IRIDEX
Annual Report 2013

Plain-text annual report

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 28, 2013or¨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 (I.R.S. Employerof incorporation or organization) Identification 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 “ExchangeAct”). 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 suchshorter period that the Registrant was 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 andposted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit andpost 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 becontained, to the best of Registrant’s knowledge, 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 $54,494,721 as of June 28, 2013 the last business day ofthe Registrant’s most recently completed 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 theoutstanding shares of common stock have been excluded from this calculation, because such persons may be deemed to be affiliates. This determination of affiliate status is not necessarilya conclusive determination for other purposes.As of March 11, 2014, Registrant had 9,993,948 shares of common stock outstanding.DOCUMENTS INCORPORATED BY REFERENCECertain parts of the Proxy Statement for the Registrant’s 2014 Annual Meeting of Stockholders (the “Proxy Statement”) are incorporated by reference into Part III of this AnnualReport on Form 10-K.  Table of Contents Page No.Part I Item 1. Business 3Item 1A. Risk Factors 13Item 1B. Unresolved Staff Comments 22Item 2. Properties 23Item 3. Legal Proceedings 23Item 4. Mine Safety Disclosures 23Part II Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters, and Issuer Purchases of Equity Securities 24Item 6. Selected Financial Data 25Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 25Item 7A. Quantitative and Qualitative Disclosures About Market Risk 32Item 8. Financial Statements and Supplementary Data 32Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 58Item 9A. Controls and Procedures 58Item 9B. Other Information 58Part III Item 10. Directors, Executive Officers and Corporate Governance 59Item 11. Executive Compensation 59Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 59Item 13. Certain Relationships and Related Transactions, and Director Independence 59Item 14. Principal Accountant Fees and Services 59Part IV Item 15. Exhibits and Financial Statement Schedules 60Signatures 63 2 PART IThis Annual Report on Form 10-K contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933,as amended, 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; sales levels generated by our independent sales force and though our distribution partners; future tax rates and availability ofcertain deferred potential tax benefits; leveraging our core business and increasing recurring revenues; broadening our product lines through productinnovation and new treatments; general economic conditions; levels of international sales; market acceptance of our products; expectations for andsources of future revenues; our marketing programs and trends in healthcare; our ability to take advantage of economies-of-scale in productdevelopment and manufacturing; our current and future liquidity and capital requirements; efforts to decrease costs and manage cash flows; levels offuture investment in research and development efforts; our ability to develop and introduce new products through strategic alliances, OEMrelationships and acquisitions; the availability of components from third-party manufacturers; results of clinical studies and the status of ourregulatory clearance; the impact of regulatory actions and determinations; and risks associated with bringing new products to market. In some cases,forward-looking statements 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 statementsinvolve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to differmaterially from those expressed or implied by such forward-looking statements. The reader is strongly urged to read the information contained underthe captions “Item 1A. Risk Factors - Factors That May Affect Future Results” in this Annual Report on Form 10-K for a more detailed description ofthese significant risks and uncertainties. The reader is cautioned not to place undue reliance on these forward-looking statements, which reflectmanagement’s analysis only as of the date of this Form 10-K. We undertake no obligation to update such forward-looking statements to reflect eventsor circumstances occurring after the date 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, aDelaware corporation, and when the context so requires, our wholly owned subsidiaries, IRIS Medical Instruments, Inc. and Light SolutionsCorporation, both California corporations, and IRIDEX France S.A. Item 1. BusinessGeneralIRIDEX Corporation is a leading worldwide provider of therapeutic based laser consoles, delivery devices and consumable instrumentation used to treatsight-threatening eye diseases in ophthalmology. In February 2012, we sold our aesthetics business to Cutera, Inc. The sale of the aesthetics business was asignificant step forward in our strategy because it allowed us to focus solely on our ophthalmology business which is our core strength. Management believesthat this path affords the Company with the best opportunity for long term profitable growth. In accordance with accounting principles generally accepted inthe U.S. (“GAAP”), we have recast our financial information disclosed within this Form 10-K to show the results from our ophthalmology business ascontinuing operations and the results from our aesthetics business as discontinued operations for all periods presented. Our ophthalmology products are soldin the United States predominantly through a direct sales force and internationally through approximately 70 independent distributors in over 100 countries.Revenues