If We Lose Key Personnel or Fail to Integrate Replacement Personnel Successfully, Our Ability to Manage Our Business Could Be Impaired.Our future success depends upon the continued service of our key management, technical, sales, and other critical personnel. Our officers and other keypersonnel are employees-at-will, and we cannot assure you that we will be able to retain them. Key personnel have left our Company in the past, and therelikely will be additional departures of key personnel from time to time in the future. The loss of any key employee could result in significant disruptions to ouroperations, including adversely affecting the timeliness of product releases, the successful implementation and completion of Company initiatives, and theresults of our operations. Competition 22Table of Contentsfor these individuals is intense, and we may not be able to attract, assimilate or retain highly qualified personnel. Competition for qualified personnel in ourindustry and the San Francisco Bay Area, as well as other geographic markets in which we recruit, is intense and characterized by increasing salaries, whichmay increase our operating expenses or hinder our ability to recruit qualified candidates. In addition, the integration of replacement personnel could be timeconsuming, may cause additional disruptions to our operations, and may be unsuccessful.If We Fail to Accurately Forecast Demand For Our Product and Component Requirements For the Manufacture of Our Product, We CouldIncur Additional Costs or Experience Manufacturing Delays and May Experience Lost Sales or Significant Inventory Carrying Costs.We use quarterly and annual forecasts based primarily on our anticipated product orders to plan our manufacturing efforts and determine ourrequirements for components and materials. It is very important that we accurately predict both the demand for our product and the lead times required toobtain the necessary components and materials. Lead times for components vary significantly and depend on numerous factors, including the specificsupplier, the size of the order, contract terms and current market demand for such components. If we overestimate the demand for our product, we may haveexcess inventory, which would increase our costs. If we underestimate demand for our product and consequently, our component and materials requirements,we may have inadequate inventory, which could interrupt our manufacturing, delay delivery of our product to our customers and result in the loss of customersales. Any of these occurrences would negatively impact our business and operating results.We Depend on Sole Source or Limited Source Suppliers.We rely on third parties to manufacture substantially all of the components used in our products, including optics, laser diodes and crystals. We havesome long term or volume purchase agreements with our suppliers and currently purchase components on a purchase order basis. Some of our suppliers andmanufacturers are sole or limited sources. In addition, some of these suppliers are relatively small private companies whose operations may be disrupted ordiscontinued at any time. There are risks associated with the use of independent manufacturers, including the following: • unavailability of shortages or limitations on the ability to obtain supplies of components in the quantities that we require; • delays in delivery or failure of suppliers to deliver critical components on the dates we require; • failure of suppliers to manufacture components to our specifications, and potentially reduced quality; and • inability to obtain components at acceptable prices.Our business and operating results may suffer from the lack of alternative sources of supply for critical sole and limited source components. Theprocess of qualifying suppliers is complex, requires extensive testing with our products, and may be lengthy, particularly as new products are introduced.New suppliers would have to be educated in our production processes. In addition, the use of alternate components may require design alterations to ourproducts and additional product testing under FDA and relevant foreign regulatory agency guidelines, which may delay sales and increase product costs. Anyfailures by our vendors to adequately supply limited and sole source components may impair our ability to offer our existing products, delay the submissionof new products for regulatory approval and market introduction, materially harm our business and financial condition and cause our stock price to decline.Establishing our own capabilities to manufacture these components would be expensive and could significantly decrease our profit margins. Our business,results of operations and financial condition would be adversely affected if we are unable to continue to obtain components in the quantity and quality desiredand at the prices we have budgeted. 23Table of ContentsIf We Fail to Maintain Our Relationships With Health Care Providers, Customers May Not Buy Our Products and Our Revenue and ProfitabilityMay Decline.We market our products to numerous health care providers, including physicians, hospitals, ambulatory surgical centers, government affiliated groupsand group purchasing organizations. We have developed and strive to maintain close relationships with members of each of these groups who assist in productresearch and development and advise us on how to satisfy the full range of surgeon and patient needs. We rely on these groups to recommend our products totheir patients and to other members of their organizations. The failure of our existing products and any new products we may introduce to retain the support ofthese various groups could have a material adverse effect on our business, financial condition and results of operations.We Face Manufacturing Risks.The manufacture of our infrared and visible laser consoles and the related delivery devices is a highly complex and precise process. We assemble criticalsubassemblies and substantially all of our final products at our facility in Mountain View, California. We may experience manufacturing difficulties, qualitycontrol issues or assembly constraints, particularly with regard to new products that we may introduce. If our sales increase substantially we may need toincrease our production capacity and may not be able to do so in a timely, effective, or cost efficient manner. We may not be able to manufacture sufficientquantities of our products, which may require that we qualify other manufacturers for our products. Furthermore, we may experience delays, disruptions,capacity constraints or quality control problems in our manufacturing operations and as a result, product shipments to our customers could be delayed,which would negatively impact our net revenues.If Our Facilities Were To Experience Catastrophic Loss, Our Operations Would Be Seriously Harmed.Our facilities could be subject to catastrophic loss such as fire, flood or earthquake. All of our research and development activities, manufacturing, ourcorporate headquarters and other critical business operations are located near major earthquake faults in Mountain View, California. Any such loss at any ofour facilities could disrupt our operations, delay production, shipments and revenue and result in large expense to repair and replace our facilities.We Are Subject To Government Regulations Which May Cause Us to Delay or Withdraw the Introduction of New Products or New Applicationsfor Our Products.The medical devices that we market and manufacture are subject to extensive regulation by the FDA and by foreign and state governments. Under theFederal Food, Drug and Cosmetic Act and the related regulations, the FDA regulates the design, development, clinical testing, manufacture, labeling, sale,distribution and promotion of medical devices. Before a new device can be introduced into the market, the product must undergo rigorous testing and anextensive regulatory review process implemented by the FDA under federal law. Unless otherwise exempt, a device manufacturer must obtain market clearancethrough either the 510(k) premarket notification process or the lengthier premarket approval application process. Depending upon the type, complexity andnovelty of the device and the nature of the disease or disorder to be treated, the FDA process can take several years, require extensive clinical testing and resultin significant expenditures. Even if regulatory approval is obtained, later discovery of previously unknown safety issues may result in restrictions on theproduct, including withdrawal of the product from the market. Other countries also have extensive regulations regarding clinical trials and testing prior to newproduct introductions. Our failure to obtain government approvals or any delays in receipt of such approvals would have a material adverse effect on ourbusiness, results of operations and financial condition.The FDA imposes additional regulations on manufacturers of approved medical devices. We are required to comply with the applicable Quality Systemregulations and our manufacturing facilities are subject to ongoing periodic inspections by the FDA and corresponding state agencies, including unannouncedinspections, and must 24Table of Contentsbe licensed as part of the product approval process before being utilized for commercial manufacturing. Noncompliance with the applicable requirements canresult in, among other things, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, withdrawal ofmarketing approvals, and criminal prosecution. The FDA also has the authority to request repair, replacement or refund of the cost of any device wemanufacture or distribute. Any of these actions by the FDA would materially and adversely affect our ability to continue operating our business and the resultsof our operations.In addition, we are also subject to varying product standards, packaging requirements, labeling requirements, tariff regulations, duties and taxrequirements. As a result of our sales in Europe, we are required to have all products “CE” marked, an international symbol affixed to all productsdemonstrating compliance with the European Medical Device Directive and all applicable standards. While currently all of our released products are CEmarked, continued certification is based on the successful review of our quality system by our European Registrar during their annual audit. Any loss ofcertification would have a material adverse effect on our business, results of operations and financial condition.The Clinical Trial Process Required to Obtain Regulatory Approvals is Costly and Uncertain, and Could Result in Delays in New ProductIntroductions or Even an Inability to Release a Product.The clinical trials required to obtain regulatory approvals for our products are complex and expensive and their outcomes are uncertain. We incursubstantial expense for, and devote significant time to, clinical trials but cannot be certain that the trials will ever result in the commercial sale of a product. Wemay suffer significant setbacks in clinical trials, even after earlier clinical trials showed promising results. Any of our products may produce undesirable sideeffects that could cause us or regulatory authorities to interrupt, delay or halt clinical trials of a product candidate. We, the FDA, or another regulatoryauthority may suspend or terminate clinical trials at any time if they or we believe the trial participants face unacceptable health risks.If We Fail to Comply With the FDA’s Quality System Regulation and Laser Performance Standards Our Manufacturing Operations Could BeHalted, and Our Business Would Suffer.We are currently required to demonstrate and maintain compliance with the FDA’s Quality System Regulation. The QSR is a complex regulatory schemethat covers the methods and documentation of the design, testing, control, manufacturing, labeling, quality assurance, packaging, storage and shipping of ourproducts. Because our products involve the use of lasers, our products also are covered by a performance standard for lasers set forth in FDA regulations. Thelaser performance standard imposes specific record-keeping, reporting, product testing and product labeling requirements. These requirements include affixingwarning labels to laser products, as well as incorporating certain safety features in the design of laser products. The FDA enforces the QSR and laserperformance standards through periodic unannounced inspections. We have been, and anticipate in the future being, subject to such inspections. Our failure totake satisfactory corrective action in response to an adverse QSR inspection or our failure to comply with applicable laser performance standards could resultin enforcement actions, including a public warning letter, a shutdown of our manufacturing operations, a recall of our products, civil or criminal penalties, orother sanctions, such as those described in the preceding risk factor above, which would cause our sales and business to suffer.If We Modify One of Our FDA Approved Devices, We May Need to Seek Reapproval, Which, if Not Granted, Would Prevent Us from Selling OurModified Products or Cause Us to Redesign Our Products.Any modifications to an FDA-cleared device that would significantly affect its safety or effectiveness or that would constitute a major change in itsintended use would require a new 510(k) clearance or possibly a premarket approval. We may not be able to obtain additional 510(k) clearances or premarketapprovals for new products or for modifications to, or additional indications for, our existing products in a timely fashion, or at all. Delays in obtaining futureclearances would adversely affect our ability to introduce new or enhanced products in a timely manner, which in turn would harm our revenues and futureprofitability. We have made modifications to 25Table of Contentsour devices in the past and may make additional modifications in the future that we believe do not or will not require additional clearances or approvals. If theFDA disagrees, and requires new clearances or approvals for the modifications, we may be required to recall and to stop marketing the modified devices,which could harm our operating results and require us to redesign our products.Because We Do Not Require Training for Users of Our Products, and Sell Our Products to Non-physicians, There Exists an Increased Potentialfor Misuse of Our Products, Which Could Harm Our Reputation and Our Business.Federal regulations restrict the sale of our products to or on the order of “licensed practitioners.” The definition of “licensed practitioners” varies fromstate to state. As a result, our products may be purchased or operated by physicians with varying levels of training, and in many states by non-physicians,including nurse practitioners and technicians. Outside the United States, many jurisdictions do not require specific qualifications or training for purchasers oroperators of our products. We do not supervise the procedures performed with our products, nor do we require that direct medical supervision occur. We, andour distributors, generally offer but do not require purchasers or operators of our products to attend training sessions. In addition, we sometimes sell oursystems to companies that rent our systems to third parties and that provide a technician to perform the procedure. The lack of training and the purchase anduse of our products by non-physicians may result in product misuse and adverse treatment outcomes, which could harm our reputation and expose us tocostly product liability litigation.Inability of Customers Obtaining Credit or Material Increases in Interest Rates May Harm Our Sales.Some of our products are sold to health care providers in general practice. Many of these health care providers purchase our products with funds theysecure through various financing arrangements with third party financial institutions, including credit facilities and short-term loans. If availability of creditbecomes more limited, or interest rates increase, these financing arrangements may be harder to obtain or more expensive to our customers, which maydecrease demand for our products. Any reduction in the sales of our products would cause our business to suffer.Some of Our Laser Systems Are Complex in Design and May Contain Defects That Are Not Detected Until Deployed By Our Customers, WhichCould Increase Our Costs and Reduce Our Revenues.Laser systems are inherently complex in design and require ongoing regular maintenance. The manufacture of our lasers, laser products and systemsinvolves a highly complex and precise process. As a result of the technical complexity of our products, changes in our or our suppliers’ manufacturingprocesses or the inadvertent use of defective materials by us or our suppliers could result in a material adverse effect on our ability to achieve acceptablemanufacturing yields and product reliability. To the extent that we do not achieve such yields or product reliability, our business, operating results, financialcondition and customer relationships would be adversely affected. We provide warranties on certain of our product sales, and allowances for estimatedwarranty costs are recorded during the period of sale. The determination of such allowances requires us to make estimates of failure rates and expected costs torepair or replace the products under warranty. We currently establish warranty reserves based on historical warranty costs. If actual return rates and/or repairand replacement costs differ significantly from our estimates, adjustments to recognize additional cost of revenues may be required in future periods.Our customers may discover defects in our products after the products have been fully deployed and operated under peak stress conditions. In addition,some of our products are combined with products from other vendors, which may contain defects. As a result, should problems occur, it may be difficult toidentify the source of the problem. If we are unable to identify and fix defects or other problems, we could experience, among other things: • loss of customers; • increased costs of product returns and warranty expenses; 26Table of Contents • damage to our brand reputation; • failure to attract new customers or achieve market acceptance; • diversion of development and engineering resources; and • legal actions by our customers.The occurrence of any one or more of the foregoing factors could seriously harm our business, financial condition and results of operations.Our Products Could Be Subject to Recalls Even After Receiving FDA Approval or Clearance. A Recall Would Harm Our Reputation andAdversely Affect Our Operating Results.The FDA and similar governmental authorities in other countries in which we market and sell our products have the authority to require the recall of ourproducts in the event of material deficiencies or defects in design or manufacture. A government mandated recall, or a voluntary recall by us, could occur as aresult of component failures, manufacturing errors or design defects, including defects in labeling. A recall could divert management’s attention, cause us toincur significant expenses, harm our reputation with customers and negatively affect our future sales.If Product Liability Claims are Successfully Asserted Against Us, We may Incur Substantial Liabilities That May Adversely Affect Our Businessor Results of Operations.We may be subject to product liability claims from time to time. Our products are highly complex and some are used to treat extremely delicate eye tissue.We believe we maintain adequate levels of product liability insurance but product liability insurance is expensive and we might not be able to obtain productliability insurance in the future on acceptable terms or in sufficient amounts to protect us, if at all. A successful claim brought against us in excess of ourinsurance coverage could have a material adverse effect on our business, results of operations and financial condition.Item 1. B Unresolved Staff CommentsNone.Item 2. PropertiesWe lease 37,000 square feet of space in Mountain View, California. This facility is being substantially utilized for all of our manufacturing, researchand development efforts and also serves as our corporate headquarters.Management believes that these facilities are adequate for our current needs and that suitable additional space or an alternative space would be availableas needed in the future on commercially reasonable terms.Item 3. Legal ProceedingsFrom time to time, we may be involved in legal proceedings arising in the ordinary course of business. We believe there is no litigation currently pendingthat could have, individually or in the aggregate, a material adverse effect on our operations or financial condition.Item 4. Mine Safety DisclosuresNot applicable. 27Table of ContentsPART IIItem 5. Market for Registrant’s Common Equity and Related Stockholder Matters, and Issuer Purchases of Equity SecuritiesMarket Information for Common EquityOur common stock is currently and since our initial public offering on February 15, 1996, has been quoted on the NASDAQ Global Market under thesymbol “IRIX”. The following table sets forth for the periods indicated the high and low sales prices for our common stock, as reported on the NASDAQGlobal Market. High Low Fiscal 2012 Fourth Quarter $4.00 $3.54 Third Quarter $4.00 $3.10 Second Quarter $4.37 $3.22 First Quarter $4.48 $3.67 Fiscal 2011 Fourth Quarter $3.80 $3.15 Third Quarter $4.10 $3.48 Second Quarter $4.55 $3.58 First Quarter $4.65 $3.48 On March 18, 2013 the closing price on the NASDAQ Global Market for our common stock was $4.63 per share. As of March 18, 2013, there wereapproximately 59 holders of record (not in street name) of our common stock. Because many of our shares of common stock are held by brokers and otherinstitutions on behalf of our stockholders, we are unable to estimate the total number of stockholders represented by these record holders.Dividend PolicyWe have never paid cash dividends on our common stock. We currently intend to retain any earnings for use in our business and do not anticipatepaying cash dividends in the foreseeable future.Purchases of Equity Securities by the Issuer and Affiliated PurchasersThe following table provides information with respect to acquisitions by the Company of shares of its common stock during the quarter endedDecember 29, 2012.ISSUER PURCHASES OF EQUITY SECURITIES Period Total Numberof SharesPurchased AveragePricePaid perShare 09/30/12 to 11/03/12 36,000(1) $3.91(3)11/04/12 to 12/01/12 3,900(1) $3.93(3)12/02/12 to 12/29/12 487,500(2) $4.10 Total 527,400 $4.09 (1)On May 5, 2011, the Board of Directors of the Company approved a share repurchase program and authorized the Company to repurchase up to anaggregate amount of $2.0 million worth of its outstanding 28Table of Contents shares of common stock. Each repurchase was financed by available cash balances and cash from operations. In March 2012, the Companyannounced an extension of the share repurchase program through May 2013 and an increase in the amount of cash available for the program to a total of$4.0 million. On February 28, 2013, the Board approved a new one year $3.0 million stock repurchase program that replaces the prior two year $4.0million program. Each repurchase was financed by available cash balances and cash from operations.(2)On December 14, 2012, the Company announced the final results of its tender offer to purchase 487,500 shares of its common stock at a purchaseprice of $4.10 per share, which expired at 5:00 p.m., New York City time, on Friday, December 7, 2012, for a total cost of approximately $2.0 million.The purchase was financed by available cash balances and cash from operations.(3)Average price paid per share of common stock repurchased is the execution price, including commissions paid to brokers.Item 6. Selected Financial DataNot applicable.Item 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsOverviewIRIDEX Corporation is a leading worldwide provider of therapeutic based laser systems, delivery devices and consumable instrumentation used to treatsight-threatening eye diseases in ophthalmology. In February 2012, we sold our aesthetics business to Cutera, Inc. We view this as a significant step forwardin our strategy because it allows us to focus solely on our ophthalmology business which is our core strength. Management believes that this path affords theCompany with the best opportunity for long term profitable growth. In accordance with US GAAP we have disclosed the financial results from our aestheticsbusiness as discontinued operations. This discussion and analysis will focus primarily on our ophthalmology business because this is our continuingbusiness and therefore provides more relevant information to the reader of our financial statements both on a retrospective and prospective basis. Ourophthalmology products are sold in the United States predominantly through a direct sales force and internationally through approximately 70 independentdistributors into over 100 countries.We manage and evaluate our business in one segment - ophthalmology. We break down this segment by geography - Domestic (U.S.) and International(the rest of the world). In addition, we review trends by laser system sales (consoles and durable delivery devices) and recurring sales (single use consumablelaser probes and other associated instrumentation (“consumables”), service and support).Our ophthalmology revenues arise primarily from the sale of our IQ and OcuLight laser systems, consumables and service and support activities. Ourcurrent family of IQ products includes IQ 532, IQ 577 and IQ 810 laser photocoagulation systems and our OcuLight products include OcuLight TX,OcuLight Symphony (Laser Delivery System), OcuLight SL, OcuLight SLx, OcuLight GL and OcuLight GLx laser photocoagulation systems. Certain ofour laser systems are capable of performing traditional continuous wavelength photocoagulation and our patented Fovea-Friendly MicroPulse laserphotocoagulation. Towards the end of 2012, we introduced the TxCell Scanning Laser Delivery System which saves significant time in a variety of laserphotocoagulation procedures in allowing physicians to deliver the laser in a multi-spot scanning mode, a more efficient method for these procedures than thetraditional single spot mode. Our current family of laser probes includes a wide variety of products in 20, 23 and 25 gauge for vitreoretinal surgery andglaucoma surgery.Sales to international distributors are made on open credit terms or letters of credit and are currently denominated in U.S. dollars and accordingly, arenot subject to risks associated with currency fluctuations. 29Table of ContentsCost of revenues consists primarily of the cost of purchasing components and sub-systems, assembling, packaging, shipping and testing componentsat our facility, direct labor and associated overhead; warranty, royalty and amortization of intangible assets; and depot service costs.Research and development expenses consist primarily of personnel costs, materials to support new product development and research support providedto clinicians at medical institutions developing new applications which utilize our products; and regulatory expenses. Research and development costs havebeen expensed as incurred.Sales and marketing expenses consist primarily of costs of personnel, sales commissions, travel expenses, advertising and promotional expenses.General and administrative expenses consist primarily of costs of personnel, legal, accounting and other public company costs, insurance and otherexpenses not allocated to other departments.Results of Operations - 2012, 2011 and 2010Our fiscal year ends on the Saturday closest to December 31. Fiscal 2012 ended on December 29, 2012, fiscal 2011 ended on December 31, 2011, andfiscal 2010 ended on January 1, 2011. Fiscal years 2012, 2011 and 2010 each included 52 weeks of operations.The following table sets forth certain data from continuing operations as a percentage of revenue from continuing operations for the periods indicated. Percentage of Revenue Years Ended FY 2012Dec 29, 2012 FY 2011Dec 31, 2011 FY 2010Jan 1, 2011 Revenues: Total revenues 100.0% 100.0% 100.0% Cost of revenues 51.7 50.9 49.9 Gross margin 48.3 49.1 50.1 Operating expenses: Research and development 13.0 11.8 11.6 Sales and marketing 23.3 22.4 21.9 General and administrative 14.5 12.8 12.9 Legal settlement, net of expenses 0.0 (3.8) 0.0 Total operating expense 50.8 43.2 46.4 (Loss) income from operations (2.5) 5.9 3.7 Legal settlement 2.3 2.4 2.5 Interest and other expense, net (0.6) (0.9) (0.1) (Loss) income from continuing operations before income taxes (0.8) 7.4 6.1 (Benefit from) provision for income taxes (0.3) 0.9 1.0 (Loss) income from continuing operations, net of tax (0.5) 6.5 5.1 (Loss) income from discontinued operations, net of tax (0.8) 1.4 4.3 Gain on sale of discontinued operations, net of tax 5.5 0.0 0.0 Income from discontinued operations, net of tax 4.7 1.4 4.3 Net income 4.2% 7.9% 9.4% 30Table of ContentsComparison of 2012 and 2011Revenues.Total revenues from continuing operations for 2012 were $33.9 million compared with $33.2 million in 2011, an increase of $0.7 million or 2.1%. Theincrease was due primarily to our recurring revenues which improved as a result of the onset of revenues from the licensing and distribution agreement withAlcon. Competition for consumable products remains strong with increased price sensitivities amongst customers. Our ophthalmology system revenuesremained consistent period to period. Our OEM revenue continued to decline as anticipated because this revenue is generated from a product that is now in itsend of life phase. (in millions) FY 2012 FY 2011 Change in $ Change in % Ophthalmology systems - domestic $7.1 $7.2 $(0.1) (1.4)% Ophthalmology systems - international 9.4 9.3 0.1 1.1% Ophthalmology recurring revenues 17.1 16.2 0.9 5.6% Ophthalmology OEM 0.3 0.5 (0.2) (40.0)% Continuing operations - ophthalmology revenues $33.9 $33.2 $0.7 2.1% Gross Profit.Gross profit remained level at $16.3 million in 2012 as a result of a decrease in gross margin to 48.3% in 2012, from 49.1% in 2011. Direct margins forthe year were comparable to 2011. The reduction in gross margin was primarily attributable to increased manufacturing and service costs. We have increasedour investment in inventory during the year with the future objective of allowing us to run our production lines more linearly throughout any particular quarterand therefore more efficiently.Research and Development.Research and development expenses increased $0.5 million or 12.1%, from $3.9 million in 2011 to $4.4 million in 2012. The increase is attributable toincreases in headcount and project material costs incurred in engineering development projects, and patent expenses as the Company continues to focus on newproduct introductions.Sales and Marketing.Sales and marketing expenses increased $0.4 million or 5.9%, from $7.5 million in 2011 to $7.9 million in 2012. The increase is primarilyattributable to increased personnel costs associated with increased headcount and marketing programs.General and Administrative.General and administrative expenses increased $0.7 million or 15.7%, from $4.3 million in 2011 to $4.9 million in 2012. The increase in expenses wasprimarily attributable to employee severance and related costs taken as part of streamlining the Company’s operations in the latter half of the year.Other Income (expense).The Company received the final annual installment of $0.8 million from the settlement with Synergetics of legal claims related to patent infringementwhich was consistent with the amount received in 2011. During 2012, the remeasurement on the fair value of the earn-out liability from prior acquisitionsresulted in an expense of $0.2 million.Income Taxes.We recorded a benefit for income taxes of $0.1 million for continuing operations for the year ended December 29, 2012 compared to a provision forincome taxes of $0.3 million for the year ended December 31, 31Table of Contents2011. The effective tax rate for the year ended December 29, 2012 was 37% compared to an effective tax rate of 12% for the year ended December 31,2011. Our effective tax rate increased due mainly to the change from 2011 pretax income of $2.5 million to 2012 pretax loss of $0.3 million. As a result of thecurrent year loss, the tax rate had also increased by a larger reduction in valuation allowance in the current year and the anticipated refund claim from carryingback tax loss to 2010 and 2011 for federal income tax purposes.Comparison of 2011 and 2010Revenues.Total revenues from continuing operations for 2011 were $33.2 million compared with $32.3 million in 2010, an increase of $0.9 million or 2.8%. Ourophthalmology system revenues grew as a result of a resurgence in appreciation of the benefits of laser photocoagulation as a treatment modality amongstphysicians and a recovery in capital spending particularly in the U.S. Competition for consumable products remains strong with increased price sensitivitiesamongst customers. Our OEM revenue is generated from a long standing relationship, the product is now in end of life and demand has and will continue todecline. (in millions) FY 2011 FY 2010 Change in $ Change in % Ophthalmology systems - domestic $7.2 $6.2 $1.0 16.1% Ophthalmology systems - international 9.3 9.2 0.1 1.1% Ophthalmology recurring revenues 16.2 16.2 0.0 0.0% Ophthalmology OEM 0.5 0.7 (0.2) (28.6)% Continuing operations - ophthalmology revenues $33.2 $32.3 $0.9 2.8% Gross Profit.Gross profit increased $0.1 million from $16.2 million in 2010 to $16.3 million in 2011. The increase in gross profits was driven by increasedrevenues offset by a reduction in gross margins from 50.1% to 49.1%. The reduction in gross margin was primarily attributable to a decrease in directmargins as a result of increased sales of lower margin systems.Research and Development.Research and development expenses increased $0.2 million or 4.3%, from $3.8 million in 2010 to $3.9 million in 2011. The increase is attributable toincreases in headcount and therefore personnel costs incurred in engineering development projects as the Company continues to focus on new productintroductions.Sales and Marketing.Sales and marketing expenses increased $0.4 million or 5.1%, from $7.1 million in 2010 to $7.5 million in 2011. The increase is primarily attributableto increased personnel costs associated with increased headcount and marketing programs.General and Administrative.General and administrative expenses increased $0.1 million or 2.3%, from $4.2 million in 2010 to $4.3 million in 2011. Expenses were stable across thetwo periods.Legal Settlement, net of expenses.In November 2011, the Company entered into a license and distribution agreement with Alcon for the IRIDEX GreenTip SoftTip Cannula family ofproducts. As part of the agreement Alcon agreed to pay 32Table of Contents$1.5 million at signing as a settlement of past legal claims. The Company has treated this as part of its ongoing business and therefore as part of operatingincome because the agreement has established on ongoing commercial relationship that will benefit the Company’s continuing business in subsequent periods.Other Income (expense).Income from the settlement with Synergetics of legal claims related to patent infringement amounted to $0.8 million for both periods. During 2012, theremeasurement on the fair value of the earn-out liability from prior acquisitions resulted in expense of $0.3 million.Income Taxes.We recorded a provision for income taxes on continuing operations of $0.3 million and an effective tax rate of 12% for fiscal year 2011 similar to aprovision for income taxes of $0.3 million and an effective tax rate of 16% for fiscal year 2010. Our tax rate is benefiting from a reduction in the valuationallowance we currently have booked against our deferred tax asset.Liquidity and Capital ResourcesComparison of 2012 and 2011Liquidity is our ability to generate sufficient cash flows from operating activities to meet our obligations and commitments. In addition, liquidityincludes the ability to obtain appropriate financing or to raise capital. During 2012, net cash used in continuing operating activities was $1.1 million. The useof cash resulted primarily from a net loss from continuing operations of $0.2 million less changes in working capital of $2.4 million partially offset by certainnon-cash items of $1.4 million. This compares to net cash provided by continuing operating activities in 2011 of $2.3 million which was generated from netincome from continuing operations of $2.1 million with non-cash items of $1.1 million less changes in working capital of $1.0 million.As of December 29, 2012, we had cash and cash equivalents of $11.9 million, no debt outstanding and working capital of $20.7 million comparedwith cash and cash equivalents of $10.8 million, no debt and working capital of $20.6 million as of December 31, 2011.Management is of the opinion that the Company’s current cash and cash equivalents together with our ability to generate cash flows from operationsprovide sufficient liquidity to operate for the next 12 months.Comparison of 2011 and 2010During 2011, net cash provided by operating activities was $2.3 million which was generated from net income from continuing operations of $2.1million with non-cash items added back of $1.1 million less changes in working capital of $1.0 million. This compares to net cash provided by continuingoperating activities in 2010 of $1.1 million which was generated from $1.7 million of net income from continuing operations with non-cash items added backof $0.8 million less changes in working capital of $1.3 million. 33Table of ContentsContractual Payment ObligationsOur contractual payment obligations that were fixed and determinable as of December 29, 2012 were as follows (in thousands): Payments Due by Period Total < 1 year 1-3 years 3-5 years Operating leases payments $1,674 $748 $925 $1 Total contractual cash obligations $1,674 $748 $925 $1 Critical Accounting PoliciesOur consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. Thepreparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, net sales andexpenses, and the related disclosures. We base our estimates on historical experience, our knowledge of economic and market factors and various otherassumptions we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.We believe the following critical accounting policies are affected by significant estimates, assumptions, and judgments used in the preparation of ourconsolidated financial statements.Discontinued Operations.Discontinued operations are presented and accounted for in accordance with Accounting Standards Codification (“ASC”) 360, Impairment orDisposal of Long-Lived Assets (“ASC 360”). When a qualifying component of the Company is disposed of or has been classified as held for sale, theoperating results of that component are removed from continuing operations for all periods presented and displayed as discontinued operations if:(a) elimination of the component’s operations and cash flows from the Company’s ongoing operations has occurred (or will occur) and (b) significantcontinuing involvement by the Company in the component’s operations does not exist after the disposal transaction.On December 30, 2011, we entered into an agreement to sell our aesthetics business to Cutera, Inc. The sale of the aesthetics business was completed onFebruary 2, 2012. The operating results of our aesthetics business were therefore classified as discontinued operations, and the associated assets and liabilitieswere classified as discontinued for all periods presented under the requirements of ASC 360.Revenue Recognition.Our revenues arise from the sale of laser consoles, delivery devices, consumables and service and support activities. Revenue from product sales isrecognized upon receipt of a purchase order and product shipment provided that no significant obligations remain and collection of the receivables isreasonably assured. Shipments are generally made with Free-On-Board (“FOB”) shipping point terms, whereby title passes upon shipment from our dock.Any shipments with FOB receiving point terms are recorded as revenue when the shipment arrives at the receiving point. Cost is recognized as product salesrevenue is recognized. The Company’s sales may include post-sales obligations for training or other deliverables. For revenue arrangements such as these, werecognize revenue in accordance with ASC 605, Revenue Recognition, Multiple-Element Arrangements. The Company allocates revenue among deliverablesin multiple-element arrangements using the relative selling price method. Revenue allocated to each element is recognized when the basic revenue recognitioncriteria is met for each element. The Company is required to apply a hierarchy to determine the selling price to be used for allocating revenue to deliverables:(i) vendor-specific objective evidence of selling price (“VSOE”), (ii) third-party evidence of selling price (“TPE”) and (iii) best estimate of the selling price(“ESP”). In general, the Company is unable to establish VSOE or TPE for all of the elements in the arrangement; therefore, revenue is allocated to 34Table of Contentsthese elements based on the Company’s ESP, which the Company determines after considering multiple factors such as management approved pricingguidelines, geographic differences, market conditions, competitor pricing strategies, internal costs and gross margin objectives. These factors may vary overtime depending upon the unique facts and circumstances related to each deliverable. As a result, the Company’s ESP for products and services couldchange. Revenues for post-sales obligations are recognized as the obligations are fulfilled.In international regions, we utilize distributors to market and sell our products. We recognize revenue upon shipment for sales to these independent, thirdparty distributors as we have no continuing obligations subsequent to shipment. Generally our distributors are responsible for all marketing, sales,installation, training and warranty labor coverage for our products. Our standard terms and conditions do not provide price protection or stock retention rightsto any of our distributors.Royalty revenues are typically based on licensees’ net sales of products that utilize our technology and are recognized as earned in accordance with thecontract terms when royalties from licensees can be reliably measured and collectibility is reasonably assured, such as upon the earlier of the receipt of aroyalty statement from the licensee or upon payment by the licensee.Inventories.Inventories are stated at the lower of cost or market and include on-hand inventory physically held at the Company’s facility, sales demo inventory andservice loaner inventory. Cost is determined on a standard cost basis which approximates actual cost on a first-in, first-out (“FIFO”) method. Lower of cost ormarket is evaluated by considering obsolescence, excessive levels of inventory, deterioration and other factors. Adjustments to reduce the cost of inventory toits net realizable value, if required, are made for estimated excess, obsolete or impaired inventory and are charged to cost of revenues. Factors influencing theseadjustments include changes in demand, product life cycle and development plans, component cost trends, product pricing, physical deterioration and qualityissues. Revisions to these adjustments would be required if these factors differ from our estimates.Sales Returns Allowance and Allowance for Doubtful Accounts.The Company estimates future product returns related to current period product revenue. We analyze historical returns, and changes in customerdemand and acceptance of our products when evaluating the adequacy of the sales returns allowance. Significant management judgment and estimates must bemade and used in connection with establishing the sales returns allowance in any accounting period. Material differences may result in the amount and timingof our revenue for any period if management made different judgments or utilized different estimates. Our provision for sales returns is recorded net of theassociated costs. The balance for the provision of sales returns have not historically been material.Similarly management must make estimates regarding the uncollectability of accounts receivable. We are exposed to credit risk in the event of non-payment by customers to the extent of amounts recorded on the balance sheet. As sales levels increase the level of accounts receivable would likely alsoincrease. In addition, in the event that customers were to delay their payments to us, the levels of accounts receivable would likely also increase. We maintainallowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. The allowance for doubtfulaccounts is based on past payment history with the customer, analysis of the customer’s current financial condition, the aging of the accounts receivablebalance, customer concentration and other known factors.Warranty.The Company accrues for estimated warranty costs upon shipment of products. Actual warranty costs incurred have not materially differed from thoseaccrued. The Company’s warranty policy is applicable to products which are considered defective in their performance or fail to meet the productspecifications. Warranty costs are reflected in the statements of operations as cost of revenues. 35Table of ContentsIncome Taxes.We account for income taxes in accordance with ASC 740, Income Taxes (“ASC 740”), which requires that deferred tax assets and liabilities berecognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. Under ASC 740, theliability method is used in accounting for income taxes. Deferred tax assets and liabilities are determined based on the differences between financial reportingand the tax basis of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected toreverse. ASC 740 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax assetwill not be realized. We evaluate annually the realizability of our deferred tax assets by assessing our valuation allowance and by adjusting the amount of suchallowance, if necessary. The factors used to assess the likelihood of realization include our forecast of future taxable income and available tax planningstrategies that could be implemented to realize the net deferred tax assets. In 2012 and 2011, we have recorded a full valuation allowance for our deferred taxassets based on our current year loss and the uncertainty regarding our ability to project future taxable income. In future periods if we are able to generateincome we may reduce or eliminate the valuation allowance.Accounting for Uncertainty in Income Taxes.We account for uncertain tax positions in accordance with ASC 740. ASC 740 seeks to reduce the diversity in practice associated with certain aspects ofmeasurement and recognition in accounting for income taxes. ASC 740 prescribes a recognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax provision that an entity takes or expects to take in a tax return. Additionally, ASC 740 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. Under ASC 740, an entity may only recognize orcontinue to recognize tax positions that meet a “more likely than not” threshold. In accordance with our accounting policy, we recognize accrued interests andpenalties related to unrecognized tax benefits as a component of income tax expense.Accounting for Stock-Based Compensation.The Company accounts for stock-based compensation in accordance with ASC 718, Compensation - Stock Compensation (“ASC 718”)which establishes accounting for stock-based awards exchanged for employee services. Accordingly, stock-based compensation cost is measured at grant date,based on the fair value of the award, and is recognized as expense over the employee’s service period. The Company recognizes compensation expense on astraight-line basis over the requisite service period of the award.We determined that the Black-Scholes option pricing model is the most appropriate method for determining the estimated fair value for stock options.The Black-Scholes model requires the use of highly subjective and complex assumptions which determine the fair value of share-based awards, including theoption’s expected term and the price volatility of the underlying stock.Recently Issued and Adopted Accounting StandardsIn June 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation ofComprehensive Income. ASU 2011-05 allows an entity the option to present the total of comprehensive income, the components of net income, and thecomponents of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Inboth choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income alongwith a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components ofother comprehensive income as part of the statement of changes in stockholders’ equity. It does not, however, change the items that must be reported in othercomprehensive income or when an item of other comprehensive income must be reclassified to net income. In December 2011, the FASB issued ASU 2011-12,Deferral of the Effective 36Table of ContentsDate for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting StandardsUpdate No. 2011-05, in order to redeliberate the portion of the earlier ASU relating to presentation of reclassifications from other comprehensive income. TheCompany adopted both updates, applied retrospectively, in the first quarter of 2012. As ASU 2011-05 and ASU 2011-12 are only presentation standards, theadoption of these standards did not have a material impact on our consolidated financial position, results of operations, or cash flows.In September 2011, FASB issued Accounting Standards Update (“ASU”) 2011-08, Intangibles-Goodwill and Other (Topic 350): Testing Goodwill forImpairment. This standard is intended to simplify how entities, test goodwill for impairment. ASU 2011-08 permits an entity to first assess qualitative factorsto determine whether it is “more likely than not” that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it isnecessary to perform the two-step goodwill impairment test described in Topic 350, Intangibles-Goodwill and Other. The more-likely-than-not threshold isdefined as having a likelihood of more than 50%. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal yearsbeginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date beforeSeptember 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, havenot yet been made available for issuance. The Company adopted this standard in the first quarter of fiscal year 2012. The adoption of this standard did nothave a material effect on our consolidated financial position, results of operations, or cash flows.In February 2013, FASB issued 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated OtherComprehensive Income (“AOCI”), which aims to improve the reporting of reclassifications out of AOCI. This update requires an entity to report the effect ofsignificant reclassifications out of AOCI on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified inits entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, anentity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts. The amendments do not changethe current requirements for reporting net income or other comprehensive income in financial statements. For public entities, the amendments are effectiveprospectively for reporting periods beginning after December 15, 2012. We intend to adopt this guidance in the first quarter of 2013. We do not anticipate thisupdate will have any significant impact on our consolidated financial position, operating results or cash flows.Off-Balance Sheet ArrangementsThe Company has no off-balance sheet arrangements.Item 7A. Quantitative and Qualitative Disclosures About Market Risk.Market risk represents the risk of loss that may impact the financial position, results of operations or cash flows due to adverse changes in financialand commodity market prices and rates. We transact the majority of our business in US dollars and therefore changes in foreign currency rates will not have asignificant impact on our income statement or cash flows. However, increases in the value of the US dollar against any local currencies could cause ourproducts to become relatively more expensive to customers in a particular country or region, leading to reduced revenue or profitability in that country orregion. As we continue to expand our international sales, our non-US dollar denominated revenue and our exposure to gains and losses on internationalcurrency transactions may increase. We currently do not engage in transactions to hedge against the risk of the currency fluctuation, but we may do so in thefuture.Item 8. Financial Statements and Supplementary Data.Our consolidated balance sheets as of December 29, 2012 and December 31, 2011 and the consolidated statements of operations, comprehensiveincome, stockholders’ equity and cash flows for each of our fiscal years 2012, 2011 and 2010 together with the related notes and the report of our independentregistered public accounting firm, are on the following pages. Additional required financial information is described in Item 15. 37Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors and Stockholders of IRIDEX CorporationWe have audited the accompanying consolidated balance sheets of IRIDEX Corporation (the “Company”) as of December 29, 2012 and December 31,2011, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three years in theperiod ended December 29, 2012. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is toexpress an opinion on these consolidated financial statements based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. TheCompany is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration ofinternal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose ofexpressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit alsoincludes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles usedand significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide areasonable basis for our opinion.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of IRIDEXCorporation as of December 29, 2012 and December 31, 2011, and the results of their operations and their cash flows for each of the three years in the periodended December 29, 2012 in conformity with accounting principles generally accepted in the United States of America./s/ Burr Pilger Mayer, IncSan Jose, CaliforniaMarch 28, 2013 38Table of ContentsIRIDEX CorporationCONSOLIDATED BALANCE SHEETS(in thousands, except share and per share data) FY 2012December 29,2012 FY 2011December 31,2011 ASSETS Current assets: Cash and cash equivalents $11,901 $10,789 Accounts receivable, net of allowance for doubtful accounts of $146 in 2012 and $162 in 2011 5,480 5,551 Inventories 8,035 6,659 Prepaid expenses and other current assets 1,129 464 Current assets of discontinued operations 510 6,043 Total current assets 27,055 29,506 Property and equipment, net 483 325 Other intangible assets, net 554 745 Goodwill 533 533 Other long-term assets 287 199 Non-current assets of discontinued operations 0 841 Total assets $28,912 $32,149 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $2,105 $1,580 Accrued compensation 1,563 1,180 Accrued expenses 1,242 1,920 Accrued warranty 453 556 Deferred revenue 1,004 1,014 Current liabilities of discontinued operations 0 2,663 Total current liabilities 6,367 8,913 Long-term liabilities: Other long-term liabilities 640 810 Total liabilities 7,007 9,723 Commitments and contingencies (Note 11) Stockholders’ equity: Convertible preferred stock, $0.01 par value: Authorized: 2,000,000 shares; Issued and outstanding: 500,000 shares in 2012 and 2011 5 5 Liquidation preference of $5,000 Common stock, $0.01 par value: Authorized: 30,000,000 shares; Issued and outstanding: 8,452,971 shares in 2012 and 8,917,824 shares in 2011 94 92 Additional paid-in capital 38,958 42,032 Accumulated other comprehensive loss 0 (35) Treasury stock, at cost 0 (1,078) Accumulated deficit (17,152) (18,590) Total stockholders’ equity 21,905 22,426 Total liabilities and stockholders’ equity $28,912 $32,149 The accompanying notes are an integral part of these consolidated financial statements. 39Table of ContentsIRIDEX CorporationCONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per share data) FY 2012Year EndedDecember 29,2012 FY 2011Year EndedDecember 31,2011 FY 2010Year EndedJanuary 1,2011 Total revenues $33,859 $33,159 $32,308 Cost of revenues 17,513 16,869 16,106 Gross profit 16,346 16,290 16,202 Operating expenses: Research and development 4,385 3,913 3,753 Sales and marketing 7,895 7,458 7,095 General and administrative 4,926 4,259 4,163 Legal settlement, net of expenses 0 (1,274) 0 Total operating expenses 17,206 14,356 15,011 (Loss) income from continuing operations (860) 1,934 1,191 Legal settlement 800 800 800 Interest and other expense, net (210) (296) (30) (Loss) income from continuing operations before income taxes (270) 2,438 1,961 (Benefit from) provision for income taxes (100) 297 308 (Loss) income from continuing operations, net of tax (170) 2,141 1,653 (Loss) income from discontinued operations, net of tax (264) 469 1,393 Gain on sale of discontinued operations, net of tax 1,872 0 0 Income from discontinued operations, net of tax 1,608 469 1,393 Net income $1,438 $2,610 $3,046 Net (loss) income per share: Basic - Continuing operations $(0.02) $0.24 $0.18 Discontinued operations 0.18 0.05 0.16 Net income $0.16 $0.29 $0.34 Diluted - Continuing operations $(0.02) $0.21 $0.16 Discontinued operations 0.18 0.05 0.14 Net income $0.16 $0.26 $0.30 Weighted average shares used in computing net income per common share - basic 8,935 8,958 8,943 Weighted average shares used in computing net income per common share - diluted 8,935 10,225 10,134 The accompanying notes are an integral part of these consolidated financial statements. 40Table of ContentsIRIDEX CorporationCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(in thousands) FY 2012Year EndedDecember 29,2012 FY 2011Year EndedDecember 31,2011 FY 2010Year EndedJanuary 1,2011 Net income $1,438 $2,610 $3,046 Other comprehensive income, net of tax: Foreign currency translation adjustments 0 0 7 Recognition of accumulated foreign currency translation loss 35 170 0 Other comprehensive income, net of tax 35 170 7 Comprehensive income $1,473 $2,780 $3,053 The accompanying notes are an integral part of these consolidated financial statements. 41Table of ContentsIRIDEX CorporationCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(in thousands, except share data) ConvertiblePreferred Stock Common Stock AdditionalPaid-in Capital TreasuryStock AccumulatedOtherComprehensiveIncome (Loss) AccumulatedDeficit Total Shares Amount Shares Amount FY 2009: Balances, January 2, 2010 500,000 $5 8,848,360 $89 $39,820 $(430) $(212) $(24,246) $15,026 Issuance of common stock under stockoption plan 34,558 88 88 Employee stock-based compensationexpense 551 551 Tax effect of stock compensation expense 1 1 Foreign currency translation adjustments 7 7 Issuance of common stock in connectionwith RetinaLabs acquisition 103,500 444 444 Contingent consideration - shares ofcommon stock in connection withRetinaLabs acquisition 264 264 Net income 3,046 3,046 FY 2010: Balances, January 1, 2011 500,000 5 8,986,418 89 41,168 (430) (205) (21,200) 19,427 Issuance of common stock under stockoption plan 99,291 1 320 321 Employee stock-based compensationexpense 544 544 Tax effect of stock compensation expense 2 2 Foreign currency translation adjustments 170 170 Issuance of common stock in connectionwith RetinaLabs acquisition 2 (2) 0 Stock repurchase (167,885) (648) (648) Net income 2,610 2,610 FY 2011: Balances, December 31, 2011 500,000 5 8,917,824 92 42,032 (1,078) (35) (18,590) 22,426 Issuance of common stock under stockoption plan 174,631 2 443 445 Employee stock-based compensationexpense 396 396 Release of restricted stock and escrowshares 36,815 Stock repurchase (188,799) (734) (734) Stock repurchased from tender offer (487,500) (2,101) (2,101) Retirement of treasury stock (1,812) 1,812 — Foreign currency translation adjustments 35 35 Net income 1,438 1,438 FY 2012: Balances, December 29, 2012 500,000 $5 8,452,971 $94 $38,958 $0 $0 $(17,152) $21,905 The accompanying notes are an integral part of these consolidated financial statements. 42Table of ContentsIRIDEX CorporationCONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands) FY 2012Year EndedDecember 29,2012 FY 2011Year EndedDecember 31,2011 FY 2010Year EndedJanuary 1,2011 Operating activities: Net income $1,438 $2,610 $3,046 Less income from discontinued operations 1,608 469 1,393 (Loss) income from continuing operations (170) 2,141 1,653 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization 427 410 297 Change in fair value of earn-out liability 215 280 0 Stock compensation cost recognized 388 478 488 Tax effect of stock compensation expense 0 2 1 Provision for doubtful accounts 33 (12) 0 Changes in operating assets and liabilities, net of assets and liabilities acquired: Accounts receivable 38 (82) (30) Inventories (1,376) (1,027) (1,522) Prepaid expenses and other current assets (665) (75) (30) Other long-term assets (88) 7 104 Accounts payable 525 66 7 Accrued compensation 383 (209) 59 Accrued expenses (756) 285 49 Accrued warranty (103) (51) 40 Deferred revenue (10) 12 (47) Other long-term liabilities 21 26 67 Net cash (used in) provided by operating activities (1,138) 2,251 1,136 Investing activities: Acquisition of property and equipment (394) (203) (193) Cash paid in business combination 0 (75) (225) Payment on earn-out liability (328) 0 0 Net cash used in investing activities (722) (278) (418) Cash flows from financing activities: Proceeds from stock option exercises 445 321 88 Repurchase of common stock (2,835) (648) 0 Proceeds from borrowings 0 0 3,938 Repayment of borrowings 0 0 (6,297) Net cash used in financing activities (2,390) (327) (2,271) Net cash provided by operating activities from discontinued operations 695 797 2,688 Net cash provided by investing activities from discontinued operations 4,632 0 0 Net cash used in financing activities from discontinued operations 0 0 (1,161) Effect of foreign exchange rate changes from discontinued operations 35 (1) 7 Net cash provided by discontinued operations 5,362 796 1,534 Net increase (decrease) in cash and cash equivalents 1,112 2,442 (19) Cash and cash equivalents, beginning of year 10,789 8,347 8,366 Cash and cash equivalents, end of year $11,901 $10,789 $8,347 Supplemental disclosure of cash flow information: Cash paid during the year for: Income taxes $(145) $522 $439 Interest paid $0 $1 $57 Supplemental disclosure of non-cash activities: Share issued at acquisition $0 $0 $444 Contingent consideration - earn-out liability $0 $105 $380 Contingent consideration - shares $0 $0 $264 The accompanying notes are an integral part of these consolidated financial statements. 