from continuing operations in 2013, 2012 and 2011 were $38.3 million, $33.9 million and $33.2 million, respectively, and we generated net income(loss) from continuing operations of $2.2 million, $(0.2) million and $2.1 million, respectively. Total net income including income from discontinuedoperations for 2013, 2012 and 2011 was $2.2 million, $1.4 million and $2.6 million, respectively.Our ophthalmology products consist of laser consoles, 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 consoles combined with durable deliverydevices (laser systems).Our laser consoles consist of our IQ products which include IQ 532, IQ 577 and IQ 810 laser photocoagulation systems; and our OcuLight productsincluding OcuLight TX, OcuLight SL, OcuLight SLx, OcuLight GL and OcuLight GLx laser photocoagulation systems. Certain of our laser consoles arecapable of performing traditional continuous wavelength photocoagulation and our patented Fovea-Friendly MicroPulse laser photocoagulation. Towards theend of 2012 we introduced the TxCell Scanning Laser Delivery System, a delivery device which saves significant time in a variety of laser photocoagulationprocedures by allowing physicians to deliver the laser in a multi-spot scanning mode, a more efficient method for these procedures than the traditional singlespot mode. Our current family of laser probes includes a wide variety of products in 20, 23 and 25 gauge for vitreoretinal surgery and glaucoma surgery.3 Ophthalmologists typically use our laser systems in hospital operating rooms (“OR”) and ambulatory surgical centers, as well as their offices andclinics. In the OR and ambulatory surgical centers, 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 atan epidemic 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 theInternational Diabetes Federation in an article published in November 2010 – at least 300 million people worldwide have diabetes, and this figure is likely toreach 438 million by the year 2030. According to the World Health Organization in their 2007 report – Vision 2020 The Right to Sight, after 20 years durationmore than 75% of patients will have some form of diabetic retinopathy. Laser photocoagulation is currently the standard treatment for this disease, althoughthere has been increased use of pharmaceuticals in recent years. A single treatment of continuous wavelength laser photocoagulation has been shown to stabilizethe patient’s vision over the long term. Continuous wavelength laser photocoagulation treatments typically take several months to be fully effective and havebeen demonstrated to last for many years. This treatment presents a very cost efficient model, and presents a risk of varying degrees of vision loss to thepatient. Pharmaceuticals can stabilize vision in the near term, as treatments typically take a few days to be fully effective and have been demonstrated to lastfor weeks. However, patients receiving pharmaceutical treatment for diabetic retinopathy require repeated injections. The injections are painful and the patientsmay experience side effects including increased risk of eye infections. Furthermore, a regimen of repeated injections is very costly to both the physician, interms of time, and to the healthcare system, in terms of dollars spent on treatment. The short comings in treating this disease have led to a renewed interest inalternative approaches that may provide 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 patient’s life. Most cases ofglaucoma can be controlled and vision loss slowed or halted by treatment. Pharmaceuticals are typically the first treatment method prescribed for glaucoma.These pharmaceutical treatments are commonly self-administered in drop form by the patients. Patients often have difficulties applying the pharmaceuticaldrops properly and may fail to appropriately or timely apply the medication, which may significantly reduce the effectiveness of the pharmaceutical. Evenwhen administered correctly, pharmaceuticals have demonstrated reduced efficacy over time. When pharmaceuticals lose their effectiveness, laser treatment isoften performed, and ultimately surgery may be required. The short comings in treating this disease have led to a renewed interest in surgical approaches thatmay 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.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.4 The 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.MicroPulseMicroPulse is a method of delivering laser energy using a mode which chops the CW beam into short, microsecond long, laser pulses, which we havedeveloped. There is a growing body of clinical evidence that demonstrates that MicroPulse therapy can generate the beneficial response associated with CWlaser photocoagulation with no detectible tissue damage for the treatment of Diabetic Retinopathy, Glaucoma and AMD. When used to treat DiabeticRetinopathy we refer to this as Fovea-Friendly because the laser can be used to treat the fovea without any loss of visual function typically associated with CWlaser photocoagulation. Our IQ products are capable of MicroPulse as well as CW laser photocoagulation.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 the sight-threatening eye diseases mentioned above. With the sale of our aesthetics business we are now focused exclusivelyon our ophthalmology business. At the end of 2013, the Company had $13.4 million in cash and no debt. Other than in 2012, when we incurred a net loss of$0.2 million from our ophthalmology operations, we generated net income from our ophthalmology operations in each of the past five years. It is our goal tocontinue to operate our business profitably.Our strategy is to leverage our existing brand and distribution channel in the ophthalmology market promote the adoption of MicroPulse as a viabletreatment alternative for Diabetic Retinopathy, Glaucoma and AMD and consequently 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, and3.