43Table of ContentsIRIDEX CorporationNotes to Consolidated Financial Statements1. Business of the CompanyDescription of Business.IRIDEX Corporation (“IRIDEX”, the “Company”, “we”, “us”, or “our”) is a leading worldwide provider of therapeutic based laser systems, deliverydevices and consumable instrumentation used to treat sight-threatening eye diseases in ophthalmology. Our ophthalmology products are sold in the UnitedStates predominantly through a direct sales force and internationally through approximately 70 independent distributors in over 100 countries. In February2012, we completed the sale of our aesthetics business to Cutera, Inc. and reclassified the aesthetics business segment as discontinued operations.2. Summary of Significant Accounting PoliciesFinancial Statement Presentation.The consolidated financial statements include the accounts of IRIDEX and our wholly owned subsidiaries. All significant intercompany accounts andtransactions have been eliminated in consolidation.Our fiscal year always ends on the Saturday closest to December 31. Fiscal 2012 ended on December 29, 2012, fiscal 2011 ended on December 31,2011, and fiscal 2010 ended on January 1, 2011. Each fiscal year consisted of 52 weeks of operations.Reclassifications.In February 2012, we completed the sale of our aesthetics business to Cutera, Inc. In accordance with accounting principles generally accepted in theU.S. (“GAAP”), we have recast our financial information to show the results from our ophthalmology business as continuing operations and the results fromour aesthetics business as discontinued operations.Use of Estimates.The preparation of consolidated financial statements in conformity with GAAP requires us to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues, and expenses and the related disclosure of contingent assets and liabilities. We base our estimates on historicalexperience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. Inaddition, any change in these estimates or their related assumptions could have an adverse effect on our operating results.Discontinued operations.Discontinued operations are presented and accounted for in accordance with Accounting Standards Codification (“ASC”) 360, “Impairment orDisposal of Long-Lived Assets”, (“ASC 360”). When a qualifying component of the Company is disposed of or has been classified as held for sale, theoperating results of that component are removed from continuing operations for all periods presented and displayed as discontinued operations if:(a) elimination of the component’s operations and cash flows from the Company’s ongoing operations has occurred (or will occur) and (b) significantcontinuing involvement by the Company in the component’s operations does not exist after the disposal transaction.On December 30, 2011, we entered into an agreement to sell our aesthetics business to Cutera, Inc. The sale of the aesthetics business was completed onFebruary 2, 2012. The operating results of our aesthetics business 44Table of Contentswere therefore classified as discontinued operations, and the associated assets and liabilities were classified as discontinued operations for all periods presentedunder the requirements of ASC 360. (in thousands) FY 2012Year EndedDecember 29, 2012 FY 2011Year EndedDecember 31, 2011 FY 2010Year EndedJanuary 1, 2011 Total revenues $1,630 $10,840 $11,386 (Loss) income from discontinued operations $(325) $653 $1,558 Gain on sales of aesthetics business $1,149 $0 $0 Income from discontinued operations, before incometaxes $824 $653 $1,558 Income tax (benefit) expense $(784) $184 $165 Income from discontinued operations, net of tax $1,608 $469 $1,393 A summary of the assets and liabilities of discontinued operations as of December 29, 2012 and December 31, 2011 is provided as follows (inthousands): FY 2012Year EndedDecember 29, 2012 FY 2011Year EndedDecember 31, 2011 Assets: Cash $0 $382 Accounts receivable, net 0 2,065 Inventories 0 3,480 Prepaid and other current assets 0 116 Restricted cash 510 0 Total current assets 510 6,043 Property, plant & equipment, net 0 24 Other intangible assets, net 0 813 Other long-term assets 0 4 Total assets $510 $6,884 Liabilities: Accounts payable $0 $387 Accrued expenses 0 967 Accrued warranty 0 234 Deferred revenue 0 1,075 Total current liabilities $0 $2,663 Restricted Cash.In connection with the sale of the aesthetics segment to Cutera, Inc. 10% of the total purchase price ($0.5 million), is to be deposited and held in anescrow account for a period of twelve months from the date of closing and will be used to resolve certain claims by Cutera, Inc. if any, which the Companyhas indemnified. The release of the restricted cash to the Company is three months following the end of the twelve month escrow period.Cash and Cash Equivalents.We consider all highly liquid debt instruments with insignificant interest rate risk and an original maturity of three months or less when purchased to becash equivalents. Cash equivalents consist primarily of cash deposits in money market funds that are available for withdrawal without restriction. 45Table of ContentsSales Returns Allowance and Allowance for Doubtful Accounts.The Company estimates future product returns related to current period product revenue. We analyze historical returns, and changes in customerdemand and acceptance of our products when evaluating the adequacy of the sales returns allowance. Significant management judgment and estimates must bemade and used in connection with establishing the sales returns allowance in any accounting period. Material differences may result in the amount and timingof our revenue for any period if management made different judgments or utilized different estimates. Our provision for sales returns is recorded net of theassociated costs. The balance for the provision of sales returns was $0.1 million as of December 29, 2012 and December 31, 2011.Similarly management must make estimates regarding the uncollectibility of accounts receivable. We are exposed to credit risk in the event of non-payment by customers to the extent of amounts recorded on the consolidated balance sheets. As of December 29, 2012, we had accounts receivable totaling$5.5 million, net of an allowance for doubtful accounts of $0.1 million. As of December 31, 2011, we had accounts receivable totaling $5.6 million, net ofan allowance for doubtful accounts of $0.2 million. As sales levels change, the level of accounts receivable would likely also change. In addition, in the eventthat customers were to delay their payments to us, the levels of accounts receivable would likely increase. We maintain allowances for doubtful accounts forestimated losses resulting from the inability of our customers to make required payments. The allowance for doubtful accounts is based on past paymenthistory with the customer, analysis of the customer’s current financial condition, the aging of the accounts receivable balance, customer concentration andother known factors.Inventories.Inventories are stated at the lower of cost or market and include on-hand inventory physically held at the Company’s facility, sales demo inventory andservice loaner inventory. Cost is determined on a standard cost basis which approximates actual cost on a first-in, first-out (“FIFO”) method. Lower of cost ormarket is evaluated by considering obsolescence, excessive levels of inventory, deterioration and other factors. Adjustments to reduce the cost of inventory toits net realizable value, if required, are made for estimated excess, obsolescence or impaired inventory and are charged to cost of revenues. Factors influencingthese adjustments include changes in demand, product life cycle and development plans, component cost trends, product pricing, physical deterioration andquality issues. Revisions to these adjustments would be required if these factors differ from our estimates.As part of our normal business, we generally utilize various finished goods inventory as either sales demos to facilitate the sale of our products toprospective customers, or as loaners that we allow our existing customers to use while we repair their products. The Company is amortizing these demos andloaners over an estimated useful life of four years. The amortization of the demos is charged to sales expense while the amortization on the loaners is charged tocost of revenues. The gross value of demos and loaners was $1.4 million and $1.2 million and the accumulated amortization was $0.6 million and $0.5million as of December 29, 2012 and December 31, 2011, respectively. The net book value of demos and loaners is charged to cost of revenues when suchdemos or loaners are sold.Property and Equipment.Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are provided on a straight–linebasis over the estimated useful lives of the assets, which is generally three years. Leasehold improvements are amortized over the lesser of their estimateduseful lives or the lease term. Repairs and maintenance costs are expensed as incurred.Valuation of Goodwill and Intangible Assets.The purchase method of accounting for acquisitions requires estimates and assumptions to allocate the purchase price to the fair value of net tangibleand intangible assets acquired with any excess value being 46Table of Contentsrecorded as goodwill. There are a number of generally accepted valuation methods used to estimate fair value of intangible assets, and we use primarily adiscounted cash flow method, which requires significant management judgment to forecast the future operating results and to estimate the discount factorsused in the analysis. The amounts allocated to, and the useful lives estimated for intangible assets affect future amortization.Goodwill and intangible assets determined to have indefinite lives are not amortized, but are subject to an annual impairment test in accordance withASC 350, Intangibles - Goodwill and Other. See Note 7 - Goodwill. Intangible assets with definite lives are amortized over the useful life of the asset.We review our amortizing intangible assets for impairment whenever events or changes in circumstances indicate that their carrying value may not berecoverable. An asset is considered impaired if its carrying amount exceeds the future non-discounted net cash flow the asset is expected to generate. If an assetis considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. Insuch circumstances, the Company conducts an impairment analysis in accordance with Impairment or Disposal of Long-Lived Assets Section of ASC 360,Property, Plant and Equipment. See Note 8 - Intangible Assets.Revenue Recognition.Our revenues arise from the sale of laser consoles, delivery devices, consumables and service and support activities. Revenue from product sales isrecognized upon receipt of a purchase order and product shipment provided that no significant obligations remain and collection of the receivables isreasonably assured. Shipments are generally made with Free-On-Board (“FOB”) shipping point terms, whereby title passes upon shipment from our dock.Any shipments with FOB receiving point terms are recorded as revenue when the shipment arrives at the receiving point. Cost is recognized as product salesrevenue is recognized. The Company’s sales may include post-sales obligations for training or other deliverables. For revenue arrangements such as these, werecognize revenue in accordance with ASC 605, Revenue Recognition, Multiple-Element Arrangements. The Company allocates revenue among deliverablesin multiple-element arrangements using the relative selling price method. Revenue allocated to each element is recognized when the basic revenue recognitioncriteria is met for each element. The Company is required to apply a hierarchy to determine the selling price to be used for allocating revenue to deliverables:(i) vendor-specific objective evidence of selling price (“VSOE”), (ii) third-party evidence of selling price (“TPE”) and (iii) best estimate of the selling price(“ESP”). In general, the Company is unable to establish VSOE or TPE for all of the elements in the arrangement; therefore, revenue is allocated to theseelements based on the Company’s ESP, which the Company determines after considering multiple factors such as management approved pricing guidelines,geographic differences, market conditions, competitor pricing strategies, internal costs and gross margin objectives. These factors may vary over timedepending upon the unique facts and circumstances related to each deliverable. As a result, the Company’s ESP for products and services couldchange. Revenues for post-sales obligations are recognized as the obligations are fulfilled.In international regions, we utilize distributors to market and sell our products. We recognize revenue upon shipment for sales to these independent, thirdparty distributors as we have no continuing obligations subsequent to shipment. Generally our distributors are responsible for all marketing, sales,installation, training and warranty labor coverage for our products. Our standard terms and conditions do not provide price protection or stock retention rightsto any of our distributors.Royalty revenues are typically based on licensees’ net sales of products that utilize our technology and are recognized as earned in accordance with thecontract terms when royalties from licensees can be reliably measured and collectibility is reasonably assured, such as upon the earlier of the receipt of aroyalty statement from the licensee or upon payment by the licensee. 47Table of ContentsTaxes Collected from Customers and Remitted to Governmental Authorities.Taxes collected from customers and remitted to governmental authorities are recognized on a net basis in the accompanying consolidated statements ofoperations.Deferred Revenue.Revenue related to service contracts is deferred and recognized on a straight line basis over the period of the applicable service period. Costs associatedwith these service arrangements are recognized as incurred. A reconciliation of the changes in the Company’s deferred revenue balances for the years endedDecember 29, 2012 and December 31, 2011 are as follows (in thousands): FY 2010: Balance, January 1, 2011 $1,002 Additions to deferral 1,403 Revenue recognized (1,391) FY 2011: Balance, December 31, 2011 1,014 Additions to deferral 1,131 Revenue recognized (1,141) FY 2012: Balance, December 29, 2012 $1,004 Warranty.The Company accrues for estimated warranty costs upon shipment of products. Actual warranty costs incurred have not materially differed from theamounts accrued. The Company’s warranty policy is applicable to products which are considered defective in their performance or fail to meet the productspecifications. Warranty costs are reflected in the consolidated statements of operations as cost of revenues. A reconciliation of the changes in the Company’swarranty liability for the years ended December 29, 2012 and December 31, 2011 are as follows (in thousands): FY 2010: Balance, January 1, 2011 $607 Accruals for product warranties 171 Cost of warranty claims (222) FY 2011: Balance, December 31, 2011 556 Accruals for product warranties 173 Cost of warranty claims (276) FY 2012: Balance, December 29, 2012 $453 Shipping and handling costs.Our shipping and handling costs billed to customers are included in revenues and the associated expense is recorded in cost of revenues for all periodspresented. Shipping and handling costs amounted to $0.3 million for each of the fiscal years 2012, 2011 and 2010.Research and Development.Research and development expenditures are charged to operations as incurred.Advertising.Advertising and promotion costs are expensed as they are incurred; such costs were approximately $0.2 million in 2012, $0.3 million in 2011, and $0.3million in 2010 and are included in sales and marketing expenses in the accompanying consolidated statements of operations. 48Table of ContentsIncome Taxes.We account for income taxes in accordance with ASC 740, Income Taxes (“ASC 740”), which requires that deferred tax assets and liabilities berecognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. Under ASC 740, theliability method is used in accounting for income taxes. Deferred tax assets and liabilities are determined based on the differences between financial reportingand the tax basis of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected toreverse. ASC 740 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax assetwill not be realized. We evaluate annually the realizability of our deferred tax assets by assessing our valuation allowance and by adjusting the amount of suchallowance, if necessary. The factors used to assess the likelihood of realization include our forecast of future taxable income and available tax planningstrategies that could be implemented to realize the net deferred tax assets. In 2012 and 2011, we have recorded a full valuation allowance for our deferred taxassets based on our current year loss and the uncertainty regarding our ability to project future taxable income. In future periods if we are able to generateincome we may reduce or eliminate the valuation allowance.Accounting for Uncertainty in Income Taxes.We account for uncertain tax positions in accordance with ASC 740. ASC 740 seeks to reduce the diversity in practice associated with certain aspects ofmeasurement and recognition in accounting for income taxes. ASC 740 prescribes a recognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax provision that an entity takes or expects to take in a tax return. Additionally, ASC 740 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. Under ASC 740, an entity may only recognize orcontinue to recognize tax positions that meet a “more likely than not” threshold. In accordance with our accounting policy, we recognize accrued interests andpenalties related to unrecognized tax benefits as a component of income tax expense.Accounting for Stock-Based Compensation.The Company accounts for stock-based compensation in accordance with ASC 718, Compensation - Stock Compensation (“ASC 718”)which establishes accounting for stock-based awards exchanged for employee services. Accordingly, stock-based compensation cost is measured at grant date,based on the fair value of the award, and is recognized as expense over the employee’s service period. The Company recognizes compensation expense on astraight-line basis over the requisite service period of the award.We determined that the Black-Scholes option pricing model is the most appropriate method for determining the estimated fair value for stock options.The Black-Scholes option pricing model requires the use of highly subjective and complex assumptions which determine the fair value of share-based awards,including the option’s expected term and the price volatility of the underlying stock.Concentration of Credit Risk and Other Risks and Uncertainties.The Company’s cash and cash equivalents are deposited in demand and money market accounts. Deposits held with banks may exceed the amount ofinsurance provided on such deposits. Generally these deposits may be redeemed upon demand and therefore, bear minimal risk.The Company markets its products to distributors and end-users throughout the world. Sales to international distributors are generally made on opencredit terms and letters of credit. Management performs ongoing credit evaluations of our customers and maintains an allowance for potential credit losses.Historically, the Company has not experienced any significant losses related to individual customers or a group of customers in any particular geographic area.For the years ended December 29, 2012, December 31, 2011, and January 1, 2011 no 49Table of Contentssingle customer accounted for greater than 10% of total sales. No single customer accounted for more than 10% of our net accounts receivable balance as ofDecember 29, 2012 and December 31, 2011.The Company’s products require approvals from the Food and Drug Administration and international regulatory agencies prior to commercialized sales.The Company’s future products may not receive required approvals. If the Company were denied such approvals, or if such approvals were delayed, it wouldhave a materially adverse impact on the Company’s business, results of operations and financial condition.Reliance on Certain Suppliers.Certain components and services used by the Company to manufacture and develop its products are presently available from only one or a limitednumber of suppliers or vendors. The loss of any of these suppliers or vendors would potentially require a significant level of hardware and/or softwaredevelopment efforts to incorporate the products or services into the Company’s products.Net Income per Share.Net income per share is computed in accordance with ASC 260, Earnings per Share. Basic net income per share is based upon the weighted averagenumber of common shares outstanding during the period. Diluted net income per share is based upon the weighted average number of common sharesoutstanding and dilutive common stock equivalents outstanding during the period. Common stock equivalents consist of incremental common shares issuableupon the exercise of stock options and the conversion of Series A Preferred Stock into common stock and are calculated under the treasury stock method.Common stock equivalent shares from unexercised stock options and the conversion of Series A Preferred Stock are excluded from the computation forperiods in which the Company incurs a loss from continuing operations as their effect is anti-dilutive or if the exercise price of such options is greater than theaverage market price of the stock for the period. See Note 16 - Computation of Basic and Diluted Net Income Per Common Share.Recently Issued and Adopted Accounting StandardsIn June 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation ofComprehensive Income. ASU 2011-05 allows an entity the option to present the total of comprehensive income, the components of net income, and thecomponents of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Inboth choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income alongwith a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components ofother comprehensive income as part of the statement of changes in stockholders’ equity. It does not, however, change the items that must be reported in othercomprehensive income or when an item of other comprehensive income must be reclassified to net income. In December 2011, the FASB issued ASU 2011-12,Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income inAccounting Standards Update No. 2011-05, in order to redeliberate the portion of the earlier ASU relating to presentation of reclassifications from othercomprehensive income. The Company adopted both updates, applied retrospectively, in the first quarter of 2012. As ASU 2011-05 and ASU 2011-12 areonly presentation standards, the adoption of these standards did not have a material impact on our consolidated financial position, results of operations, orcash flows.In September 2011, FASB issued Accounting Standards Update (“ASU”) 2011-08, Intangibles-Goodwill and Other (Topic 350): Testing Goodwill forImpairment. This standard is intended to simplify how entities, test goodwill for impairment. ASU 2011-08 permits an entity to first assess qualitative factorsto determine whether it is “more likely than not” that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it isnecessary to perform the two-step goodwill impairment test described in Topic 350, 50Table of ContentsIntangibles-Goodwill and Other. The more-likely-than-not threshold is defined as having a likelihood of more than 50%. ASU 2011-08 is effective forannual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annualand interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual orinterim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance. The Company adopted this standard in thefirst quarter of fiscal year 2012. The adoption of this standard did not have a material effect on our consolidated financial position, results of operations, orcash flows.In February 2013, FASB issued 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated OtherComprehensive Income (“AOCI”), which aims to improve the reporting of reclassifications out of AOCI. This update requires an entity to report the effect ofsignificant reclassifications out of AOCI on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified inits entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, anentity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts. The amendments do not changethe current requirements for reporting net income or other comprehensive income in financial statements. For public entities, the amendments are effectiveprospectively for reporting periods beginning after December 15, 2012. We intend to adopt this guidance in the first quarter of 2013. We do not anticipate thisupdate will have any significant impact on our consolidated financial position, operating results or cash flows.3. Business CombinationOcunetics, Inc.:On September 15, 2011, the Company acquired certain assets of Ocunetics, Inc. The purchase price for the acquired assets consisted of $75 thousandin cash consideration and an earn-out provision fair valued at $105 thousand. The earn-out is tied to future revenues and could result in additional cash andshare consideration being paid to Ocunetics, Inc. based on the future performance of the acquired products and intellectual property.In accordance with ASC 805, Business Combinations, the acquisition has been accounted for as a business combination. Under the purchase methodof accounting, the assets acquired from Ocunetics, Inc. at the date of acquisition are recorded in the consolidated financial statements at their respective fairvalues as of the acquisition date. The excess of the purchase price over the fair value of the acquired net assets has been recorded as goodwill in the amount of$60 thousand. This goodwill is expected to be non-deductible for tax purposes. The purchase price includes the fair value of the cash earn-out which wasrecorded as a long-term liability. No value was attributed to the contingent equity-based consideration as management believed the likelihood of achieving thenecessary targets in the future is remote. Costs incurred associated with the acquisition were immaterial. The financial results of Ocunetics, Inc. prior to theacquisition were immaterial for purposes of pro forma financial disclosures. As of the end of the reporting period, there has been no revenues or earningsgenerated by the acquiree since the acquisition date.Identifiable intangible assets. Intangible assets included in the purchase price allocation consist of technology patents of $120 thousand, assigned aneconomic useful life whereby the economic value of the asset is its ability to provide the Company relief from royalty and is being amortized as a percentage ofrevenues generated per units sold.Goodwill. Approximately $60 thousand has been allocated to goodwill. Goodwill represents the excess of the purchase price over the fair value of theunderlying net tangible and intangible assets. In accordance with ASC 350-20, goodwill, is not amortized but instead is tested for impairment at least annually(more frequently if certain indicators are present). In the event that management determines that the value of goodwill has become impaired, an accountingcharge for the amount of impairment is incurred in the fiscal quarter in which the determination is made. The Company believes the goodwill realized was theresult of a number of factors, 51Table of Contentsincluding expected revenue growth opportunities for future products and the opportunity to commercialize acquired intellectual property.4. Fair Value MeasurementFair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between marketparticipants at the measurement date. The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market dataobtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on thebest information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priorityto unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The threelevels of the fair value hierarchy are described below: • Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. • Level 2: Directly or indirectly observable inputs as of the reporting date through correlation with market data, including quoted prices for similar assetsand liabilities in active markets and quoted prices in markets that are not active. Level 2 also includes assets and liabilities that are valued using modelsor other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates andvolatility factors, are corroborated by readily observable data from actively quoted markets for substantially the full term of the financial instrument. • Level 3: Unobservable inputs that are supported by little or no market activity and reflect the use of significant management judgment. These values aregenerally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservableinputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value.The carrying amounts of the Company’s financial assets and liabilities, including cash and cash equivalents, accounts receivable, accounts payable,and accrued expenses at December 29, 2012 and December 31, 2011, approximate fair value because of the short maturity of these instruments.As of December 29, 2012 and December 31, 2011, financial assets and liabilities measured and recognized at fair value on a recurring basis andclassified under the appropriate level of the fair value hierarchy as described above was as follows (in thousands): FY 2012: December 29, 2012 FY 2011: December 31, 2011 Fair Value Measurements Fair Value Measurements Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Assets: Money market funds $10,839 $10,839 $10,133 $10,133 Liabilities: Earn-out liability $652 $652 $765 $765 The Company’s Level 1 financial assets are money market funds