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 ThatMay Affect Future Results – “Our future success depends on our ability to develop and successfully introduce new products and new applications.” and“Efforts to acquire additional companies or product lines may divert our managerial resources away from our business operations, and if wecomplete additional acquisitions, we may incur or assume additional liabilities or experience integration problems.”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 capital equipment products range in price from $1,000 to $60,000 and consist of laser consolesand specialized durable delivery devices. Our line of consumable products range in price from $10 to $250 and consist primarily of cannulas and laserprobes.ConsolesOur laser consoles, which are identified below, incorporate the economic and technical benefits of solid state and semiconductor laser technology.Visible (Yellow) Photocoagulator Console. Our IQ 577 delivers visible (Yellow – 577nm) laser light. This product utilizes state of the art userinterface technology and delivers a 577 wavelength which is at the peak of oxyhemoglobin absorption and allows ophthalmologists to obtain optimal resultswith 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 wireless footswitch.5 Visible (Green) Photocoagulator Console. Our IQ 532 delivers visible (Green – 532nm) laser light. This product utilizes a user interface andproduct platform based on the IQ 577, as more fully described above, as well as our OcuLight TX, OcuLight GL and OcuLight GLx Photocoagulators. TheOcuLight TX/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 installation. Our laser consoles, together with our Symphony slit lamp adapters, combine theclinical versatility and convenience of multiple wavelength delivery into one delivery device for retinal and glaucoma procedures. Currently, our compatibleconsoles are the OcuLight GLx and the OcuLight TX green laser consoles and the OcuLight SLx and the IQ 810 infrared laser consoles and the IQ 577 yellowlaser 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. A second version was introduced at the end of 2013 that worked with a wider variety of slight lamps existing in the market and included anumber of enhanced features.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,or freezing 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,and results 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.6 GreenTip™ Soft Tip Cannula. The GreenTip cannula allows surgeons to effectively visualize and access the proximity of the retina while performinga fluid 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.MoistAir™ In-Line Air Humidifier. The MoistAir Humidifying Chamber connects to the air line and provides humidified air to the eye during fluidair exchange. 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, ambulatory surgical centers or clinic/outpatient settings and are non-elective and covered by insurance. Procedure Console Delivery Devices and Other Product ModeAge-related Macular Degeneration Retinal Photocoagulation Infrared & Visible Slit Lamp Adapter CW Diabetic Retinopathy Macular Edema Grid RetinalPhotocoagulation Infrared & Visible Slit Lamp Adapter & Operating MicroscopeAdapter, 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 MicroPulse Glaucoma Primary Open-Angle Trabeculoplasty Infrared & Visible Slit Lamp Adapter CW or MicroPulse Angle-closure Iridotomy Infrared & Visible Slit Lamp Adapter CW Uncontrolled Glaucoma TransscleralCyclophotocoagulation Infrared G-Probe* CW Retinal Tears and Detachments Retinopexy RetinalPhotocoagulationVitrectomy Procedure Infrared & Visible Slit Lamp Adapter, Laser Indirect Ophthalmoscope,Operating Microscope Adapter, EndoProbe*GreenTip cannula*, MoistAir HumidifyingChamber* CW Transscleral RetinalPhotocoagulation Infrared DioPexy Probe CW Retinopathy of Prematurity Retinal Photocoagulation Infrared Laser Indirect Ophthalmoscope CW Ocular Tumors Retinal Photocoagulation Infrared Slit Lamp Adapter, Operating Microscope Adapter,Laser Indirect Ophthalmoscope CW Macular Holes Vitrectomy Procedure Visible EndoProbe* CW*Consumable and disposable products7 Research 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 11 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, electrical engineering,optics, lasers, fiber optics, software, firmware and delivery devices. The R&D process integrates all of the necessary disciplines of the Company fromproduct inception through customer acceptance. This process facilitates reliable new product innovations and a consistent pipeline of innovative products forour 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 investmentsin researching and improving the treatment of serious eye diseases such as diabetic retinopathy and glaucoma, and AMD. The objectives of developing newtreatments and applications are to expand the potential patient population, to more effectively and more economically treat diseases, to treat patients earlier inthe treatment regimen and to reduce the side effects of treatment.We spent $3.7 million on R&D in our continuing operations in 2013, $4.4 million in 2012 and $3.9 million in 2011.We consider clinical projects to be a component of our R&D efforts and they may or may not result in additional commercial opportunities. SeeItem 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 regulatory approvalsis 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 for use by ophthalmologists specializing in the treatment of eye disease in the retina, glaucoma and pediatrics eyediseases. Other customers include research and teaching hospitals, government installations, surgical centers, hospitals, and office clinics (outpatient). Nosingle customer or distributor accounted for 10% or more of total revenues in fiscal years 2013, 2012 and 2011.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 are engaged in sales efforts within the UnitedStates and 5 employees engaged in managing our distribution sales efforts internationally. We also contract for the services of 13 independent salesrepresentatives. Our sales are administered through our corporate headquarters in Mountain View, California. See Item 1A. Risk Factors—Factors That MayAffect Future Results – “We rely on our direct and independent sales force and network of international distributors to sell our products and anyfailure to maintain our direct sales force and distributor relationships could harm our business.”8 International sales represented 45.0%, 45.4% and 44.4% of our sales in 2013, 2012 and 2011, 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 of which wereexclusively engaged in supporting our aesthetics business. In June 2008, we transitioned the responsibility for the sales and service of our aesthetics productsin the UK to an independent distributor and during 2011 we deregistered the legal entity. Upon closing the sale of the aesthetics business to Cutrera, Inc. inFebruary 2012, our French subsidiary ceased operations. 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 needs, which in turn providesus 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.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.OperationsThe manufacture of our visible light and infrared laser consoles 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 33 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 or newapplications for our products.”, “If we fail to comply with the FDA’s quality system regulation and laser performance standards, our manufacturingoperations could be halted, and our business would suffer.” and “If we modify one of our FDA approved devices, we may need to seek reapproval,which, if not granted, would prevent us from selling our modified products or cause us to redesign our products.”We 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.”9 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), Macugen (OSI Pharmaceuticals) and Ozurdex (Allergan), and to a lesser extent Visudyne (Novartis), compete rigorously with traditional laserprocedures.Some ophthalmic competitors have substantially greater financial, engineering, product development, manufacturing, marketing and technicalresources than we do. Some companies also have greater name recognition than us and long-standing customer relationships. In addition, other medicalcompanies, academic and research institutions, or others, may develop new technologies or therapies, including medical devices, surgical procedures orpharmacological treatments and obtain regulatory approval for products utilizing such techniques that are more effective in treating the conditions targeted byus, or are less expensive than our current or future products. Our technologies and products could be rendered obsolete by such developments. Any suchdevelopments could have a material adverse effect on our business, financial condition and results of operations. See Item 1A. Risk Factors - Factors ThatMay Affect Future Results - “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 agreements and technical measures to protect our intellectual property rights. These are eitherdeveloped internally or obtained from acquisitions such as RetinaLabs and Ocunetics. We file patent applications to protect technology, inventions andimprovements that are significant to the development of our business. We have been issued 26 United States patents and 17 foreign patents on the technologiesrelated to our continuing products and processes, which have expiration dates ranging from 2014 to 2028. We have 12 pending patent applications in theUnited States and 11 foreign pending patent applications that 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 to protectour intellectual property and business.”10 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 business, financial condition and results of operations. For any of our products that arecleared through the 510(k) process, such as our IQ 810 system, modifications or enhancements that could significantly affect the safety or efficacy of thedevice or that constitute a major change to the intended use of the device 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.11 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 of 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.The 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 basis for the costs associated with an in-patient hospitalization based on the patient’s discharge diagnosis, regardless ofthe actual 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”.12 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 material level of backlog. As a result, we do not believe that our backlog at any particular time is indicative of futuresales levels. 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.EmployeesCurrently, we have a total of 101 full-time equivalent employees engaged in our ongoing ophthalmology operations, including 48 in operations(including manufacturing, quality, logistics and service), 28 in sales and marketing which does not include the 13 independent sales representatives, 11 inresearch and development and 14 in finance and administration. We also employ, from time to time, a number of temporary and part-time employees as well asconsultants on a contract basis. At December 28, 2013, we employed 17 such persons. Our future success will depend 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 attracting and retaining such personnel. Our employeesare not represented by a collective bargaining organization, and we have never experienced a work stoppage or strike. We consider our employee relations to begood.