whose fair values are based on quoted market prices. The Company does not haveany Level 2 financial assets or liabilities. The fair value of the earn-out liability arising from the acquisitions of RetinaLabs and Ocunetics is classified withinLevel 3 of the fair value hierarchy since it is based on significant unobservable inputs. The significant unobservable inputs include projected royalties anddiscount rates to present value the payments. A significant increase (decrease) in the projected royalty payments in isolation could result in a significantlyhigher (lower) fair value measurement and 52Table of Contentsa significant increase (decrease) in the discount rate in isolation could result in a significantly lower (higher) fair value measurement. The fair value of the earn-out liability is calculated on a quarterly basis by the Company based on a collaborative effort of the Company’s operations, finance and accounting groupsbased on additional information as it becomes available. Any change in the fair value adjustment is recorded in the statement of operations of that period.The following table presents quantitative information about the inputs and valuation methodologies used for our fair value measurements classified inLevel 3 of the fair value hierarchy as of December 29, 2012. As of December 29, 2012 Fair Value(in thousands) ValuationTechnique SignificantUnobservableInput WeightedAverage(range) Earn-out liability $652 Discountedcash flow Projected royalties(in thousands) $1,762 (631 - 1,980) Discount rate 21.84%(20.85% - 27.00% ) The following table provides a reconciliation of the beginning and ending balances of the contingent consideration - cash (Level 3 liabilities) (inthousands): Balance as of January 1, 2011 $380 Addition of earn-out related to Ocunetics, Inc. acquisition 105 Change in fair value of earn-out liability 280 Balance as of December 31, 2011 765 Payments against earn-out (328) Change in fair value of earn-out liability 215 Balance as of December 29, 2012 $652 The change in the contingent consideration during fiscal year 2012 was due to the acquisition of Ocunetics and an increase in the fair value of theremaining contingent consideration of a prior acquisition as a result of improving expectations of future cash flows.5. InventoriesThe components of the Company’s inventories are as follows (in thousands): FY 2012December 29,2012 FY 2011December 31,2011 Raw materials and work in process $5,357 $2,694 Finished goods 2,678 3,965 Total inventories $8,035 $6,659 53Table of Contents6. Property and EquipmentThe components of the Company’s property and equipment are as follows (in thousands): FY 2012December 29,2012 FY 2011December 31,2011 Equipment $6,762 $6,372 Leasehold improvements 2,278 2,278 Less: accumulated depreciation and amortization (8,557) (8,325) Property and equipment, net $483 $325 Depreciation expense related to property and equipment was $236 thousand, $185 thousand, and $314 thousand for the fiscal years 2012, 2011 and2010, respectively.7. GoodwillThe carrying value of goodwill was $0.5 million at December 29, 2012 and December 31, 2011. Changes in goodwill for the years ended December 29,2012 and December 31, 2011 are presented in the following table (in thousands): FY 2012December 29,2012 FY 2011December 31,2011 Balance, beginning of period $533 $473 Goodwill as a result of acquisition 0 60 Balance, end of period $533 $533 Goodwill is tested for impairment at least annually or whenever there is a change in circumstances that indicates the carrying value of these assets maybe impaired. The determination of whether any potential impairment of goodwill exists is based upon a two-step impairment test performed in accordance withASC 350, Intangibles - Goodwill and Other. There was no impairment of goodwill recognized during fiscal years 2012, 2011 or 2010.8. Intangible AssetsThe components of the Company’s purchased intangible assets as of December 29, 2012 are as follows (in thousands): UsefulLives FY 2012AnnualAmortization GrossCarryingValue AccumulatedAmortization NetCarryingValue Useful LivesRemainingCustomer Relations 15 Years $16 $240 $44 $196 12.4 YearsPatents Varies 175 720 362 358 Varies $191 $960 $406 $554 54Table of ContentsThe components of the Company’s purchased intangible assets as of December 31, 2011 are as follows (in thousands): UsefulLives FY 2011AnnualAmortization GrossCarryingValue AccumulatedAmortization NetCarryingValue Useful LivesRemainingCustomer Relations 15 Years $16 $240 $28 $212 13.4 YearsPatents Varies 180 720 187 533 Varies $196 $960 $215 $745 Aggregate amortization expense for the fiscal years 2012 and 2011 were $191 thousand, and $196 thousand, respectively. The amortization ofCustomer Relations was charged to sales and marketing expense and the amortization of Patents was charged to cost of revenues.Estimated future amortization expense for purchased intangible assets is as follows (in thousands): Fiscal Year: 2013 $249 2014 71 2015 86 2016 16 2017 16 Thereafter 116 Total $554 9. Accrued ExpensesThe components of the Company’s accrued expenses are as follows (in thousands): FY 2012December 29,2012 FY 2011December 31,2011 Income taxes payable $0 $210 Sales and use tax payable 49 94 Distributor commission 173 274 Customer deposits 158 117 Royalties payable 32 126 Earn-out – short term 156 197 Other accrued expenses 674 902 Total accrued expenses $1,242 $1,920 10. Bank BorrowingsThe Company had a Loan and Security Agreement with Silicon Valley Bank which expired in June 2012.11. Commitments and ContingenciesLease Agreements.The Company leases its operating facilities under a noncancelable operating lease. On December 22, 2009, the lease for the Mountain View, Californiafacility was amended and renewed to lease for an additional six year 55Table of Contentsperiod beginning March 1, 2010 until February 28, 2015. Rent expense totaled $0.6 million for each of the fiscal years 2012, 2011 and 2010.Future minimum lease payments under current operating leases at December 29, 2012 are summarized as follows (in thousands): Fiscal Year Operating Lease Payments 2013 $748 2014 786 2015 139 2016 1 Total future minimum lease payments $1,674 License Agreements.The Company is obligated to pay royalties equivalent to 5% of sales on certain products under certain license agreements. Royalty expense wasapproximately $0.1 million, $0.2 million and $0.1 million for the fiscal years 2012, 2011 and 2010, respectively.Indemnification Arrangements.The Company enters into standard indemnification arrangements in our ordinary course of business. Pursuant to these arrangements, the Companyindemnifies, holds harmless, and agrees to reimburse the indemnified parties for losses suffered or incurred by the indemnified party, generally our businesspartners or customers, in connection with any trade secret, copyright, patent or other intellectual property infringement claim by any third party with respect toour products. The term of these indemnification agreements is generally perpetual anytime after the execution of the agreement. The maximum potential amountof future payments the Company could be required to make under these agreements is not determinable. The Company has never incurred costs to defendlawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the estimated fair value of these agreements is minimal.The Company has entered into indemnification agreements with its directors and officers that may require the Company to indemnify its directors andofficers against liabilities that may arise by reason of their status or service as directors or officers, other than liabilities arising from willful misconduct of aculpable nature; to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified; and to make good faithdetermination whether or not it is practicable for the Company to obtain directors and officers insurance. The Company currently has directors and officersliability insurance.In general, management believes that claims which are pending or known to be threatened, will not have a material adverse effect on the Company’sfinancial position or results of operations and are adequately covered by the Company’s liability insurance. However, it is possible that cash flows or resultsof operations could be materially affected in any particular period by the unfavorable resolution of one of more of these contingencies or because of thediversion of management’s attention and the incurrence of significant expenses.12. Stockholders’ EquityConvertible Preferred StockThe Company is authorized to issue up to 2,000,000 shares of undesignated preferred stock from time to time in one or more series. During August2007, the Company filed a Certificate of Designation authorizing the Company to issue up to 500,000 of the 2,000,000 shares of authorized undesignatedpreferred stock as shares of Series A Preferred Stock, par value $0.01 per share. 56Table of ContentsIn August 2007, the Company issued 500,000 shares of Series A Preferred Stock, convertible into 1 million shares of common stock, and warrants topurchase an aggregate of 600,000 shares of common stock at an exercise price of $0.01 per share. The warrants were to expire December 31, 2007 but wereexercised prior to that date. The purchase price for a unit of 1 share of Series A Preferred Stock and a warrant to purchase 1.2 shares of common stock was$10.00, resulting in net proceeds to the Company of approximately $4.9 million. Of the total $4.9 million proceeds received, approximately $2.3 million hasbeen allocated to the common stock warrants based on their estimated fair value at the time of issuance.In the event that the common stock of the Company trades on a trading market at or above a closing price equal to $5.00 per share (as adjusted forcapital reorganizations, stock splits, reclassifications, etc.) for a period of 30 consecutive trading days, the shares of Series A Preferred Stock shallautomatically convert to common stock.Holders of Series A Preferred Stock have preferential rights to noncumulative dividends when and if declared by the Board of Directors. In the event ofliquidation, the holders have preferential rights to liquidation payments in the amount of the original purchase price plus declared and unpaid dividends, ifany. At December 29, 2012, the aggregate liquidation preference was $5,000,000.In addition, holders of Series A Preferred Stock have certain registration rights including the requirement that the Company file a Form S-3 registrationstatement within 90 days of becoming eligible to file a Form S-3 registration statement and the right to request that the Company file a Form S-1 registrationstatement any time after February 29, 2008.If the holders notify the Company of their decision to have a registration statement filed, the Company has 90 days to cause the registration statement tobe declared effective. If the registration statement is not filed within 90 days, the Company is obligated to pay the holders partial liquidated damages until theregistration statement is declared effective. The Company shall pay to each holder an amount in cash equal to 1% of the aggregate purchase price paid for theoriginal units of Series A Preferred Stock and warrants to purchase common stock. The maximum aggregate damages payable to the holders is 12% of theaggregate purchase price paid by the holders. If the Company fails to pay any partial liquidated damages in full within seven days of the date payable, theCompany will pay interest thereon at a rate of 18% per annum (or the lesser maximum amount that is permitted to be paid by applicable law) to the holders.The maximum potential amount of damages, excluding interest, that the Company may have to pay the holders is $600,000. The Company regards theprobability of having to make this payment to the holders as remote and has therefore not recorded a liability to represent this potential obligation.During 2009 the holders of the Series A Preferred Stock and the Company agreed to amend the Form S-3 registration rights. The agreement changed theclause requiring the Company to file a Form S-3 registration statement within 90 days of becoming eligible to a right to request the Company file a Form S-3registration statement any time after June 30, 2009. In consideration for extending the period during which the Company is not required to file a registrationstatement, the Company issued the holders of Series A Preferred Stock warrants to purchase an aggregate of 20,000 shares of common stock at an exerciseprice of $0.01 per share. The warrants were exercised in fiscal year 2009. As of December 29, 2012, the Company has not received a request to file a Form S-3.Stock-Based Compensation1998 Stock Plan.The 1998 Stock Plan (the 1998 Plan), as amended, provides for the granting to employees (including officers and employee directors) of incentivestock options and for the granting to employees (including officers and employee directors) and consultants of nonstatutory stock options, stock purchaserights (SPRs), restricted stock, restricted stock units, performance shares, performance units and stock appreciation rights. The exercise 57Table of Contentsprice of incentive stock options and stock appreciation rights granted under the 1998 Plan must be at least equal to the fair market value of the shares at thetime of grant. With respect to any recipient who owns stock possessing more than 10% of the voting power of our outstanding capital stock, the exercise priceof any option or SPR granted must be at least equal to 110% of the fair market value at the time of grant. Options granted under the 1998 Plan are exercisableat such times and under such conditions as determined by the Administrator; generally over a four year period. The maximum term of incentive stock optionsgranted to any recipient must not exceed ten years; provided, however, that the maximum term of an incentive stock option granted to any recipient possessingmore than 10% of the voting power of the Company’s outstanding capital stock must not exceed five years. In the case of SPRs, unless the Administratordetermines otherwise, the Company has a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser’s employment with theCompany for any reason (including death or disability). Such repurchase option lapses at a rate determined by the Administrator. The purchase price forshares repurchased by the Company is the original price paid by the purchaser. In June 2006, the 1998 Plan was amended to shorten the contractual life of alloption grants made after June 2006 to a seven year term. As of December 29, 2012, no shares were subject to repurchase. The form of consideration forexercising an option or stock purchase right, including the method of payment, is determined by the Administrator. The 1998 Plan expired in February 2008.Stand-Alone Options.In February 2007, the Compensation Committee of the Company’s Board of Directors approved the grant of 235,000 non-qualified stock options,outside of the Company’s existing stock plans, to a total of 54 new employees, both domestic and international, hired in connection with the Company’sacquisition of the assets of the aesthetics business of Laserscope. The options were granted as of February 28, 2007 at an exercise price of $10.06 per share.As of December 29, 2012 there were 4,000 shares outstanding and exercisable under these options.2008 Equity Incentive PlanOn June 11, 2008, the shareholders approved the adoption of the 2008 Equity Incentive Plan, (the Incentive Plan). There are no material changes in theIncentive Plan from the 1998 Stock Plan. The maximum aggregate number of shares that may be awarded and sold under the Incentive Plan is 300,000 sharesplus any shares subject to stock options or similar awards granted under the 1998 Stock Plan that expire or otherwise terminate without having been exercisedin full and shares issued pursuant to awards granted under the 1998 Stock Plan that are forfeited to the Company on or after the date the 1998 Stock Planexpires.Exchange ProgramIn August 2009, we completed a one-time stock exchange program to exchange certain employee stock options issued under the 1998 Plan, the IncentivePlan or in connection with IRIDEX’s acquisition of the assets of the aesthetics business of Laserscope for stock options issued under the Incentive Plan (the“Exchange Program”). The exchange offer was made to employees of the Company who, as the date of the exchange offer commenced, were actively employed.Members of our board of directors and our executive officers who are subject to the provisions of Section 16 of the Securities 1934 Exchange Act were noteligible to participate. The number of options held by eligible employees at the date of commencement was 663,018. Seventy two eligible employeessurrendered 364,162 options in exchange for 197,116 new options. These new options were granted pursuant to the Exchange Program and have an exerciseprice of $2.35 per share, the closing price of IRIDEX common stock as reported by NASDAQ on August 27, 2009.The exchange of original options for new options was treated as a modification of the original options. As such, the Company will continue to recognizecompensation cost for the incremental difference between the fair value of the new option and the fair value of the original options immediately beforemodification, reflecting the current facts and circumstances on the modification date, in addition to the compensation cost being incurred for 58Table of Contentsthe original options, over the vesting term of the new options. The Exchange resulted in an incremental expense of approximately $38 thousand which is beingrecognized over the vesting periods of the new options which ranges from 6 months to 3 years.The following table summarizes information regarding activity in our stock option plans during the fiscal years ended 2012, 2011 and 2010 (inthousands except share and per share data): Outstanding Options SharesAvailablefor Grant Numberof Shares AggregatePrice WeightedAverageExercise Price FY 2009: Balances, January 2, 2010 862,157 1,583,508 $6,169 $3.91 Additional shares reserved 93,299 Options granted (195,800) 195,800 780 3.98 Options exercised 0 (34,558) (88) 2.54 Options cancelled 126,684 (126,684) (955) 7.54 Options expired (126,203) 0 0 0 FY 2010: Balances, January 1, 2011 760,137 1,618,066 $5,906 3.65 Additional shares reserved 63,063 Options granted (319,900) 319,900 1,148 3.59 Options exercised 0 (99,291) (321) 3.24 Options cancelled 72,274 (72,274) (353) 4.88 Options expired (70,353) 0 0 0 FY 2011: Balances, December 31, 2011 505,221 1,766,401 $6,380 3.61 Additional shares reserved 324,501 Options granted (335,050) 335,050 1,313 3.92 Options exercised 0 (174,631) (445) 2.55 Options cancelled 356,277 (356,277) (1,550) 4.35 Options expired (108,971) 0 0 0 FY 2012: Balances, December 29, 2012 741,978 1,570,543 $5,698 $3.63 There were 2,312,521 shares reserved for future issuance under the stock option plans at December 29, 2012. 59Table of ContentsThe following table summarizes information with respect to stock options outstanding and exercisable at December 29, 2012: Options Outstanding Options Vested and Exercisable Range of Exercise Prices Number of SharesOutstanding atDecember 29,2012 Weighted AverageRemainingContractual Life WeightedAverageExercisePrice Number of SharesExercisable atDecember 29,2012 WeightedAverageExercisePrice (Years) $0.82 - $1.00 159,645 2.71 $0.90 158,855 $0.90 $2.24 - $2.38 166,531 2.16 $2.33 161,232 $2.33 $2.41 - $2.78 185,237 2.06 $2.56 185,237 $2.56 $2.93 - $3.52 163,651 2.44 $3.26 128,378 $3.24 $3.53 - $3.75 147,000 5.35 $3.66 55,031 $3.64 $3.86 - $3.86 188,500 6.96 $3.86 0 $0.00 $3.89 - $4.31 226,073 4.98 $4.11 114,659 $4.16 $4.43 - $5.56 221,419 1.41 $5.20 221,419 $5.20 $5.69 - $9.79 108,487 1.19 $7.33 108,487 $7.33 $10.06 - $10.06 4,000 1.17 $10.06 4,000 $10.06 $0.82 - $10.06 1,570,543 3.34 $3.63 1,137,298 $3.58 The determination of fair value of options granted by the Company is computed using the Black-Scholes option-pricing model with the followingweighted average assumptions: Employee Stock Option Plan FY 2012 FY 2011 FY 2010Average risk free interest rate 0.68% 0.98% 2.03%Expected life (in years) 4.55 years 4.70 years 4.75 yearsDividend yield 0 0 0Average volatility 89.2% 92.2% 88.2%The weighted average grant date fair value of option granted as calculated using Black-Scholes option-pricing was $2.60, $2.47 and $2.70 per share forthe fiscal years 2012, 2011 and 2010, respectively.Option-pricing models require the input of various subjective assumptions, including the option’s expected life and the price volatility of the underlyingstock. The expected stock price volatility is based on analysis of the Company’s stock price history over a period commensurate with the expected term of theoptions, trading volume of the Company’s stock, look-back volatilities and Company specific events that affected volatility in a prior period. The Companyhad elected to use the simplified method for estimating the expected term prior to July 3, 2011. Effective July 3, 2011, the expected term of employee stockoptions represents the weighted average period the stock options are expected to remain outstanding and is based on the history of exercises and cancellations onall past option grants made by the Company, the contractual term, the vesting period and the expected remaining term of the outstanding options. The risk-freeinterest rate is based on the U.S. Treasury interest rates whose term is consistent with the expected life of the stock options. No dividend yield is included asthe Company has not issued any dividends and does not anticipate issuing any dividends in the future. 60Table of ContentsThe following table shows stock-based compensation expense included in Income from Continuing Operations in the Consolidated Statements ofOperations for 2012, 2011 and 2010 (in thousands): FY 2012Year EndedDecember 29,2012 FY 2011Year EndedDecember 31,2011 FY 2010Year EndedJanuary 1,2011 Cost of revenues $63 $60 $64 Research and development 77 76 93 Sales and marketing 105 112 116 General and administrative 143 230 215 Total stock-based compensation expense - continuingoperations 388 478 488 Total stock-based compensation expense - discontinuedoperations 8 66 63 Total stock-based compensation expense $396 $544 $551 Stock-based compensation expense capitalized to inventory was immaterial for 2012, 2011, and 2010.Information regarding stock options outstanding, exercisable and expected to vest at December 29, 2012 is summarized below: Number ofShares Weighted AverageExercise Price Weighted AverageRemaining ContractualLife (Years) AggregateIntrinsic Value(thousands) Options outstanding 1,570,543 $3.63 3.34 $1,013 Options vested and expected to vest 1,471,271 $3.63 3.16 $1,003 Options exercisable 1,137,298 $3.58 2.25 $980 The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the Company’s closing stock price on thelast trading day of fiscal 2012 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holdershad all option holders exercised their options on December 29, 2012. This amount changes based on the fair market value of the Company’s stock. The totalintrinsic value of options exercised for fiscal years 2012, 2011 and 2010 were approximately $261 thousand, $84 thousand and $46 thousand, respectively.As of December 29, 2012, there was $1.4 million of total unrecognized compensation cost related to non-vested share-based compensation arrangementsunder both of the plans. The cost is expected to be recognized over a weighted average period of 3.28 years.Restricted Stock Awards/Restricted Stock UnitsEffective for the 2011 fiscal year, each non-employee member of the Board received an annual equity award of either restricted stock or a restricted stockunit (“RSU”), at the election of such Board member, in each case equal to $20,000 worth of our common stock (determined at the fair market value of theshares at the time such award is granted) under the Company’s 2008 Equity Incentive Plan. Each equity award or RSU vests in full on the one-yearanniversary of the date of grant provided that the non-employee member continues to serve on the Board through such date. 61Table of ContentsSummary of Restricted Stock Units and AwardsThe Company recognizes the estimated compensation expense of restricted stock units and awards, net of estimated forfeitures, over the vestingterm. The estimated compensation expense is based on the fair value of the Company’s common stock on the date of grant.Information regarding the restricted stock units outstanding, vested and expected to vest as of December 29, 2012 is summarized below: NumberofShares Weighted AverageRemaining Contractual Life(years) Aggregate IntrinsicValue (thousands) As of December 29, 2012 Restricted stock units outstanding 55,999 0.94 $211 Restricted stock units vested and expectedto vest 48,545 0.91 $183 The intrinsic value of the restricted stock units is calculated based on the closing price of IRIDEX shares as quoted on the NASDAQ Global Market onthe last trading day of the year, December 29, 2012 of $3.76.For the year ended December 29, 2012, the Company granted 55,999 shares of restricted stock units, with a weighted average grant date fair value ofapproximately $216,000 or $3.85 per share, and 10,666 shares of restricted stock awards, with a weighted average grant date fair value of approximately$40,000 or $3.75 per share, to the Board of Directors. For the year ended December 31, 2011, the Company granted 90,189 shares of restricted stock units,with a weighted average grant date fair value of approximately $315,000 or $3.49 per share, and 10,126 shares of restricted stock awards, with a weightedaverage grant date fair value of approximately $40,000 or $3.95 per share. There were no restricted stock units or awards granted in 2010.Information regarding the restricted stock units and awards activity during the year ended December 29, 2012 and December 31, 2011 is summarizedbelow: Number ofShares Weighted AverageGrant Date FairValue Outstanding at January 1, 2011 0 $0.00 Restricted stock units granted 90,189 $3.49 Outstanding at December 31, 2011 90,189 $3.49 Restricted stock units granted 55,999 $3.85 Restricted stock units released (15,189) $3.95 Restricted stock units forfeited (75,000) $3.40 Outstanding at December 29, 2012 55,999 $3.85 Number ofShares Weighted AverageGrant Date FairValue Outstanding at January 1, 2011 0 $0.00 Restricted stock awards granted 10,126 $3.95 Outstanding at December 31, 2011 10,126 $3.95 Restricted stock awards granted 10,666 $3.75 Restricted stock awards released (10,126) $3.95 Outstanding at December 29, 2012 10,666 $3.75 62Table of Contents13. Employee Benefit PlanThe Company has a plan known as the IRIS Medical Instruments 401(k) Trust to provide retirement benefits through the deferred salary deductions forsubstantially all US employees. Employees may contribute up to 15% of their annual compensation to the plan, limited to a maximum amount set by theInternal Revenue Service. The plan also provides for Company contributions at the discretion of the Board of Directors. Prior to the start of fiscal 2009, theCompany suspended the matching contributions. Subsequent to the fiscal 2012 year end, the Company reinstated a Company match in the amount of 50% ofemployee contributions up to a maximum of $3 thousand per year.14. Income TaxesPre-tax book (loss) income from continuing operations was comprised of the following: FY 2012Year EndedDecember 29,2012 FY 2011Year EndedDecember 31,2011 FY 2010Year EndedJanuary 1,2011 United States $(270) $2,438 $1,961 Foreign 0 0 0 Total $(270) $2,438 $1,961 The provision for (benefit from) income taxes from continuing operations includes: FY 2012Year EndedDecember 29,2012 FY 2011Year EndedDecember 31,2011 FY 2010Year EndedJanuary 1,2011 Current: Federal $(114) $267 $288 State 14 30 20 Foreign 0 0 0 (100) 297 308 Deferred: Federal 0 0 0 State 0 0 0 Income tax (benefit) provision $(100) $297 $308 The Company’s effective tax rate differs from the statutory federal income tax rate as shown in the following schedule: FY 2012Year EndedDecember 29,2012 FY 2011Year EndedDecember 31,2011 FY 2010Year EndedJanuary 1,2011 Income tax provision at statutory rate 34% 34% 34% State income taxes, net of federal benefit (88%) (2%) (1%) Permanent differences (89%) 0% 3% Research and development credits 0% (4%) (4%) Change in valuation allowance 180% (16%) (16%) Effective tax rate 37% 12% 16% 63Table of ContentsThe tax effect of temporary differences and carry-forwards that give rise to significant portions of the net deferred tax assets are presented below (inthousands): FY 2012December 29,2012 FY 2011December 31,2011 Accruals and reserves $2,295 $2,775 Deferred revenue 38 70 Fixed assets 429 488 Intangibles 180 6,959 Stock compensation 753 789 Net operating loss 5,310 120 Research and development credits 1,008 508 Other tax credits 47 1 Other 1 (10) Net deferred tax asset $10,061 $11,700 Valuation allowance (10,061) (11,700) Net deferred tax assets $0 $0 The Company has recorded a full valuation allowance for its deferred tax assets based on its past losses and the uncertainty regarding the ability toproject future taxable income.As of December 29, 2012, the Company had federal and State net operating loss (“NOL”) carry forwards of $13.9 million and $11.7 million,respectively. Of the total state NOL carryover, $1.3 million relates to windfall stock option deductions which, when realized, will be credited to equity. Thefederal NOL will begin to expire in 2022 and the state NOL will begin to expire in 2020. The state of California suspended the ability of companies to utilizetheir NOLs for tax years 2011 and 2010.The American Taxpayer Relief Act of 2012 was enacted on January 2, 2013. The Act reinstated the research and development credit retroactively toJanuary 1, 2012 and extended it through 2013. As the law enactment is a subsequent event, no tax benefit from claiming the federal research and developmentcredit has been considered for 2012. As of December 29, 2012, the Company had Federal and State research credit carry forwards of approximately $1.0million and $1.5 million, respectively, available to offset future tax liabilities. The Federal credits will begin expiring in 2026 if not used. The state researchcredits do not expire.The above net operating losses and research and development credits are subject to IRC sections 382 and 383. In the event of a change in ownership asdefined by these code sections, the usage of the above mentioned NOL’s and credits may be limited.The Company accounts for uncertain tax positions in accordance with ASC 740, Income Taxes. ASC 740 seeks to reduce the diversity in practiceassociated with certain aspects of measurement and recognition in accounting for income taxes. ASC 740 prescribes a recognition threshold and measurementattribute for the financial statement recognition and measurement of a tax provision that an entity takes or expects to take in a tax return. Additionally, ASC 740provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. Under ASC 740, anentity may only recognize or continue to recognize tax positions that meet a “more likely than not” threshold. In accordance with our accounting policy, werecognize accrued interests and penalties related to unrecognized tax benefits as a component of income tax expense.As of December 29, 2012, the Company had accrued $67 thousand for payment of interest related to unrecognized tax benefits. 