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, through the SEC’s website at www.sec.gov. These periodic reportsand amendments are also available, free of charge, on our website at www.IRIDEX.com, as soon as reasonably practicable after such reports are electronicallyfiled with the Securities and Exchange Commission.Investors and others should note that we announce material financial information to our investors using SEC filings, press releases, our investorrelations website, public conference calls and webcasts. We use these channels as well as social media to communicate with investors, customers and thepublic about our company, our products and other issues. It is possible that the information we post on social media channels could be deemed to be materialinformation. We encourage investors, our customers, and others interested in IRIDEX to review the information we post on our Facebook page(www.facebook.com/IRIDEX) and Twitter feed (https://twitter.com/IRIDEX). Any information on, or that can be accessed through, our website and socialmedia channels is not part of this report. 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 havea material 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.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 bya number 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;·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;13 ·fluctuations in our product mix within ophthalmology products and foreign and domestic sales;·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, including new drugs, entry of new competitorsinto our markets, pricing pressures and other competitive factors;·our long and highly variable sales cycle;·changes in the prices at which we can sell our products, including the impact of changes in exchange rates;·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 toadjust operating expenses quickly enough to compensate for the shortfall of sales, and our results of operations may be adversely affected. In addition, wehave historically made a significant portion of each quarter’s product shipments near the end of the quarter. If that pattern continues, any delays in shipmentof products 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. For fiscal year 2013, the closing price of our commonstock fluctuated from a low of $3.76 per share to a high of $10.46 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.We 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, including with respect to our MicroPulse laserphotocoagulation systems;·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.14 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), Macugen (OSIPharmaceuticals) and Ozurdex (Allergan), and to a lesser extent Visudyne (Novartis), 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- party coverageand reimbursement policies.Changes 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 continue to challenge the coverage of new products and the level of reimbursement for covered products. Doctors, clinics, hospitals and other users of ourproducts may not obtain adequate reimbursement for use of our products from third-party payers. While we believe that the laser procedures using ourproducts have generally been reimbursed, payers may deny coverage and reimbursement for our products if they determine that the device was not reasonableand necessary for 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 28, 2013, ourinternational ophthalmology sales were $17.2 million or 45.0% 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;15 ·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.Any 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 and 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 process or obtain the regulatory approvals required to market such productssuccessfully. The products currently in our16 development pipeline may not be approved by regulatory entities and may not be commercially successful, and our current and planned products could besurpassed by more effective or advanced products of current or future competitors. Therefore, even if we are able to successfully develop enhancements or newgenerations of our products, these enhancements or new generations of products may not produce revenue in excess of the costs of development and they maybe quickly rendered obsolete by 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 rely on our direct and independent sales forces and network of international distributors to sell our products and any failure tomaintain our sales force and distributor relationships could harm our business.Our ability to sell our products and generate revenues depends upon our direct and independent sales forces within the United States and relationshipswith independent distributors outside the United States. Currently our direct and independent sales forces within the United States consists of approximately12 employees and 10 independent representatives, respectively. We maintain relationships with approximately 70 independent distributors internationallyselling our products into over 100 countries, managed by a team of 5 people. We generally grant our distributors exclusive territories for the sale of ourproducts in specified countries. The amount and timing of resources dedicated by our distributors to the sales of our products is not within our control. Ourinternational sales are entirely dependent on the efforts of these third parties. If any distributor breaches the terms of its distribution agreement with us or failsto generate sales of our products, we may be forced to replace the distributor and our ability to sell our products into that exclusive sales territory would beadversely 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 independent and distributor agreements are generally terminable at will by either party and independents and distributors may terminate theirrelationships with us, which would affect our sales and results of operations.