64Table of ContentsA reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands): FY 2012Year EndedDecember 29,2012 FY 2011Year EndedDecember 31,2011 FY 2010Year EndedJanuary 1,2011 Balance at the beginning of the year $1,191 $865 $637 Additions based upon tax positions related to the current year 36 58 67 Additions based upon tax positions related to the prior year 0 268 161 Reductions based upon tax positions related to the prior year (273) 0 0 Balance at the end of the year $954 $1,191 $865 During fiscal 2012, the Company incurred a tax loss mainly from the disposal of discontinued operations and anticipates the ability to claim a taxrefund of approximately $0.6 million by carrying back the loss to 2010 and 2011 for federal income tax purpose. As a result, the Company recognized a taxbenefit of $0.3 million from the release and reclassification of the ASC 740 long term liability.If the ending balance of $954 thousand of unrecognized tax benefits at December 29, 2012 were recognized, none of the recognition would affect theincome tax rate. The Company does not anticipate any material change in its unrecognized tax benefits of $954 thousand over the next twelve months. Theunrecognized tax benefits may change during the next year for items that arise in the ordinary course of business.The Company files U.S. federal and state returns as well as foreign return in France. The tax years 2007 to 2012 remain open in several jurisdictions,none of which have individual significance.15. Major Customers and Business SegmentsThe Company operates in one segment, ophthalmology. The Company develops, manufactures and markets medical devices. Our revenues arise fromthe sale of consoles, delivery devices, consumables, service and support activities.For fiscal years 2012, 2011 and 2010, no customer individually accounted for more than 10% of our revenue.Revenue information shown by geographic region is as follows (in thousands): FY 2012Year EndedDecember 29,2012 FY 2011Year EndedDecember 31,2011 FY 2010Year EndedJanuary 1,2011 United States $18,496 $18,447 $17,796 Europe 7,468 8,940 8,954 Rest of Americas 2,335 2,287 2,198 Asia/Pacific Rim 5,560 3,485 3,360 $33,859 $33,159 $32,308 Revenues are attributed to countries based on location of end customers. For fiscal years 2012, 2011 and 2010 no individual country accounted for morethan 10% of the Company’s sales, except for the United States, which accounted for 54.6%, 55.6%, and 55.2% of sales in 2012, 2011, and 2010respectively. 65Table of Contents16. Computation of Basic and Diluted Net (Loss) Income Per Common ShareA reconciliation of the numerator and denominator of basic and diluted net (loss) income per common share is provided as follows (in thousands, exceptper share amounts): FY 2012Year EndedDecember 29,2012 FY 2011Year EndedDecember 31,2011 FY 2010Year EndedJanuary 1,2011 Numerator: (Loss) income from continuing operations $(170) $2,141 $1,653 Income from discontinued operations 1,608 469 1,393 Net income $1,438 $2,610 $3,046 Denominator: Weighted average shares of common stock (basic) 8,935 8,958 8,943 Effect of dilutive preferred shares 0 1,000 1,000 Effect of dilutive stock options 0 245 183 Effect of dilutive contingent shares 0 22 8 Weighted average shares of common stock (diluted) 8,935 10,225 10,134 Per share data: Basic net (loss) income per share: Net (loss) income before discontinued operations $(0.02) $0.24 $0.18 Discontinued operations 0.18 0.05 0.16 Net income $0.16 $0.29 $0.34 Diluted net (loss) income per share: Net (loss) income before discontinued operations $(0.02) $0.21 $0.16 Discontinued operations 0.18 0.05 0.14 Net income $0.16 $0.26 $0.30 For periods in which the Company incurs a loss from continuing operations, the conversion of Series A Preferred Stock to common stock and commonstock equivalent shares from unexercised stock options are excluded from the computation as their effect is anti-dilutive. Accordingly at December 29, 2012,1,000,000 shares of common stock equivalents (from the conversion of Series A Preferred Stock) and stock options to purchase 1,570,543 have beenexcluded.For periods in which the Company generates income from continuing operations, the conversion of Series A Preferred Stock to common stock andcommon stock equivalent shares from unexercised stock options (if the exercise price of such options is lower than the average market price of the stock for theperiod) are included in the computation as their effect is dilutive. The Company excludes stock options and other common stock equivalents from thecomputation if the exercise price of the options is greater than the average market price of the stock for the period because the inclusion of these options wouldbe anti-dilutive. Accordingly, at December 31, 2011 and January 1, 2011, stock options to purchase 713,462 and 809,997 shares, respectively, wereexcluded from the computation of diluted weighted average shares outstanding. 66Table of Contents17. Subsequent EventsOn January 9, 2013, the Company received $0.5 million in the form of a cash distribution from an insurance carrier which will be recorded in the firstquarter of 2013. The distribution to the Company was a result of the Company being an eligible member of the insurance carrier following the insurancecarrier’s conversion from a mutual company to a stock insurer.On February 28, 2013, the Board of Directors approved a new one year $3.0 million stock repurchase program that replaces the prior two year $4.0million stock repurchase program.In March 2013, the Company entered into a global distribution and supply agreement with Peregrine Surgical Ltd. (“Peregrine”). Under the agreement,IRIDEX will become a worldwide distributor for Peregrine labeled products and Peregrine will become part of the IRIDEX supply chain. IRIDEX hascommitted to purchase $0.8 million worth of product annually over the four year life of the agreement.The Company has evaluated subsequent events and has concluded that no additional subsequent events that require disclosure in the financialstatements have occurred since the year ended December 29, 2012. 67Table of ContentsItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNot applicable.Item 9A. Controls and ProceduresEvaluation of Disclosure Controls and Procedures.Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosurecontrols and procedures pursuant to Rule 13a-15 under the Exchange Act. In designing and evaluating our disclosure controls and procedures, managementrecognizes that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that theobjectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily wasrequired to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controlsand procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design willsucceed in achieving its stated goals under all potential future conditions.Based on management’s evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 29, 2012, our disclosurecontrols and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required todisclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SECrules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief FinancialOfficer, as appropriate, to allow timely decisions regarding required disclosure.Management’s Report on Internal Control over Financial Reporting.Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of theExchange Act. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.Under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, we conducted anevaluation of the effectiveness of our internal control over financial reporting as of December 29, 2012 using the criteria for effective internal control overfinancial reporting as described in “Internal Control - Integrated Framework,” issued by the Committee of Sponsoring Organization of the TreadwayCommission. Based on their evaluation as of the end of the period covered by this Annual Report on Form 10-K, our Chief Executive Officer and ChiefFinancial Officer have concluded that our internal control over financial reporting was effective as of December 29, 2012.This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm regarding internal controlover financial reporting. Management’s report is not subject to attestation by our independent registered public accounting firm.Changes in Internal Control over Financial Reporting.There were no changes in our internal control over financial reporting that occurred during the fourth quarter of fiscal year 2012 that has materiallyaffected, or is reasonably likely to materially affect, our internal control over financial reporting.Item 9B. Other InformationNot applicable. 68Table of ContentsPART IIICertain information required by Part III has been omitted from this Form 10-K. This information is instead incorporated herein by reference to ourdefinitive Proxy Statement for our 2013 Annual Meeting of Stockholders (the Proxy Statement), which we will file within 120 days after the end of our fiscalyear pursuant to Regulation 14A in time for our Annual Meeting of Stockholders to be held June 12, 2013.Item 10. Directors and Executive Officers and Corporate GovernanceInformation regarding our directors is incorporated herein by reference to “Proposal One - Election of Directors - Nominees” in our Proxy Statement. Theinformation concerning our current executive officers is incorporated herein by reference to “Executive Officers” in our Proxy Statement. Information regardingdelinquent filers is incorporated by reference to “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement. Information regarding ourcode of business conduct and ethics is incorporated herein by reference to “Corporate Governance Matters - Code of Business Conduct and Ethics” in ourProxy Statement.Item 11. Executive CompensationThe information required by this item is incorporated herein by reference to “Executive Compensation” in our Proxy Statement.Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersThe information required by this Item is incorporated herein by reference to “Security Ownership of Certain Beneficial Owners and Management” in ourProxy Statement.Item 13. Certain Relationships and Related Transactions, and Director IndependenceThe information required by this Item is incorporated herein by reference to “Certain Relationships and Related Transactions” in our Proxy Statement.Item 14. Principal Accountant Fees and Services.The information required by this item is incorporated herein by reference to “Proposal Two - Ratification of Appointment of Independent Accountants” inour Proxy Statement. 69Table of ContentsPART IVItem 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K(a) The following documents are filed in Part II of this Annual Report on Form 10-K: Page inForm 10-KReport 1. Index to Financial Statements Report of Independent Registered Public Accounting Firm 38 Consolidated Balance Sheets as of December 29, 2012 and December 31, 2011 39 Consolidated Statements of Operations for the years ended December 29, 2012, December 31, 2011 and January 1, 2011 40 Consolidated Statements of Comprehensive Income for the years ended December 29, 2012, December 31, 2011 and January 1, 2011 41 Consolidated Statements of Stockholders’ Equity for the years ended December 29, 2012, December 31, 2011 and January 1, 2011 42 Consolidated Statements of Cash Flows for the years ended December 29, 2012, December 31, 2011 and January 1, 2011 43 Notes to Consolidated Financial Statements 44 2. Financial Statement ScheduleSchedules have been omitted because they are either not required, not applicable, or the required information is included in the consolidated financialstatements or notes thereto.3. ExhibitsExhibit Index Exhibits Exhibit Title 2.1(15) Asset Purchase Agreement by and among Cutera, Inc., Registrant, and U.S. Bank, National Association, as Escrow Agent, datedDecember 30, 2011. 3.1(1) Amended and Restated Certificate of Incorporation of Registrant. 3.2(2) Amended and Restated Bylaws of Registrant. 4.1(3) Certificate of Designation, Preferences and Rights of Series A Preferred Stock. 4.2(3) Investor Rights Agreement, dated as of August 31, 2007, by and among the Company, BlueLine Capital Partners, LP; BlueLineCapital Partners III, LP and BlueLine Capital Partners II, LP. 4.3(4) Amendment No. 1 to Investor Rights Agreement, dated as of March 31, 2009.10.1(1) Form of Indemnification Agreement with directors and officers.10.2(5) Lease Agreement dated December 6, 1996 by and between Zappettini Investment Co. and the Registrant, as amended pursuant toAmendment No. 1 dated September 15, 2003 and Amendment No. 2 dated December 22, 2008.10.3(6)* 1995 Director Option Plan.10.4(7)* 1998 Stock Plan.10.5(8)* 2005 Employee Stock Purchase Plan. 70Table of ContentsExhibits Exhibit Title 10.6* 2008 Equity Incentive Plan. 10.7(9)* Form of 2008 Equity Incentive Plan Option Agreement. 10.8(10)* Form of Stand-alone stock option agreement. 10.9(5)* Change of Control Severance Agreement by and between the Company and James Mackaness, dated January 22, 2008. 10.10(3) Securities Purchase Agreement, dated August 31, 2007, by and among BlueLine Capital Partners, LP, BlueLine Capital Partners III,LP, BlueLine Capital Partners II, LP and IRIDEX Corporation. 10.11(4) Common Stock Purchase Warrant, dated March 31, 2009, issued to BlueLine Capital Partners, LP. 10.12(4) Common Stock Purchase Warrant, dated March 31, 2009, issued to BlueLine Capital Partners II, LP. 10.13(4) Common Stock Purchase Warrant, dated March 31, 2009, issued to BlueLine Capital Partners II, LP. 10.14(11)* 2012 Bonus Plan Summary. 10.15(12)* 2013 Bonus Plan Summary. 10.16(13)* Employment Agreement by and between Registrant and Dominik Beck, dated as of August 16, 2011. 10.17(13)* Executive Transition Agreement by and between Registrant and Theodore A. Boutacoff, dated October 10, 2011. 10.18(14)* Form of 2008 Equity Incentive Plan Restricted Stock Award Agreement. 10.19(14)* Form of 2008 Equity Incentive Plan Restricted Stock Unit Award Agreement. 10.20* Agreement and Release by and between Registrant and Dominik Beck, dated as of November 6, 2012. 10.21* ADEA Waiver Agreement and Release by and between Registrant and Dominik Beck, dated as of November 6, 2012. 21.1(1) Subsidiaries of Registrant. 23.1 Consent of Burr Pilger Mayer, Inc., Independent Registered Public Accounting Firm. 24.1 Power of Attorney (See page 64). 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.101.INS XBRL Instance Document. 71Table of ContentsExhibits Exhibit Title101.SCH XBRL Taxonomy Extension Schema Document.101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.101.DEF XBRL Taxonomy Extension Definition Linkbase Document.101.LAB XBRL Taxonomy Extension Labels Linkbase Document.101.PRE XBRL Taxonomy Extension Presentation Linkbase Document. *Indicates a management contract or compensatory plan or arrangement.(1)Incorporated by reference to the Exhibits filed with the Registration Statement on Form SB-2 (No. 333-00320-LA) which was declared effective onFebruary 15, 1996.(2)Incorporated by reference to the Exhibits filed with the Registrant’s Report on Form 8-K on November 21, 2007.(3)Incorporated by reference to the Exhibits filed with the Registrant’s Report on Form 8-K on September 7, 2007.(4)Incorporated by reference to the Exhibits filed with the Registrant’s Report on Form 8-K on April 6, 2009.(5)Incorporated by reference to the Exhibits filed with the Registrant’s Report on Form 10-K for the year ended January 3, 2009.(6)Incorporated by reference to Exhibit 10.3 filed with the Registrant’s Registration Statement on Form S-8 on August 3, 2004.(7)Incorporated by reference to the definitive proxy statement on Schedule 14A filed on May 4, 2009.(8)Incorporated by reference to the appendix filed with the Registrant’s Proxy Statement for the Company’s 2004 Annual Meeting of Stockholders whichwas filed on April 30, 2004.(9)Incorporated by reference to Exhibit 99.1 filed with Registrant’s Registration Statement on Form S-8 on November 21, 2008.(10)Incorporated by reference to Exhibit 99.(d)(5) filed with the Registration Statement on Form SC TO-I July 30, 2009.(11)Incorporated by reference to Exhibit 99.1 filed with the Registrant’s Report on Form 8-K on February 21, 2012.(12)Incorporated by reference to the Registrant’s Report on Form 8-K on December 19, 2012.(13)Incorporated by reference to the Exhibits filed with the Registrant’s Report on Form 8-K on October 12, 2011.(14)Incorporated by reference to the Exhibits filed with the Registrant’s Report on Form 10-Q for the quarter ended July 2, 2011.(15)Incorporated by reference to the Exhibit 2.1 filed with the Registrant’s Report on Form 8-K on January 4, 2012.Trademark AcknowledgmentsIRIDEX, the IRIDEX logo, IRIS Medical, OcuLight, SmartKey, EndoProbe, and ScanLite are our registered trademarks. G-Probe, DioPexy, DioVet,TruFocus, TrueCW, DioLite, IQ 810, IQ 577, IQ 532, MicroPulse, TxCell, OtoProbe, Symphony, VariLite, EasyFit, Endoview, MoistAir and GreenTipproduct names are our trademarks. All other trademarks or trade names appearing in this Annual Report on Form 10-K are the property of their respectiveowners. 72Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized, in the City of Mountain View, State of California, on the 28th day of March 2013. IRIDEX CORPORATIONBy: /S/ WILLIAM M. MOORE William M. Moore President and Chief Executive OfficerKNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints William M. Moore andJames H. Mackaness, jointly and severally, their attorney-in-fact, each with full power of substitution, for him in any and all capacities, to sign on behalf ofthe undersigned any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith,with the Securities and Exchange Commission, and each of the undersigned does hereby ratifying and confirming all that each of said attorneys-in-fact, or hissubstitutes, may do or cause to be done by virtue hereof.Pursuant to the requirements of the Securities Act of 1934, this report has been signed by the following persons in the capacities and on the datesindicated. Signature Title Date/s/ William M. Moore(William M. Moore) President, Chief Executive Officer, and Chairman of the Board (PrincipalExecutive Officer) March 28, 2013/s/ James H. Mackaness(James H. Mackaness) Chief Financial Officer and Chief Operating Officer(Principal Financial and Accounting Officer) March 28, 2013/s/ Sanford Fitch(Sanford Fitch) Director March 28, 2013/s/ Garrett A. Garrettson(Garrett A. Garrettson) Director March 28, 2013/s/ James B. Hawkins(James B. Hawkins) Director March 28, 2013/s/ Ruëdiger Naumann-Etienne(Ruëdiger Naumann-Etienne) Director March 28, 2013/s/ Scott A. Shuda(Scott A. Shuda) Director March 28, 2013 73Table of ContentsExhibit Index Exhibits Exhibit Title 2.1(15) Asset Purchase Agreement by and among Cutera, Inc., Registrant, and U.S. Bank, National Association, as Escrow Agent, datedDecember 30, 2011. 3.1(1) Amended and Restated Certificate of Incorporation of Registrant. 3.2(2) Amended and Restated Bylaws of Registrant. 4.1(3) Certificate of Designation, Preferences and Rights of Series A Preferred Stock. 4.2(3) Investor Rights Agreement, dated as of August 31, 2007, by and among the Company, BlueLine Capital Partners, LP; BlueLineCapital Partners III, LP and BlueLine Capital Partners II, LP. 4.3(4) Amendment No. 1 to Investor Rights Agreement, dated as of March 31, 2009.10.1(1) Form of Indemnification Agreement with directors and officers.10.2(5) Lease Agreement dated December 6, 1996 by and between Zappettini Investment Co. and the Registrant, as amended pursuant toAmendment No. 1 dated September 15, 2003 and Amendment No. 2 dated December 22, 2008.10.3(6)* 1995 Director Option Plan.10.4(7)* 1998 Stock Plan.10.5(8)* 2005 Employee Stock Purchase Plan.10.6* 2008 Equity Incentive Plan.10.7(9)* Form of 2008 Equity Incentive Plan Option Agreement.10.8(10)* Form of Stand-alone stock option agreement.10.9(5)* Change of Control Severance Agreement by and between the Company and James Mackaness, dated January 22, 2008.10.10(3) Securities Purchase Agreement, dated August 31, 2007, by and among BlueLine Capital Partners, LP, BlueLine Capital Partners III,LP, BlueLine Capital Partners II, LP and IRIDEX Corporation.10.11(4) Common Stock Purchase Warrant, dated March 31, 2009, issued to BlueLine Capital Partners, LP.10.12(4) Common Stock Purchase Warrant, dated March 31, 2009, issued to BlueLine Capital Partners II, LP.10.13(4) Common Stock Purchase Warrant, dated March 31, 2009, issued to BlueLine Capital Partners II, LP.10.14(11)* 2012 Bonus Plan Summary.10.15(12)* 2013 Bonus Plan Summary.10.16(13)* Employment Agreement by and between Registrant and Dominik Beck, dated as of August 16, 2011.10.17(13)* Executive Transition Agreement by and between Registrant and Theodore A. Boutacoff, dated October 10, 2011.10.18(14)* Form of 2008 Equity Incentive Plan Restricted Stock Award Agreement.10.19(14)* Form of 2008 Equity Incentive Plan Restricted Stock Unit Award Agreement.10.20* Agreement and Release by and between Registrant and Dominik Beck, dated as of November 6, 2012. 74Table of ContentsExhibits Exhibit Title 10.21* ADEA Waiver Agreement and Release by and between Registrant and Dominik Beck, dated as of November 6, 2012. 21.1(1) Subsidiaries of Registrant. 23.1 Consent of Burr Pilger Mayer, Inc., Independent Registered Public Accounting Firm. 24.1 Power of Attorney (See page 64). 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Actof 2002. 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Actof 2002.101.INS XBRL Instance Document.101.SCH XBRL Taxonomy Extension Schema Document.101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.101.DEF XBRL Taxonomy Extension Definition Linkbase Document.101.LAB XBRL Taxonomy Extension Labels Linkbase Document.101.PRE XBRL Taxonomy Extension Presentation Linkbase Document. *Indicates a management contract or compensatory plan or arrangement.(1)Incorporated by reference to the Exhibits filed with the Registration Statement on Form SB-2 (No. 333-00320-LA) which was declared effective onFebruary 15, 1996.(2)Incorporated by reference to the Exhibits filed with the Registrant’s Report on Form 8-K on November 21, 2007.(3)Incorporated by reference to the Exhibits filed with the Registrant’s Report on Form 8-K on September 7, 2007.(4)Incorporated by reference to the Exhibits filed with the Registrant’s Report on Form 8-K on April 6, 2009.(5)Incorporated by reference to the Exhibits filed with the Registrant’s Report on Form 10-K for the year ended January 3, 2009.(6)Incorporated by reference to Exhibit 10.3 filed with the Registrant’s Registration Statement on Form S-8 on August 3, 2004.(7)Incorporated by reference to the definitive proxy statement on Schedule 14A filed on May 4, 2009.(8)Incorporated by reference to the appendix filed with the Registrant’s Proxy Statement for the Company’s 2004 Annual Meeting of Stockholders whichwas filed on April 30, 2004.(9)Incorporated by reference to Exhibit 99.1 filed with Registrant’s Registration Statement on Form S-8 on November 21, 2008.(10)Incorporated by reference to Exhibit 99.(d)(5) filed with the Registration Statement on Form SC TO-I July 30, 2009.(11)Incorporated by reference to Exhibit 99.1 filed with the Registrant’s Report on Form 8-K on February 21, 2012.(12)Incorporated by reference to the Registrant’s Report on Form 8-K on December 19, 2012.(13)Incorporated by reference to the Exhibits filed with the Registrant’s Report on Form 8-K on October 12, 2011.(14)Incorporated by reference to the Exhibits filed with the Registrant’s Report on Form 10-Q for the quarter ended July 2, 2011.(15)Incorporated by reference to the Exhibit 2.1 filed with the Registrant’s Report on Form 8-K on January 4, 2012. 75Exhibit 10.6IRIDEX CORPORATION2008 EQUITY INCENTIVE PLAN(as amended April 26, 2012)1. Purposes of the Plan. The purposes of this Plan are: • to attract and retain the best available personnel for positions of substantial responsibility, • to provide incentives to individuals who perform services to the Company, and • to promote the success of the Company’s business.The Plan permits the grant of Incentive Stock Options, Nonstatutory Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted StockUnits, Performance Units, Performance Shares and other stock or cash awards as the Administrator may determine.2. Definitions. As used herein, the following definitions will apply:(a) “Administrator” means the Board or any of its Committees as will be administering the Plan, in accordance with Section 4 of the Plan.(b) “Affiliate” means any corporation or any other entity (including, but not limited to, partnerships and joint ventures) controlling, controlled by,or under common control with the Company.(c) “Applicable Laws” means the requirements relating to the administration of equity-based awards under U.S. state corporate laws, U.S. federaland state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws ofany foreign country or jurisdiction where Awards are, or will be, granted under the Plan.(d) “Award” means, individually or collectively, a grant under the Plan of Options, Stock Appreciation Rights, Restricted Stock, Restricted StockUnits, Performance Units, Performance Shares and other stock or cash awards as the Administrator may determine.(e) “Award Agreement” means the written or electronic agreement setting forth the terms and provisions applicable to each Award granted underthe Plan. The Award Agreement is subject to the terms and conditions of the Plan.(f) “Board” means the Board of Directors of the Company.(g) “Cash Position” means as to any Performance Period, the Company’s level of cash, cash equivalents, available-for-sales securities, and thelong term portion of available-for-sales securities.(h) “Change in Control” means the occurrence of any of the following events:(i) A change in the ownership of the Company which occurs on the date that any one person, or more than one person acting as a group, (“Person”) acquires ownership of the stock of the Company that, together with the stock held by such Person, constitutes more than 50% of thetotal voting power of the stock of the Company; provided, however, that for purposes of this subsection (i), the acquisition of additional stock byany one Person, who is considered to own more than 50% of the total voting power of the stock of the Company will not be considered a Changein Control; or(ii) A change in the effective control of the Company which occurs on the date that a majority of members of the Board is replaced duringany twelve (12) month period by Directors whose appointment or election is not endorsed by a majority of the members of the Board prior to thedate of the appointment or election. For purposes of this clause (ii), if any Person is considered to effectivelycontrol the Company, the acquisition of additional control of the Company by the same Person will not be considered a Change in Control; or(iii) A change in the ownership of a substantial portion of the Company’s assets which occurs on the date that any Person acquires (or hasacquired during the twelve (12) month period ending on the date of the most recent acquisition by such person or persons) assets from theCompany that have a total gross fair market value equal to or more than 50% of the total gross fair market value of all of the assets of theCompany immediately prior to such acquisition or acquisitions; provided, however, that for purposes of this subsection (iii), the following willnot constitute a change in the ownership of a substantial portion of the Company’s assets: (A) a transfer to an entity that is controlled by theCompany’s stockholders immediately after the transfer, or (B) a transfer of assets by the Company to: (1) a stockholder of the Company(immediately before the asset transfer) in exchange for or with respect to the Company’s stock, (2) an entity, 50% or more of the total value orvoting power of which is owned, directly or indirectly, by the Company, (3) a Person, that owns, directly or indirectly, 50% or more of the totalvalue or voting power of all the outstanding stock of the Company, or (4) an entity, at least 50% of the total value or voting power of which isowned, directly or indirectly, by a Person described in this subsection (iii)(B)(3). For purposes of this subsection (iii), gross fair market valuemeans the value of the assets of the Company, or the value of the assets being disposed of, determined without regard to any liabilities associatedwith such assets.For purposes of this Section 2(h), persons will be considered to be acting as a group if they are owners of a corporation that enters into a merger,consolidation, purchase or acquisition of stock, or similar business transaction with the Company.(i) “Code” means the Internal Revenue Code of 1986, as amended. Any reference to a section of the Code herein will be a reference to anysuccessor or amended section of the Code.(j) “Committee” means a committee of Directors or of other individuals satisfying Applicable Laws appointed by the Board in accordance withSection 4 hereof.(k) “Common Stock” means the common stock of the Company.(l) “Company” means IRIDEX Corporation a Delaware corporation, or any successor thereto.(m) “Consultant” means any person, including an advisor, engaged by the Company or its Affiliates to render services to such entity.(n) “Determination Date” means the latest possible date that will not jeopardize the qualification of an Award granted under the Plan as“performance-based compensation” under Section 162(m) of the Code.(o) “Director” means a member of the Board.(p) “Disability” means total and permanent disability as defined in Section 22(e)(3) of the Code, provided that in the case of Awards other thanIncentive Stock Options, the Administrator in its discretion may determine whether a permanent and total disability exists in accordance with uniformand non-discriminatory standards adopted by the Administrator from time to time.(q) “Earnings Per Share” means as to any Performance Period, the Company’s or a business unit’s Net Income, divided by a weighted averagenumber of Common Stock outstanding and dilutive common equivalent Shares deemed outstanding.(r) “Employee” means any person, including Officers and Directors, employed by the Company or its Affiliates. Neither service as a Director norpayment of a director’s fee by the Company will be sufficient to constitute “employment” by the Company.(s) “Exchange Act” means the Securities Exchange Act of 1934, as amended.(t) “Fair Market Value” means, as of any date, the value of the Common Stock as the Administrator may determine in good faith by reference tothe price of such stock on any established stock exchange or a 2national market system on the day of determination if the Common Stock is so listed on any established stock exchange or a national market system. Ifthe Common Stock is not listed on any established stock exchange or a national market system, the value of the Common Stock will be determined asthe Administrator may determine in good faith.(u) “Fiscal Year” means the fiscal year of the Company.(v) “Incentive Stock Option” means an Option that by its terms qualifies and is otherwise intended to qualify as an incentive stock option withinthe meaning of Section 422 of the Code and the regulations promulgated thereunder.(w) Individual Objectives” means as to a Participant for any Performance Period, the objective and measurable goals set by a “management byobjectives” process and approved by the Administrator (in its discretion).(x) “Net Income” means as to any Performance Period, the Company’s or a business unit’s income after taxes.(y) “Nonstatutory Stock Option” means an Option that by its terms does not qualify or is not intended to qualify as an Incentive Stock Option.(z) “Officer” means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules andregulations promulgated thereunder.(aa) “Operating Cash Flow” means as to any Performance Period, the Company’s or a business unit’s sum of Net Income plus depreciation andamortization plus changes in working capital comprised of accounts receivable, inventories, other current assets, trade accounts payable, accruedexpenses, product warranty, advance payments from customers and long-term accrued expenses.(bb) “Operating Income” means as to any Performance Period, the Company’s or a business unit’s income from operations but excluding anyunusual items or non-operating or non-cash related expenses.(cc) “Option” means a stock option granted pursuant to Section 6 of the Plan.(dd) “Parent” means a “parent corporation,” whether now or hereafter existing, as defined in Section 424(e) of the Code.(ee) “Participant” means the holder of an outstanding Award.(ff) “Performance Goals” will have the meaning set forth in Section 11 of the Plan.(gg) “Performance Period” means any Fiscal Year or such other period as determined by the Administrator in its sole discretion.(hh) “Performance Share” means an Award denominated in Shares which may be earned in whole or in part upon attainment of PerformanceGoals or other vesting criteria as the Administrator may determine pursuant to Section 10.(ii) “Performance Unit” means an Award which may be earned in whole or in part upon attainment of Performance Goals or other vesting criteriaas the Administrator may determine and which may be settled for cash, Shares or other securities or a combination of the foregoing pursuant toSection 10.(jj) “Period of Restriction” means the period during which the transfer of Shares of Restricted Stock are subject to restrictions and therefore, theShares are subject to a substantial risk of forfeiture. Such restrictions may be based on the passage of time, the achievement of target levels ofperformance, or the occurrence of other events as determined by the Administrator.(kk) “Plan” means this 2008 Equity Incentive Plan.(ll) “Restricted Stock” means Shares issued pursuant to an Award of Restricted Stock under Section 8 of the Plan, or issued pursuant to the earlyexercise of an Option. 3(mm) “Restricted Stock Unit” means a bookkeeping entry representing an amount equal to the Fair Market Value of one Share, granted pursuantto Section 9. Each Restricted Stock Unit represents an unfunded and unsecured obligation of the Company.(nn) “Return on Assets” means as to any Performance Period, the percentage equal to the Company’s or a business unit’s Operating Income,divided by average net Company or business unit, as applicable, assets.(oo) “Return on Equity” means as to any Performance Period, the percentage equal to the Company’s Net Income divided by average stockholder’sequity.(pp) “Return on Sales” means as to any Performance Period, the percentage equal to the Company’s or a business unit’s Operating Income,divided by the Company’s or the business unit’s, as applicable, revenue.(qq) “Revenue” means as to any Performance Period, the Company’s or business unit’s net sales.(rr) “Rule 16b-3” means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised withrespect to the Plan.(ss) “Section 16(b)” means Section 16(b) of the Exchange Act.(tt) “Service Provider” means an Employee, Director, or Consultant.(uu) “Share” means a share of the Common Stock, as adjusted in accordance with Section 14 of the Plan.(vv) “Stock Appreciation Right” means an Award, granted alone or in connection with an Option, that pursuant to Section 7 is designated as aStock Appreciation Right.(ww) “Subsidiary” means a “subsidiary corporation,” whether now or hereafter existing, as defined in Section 424(f) of the Code.(xx) “Total Stockholder Return” means as to any Performance Period, the total return (change in share price plus reinvestment of any dividends)of a Share.3. Stock Subject to the Plan.(a) Subject to the provisions of Section 14 of the Plan, the maximum aggregate number of Shares that may be awarded and sold under the Plan is700,000 Shares, plus any Shares subject to stock options or similar awards granted under the Company’s 1998 Stock Plan (the “1998 Plan”) thatexpire or otherwise terminate without having been exercised in full and Shares issued pursuant to awards granted under the 1998 Plan that are forfeitedto or repurchased by the Company on or after the date the 1998 Plan expires, with the maximum number of Shares to be added to the Plan from the1998 Plan to be no more than 1,367,361 Shares. The Shares may be authorized, but unissued, or reacquired Common Stock.(b) Full Value Awards. Any Shares subject to Options or Stock Appreciation Rights will be counted against the numerical limits of this Section 3as one Share for every Share subject thereto. Any Shares subject to Awards of Restricted Stock, Restricted Stock Units, Performance Shares orPerformance Units with a per share or unit purchase price lower than 100% of Fair Market Value on the date of grant will be counted against thenumerical limits of this Section 3 as two (2) Shares for every one Share subject thereto. To the extent that a Share that was subject to an Award thatcounted as two (2) Shares against the Plan reserve pursuant to the preceding sentence is recycled back into the Plan under the next paragraph of thisSection 3, the Plan will be credited with two (2) Shares.(c) Lapsed Awards. If an Award expires or becomes unexercisable without having been exercised in full, or, with respect to Restricted Stock,Restricted Stock Units, Performance Shares or Performance Units, is forfeited to or repurchased by the Company, the unpurchased Shares (or forAwards other than Options and Stock Appreciation Rights, the forfeited or repurchased Shares) which were subject thereto will become available forfuture grant or sale under the Plan (unless the Plan has terminated). Upon exercise of a Stock Appreciation Right settled in Shares, the gross number ofShares covered by the portion of the Award so 4exercised will cease to be available under the Plan. Shares that have actually been issued under the Plan under any Award will not be returned to the Planand will not become available for future distribution under the Plan; provided, however, that if unvested Shares of Restricted Stock, Restricted StockUnits, Performance Shares or Performance Units are repurchased by the Company or are forfeited to the Company, such Shares will become availablefor future grant under the Plan. Shares used to pay the tax and/or exercise price of an Award will not become available for future grant or sale under thePlan. To the extent an Award under the Plan is paid out in cash rather than Shares, such cash payment will not reduce the number of Shares availablefor issuance under the Plan. Notwithstanding the foregoing provisions of this Section 3(c), subject to adjustment provided in Section 14, the maximumnumber of Shares that may be issued upon the exercise of Incentive Stock Options will equal the aggregate Share number stated in Section 3(a), plus, tothe extent allowable under Section 422 of the Code, any Shares that become available for issuance under the Plan under this Section 3(c).(d) Share Reserve. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as will besufficient to satisfy the requirements of the Plan.4. Administration of the Plan.(a) Procedure.(i) Multiple Administrative Bodies. Different Committees with respect to different groups of Service Providers may administer the Plan.(ii) Section 162(m). To the extent that the Administrator determines it to be desirable to qualify Awards granted hereunder as “performance-based compensation” within the meaning of Section 162(m) of the Code, the Plan will be administered by a Committee of two (2) or more “outsidedirectors” within the meaning of Section 162(m) of the Code.(iii) Rule 16b-3. To the extent desirable to qualify transactions hereunder as exempt under Rule 16b-3, the transactions contemplatedhereunder will be structured to satisfy the requirements for exemption under Rule 16b-3.(iv) Other Administration. Other than as provided above, the Plan will be administered by (A) the Board or (B) a Committee, whichcommittee will be constituted to satisfy Applicable Laws.(b) Powers of the Administrator. Subject to the provisions of the Plan, and in the case of a Committee, subject to the specific duties delegated bythe Board to such Committee, the Administrator will have the authority, in its discretion:(i) to determine the Fair Market Value;(ii) to select the Service Providers to whom Awards may be granted hereunder;(iii) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Award granted hereunder;(iv) to construe and interpret the terms of the Plan and Awards granted pursuant to the Plan;(v) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plansestablished for the purpose of satisfying applicable foreign laws;(vi) to modify or amend each Award (subject to Section 19(c) of the Plan). Notwithstanding the previous sentence, the Administrator maynot, without the approval of the Company’s stockholders: (A) modify or amend an Option or Stock Appreciation Right to reduce the exercise priceof such Option or Stock Appreciation Right after it has been granted (except for adjustments made pursuant to Section 14), or (B) cancel anyoutstanding Option or Stock Appreciation Right and replace it with a new Option or Stock Appreciation Right with a lower exercise price; 5(vii) to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Award previously grantedby the Administrator;(viii) to allow a Participant to defer the receipt of the payment of cash or the delivery of Shares that would otherwise be due to suchParticipant under an Award pursuant to such procedures as the Administrator may determine; and(ix) to make all other determinations deemed necessary or advisable for administering the Plan.(c) Effect of Administrator’s Decision. The Administrator’s decisions, determinations, and interpretations will be final and binding on allParticipants and any other holders of Awards.5. Eligibility. Nonstatutory Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, Performance Shares and PerformanceUnits as the Administrator determines may be granted to Service Providers. Incentive Stock Options may be granted only to Employees of the Company orany Parent or Subsidiary of the Company.6. Stock Options.(a) Limitations.(i) Each Option will be designated in the Award Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However,notwithstanding such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Optionsare exercisable for the first time by the Participant during any calendar year (under all plans of the Company and any Parent or Subsidiary)exceeds $100,000 (U.S.), such Options will be treated as Nonstatutory Stock Options. For purposes of this Section 6(a), Incentive Stock Optionswill be taken into account in the order in which they were granted. The Fair Market Value of the Shares will be determined as of the time theOption with respect to such Shares is granted.(ii) The Administrator will have complete discretion to determine the number of Shares subject to an Option granted to any Participant,provided that during any Fiscal Year, no Participant will be granted an Option covering more than 200,000 Shares. Notwithstanding the limitationin the previous sentence, in connection with his or her initial service as an Employee, an Employee may be granted Options covering up to anadditional 400,000 Shares.(b) Term of Option. The Administrator will determine the term of each Option in its sole discretion; provided, however, that the term will be nomore than ten (10) years from the date of grant thereof. Moreover, in the case of an Incentive Stock Option granted to a Participant who, at the time theIncentive Stock Option is granted, owns stock representing more than 10% of the total combined voting power of all classes of stock of the Company orany Parent or Subsidiary, the term of the Incentive Stock Option will be five (5) years from the date of grant or such shorter term as may be provided inthe Award Agreement.(c) Option Exercise Price and Consideration.(i) Exercise Price. The per share exercise price for the Shares to be issued pursuant to exercise of an Option will be determined by theAdministrator, but will be no less than 100% of the Fair Market Value per Share on the date of grant. In addition, in the case of an Incentive StockOption granted to an Employee who, at the time the Incentive Stock Option is granted, owns stock representing more than 10% of the voting powerof all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price will be no less than 110% of the Fair MarketValue per Share on the date of grant. Notwithstanding the foregoing provisions of this Section 6(c), Options may be granted with a per Shareexercise price of less than 100% of the Fair Market Value per Share on the date of grant pursuant to a transaction described in, and in a mannerconsistent with, Section 424(a) of the Code.(ii) Waiting Period and Exercise Dates. At the time an Option is granted, the Administrator will fix the period within which the Optionmay be exercised and will determine any conditions that must be satisfied before the Option may be exercised. 6(iii) Form of Consideration. The Administrator will determine the acceptable form(s) of consideration for exercising an Option, includingthe method of payment, to the extent permitted by Applicable Laws.(d) Exercise of Option.(i) Procedure for Exercise; Rights as a Stockholder. Any Option granted hereunder will be exercisable according to the terms of the Planand at such times and under such conditions as determined by the Administrator and set forth in the Award Agreement. An Option may not beexercised for a fraction of a Share.An Option will be deemed exercised when the Company receives: (i) notice of exercise (in such form as the Administrator specifies from timeto time) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised (togetherwith any applicable withholding taxes). No adjustment will be made for a dividend or other right for which the record date is prior to the date theShares are issued, except as provided in Section 14 of the Plan.(ii) Termination of Relationship as a Service Provider. If a Participant ceases to be a Service Provider, other than upon the Participant’stermination as the result of the Participant’s death or Disability, the Participant may exercise his or her Option within such period of time as isspecified in the Award Agreement to the extent that the Option is vested on the date of termination (but in no event later than the expiration of theterm of such Option as set forth in the Award Agreement). In the absence of a specified time in the Award Agreement, the Option will remainexercisable for three (3) months following the Participant’s termination. Unless otherwise provided by the Administrator, if on the date oftermination the Participant is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option will revert to thePlan. If after termination the Participant does not exercise his or her Option within the time specified by the Administrator, the Option willterminate, and the Shares covered by such Option will revert to the Plan.(iii) Disability of Participant. If a Participant ceases to be a Service Provider as a result of the Participant’s Disability, the Participant mayexercise his or her Option within such period of time as is specified in the Award Agreement to the extent the Option is vested on the date oftermination (but in no event later than the expiration of the term of such Option as set forth in the Award Agreement). In the absence of a specifiedtime in the Award Agreement, the Option will remain exercisable for twelve (12) months following the Participant’s termination. Unless otherwiseprovided by the Administrator, if on the date of termination the Participant is not vested as to his or her entire Option, the Shares covered by theunvested portion of the Option will revert to the Plan. If after termination the Participant does not exercise his or her Option within the timespecified herein, the Option will terminate, and the Shares covered by such Option will revert to the Plan.(iv) Death of Participant. If a Participant dies while a Service Provider, the Option may be exercised following the Participant’s deathwithin such period of time as is specified in the Award Agreement to the extent that the Option is vested on the date of death (but in no event maythe option be exercised later than the expiration of the term of such Option as set forth in the Award Agreement), by the Participant’s designatedbeneficiary, provided such beneficiary has been designated prior to Participant’s death in a form acceptable to the Administrator. If no suchbeneficiary has been designated by the Participant, then such Option may be exercised by the personal representative of the Participant’s estate orby the person(s) to whom the Option is transferred pursuant to the Participant’s will or in accordance with the laws of descent and distribution. Inthe absence of a specified time in the Award Agreement, the Option will remain exercisable for twelve (12) months following Participant’s death.Unless otherwise provided by the Administrator, if at the time of death Participant is not vested as to his or her entire Option, the Shares coveredby the unvested portion of the Option will immediately revert to the Plan. If the Option is not so exercised within the time specified herein, theOption will terminate, and the Shares covered by such Option will revert to the Plan. 7(v) Other Termination. A Participant’s Award Agreement may also provide that if the exercise of the Option following the termination ofParticipant’s status as a Service Provider (other than upon the Participant’s death or Disability) would result in liability under Section 16(b), thenthe Option will terminate on the earlier of (A) the expiration of the term of the Option set forth in the Award Agreement, or (B) the 10th day after thelast date on which such exercise would result in such liability under Section 16(b). Finally, a Participant’s Award Agreement may also providethat if the exercise of the Option following the termination of the Participant’s status as a Service Provider (other than upon the Participant’s deathor Disability) would be prohibited at any time solely because the issuance of Shares would violate the registration requirements under theSecurities Act, then the Option will terminate on the earlier of (A) the expiration of the term of the Option, or (B) the expiration of a period of three(3) months after the termination of the Participant’s status as a Service Provider during which the exercise of the Option would not be in violationof such registration requirements.7. Stock Appreciation Rights.(a) Grant of Stock Appreciation Rights. Subject to the terms and conditions of the Plan, a Stock Appreciation Right may be granted to ServiceProviders at any time and from time to time as will be determined by the Administrator, in its sole discretion.(b) Number of Shares. The Administrator will have complete discretion to determine the number of Stock Appreciation Rights granted to anyParticipant, provided that during any Fiscal Year, no Participant will be granted Stock Appreciation Rights covering more than 200,000 Shares.Notwithstanding the limitation in the previous sentence, in connection with his or her initial service as an Employee, an Employee may be granted StockAppreciation Rights covering up to an additional 400,000 Shares.(c) Exercise Price and Other Terms. The Administrator, subject to the provisions of the Plan, will have complete discretion to determine theterms and conditions of Stock Appreciation Rights granted under the Plan, provided, however, that the exercise price will be not less than 100% of theFair Market Value of a Share on the date of grant.(d) Stock Appreciation Right Agreement. Each Stock Appreciation Right grant will be evidenced by an Award Agreement that will specify theexercise price, the term of the Stock Appreciation Right, the conditions of exercise, and such other terms and conditions as the Administrator, in its solediscretion, will determine.(e) Expiration of Stock Appreciation Rights. A Stock Appreciation Right granted under the Plan will expire upon the date determined by theAdministrator, in its sole discretion, and set forth in the Award Agreement; provided, however, that the term will be no more than ten (10) years from thedate of grant thereof. Notwithstanding the foregoing, the rules of Section 6(d) also will apply to Stock Appreciation Rights.(f) Payment of Stock Appreciation Right Amount. Upon exercise of a Stock Appreciation Right, a Participant will be entitled to receive paymentfrom the Company in an amount determined by multiplying:(i) The difference between the Fair Market Value of a Share on the date of exercise over the exercise price; times(ii) The number of Shares with respect to which the Stock Appreciation Right is exercised.At the discretion of the Administrator, the payment upon Stock Appreciation Right exercise may be in cash, in Shares of equivalent value, or in somecombination thereof.8. Restricted Stock.(a) Grant of Restricted Stock. Subject to the terms and provisions of the Plan, the Administrator, at any time and from time to time, may grantShares of Restricted Stock to Service Providers in such amounts as the Administrator, in its sole discretion, will determine. 8(b) Restricted Stock Agreement. Each Award of Restricted Stock will be evidenced by an Award Agreement that will specify the Period ofRestriction, the number of Shares granted, and such other terms and conditions as the Administrator, in its sole discretion, will determine.Notwithstanding the foregoing sentence, for restricted stock intended to qualify as “performance-based compensation” within the meaning ofSection 162(m) of the Code, during any Fiscal Year no Participant will receive more than an aggregate of 150,000 Shares of Restricted Stock.Notwithstanding the foregoing limitation, in connection with his or her initial service as an Employee, for restricted stock intended to qualify as“performance-based compensation” within the meaning of Section 162(m) of the Code, an Employee may be granted an aggregate of up to an additional150,000 Shares of Restricted Stock. Unless the Administrator determines otherwise, Shares of Restricted Stock will be held by the Company as escrowagent until the restrictions on such Shares have lapsed.(c) Transferability. Except as provided in this Section 8, Shares of Restricted Stock may not be sold, transferred, pledged, assigned, or otherwisealienated or hypothecated until the end of the applicable Period of Restriction.(d) Other Restrictions. The Administrator, in its sole discretion, may impose such other restrictions on Shares of Restricted Stock as it maydeem advisable or appropriate.(e) Removal of Restrictions. Except as otherwise provided in this Section 8, Shares of Restricted Stock covered by each Restricted Stock grantmade under the Plan will be released from escrow as soon as practicable after the last day of the Period of Restriction. The Administrator, in itsdiscretion, may accelerate the time at which any restrictions will lapse or be removed.(f) Voting Rights. During the Period of Restriction, Service Providers holding Shares of Restricted Stock granted hereunder may exercise fullvoting rights with respect to those Shares, unless the Administrator determines otherwise.(g) Dividends and Other Distributions. During the Period of Restriction, Service Providers holding Shares of Restricted Stock will be entitled toreceive all dividends and other distributions paid with respect to such Shares unless otherwise provided in the Award Agreement. If any such dividendsor distributions are paid in Shares, the Shares will be subject to the same restrictions on transferability and forfeitability as the Shares of RestrictedStock with respect to which they were paid.(h) Return of Restricted Stock to Company. On the date set forth in the Award Agreement, the Restricted Stock for which restrictions have notlapsed will revert to the Company and again will become available for grant under the Plan.(i) Section 162(m) Performance Restrictions. For purposes of qualifying grants of Restricted Stock as “performance-based compensation” underSection 162(m) of the Code, the Administrator, in its discretion, may set restrictions based upon the achievement of Performance Goals. ThePerformance Goals will be set by the Administrator on or before the Determination Date. In granting Restricted Stock which is intended to qualify underSection 162(m) of the Code, the Administrator will follow any procedures determined by it from time to time to be necessary or appropriate to ensurequalification of the Award under Section 162(m) of the Code (e.g., in determining the Performance Goals).9. Restricted Stock Units.(a) Grant. Restricted Stock Units may be granted at any time and from time to time as determined by the Administrator. Each Restricted StockUnit grant will be evidenced by an Award Agreement that will specify such other terms and conditions as the Administrator, in its sole discretion, willdetermine, including all terms, conditions, and restrictions related to the grant, the number of Restricted Stock Units and the form of payout, which,subject to Section 9(d), may be left to the discretion of the Administrator. Notwithstanding anything to the contrary in this subsection (a), for RestrictedStock Units intended to qualify as “performance-based compensation” within the meaning of Section 162(m) of the Code, during any Fiscal Year of theCompany, no Participant will receive more than an aggregate of 150,000 Restricted 9Stock Units. Notwithstanding the limitation in the previous sentence, for Restricted Stock Units intended to qualify as “performance-basedcompensation” within the meaning of Section 162(m) of the Code, in connection with his or her initial service as an Employee, an Employee may begranted an aggregate of up to an additional 150,000 Restricted Stock Units.(b) Vesting Criteria and Other Terms. The Administrator will set vesting criteria in its discretion, which, depending on the extent to which thecriteria are met, will determine the number of Restricted Stock Units that will be paid out to the Participant. After the grant of Restricted Stock Units, theAdministrator, in its sole discretion, may reduce or waive any restrictions for such Restricted Stock Units. Each Award of Restricted Stock Units willbe evidenced by an Award Agreement that will specify the vesting criteria, and such other terms and conditions as the Administrator, in its solediscretion will determine. The Administrator, in its discretion, may accelerate the time at which any restrictions will lapse or be removed.(c) Earning Restricted Stock Units. Upon meeting the applicable vesting criteria, the Participant will be entitled to receive a payout as specified inthe Award Agreement.(d) Form and Timing of Payment. Payment of earned Restricted Stock Units will be made as soon as practicable after the date(s) set forth in theAward Agreement. The Administrator, in its sole discretion, may pay earned Restricted Stock Units in cash, Shares, or a combination thereof. Sharesrepresented by Restricted Stock Units that are fully paid in cash again will be available for grant under the Plan.(e) Cancellation. On the date set forth in the Award Agreement, all unearned Restricted Stock Units will be forfeited to the Company.(f) Section 162(m) Performance Restrictions. For purposes of qualifying grants of Restricted Stock Units as “performance-basedcompensation” under Section 162(m) of the Code, the Administrator, in its discretion, may set restrictions based upon the achievement of PerformanceGoals. The Performance Goals will be set by the Administrator on or before the Determination Date. In granting Restricted Stock Units which areintended to qualify under Section 162(m) of the Code, the Administrator will follow any procedures determined by it from time to time to be necessaryor appropriate to ensure qualification of the Award under Section 162(m) of the Code (e.g., in determining the Performance Goals).10. Performance Units and Performance Shares.(a) Grant of Performance Units/Shares. Performance Units and Performance Shares may be granted to Service Providers at any time and fromtime to time, as will be determined by the Administrator, in its sole discretion. The Administrator will have complete discretion in determining thenumber of Performance Units/Shares granted to each Participant provided that during any Fiscal Year, for Performance Units or Performance Sharesintended to qualify as “performance-based compensation” within the meaning of Section 162(m) of the Code, (i) no Participant will receive PerformanceUnits having an initial value greater than $1,000,000, and (ii) no Participant will receive more than 150,000 Performance Shares. Notwithstanding theforegoing limitation, for Performance Shares intended to qualify as “performance-based compensation” within the meaning of Section 162(m) of theCode, in connection with his or her initial service, a Service Provider may be granted up to an additional 150,000 Performance Shares.(b) Value of Performance Units/Shares. Each Performance Unit will have an initial value that is established by the Administrator on or beforethe date of grant. Each Performance Share will have an initial value equal to the Fair Market Value of a Share on the date of grant.(c) Performance Objectives and Other Terms. The Administrator will set performance objectives or other vesting provisions. The Administratormay set vesting criteria based upon the achievement of Company-wide, business unit, or individual goals (including, but not limited to, continuedemployment), or any other basis determined by the Administrator in its discretion. Each Award of Performance Units/Shares will be evidenced by anAward Agreement that will specify the Performance Period, and such other terms and conditions as the Administrator, in its sole discretion, willdetermine. After the grant of Performance 10Units/Shares, the Administrator, in its sole discretion, may reduce or waive any restrictions for such Awards.(d) Earning of Performance Units/Shares. After the applicable Performance Period has ended, the holder of Performance Units/Shares will beentitled to receive a payout of the number of Performance Units/Shares earned by the Participant over the Performance Period, to be determined as afunction of the extent to which the corresponding performance objectives or other vesting provisions have been achieved. After the grant of a PerformanceUnit/Share, the Administrator, in its sole discretion, may reduce or waive any performance objectives or other vesting provisions for such PerformanceUnit/Share.(e) Form and Timing of Payment of Performance Units/Shares. Payment of earned Performance Units/Shares will be made as soon aspracticable after the expiration of the applicable Performance Period. The Administrator, in its sole discretion, may pay earned PerformanceUnits/Shares in the form of cash, in Shares (which have an aggregate Fair Market Value equal to the value of the earned Performance Units/Shares at theclose of the applicable Performance Period) or in a combination thereof.(f) Cancellation of Performance Units/Shares. On the date set forth in the Award Agreement, all unearned or unvested Performance Units/Shareswill be forfeited to the Company, and again will be available for grant under the Plan.(g) Section 162(m) Performance Restrictions. For purposes of qualifying grants of Performance Units/Shares as “performance-basedcompensation” under Section 162(m) of the Code, the Administrator, in its discretion, may set restrictions based upon the achievement of PerformanceGoals. The Performance Goals will be set by the Administrator on or before the Determination Date. In granting Performance Units/Shares which areintended to qualify under Section 162(m) of the Code, the Administrator will follow any procedures determined by it from time to time to be necessaryor appropriate to ensure qualification of the Award under Section 162(m) of the Code (e.g., in determining the Performance Goals).11. Performance-Based Compensation Under Code Section 162(m).(a) General. If the Administrator, in its discretion, decides to grant an Award intended to qualify as “performance-based compensation” underCode Section 162(m), the provisions of this Section 11 will control over any contrary provision in the Plan; provided, however, that the Administratormay in its discretion grant Awards that are not intended to qualify as “performance-based compensation” under Section 162(m) of the Code to suchParticipants that are based on Performance Goals or other specific criteria or goals but that do not satisfy the requirements of this Section 11.(b) Performance Goals. The granting and/or vesting of Awards of Restricted Stock, Restricted Stock Units, Performance Shares andPerformance Units and other incentives under the Plan may be made subject to the attainment of performance goals relating to one or more businesscriteria within the meaning of Code Section 162(m) and may provide for a targeted level or levels of achievement (“Performance Goals”) including(i) Cash Position, (ii) Earnings Per Share, (iii) Individual Objectives, (iv) Net Income, (v) Operating Cash Flow, (vi) Operating Income, (vii) Return onAssets, (viii) Return on Equity, (ix) Return on Sales, (x) Revenue, and (xi) Total Stockholder Return. Any Performance Goals may be used to measurethe performance of the Company as a whole or a business unit of the Company and may be measured relative to a peer group or index. The PerformanceGoals may differ from Participant to Participant and from Award to Award. Prior to the Determination Date, the Administrator will determine whetherany significant element(s) will be included in or excluded from the calculation of any Performance Goal with respect to any Participant.(c) Procedures. To the extent necessary to comply with the performance-based compensation provisions of Code Section 162(m), with respect toany Award granted subject to Performance Goals, within the first twenty-five percent (25%) of the Performance Period, but in no event more than ninety(90) days following the commencement of any Performance Period (or such other time as may be required or permitted by Code Section 162(m)), theAdministrator will, in writing, (i) designate one or more Participants to whom an Award will be made, (ii) select the Performance Goals applicable to the 11Performance Period, (iii) establish the Performance Goals, and amounts of such Awards, as applicable, which may be earned for such PerformancePeriod, and (iv) specify the relationship between Performance Goals and the amounts of such Awards, as applicable, to be earned by each Participant forsuch Performance Period. Following the completion of each Performance Period, the Administrator will certify in writing whether the applicablePerformance Goals have been achieved for such Performance Period. In determining the amounts earned by a Participant, the Administrator will have theright to reduce or eliminate (but not to increase) the amount payable at a given level of performance to take into account additional factors that theAdministrator may deem relevant to the assessment of individual or corporate performance for the Performance Period. A Participant will be eligible toreceive payment pursuant to an Award for a Performance Period only if the Performance Goals for such period are achieved.(d) Additional Limitations. Notwithstanding any other provision of the Plan, any Award which is granted to a Participant and is intended toconstitute qualified performance based compensation under Code Section 162(m) will be subject to any additional limitations set forth in the Code(including any amendment to Section 162(m)) or any regulations and ruling issued thereunder that are requirements for qualification as qualifiedperformance-based compensation as described in Section 162(m) of the Code, and the Plan will be deemed amended to the extent necessary to conform tosuch requirements.12. Leaves of Absence. Unless the Administrator provides otherwise, vesting of Awards granted hereunder will be suspended during any unpaid leaveof absence. A Service Provider will not cease to be an Employee in the case of (i) any leave of absence approved by the Company, or (ii) transfers betweenlocations of the Company or between the Company, its Parent, or any Subsidiary. For purposes of Incentive Stock Options, no such leave may exceed three(3) months, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absenceapproved by the Company is not so guaranteed, then six (6) months and one day following the commencement of such leave any Incentive Stock Option heldby the Participant will cease to be treated as an Incentive Stock Option and will be treated for tax purposes as a Nonstatutory Stock Option.13. Transferability of Awards. Unless determined otherwise by the Administrator, an Award may not be sold, pledged, assigned, hypothecated,transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of theParticipant, only by the Participant. If the Administrator makes an Award transferable, such Award will contain such additional terms and conditions as theAdministrator deems appropriate.14. Adjustments; Dissolution or Liquidation; Merger or Change in Control.(a) Adjustments. In the event that any dividend or other distribution (whether in the form of cash, Shares, other securities, or other property),recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange ofShares or other securities of the Company, or other change in the corporate structure of the Company affecting the Shares occurs, the Administrator, inorder to prevent diminution or enlargement of the benefits or potential benefits intended to be made available under the Plan, will adjust the number andclass of Shares that may be delivered under the Plan and/or the number, class, and price of Shares covered by each outstanding Award, and thenumerical Share limits set forth in Sections 3, 6, 7, 8, 9, and 10.(b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Administrator will notify eachParticipant as soon as practicable prior to the effective date of such proposed transaction. To the extent it has not been previously exercised, an Awardwill terminate immediately prior to the consummation of such proposed action.(c) Change in Control. In the event of a merger or Change in Control, each outstanding Award will be treated as the Administrator determines,including, without limitation, that each Award will be assumed or an equivalent option or right substituted by the successor corporation or a Parent orSubsidiary of the successor corporation (the “Successor Corporation”). The Administrator will not be required to treat all Awards similarly in thetransaction. 12In the event that the Successor Corporation does not assume or substitute for the Award, the Participant will fully vest in and have the right to exercise allof his or her outstanding Options and Stock Appreciation Rights, including Shares as to which such Awards would not otherwise be vested or exercisable, allrestrictions on Restricted Stock will lapse, and, with respect to Restricted Stock Units, Performance Shares and Performance Units, all Performance Goals orother vesting criteria will be deemed achieved at target levels and all other terms and conditions met. In addition, if an Option or Stock Appreciation Right isnot assumed or substituted for in the event of a Change in Control, the Administrator will notify the Participant in writing or electronically that the Option orStock Appreciation Right will be fully vested and exercisable for a period of time determined by the Administrator in its sole discretion, and the Option orStock Appreciation Right will terminate upon the expiration of such period.For the purposes of this subsection (c), an Award will be considered assumed if, following the Change in Control, the Award confers the right topurchase or receive, for each Share subject to the Award immediately prior to the Change in Control, the consideration (whether stock, cash, or other securitiesor property) or, in the case of a Stock Appreciation Right upon the exercise of which the Administrator determines to pay cash or a Performance Share orPerformance Unit which the Administrator can determine to pay in cash, the fair market value of the consideration received in the merger or Change in Controlby holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type ofconsideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the Change in Controlis not solely common stock of the Successor Corporation, the Administrator may, with the consent of the Successor Corporation, provide for the considerationto be received upon the exercise of an Option or Stock Appreciation Right or upon the payout of a Performance Share or Performance Unit, for each Sharesubject to such Award (or in the case of Performance Units, the number of implied shares determined by dividing the value of the Performance Units by theper share consideration received by holders of Common Stock in the Change in Control), to be solely common stock of the Successor Corporation equal infair market value to the per share consideration received by holders of Common Stock in the Change in Control.Notwithstanding anything in this Section 14(c) to the contrary, an Award that vests, is earned or paid-out upon the satisfaction of one or morePerformance Goals will not be considered assumed if the Company or its successor modifies any of such Performance Goals without the Participant’s consent;provided, however, a modification to such Performance Goals only to reflect the Successor Corporation’s post-Change in Control corporate structure will notbe deemed to invalidate an otherwise valid Award assumption.15. Tax Withholding(a) Withholding Requirements. Prior to the delivery of any Shares or cash pursuant to an Award (or exercise thereof), the Company will have thepower and the right to deduct or withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy federal, state, local, foreignor other taxes (including the Participant’s FICA obligation) required to be withheld with respect to such Award (or exercise thereof).(b) Withholding Arrangements. The Administrator, in its sole discretion and pursuant to such procedures as it may specify from time to time,may permit a Participant to satisfy such tax withholding obligation, in whole or in part by (without limitation) (i) paying cash, (ii) electing to have theCompany withhold otherwise deliverable cash or Shares having a Fair Market Value equal to the minimum amount required to be withheld,(iii) delivering to the Company already-owned Shares having a Fair Market Value equal to the amount required to be withheld, or (iv) selling a sufficientnumber of Shares otherwise deliverable to the Participant through such means as the Administrator may determine in its sole discretion (whether througha broker or otherwise) equal to the amount required to be withheld. The amount of the withholding requirement will be deemed to include any amountwhich the Administrator agrees may be withheld at the time the election is made, not to exceed the amount determined by using the maximum federal,state or local marginal income tax rates applicable to the Participant with respect to the Award on 13the date that the amount of tax to be withheld is to be determined. The Fair Market Value of the Shares to be withheld or delivered will be determined asof the date that the taxes are required to be withheld.16. No Effect on Employment or Service. Neither the Plan nor any Award will confer upon a Participant any right with respect to continuing theParticipant’s relationship as a Service Provider with the Company, nor will they interfere in any way with the Participant’s right or the Company’s right toterminate such relationship at any time, with or without cause, to the extent permitted by Applicable Laws.17. Date of Grant. The date of grant of an Award will be, for all purposes, the date on which the Administrator makes the determination granting suchAward, or such other later date as is determined by the Administrator. Notice of the determination will be provided to each Participant within a reasonable timeafter the date of such grant.18. Effective Date and Term of Plan. The Plan will become effective upon the date the stockholders of the Company approve the Plan. The Companywill obtain such stockholder approval in the manner and to the degree required under Applicable Laws. It will continue in effect for a term of ten (10) yearsfrom the date of stockholder approval, unless terminated earlier under Section 19 of the Plan.19. Amendment and Termination of the Plan.(a) Amendment and Termination. The Administrator may at any time amend, alter, suspend or terminate the Plan.(b) Stockholder Approval. The Company will obtain stockholder approval of any Plan amendment to the extent necessary and desirable tocomply with Applicable Laws.(c) Effect of Amendment or Termination. No amendment, alteration, suspension, or termination of the Plan will impair the rights of anyParticipant, unless mutually agreed otherwise between the Participant and the Administrator, which agreement must be in writing and signed by theParticipant and the Company. Termination of the Plan will not affect the Administrator’s ability to exercise the powers granted to it hereunder withrespect to Awards granted under the Plan prior to the date of such termination.20. Conditions Upon Issuance of Shares.(a) Legal Compliance. Shares will not be issued pursuant to the exercise of an Award unless the exercise of such Award and the issuance anddelivery of such Shares will comply with Applicable Laws and will be further subject to the approval of counsel for the Company with respect to suchcompliance.(b) Investment Representations. As a condition to the exercise of an Award, the Company may require the person exercising such Award torepresent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sellor distribute such Shares if, in the opinion of counsel for the Company, such a representation is required.21. Inability to Obtain Authority. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority isdeemed by the Company’s counsel to be necessary to the lawful issuance and sale of any Shares hereunder, will relieve the Company of any liability in respectof the failure to issue or sell such Shares as to which such requisite authority will not have been obtained.22. Underwater Stock Option Exchange Program. Notwithstanding any contrary provision of the Plan, if the Company’s stockholders approve theone-time-only option exchange program described in the proxy statement with respect to the Company’s 2009 Annual Meeting of Stockholders under whichcertain outstanding Options may be surrendered or cancelled at the election of the person holding such Option (and therefore made available for future grantunder Section 3(c)) in exchange for a lesser number of Options with a lower exercise price (the “Exchange”), the Administrator may provide for, and theCompany may implement, the Exchange within twelve (12) months after the date of such Annual Meeting. 14Exhibit 10.20IRIDEX CORPORATIONAGREEMENT AND RELEASEThis Separation Agreement and Release (“Agreement”) is made by and between Dr. Dominik Beck (“Employee”) and IRIDEX Corporation (the“Company”) (collectively referred to as the “Parties” or individually referred to as a “Party”) effective on the Effective Date (defined below).WHEREAS, Employee was employed by the Company;WHEREAS, Employee and the Company entered into the Employment Agreement dated August 16, 2011, pursuant to which the Employee was tocommence employment with the Company on or before October 15, 2011 (the “Employment Agreement”);WHEREAS, Employee signed an Employment, Confidential Information, Invention Assignment, and Arbitration Agreement with the Company onAugust 29, 2011 (the “Confidentiality Agreement”);WHEREAS, the Company and Employee have entered into (i) a stock option agreement (the “Stock Option Agreement”) dated October 10, 2011 issuedpursuant to the Company’s 2008 Equity Incentive Plan (the “Plan”), pursuant to which Employee was granted the option to purchase up to 135,000 shares ofthe Company’s Common Stock subject to the terms and conditions of the Plan and the Stock Option Agreement and (ii) the Restricted Stock Unit Award datedOctober 10, 2011, pursuant to which Employee was granted a restricted stock unit award for 75,000 shares of the Company’s Common Stock subject to theterms and conditions of the Plan (the “RSU Award” and, collectively with the Stock Option Agreement, the “Stock Agreements”);WHEREAS, Employee’s positions as an officer and employee with the Company and any of its subsidiaries were terminated in conjunction with arestructuring of the senior executive team effective as of August 24, 2012 (the “Separation Date”);WHEREAS, the Parties wish to resolve any and all disputes, claims, complaints, grievances, charges, actions, petitions, and demands that either Partymay currently have against the other Party and any of the other Party’s related Releasees (as defined below), including, but not limited to, any and all suchclaims arising out of or in any way related to all of Employee’s relationships (and the ending of such) with the Company. 1NOW, THEREFORE, in consideration of the mutual promises made herein, the Company and Employee hereby agree as follows:1. Consideration.a. Settlement Payments. In consideration of Employee’s execution of and compliance with this Agreement, the Company will pay the designatedrecipients below as follows (collectively the “Payments”):(1) The “First Payment”: made payable by the Company to Employee (in compromise settlement of all of Employee’s present claimsagainst the Company Releasees, as defined below, which are subject to both taxation and withholding but no other set-off of any kind) toEmployee in the gross amount of Sixty-One Thousand Dollars ($61,000), less applicable government mandatory tax withholdings only,which the Company also agrees to accurately and timely report to the applicable government entities (by W-2) and otherwise so accuratelydocument;(2) The “Second Payment”: made payable by the Company to Employee (in compromise settlement of all of Employee’s present claims,including his present and potential: statutory (except ADEA and attorneys fees-related) and tort claims and interest related to those claimsagainst the Company Releasees which are subject to taxation but not withholding or set-off of any kind) in the actual amount (i.e., with nowithholding or set-off of any kind) of Forty-Eight Thousand and Two Hundred Fifty Dollars ($48,250), which the Company also agreesto timely and accurately then: issue to the Employee a Form 1099 Misc. and so report to the applicable government entities, and otherwiseso accurately document; and(3) The “Third Payment”: made payable by the Company to Employee’s attorneys (Pierce & Shearer LLP) in compromise settlement of allof Employee’s present attorneys’ fees/costs relating to his alleged claims against the Company Releasees, as defined below, in the actualamount (i.e., no withholding or set-off of any kind) of Fifty-One Thousand Dollars ($51,000). The Company agrees to timely andaccurately report this payment to the applicable government entities, and otherwise so accurately document. Employee and his counselacknowledge and agree that the Company will timely issue two IRS Form 1099s with respect to this payment – one to Pierce & ShearerLLP in the amount of Fifty-One Thousand Dollars ($51,000) and the other to Employee in the amount of Fifty-One Thousand Dollars($51,000);(4) The “Fourth Payment”: made payable by the Company to Employee in lieu of reimbursement for COBRA, such payments are subjectto both taxation and withholding but no other set-off of any kind, to Employee in the gross amount of Fourteen Thousand and EightyFour Dollars ($14,084), less applicable government mandatory tax withholdings only, which the Company also agrees to accurately andtimely report to the applicable government entities (by W-2) and otherwise so accurately document.The Payments will be made by the Company for the respective recipients’ physical receipt as follows: the Second and Third Payments within ten(10) calendar days of the Effective Date and 2the First Payment no earlier than January 2, 2013 and no later than January 15, 2013. The Fourth Payment shall be paid in monthly installments of ThreeThousand Five Hundred Twenty-One Dollars ($3,521) per month for a period of four (4) months beginning on or about January 15, 2013 or until Employeehas secured other full-time employment which provides he and his family eligibility for health insurance comparable to the coverage they received from theCompany while Employee was employed, whichever occurs first. Employee acknowledges and agrees that if he secures such full-time employment on anydate prior to April 15, 2013 then the Company will no longer be obligated or required to make any then remaining monthly payments to him pursuant to theFourth Payment. Employee specifically acknowledges and agrees that if and when all the Payments above are fully and timely paid and corresponding fundsclear, any obligation that the Company had to pay Employee statutory wages and any other compensation whatsoever will then have been fully satisfied. TheParties disagree on whether Employee is eligible for contractual severance pursuant to his Employment Agreement, and Employee agrees that he is waiving anyrights to such severance only so long as all the Payments’ funds are timely received and are never sought back by the Company or any of its related Releasees(defined below).b. ADEA Waiver/Additional Consideration For. In consideration of Employee’s concurrent execution (and non-revocation of) the accompanyingADEA Waiver Agreement and Release (the “ADEA Waiver”), the Company will also pay Employee the actual amount of Eighteen Thousand and SevenHundred and Fifty Dollars ($18,750) (i.e., no withholdings or setoff of any kind) (the “ADEA Payment”), for his physical receipt seven days after theeffective date (defined therein) of the ADEA Waiver, which the Company also agrees to accurately and timely report to the applicable government entities (by1099) and otherwise so accurately document. Employee acknowledges and agrees that he will only receive one payment of Eighteen Thousand and SevenHundred and Fifty Dollars ($18,750) for his execution of and compliance with the ADEA Waiver, as outlined therein. Employee is not required to sign theADEA Waiver to receive the other above consideration and acknowledges and agrees that the ADEA Waiver in no way affects the continuing validity or effectof any other consideration owed and or herein provided to Employee by the Company.2. Benefits. Employee’s and his eligible dependents’ (Company-paid for only) health insurance benefits ceased on August 31, 2012, subject to theirrights to continue their health insurance under COBRA. Except as stated otherwise elsewhere in this Agreement, Employee’s additional vesting in all otherbenefits and incidents of employment, including, but not limited to the accrual of bonuses, vacation, and paid time off stopped following the Separation Date.3. Payment of Salary; Equity Interests; Resignation from Board of Directors.a. Payment of Salary. Employee specifically acknowledges and agrees that the Company has already paid Employee for all his salary for all of theservices that Employee has rendered to the Company.b. Equity Interests. Employee acknowledges and represents that, other than pursuant to the Stock Agreements, Employee has no right, title orinterest in or to any direct or indirect equity interests in the Company. Employee further acknowledges and represents that none of the shares of the Company’sCommon Stock issuable under the Stock Option Agreement, 3nor any of the shares or interests subject to the RSU Award, had vested as of the Separation Date and Employee, through his release below, will have no rightto exercise or otherwise receive any benefits under the Stock Agreements.c. Resignation from Board of Directors. In further consideration for (and within two (2) business days of) the clearance of the funds of the Secondand Third Payments, Employee will then resign in writing from his position as a member of the board of directors of the Company and the board of directorsof any of the Company’s subsidiaries on which he serves (if any), by executing the letter attached to this Agreement as Exhibit B and scanning and e-mailingthe signed letter to the Chairman of the Board of Directors, William Moore, at wmoore@iridex.com.4. Releases of Claims. Subject to the qualifications set forth in this Agreement, each Party, on his/its own behalf, otherwise hereby releases both the otherParty and (to the fullest extent applicable except as otherwise limited herein) that Party’s spouses, heirs, legal counsel, present and former officers anddirectors, employees, administrators, affiliates, representatives, agents, benefit plans, plan administrators, insurers, divisions, investors, shareholders,predecessors, successors, and assigns (collectively, the “Releasees”) from all claims, complaints, actions, causes of action, demands or obligations relating toany matters of any kind, whether presently known or unknown, suspected or unsuspected, which either Party (or his/its, representatives, agents,predecessors, successors, and assigns) currently may possess against any of the other Party’s Releasees arising from any omissions, acts, facts, or damagesthat have occurred up until and including the Effective Date of this Agreement, including generally, without limitation beyond those specifically enumerated inParagraphs 1 and 4 of this Agreement, claims:a. relating to or arising from Employee’s employment relationship with the Company and the termination of that relationship;b. relating to or arising from Employee’s right to purchase, or actual purchase of Company stock, including, without limitation, any relatedclaims for fraud, misrepresentation, breach of fiduciary duty, breach of duty under applicable state corporate law, and securities fraud under any state orfederal law;c. for wrongful discharge of employment; termination in violation of public policy; discrimination; harassment; retaliation; breach of contract,both express and implied; breach of covenant of good faith and fair dealing, both express and implied; promissory estoppel; negligent or intentional inflictionof emotional distress; fraud; negligent or intentional misrepresentation; negligent or intentional interference with contract or prospective economic advantage;unfair business practices; defamation; libel; slander; negligence; personal injury; assault; battery; invasion of privacy; false imprisonment; conversion; anddisability benefits;d. for violation of any federal, state, or municipal statute, including, but not limited to, Title VII of the Civil Rights Act of 1964; the Civil RightsAct of 1991; the Rehabilitation Act of 1973; the Americans with Disabilities Act of 1990; the Equal Pay Act; the Fair Labor Standards Act; the Fair CreditReporting Act; the Age Discrimination in Employment 4Act of 1967; the Older Workers Benefit Protection Act; the Employee Retirement Income Security Act of 1974; the Worker Adjustment and RetrainingNotification Act; the Family and Medical Leave Act; the Sarbanes-Oxley Act of 2002; the Immigration Control and Reform Act; the California Family RightsAct; the California Labor Code; the California Workers’ Compensation Act; and the California Fair Employment and Housing Act;e. for violation of the federal or any state constitution;f. arising out of any other laws and regulations relating to employment or employment discrimination; andg. for attorneys’ fees and costs.The Parties agree that the releases set forth in this section shall be and remain in effect in all respects complete general releases as to the matters released.Nevertheless, none of the waivers and releases anywhere in this Agreement shall waive, release, apply to and/or limit in any way either: (1) Employee’s (andany eligible dependents, only if and where applicable) already legally accrued and/or vested rights (if any) insurance-related benefits from a Company (orCompany-related) insurance provider under any Company insurance-related plans stemming from Employee’s Company: Board role and/or employment;(2) Employee’s rights (to the extent otherwise qualified) to workers’ compensation, unemployment benefits (the Company agreeing that it has not, and so longas Employee executes and materially complies with this Agreement will not, assert any disqualifying basis with respect to Employee’s eligibility for suchunemployment benefits in any manner), ERISA-related rights, and any all rights which cannot legally be waived; (3) Employee’s (pre-existing only) rights toindemnification, duty to defend and to be held harmless by the Company pursuant to any pre-existing contracts, applicable insurance (e.g., “D&O”) policies,statutes, common law obligations, or otherwise; (4) Employee’s claims should the Company have misreported, not reported or untimely reported (in part or inwhole) anything related to his past compensation as a Company employee to the appropriate taxing authorities; (5) the Parties’ rights to enforce the Agreement;(6) the Parties’ rights to raise claims for the other Parties’ (and associated Releasees’) future actions or inactions, and (7) Employee’s already legally accruedand/or vested rights to his retirement funds contained in his 401(k) account with the Company. Each Party represents that he/it has made no assignment ortransfer of any right, claim, complaint, charge, duty, obligation, demand, cause of action, or other matter waived or released by this Agreement.5. California Civil Code Section 1542. Each Party acknowledges that he/it has been advised to consult with legal counsel and is familiar with theprovisions of California Civil Code Section 1542, a statute that otherwise prohibits the release of unknown claims, which provides as follows:A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXISTIN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER MUST HAVEMATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR. 5Each Party, being aware of said code section, agrees to expressly waive any rights he/it may have thereunder as to the other Party and its/his related Releasees,as well as under any other statute or common law principles of similar effect, subject to the same qualifications set forth in Section 4 above.6. Application for Employment; Eligibility for Re-hire. Employee understands and agrees that (although the Company represents and warrants that hewill always remain eligible for re-hire in exchange for Employee agreeing hereby never to re-apply intentionally for employment or other working relationshipfor the Company), as a condition of this Agreement, Employee shall not be entitled to any future employment with the Company, and Employee hereby waivesany right, or alleged right, of employment or re-employment with the Company. Within five (5) days of the Effective Date, the Company will provideEmployee with a blue ink-signed original (on then current Company letterhead) of a letter in the form of Exhibit A.7. No Pending or Future Lawsuits. Each Party represents that he/it has no lawsuits, filed claims (other than Employee’s approved/open unemploymentbenefits claim), or other civil actions (e.g. arbitration filings) pending in his/its name, or on behalf of any other person or entity, against the other Party or anyof the other Party’s Releasees. Each Party also represents that he/it does not currently intend to bring any new such claims on his/its own behalf or on behalf ofany other person or entity against the other Party or any of the other Party’s Releasees.8. Confidentiality. Each Party agrees that he/it will generally keep confidential the terms of this Agreement (except as to its existence, its generalconfidentiality, Employee’s eligibility for re-hire and that Employee’s termination was exclusively due to a restructuring of the senior executive team), exceptalso: (1) to the extent reasonably needed to comply with legal requirements or by the Company pursuant to the Company’s reasonable business requirements;(2) to members of Employee’s immediate family; (3) to any attorney or financial advisor for the purpose of confidentially obtaining any legal or financialadvice pertaining to this Agreement and/or for the purpose of representation of either Party’s interest in connection with any inquiry or action on the part of anygovernment or taxing authority or agency; and (4) in order to pursue (or defend against) any claimed material breach or non-performance of this Agreement orother future (or excepted past) believed wrongdoing associated with Employee’s and/or his Releasees’ past relationships and interactions with the Companyand/or its Releasees. The Parties acknowledge and agree that this Paragraph 8 also does not restrict Employee from publicizing Exhibit A.9. Trade Secrets and Confidential Information; Return of Company Property. Employee, except to the extent this Agreement’s terms are inconsistent withit, agrees to observe and abide by the material terms of the Confidentiality Agreement, specifically including the provisions therein regarding non-disclosure ofthe Company’s trade secrets and confidential and proprietary information, and non-solicitation of Company employees. Consistent with his Boardmembership and with the Company’s consent, Employee has retained some Company confidential information and property. Within five (5) business days ofhis resignation from Company Board membership, Employee will provide any and all Company confidential information or property that he may have in hispossession to the Company and so long as he does so, then the Company agrees he will have acted consistent with (and not in violation of) his past 6and Agreement-related obligations. However, if Employee locates any other Company property in his possession thereafter and then promptly returns it to theCompany, his so doing will be considered consistent with (and not in violation) of all his Agreement-related obligations including in this paragraph.10. No Cooperation. Each Party agrees that he/it will not intentionally (directly or indirectly) attempt to or actually encourage, counsel, or assist anyattorneys or their clients in the presentation or prosecution of any disputes, differences, grievances, claims, charges, or complaints by any third party againstthe other Party or the other Party’s Releasees, unless under a subpoena or other court order to do so. Each Party agrees both to immediately notify the otherParty upon receipt of any such subpoena or court order, and to furnish within three (3) business days of its actual receipt by Employee or his obtainingknowledge thereof, a copy of such subpoena or other court order. If approached by anyone for counsel or assistance in the presentation or prosecution of anydisputes, differences, grievances, claims, charges, or complaints against any of the Releasees, the other Party shall state no more than that he/it cannot providecounsel or assistance.11. Non-Disparagement and Non-Interference. Employee agrees to refrain from making any illegally disparaging statements through any means in anyformat about the Company or any of its management personnel including, without limitation, the business, business reputation products, intellectualproperty, financial standing, future, or employment/compensation/benefit practices of the Company. The Company agrees to refrain from making any illegallydisparaging statements through any means in any format about Employee. The Company agrees that when making statements (in any form) concerningEmployee it will not make such statements that are inconsistent with the representations contained in Exhibit A. Employee understands that the Company’sobligations under this paragraph extend only to the Company’s current executive officers at the Senior Vice President level and above, including the ChiefExecutive Officer, and members of its Board of Directors. The Company shall direct any inquiries by potential future employers or other backgroundcheckers to Antoinette Ryglisyn (or any successor to her)/the Company’s human resources department, which shall use its best efforts to confirm only theEmployee’s various Company positions held, their dates held, his eligibility for re-hire, and his compensation levels during his employment with theCompany. If the Employee requests from the Chief Executive Officer in writing at least three (3) business days in advance that the Company make additionalreasonable statements regarding Employee to a prospective employer or other background checker, such additional statements will not be unreasonablywithheld. Each Party also agrees not to tortiously interfere with either the contracts and/or professional relationships of the other Party. Notwithstanding theforegoing, the Parties acknowledge and agree that any Company Board members, its Chief Executive Officer, and either Party may testify truthfully in anyarbitration or litigation proceedings, and further agree that this non-disparagement provision shall not prohibit or limit any of the Board members, the ChiefExecutive Officer, or either Party from testifying truthfully in any such proceedings.12. Material Breach. Each Party acknowledges and agrees that any material breach of this Agreement or of any legally still enforceable provision of theConfidentiality Agreement shall entitle the non-breaching Party immediately to cease providing the consideration provided to the 7other Party under this Agreement, except as provided by law. The Company acknowledges and agrees that its failure timely to make in full any of either thePayments or the ADEA Payment shall constitute a material breach of this Agreement and leaving the Agreement then voidable at Employee’s sole election as oneof his options for then pursuing any and all available legal rights, claims and remedies (including those that would otherwise have been released, waived or inany way limited by this Agreement, and including Employee’s claim regarding the entire disputed portion of the severance amounts contained in theEmployment Agreement).13. No Admission of Liability. Each Party understands and acknowledges that this Agreement constitutes a compromise and settlement of any and allactual or potential past disputed claims. No action taken by either Party hereto, either previously or in connection with this Agreement, shall be deemed orconstrued to be (a) an admission of the truth or falsity of any actual or potential claims or (b) an acknowledgment or admission by any Party of any fault orliability whatsoever to the other Party, the other Party’s Releasees, or to any third party.14. ARBITRATION. THE PARTIES AGREE THAT ANY AND ALL DISPUTES ARISING OUT OF THE TERMS OF THIS AGREEMENT,THEIR INTERPRETATION, AND ANY OF THE MATTERS HEREIN RELEASED, SHALL BE SUBJECT TO ARBITRATION IN SANTA CLARACOUNTY, BEFORE JUDICIAL ARBITRATION & MEDIATION SERVICES (“JAMS”), PURSUANT TO ITS EMPLOYMENT ARBITRATIONRULES & PROCEDURES (“JAMS RULES”). THE ARBITRATOR MAY GRANT INJUNCTIONS AND OTHER RELIEF IN SUCH DISPUTES. THEARBITRATOR SHALL ADMINISTER AND CONDUCT ANY ARBITRATION IN ACCORDANCE WITH CALIFORNIA LAW, INCLUDING THECALIFORNIA CODE OF CIVIL PROCEDURE, AND THE ARBITRATOR SHALL APPLY SUBSTANTIVE AND PROCEDURAL CALIFORNIA LAWTO ANY DISPUTE OR CLAIM, WITHOUT REFERENCE TO ANY CONFLICT-OF-LAW PROVISIONS OF ANY JURISDICTION. TO THEEXTENT THAT THE JAMS RULES CONFLICT WITH CALIFORNIA LAW, CALIFORNIA LAW SHALL TAKE PRECEDENCE. THE DECISIONOF THE ARBITRATOR SHALL BE FINAL, CONCLUSIVE, AND BINDING ON THE PARTIES TO THE ARBITRATION. THE PARTIES AGREETHAT THE PREVAILING PARTY IN ANY ARBITRATION SHALL BE ENTITLED TO INJUNCTIVE RELIEF IN ANY COURT OF COMPETENTJURISDICTION TO ENFORCE THE ARBITRATION AWARD. THE COMPANY SHALL PAY THE COSTS AND EXPENSES OF SUCHARBITRATION (INCLUDING WITHOUT LIMITATION THE ARBITRATOR’S FULL FEES AND COSTS), AND EACH PARTY SHALLSEPARATELY PAY FOR ITS RESPECTIVE COUNSEL FEES AND EXPENSES; PROVIDED, HOWEVER, THAT THE ARBITRATOR SHALLAWARD ATTORNEYS’ FEES AND COSTS TO THE PREVAILING PARTY, EXCEPT AS PROHIBITED BY LAW. THE PARTIES HEREBY AGREETO WAIVE THEIR RIGHT TO HAVE ANY DISPUTE BETWEEN THEM RESOLVED IN A COURT OF LAW BY A JUDGE OR JURY.NOTWITHSTANDING THE FOREGOING, THIS SECTION WILL NOT PREVENT EITHER PARTY FROM SEEKING INJUNCTIVE RELIEF (ORANY OTHER PROVISIONAL REMEDY) FROM ANY COURT HAVING JURISDICTION OVER THE PARTIES AND THE SUBJECT MATTER OFTHEIR DISPUTE RELATING TO THIS AGREEMENT AND THE AGREEMENTS INCORPORATED HEREIN BY REFERENCE. SHOULD ANYPART OF THE ARBITRATION AGREEMENT CONTAINED IN THIS PARAGRAPH CONFLICT WITH ANY OTHER ARBITRATION AGREEMENTBETWEEN THE PARTIES, THE PARTIES AGREE THAT THIS ARBITRATION AGREEMENT SHALL GOVERN. 815. Costs. The Parties shall ultimately be responsible for their own full: costs, attorneys’ fees, and other fees incurred in connection with the preparationof this Agreement.16. Tax Consequences. Other than as to its own agreement to report and withhold as specifically outlined above with respect to the Payments and theADEA Payment, the Company makes no representations or warranties with respect to the tax consequences to Employee of the Payments and ADEA Paymentand any other consideration provided to Employee or made on his behalf under the terms of this Agreement. Employee agrees and understands that he isresponsible for payment, if any, of only all local, state, and/or federal taxes due from him on those Payments and the ADEA Payment and/or on any otherconsideration provided hereunder by the Company and any penalties or assessments related to those taxes due from him. Employee further agrees to indemnifyand hold the Company harmless from any claims, demands, deficiencies, penalties, interest, assessments, executions, judgments, or recoveries by anygovernment agency against the Company for any amounts found due on account of (a) Employee’s failure to pay or delayed payment of, federal or state taxesdue from him, or (b) damages sustained by the Company by reason of any such claims, including attorneys’ fees and costs, so long as the Company timelyand accurately reports the Payments and ADEA Payment on Form W-2s and Form 1099s, respectively, to the applicable government entities as described inParagraph 1 herein.17. Authority. The Company represents and warrants that the undersigned has full authority to act on behalf of the Company and to bind the Companyand all who may claim through it to the terms and conditions of this Agreement. Employee represents and warrants that he has the capacity to act on his ownbehalf and on behalf of all who might claim through him to bind them to the terms and conditions of this Agreement. Each Party warrants and represents thatthere are no liens or claims of lien or assignments in law or equity or otherwise of or against any of the claims or causes of action released herein.18. No Representations. Each Party represents that he/it has had an opportunity to consult with an attorney, and has carefully read and understands thescope and effect of the provisions of this Agreement. Each Party so also represents that he/it has not relied upon any representations or statements made by theother Party that are not specifically either set forth (or incorporated by reference) in this Agreement.19. Severability. In the event that any provision or any portion of any provision hereof or any surviving agreement made a part hereof becomes or isdeclared by a court of competent jurisdiction or arbitrator to be illegal, unenforceable, or void, this Agreement shall continue in full force and effect withoutsaid provision or portion of provision.20. Entire Agreement. This Agreement, including the agreements and contracts described in Paragraph 4 herein, the concurrent ADEA Waiver, and theConfidentiality Agreement represent the entire agreement and understanding between the Company and Employee concerning the subject matter of thisAgreement and Employee’s employment with and 9separation from the Company and the events leading up thereto, and otherwise supersedes and replaces any and all prior agreements and understandingsconcerning the subject matter of this Agreement. Employee acknowledges and agrees that the ADEA Waiver is not superseded or replaced by (but is concurrentwith) this Agreement. Employee acknowledges and agrees that, so long as the Company timely and fully pays as set forth in Paragraph 1 herein, thisAgreement forever and entirely supersedes and replaces the Employment Agreement.21. No Oral Modification. This Agreement may only be amended in a writing signed by Employee and the then Chairman of the Company’s Board ofDirectors.22. Governing Law. This Agreement shall be governed by the laws of the State of California, without regard for choice-of-law provisions. Each Partyconsents to the personal, general and any other required jurisdiction and venue with JAMS in Santa Clara, California, and for enforcement or appeal of anyJAMS order to the applicable Courts with jurisdiction over events that have taken place exclusively in Santa Clara County, California.23. Counterparts; Service; Effective Date. This Agreement may be separately executed by the Parties in separate counterparts and then shall be effectiveupon respective receipt by either the Parties or their legal counsel by either PDF/email, facsimile, or personal delivery (the “Effective Date”). Each counterpartshall have the same force and effect as an original and shall constitute an effective, binding agreement on the part of each of the undersigned, subject only toexclusively Employee’s revocation rights only as to the ADEA Waiver.24. Section 409A. It is the intention of the Company and Employee that this Agreement and any payments or benefits under this Agreement shall beeither exempt from or in full compliance with Section 409A of the Internal Revenue Code of 1986, as amended (“Section 409A”). The Company makes norepresentations regarding Section 409A as it relates to this Agreement with respect to compliance or otherwise. Employee is encouraged to consult with hisindividual tax advisor regarding any potential application of Section 409A.25. Voluntary Execution of Agreement. Each Party understands and agrees that he/it executed this Agreement voluntarily, without any duress or undueinfluence on the part or behalf of the other Party, the other Party’s Releasees, or any third party (e.g. his/its own legal counsel), with the full intent of releasingall present claims and rights (subject to the qualifications in this Agreement) against the other Party and the other Party’s Releasees. Each Party acknowledgesthat: (a)He/it has read this Agreement; (b)He/it has been represented in the preparation, negotiation, and execution of this Agreement by legal counsel of his/her own choice; (c)He/it understands the terms and consequences of this Agreement and of the releases and waivers it contains; and (d)He/it is fully aware of the legal and binding effect of this Agreement. 1026. Further Assurances. The Parties agree to execute reasonably any and all reasonable documents, consents and instruments and to take all reasonableactions and to do all things necessary or appropriate to effectuate the purposes and intents of this Agreement.IN WITNESS WHEREOF, the Parties have executed this Agreement on the respective dates set forth below. DR. DOMINIK BECK, an individualDated: November 6, 2012 By: /s/ DR. DOMINIK BECK Dr. Dominik Beck IRIDEX CORPORATIONDated: November 5, 2012 By: /s/ WILLIAM M. MOORE William M. Moore Chairman & Chief Executive Officer 11Exhibit A[to be put on undated IRIDEX Corporation letterhead]To Whom It May Concern:Dr. Dominik Beck served as President and Chief Executive officer of IRIDEX Corporation and was also a member of the Company’s Board of Directors.Dr. Beck left at the end of August 2012 in conjunction with the Company’s senior executive restructuring following uniquely challenging times in our industry.Dr. Beck remains eligible for rehire. We wish him all further professional and personal successes and thank him for his contributions.Sincerely,William M. MooreChairman & Chief Executive OfficerIRIDEX Corporation1212 Terra Bella Ave.Mountain View, CA 94043 12Exhibit BDear Mr. Moore and the Iridex Corporation Board of Directors:I hereby tender my resignation from the Board of Directors of IRIDEX Corporation, effective immediately. I offer my best wishes for the Company’s continuedsuccess.Sincerely,Dr. Dominik Beck 13Exhibit 10.21IRIDEX CORPORATIONADEA WAIVER AGREEMENT AND RELEASEThis ADEA Waiver Agreement and Release (the “ADEA Waiver” or the “Agreement”) is made by and between Dr. Dominik Beck (“Employee”) andIRIDEX Corporation (the “Company”) (collectively referred to as the “Parties” or individually referred to as a “Party”).WHEREAS, Employee was employed by the Company;WHEREAS, Employee and the Company entered into the Employment Agreement dated August 16, 2011 (the “Employment Agreement”);WHEREAS, Employee’s positions as an officer and employee with the Company and any of its subsidiaries were terminated in conjunction with arestructuring of the senior executive team effective as of August 24, 2012 (the “Separation Date”);WHEREAS, the Company and Employee are entering concurrently into a Separation Agreement and Release (the “Separation Agreement”), and;WHEREAS, the Parties also wish to resolve any and all disputes, claims, complaints, grievances, charges, actions, petitions, and demands that theEmployee may have against the Company and any of the Company Releasees (as defined below) arising from or relating to the Age Discrimination inEmployment Act of 1967 only (e.g., any and all such claims arising out of or in any way related to Employee’s employment with or separation from theCompany).NOW, THEREFORE, in consideration of the mutual promises made herein, the Company and Employee hereby agree as follows:1. Consideration. In consideration of Employee’s execution of this ADEA Waiver (and so long as he does not timely revoke it), the Company will payEmployee the actual amount (i.e., no withholdings or setoff of any kind) of Eighteen Thousand Seven Hundred and Fifty Dollars ($18,750) (the “ADEAPayment”) for Employee’s physical receipt within seven days of the Effective Date (defined below). The ADEA Payment is made in compromise settlement ofany of Employee’s alleged and/or potential age discrimination-related claims only against the Company and the Company Releasees, as defined below, andwhich the Company also agrees to accurately and timely report to the applicable government entities (by 1099) and otherwise so accurately document.2. Acknowledgment of Waiver of Claims under ADEA. Employee acknowledges that (conditioned on his fully and timely receipt of the ADEA Payment)he is hereby waiving and releasing any rights he may have under the Age Discriminationin Employment Act of 1967 (“ADEA”) against the “Company Releasees”, defined herein as the Company and its present and former officers and directors,employees, administrators, affiliates, representatives, agents, benefit plans, plan administrators, insurers, divisions, investors, shareholders, predecessors,successors, and assigns, and that this waiver and release is knowing and voluntary. Employee agrees that this waiver and release does not apply to any rightsor claims that may arise under the ADEA after the Effective Date of this Agreement, or to any other rights or claims whether before or after then. Employeefurther acknowledges that he has been advised by this writing that: (a) he should consult with an attorney prior to executing this Agreement; (b) he has twenty-one (21) days within which to consider this Agreement; (c) he has seven (7) days following his execution of this Agreement to revoke this Agreement; (d) thisAgreement shall not be effective until after the revocation period has expired; and (e) nothing in this Agreement prevents or precludes Employee fromchallenging or seeking a determination in good faith of the validity of this waiver under the ADEA, nor does it impose any condition precedent, penalties, orcosts for doing so, unless specifically authorized by federal law. In the event Employee signs this Agreement and returns it to the Company in less than the 21-day period identified above, Employee hereby acknowledges that he has freely and voluntarily chosen to waive the time period allotted for considering thisAgreement. Employee acknowledges and understands that revocation must be accomplished by a written notification to the person executing this Agreement onthe Company’s behalf that is received prior to the Effective Date. Employee acknowledges and agrees that any changes, whether material or immaterial, do notrestart the running of the 21-day period pursuant to 29 C.F.R. 1625.22(e)(4).3. Costs. The Parties shall each bear their own costs, attorneys’ fees, and other fees incurred in connection with the preparation of this Agreement.4. Governing Law. This Agreement shall be governed by the laws of the State of California, without regard for choice-of-law provisions. Each Partyconsents to the personal, general and any other required jurisdiction and venue with JAMS (and subject to the same ADR terms found in the SeparationAgreement, whose ADR terms are expressly incorporated into this Agreement by reference) in Santa Clara, California, and for enforcement or appeal of anyJAMS order to the applicable Courts with jurisdiction over events that have taken place exclusively in Santa Clara County, California.5. Counterparts; Service; Effective Date. Employee (and he alone) has seven (7) days after he signs this Agreement to revoke it. This Agreement willbecome effective on the eighth (8th) day after Employee has signed this Agreement, so long as it has been signed by the Parties and he has not revoked it (the“Effective Date”). This Agreement may be separately executed in separate counterparts and then (upon respective receipt by either the Parties or their legalcounsel by either PDF/email, facsimile, or delivery) each counterpart shall have the same force and effect as an original and shall constitute an effective,binding agreement on the part of each of the undersigned, subject only to exclusively Employee’s timely revocation rights. 26. Entire Agreement. This ADEA Waiver represents the entire agreement and understanding between the Company and Employee concerning any claimsby Employee against the Releasees of an ADEA primary nature only and is the only agreement ever between the Parties on that subject and this ADEA Waiverdoes not supersede, replace or modify in any way the Parties’ Separation Agreement.7. Voluntary Execution of Agreement. Each Party understands and agrees that he/it executed this Agreement voluntarily, without any duress or undueinfluence on the part or behalf of the other Party or any third party (e.g. his/its own legal counsel), with the full intent of releasing all present claims and rights(subject to the qualifications in this Agreement) against the other Party. Each Party acknowledges that: a.He/it has read this Agreement; b.He/it has been represented in the preparation, negotiation, and execution of this Agreement by legal counsel of his/her own choice; c.He/it understands the terms and consequences of this Agreement and of the release and waiver it contains; and d.He/it is fully aware of the legal and binding effect of this Agreement.IN WITNESS WHEREOF, the Parties have executed this Agreement on the respective dates set forth below. DR. DOMINIK BECK, an individualDated: November 6, 2012 By: /s/ DR. DOMINIK BECK Dr. Dominik Beck IRIDEX CORPORATIONDated: November 5, 2012 By: /s/ WILLIAM M. MOORE Name: William M. Moore Title: Chairman and Chief Executive Officer 3Exhibit 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (333-183513, 333-161630, 333-155598, 333-147866,333-135822, 333-127716, 333-117885, 333-107700, 333-97541, 333-67480, 333-45736, 333-86091, 333-57573, 333-32161) of our report dated March 28,2013 related to the consolidated financial statements of IRIDEX Corporation, which appear in this Annual Report on Form 10-K./s/ Burr Pilger Mayer, Inc.San Jose, CaliforniaMarch 28, 2013EXHIBIT 31.1CERTIFICATION OF CHIEF EXECUTIVE OFFICERPURSUANT TO SECTION 13(a) or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934AS ADOPTED PURSUANT TOSECTION 302 OF THE SARBANES-OXLEY ACT OF 2002I, William M. Moore, certify that: 1.I have reviewed this annual report on Form 10-K of IRIDEX Corporation; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respectsthe financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which this report is being prepared; b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d)Disclosed in this report any changes in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonablylikely to materially affect the registrant’s internal control over financial reporting; and 5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting.Date: March 28, 2013 By: /s/ WILLIAM M. MOORE Name: William M. MooreTitle: President and Chief Executive Officer(Principal Executive Officer)EXHIBIT 31.2CERTIFICATION OF CHIEF FINANCIAL OFFICERPURSUANT TO SECTION 13(a) or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934AS ADOPTED PURSUANT TOSECTION 302 OF THE SARBANES-OXLEY ACT OF 2002I, James H. Mackaness, certify that: 1.I have reviewed this annual report on Form 10-K of IRIDEX Corporation; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respectsthe financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which this report is being prepared; b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonablylikely to materially affect the registrant’s internal control over financial reporting; and 5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting.Date: March 28, 2013 By: /s/ JAMES H. MACKANESS Name: James H. MackanessTitle: Chief Financial Officer and Chief Operating Officer(Principal Financial and Accounting Officer)EXHIBIT 32.1CERTIFICATION OF CHIEF EXECUTIVE OFFICERPURSUANT TO 18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002I, William M. Moore, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, certify that the AnnualReport of IRIDEX Corporation on Form 10-K for the fiscal year ended December 29, 2012 (i) fully complies with the requirements of Section 13(a) or 15(d) ofthe Securities Exchange Act of 1934 and (ii) that information contained in such Annual Report on Form 10-K fairly presents, in all material respects, thefinancial condition and results of operations of IRIDEX Corporation.Date: March 28, 2013 By: /S/ WILLIAM M. MOOREName: William M. MooreTitle: President and Chief Executive Officer (PrincipalExecutive Officer)EXHIBIT 32.2CERTIFICATION OF CHIEF FINANCIAL OFFICERPURSUANT TO 18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002I, James H. Mackaness, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, certify that theAnnual Report of IRIDEX Corporation on Form 10-K for the fiscal year ended December 29, 2012 (i) fully complies with the requirements of Section 13(a) or15(d) of the Securities Exchange Act of 1934 and (ii) that information contained in such Annual Report on Form 10-K fairly presents, in all material respects,the financial condition and results of operations of IRIDEX Corporation.Date: March 28, 2013 By: /S/ JAMES H. MACKANESSName: James H. MackanessTitle: Chief Financial Officer and Chief Operating Officer(Principal Financial and Accounting Officer)

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