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 accounts17 receivable and/or customer insolvencies, counterparty failures negatively impacting our operations, and increasing expense or inability to obtain futurefinancing.If economic uncertainty persisted, or if the economy entered a prolonged period of decelerating growth, our results of operations may be harmed.If 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 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 12 pending patent applications in the United States and 11foreign pending patent applications that have been filed. Our patent applications may not be approved. Any patents granted now or in the future may offer onlylimited protection against potential infringement and development by our competitors of competing products. Moreover, our competitors, many of which havesubstantial resources and have made substantial investments in competing technologies, may seek to apply for and obtain patents that will prevent, limit orinterfere with our ability to make, use or sell our products either in the United States or in international markets. Patents have a limited lifetime and once apatent expires competition may increase.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. An adverse determination in a judicial or administrative proceeding and failure to obtain necessary licenses or develop alternate technologies couldprevent us from manufacturing and selling our products, which would have a material adverse effect on our business, results of operations and financialcondition.18 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 otherkey personnel 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 for these individuals is intense, and we may not be able to attract, assimilate or retain highly qualified personnel.Competition for qualified personnel in our industry and the San Francisco Bay Area, as well as other geographic markets in which we recruit, is intense andcharacterized by increasing salaries, which may increase our operating expenses or hinder our ability to recruit qualified candidates. In addition, the integrationof replacement personnel could be time consuming, 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 could incuradditional 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.If 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.19 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 assemblecritical subassemblies and substantially all of our final products at our facility in Mountain View, California. We may experience manufacturing difficulties,quality control issues or assembly constraints, particularly with regard to new products that we may introduce. If our sales increase substantially we mayneed to increase 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 manufacturesufficient quantities 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 bedelayed, 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 theFDA Act and the related regulations, the FDA regulates the design, development, clinical testing, manufacture, labeling, sale, distribution and promotion ofmedical devices. Before a new device can be introduced into the market, the product must undergo rigorous testing and an extensive regulatory review processimplemented by the FDA under federal law. Unless otherwise exempt, a device manufacturer must obtain market clearance through either the 510(k)premarket notification process or the lengthier premarket approval application process. Depending upon the type, complexity and novelty of the device and thenature of the disease or disorder to be treated, the FDA process can take several years, require extensive clinical testing and result in significant expenditures.Even if regulatory approval is obtained, later discovery of previously unknown safety issues may result in restrictions on the product, including withdrawalof the product from the market. Other countries also have extensive regulations regarding clinical trials and testing prior to new product introductions. Ourfailure to obtain government approvals or any delays in receipt of such approvals would have a material adverse effect on our business, results of operationsand 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 be licensed as part of the product approval process before being utilized for commercial manufacturing. Noncompliance with theapplicable requirements can result in, among other things, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension ofproduction, withdrawal of marketing approvals, and criminal prosecution. The FDA also has the authority to request repair, replacement or refund of the costof any device we manufacture or distribute. Any of these actions by the FDA would materially and adversely affect our ability to continue operating ourbusiness and the results of 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. When we doembark upon clinical trials, we incur substantial expense for, and devote significant time to, these trials but cannot be certain that the trials will ever result inthe commercial sale of a product. We may suffer significant setbacks in clinical trials, even after earlier clinical trials showed promising results. Any of ourproducts may produce undesirable side effects that could cause us or regulatory authorities to interrupt, delay or halt clinical trials of a product candidate. We,the FDA, or another regulatory authority may suspend or terminate clinical trials at any time if they or we believe the trial participants face unacceptable healthrisks.20 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 regulatoryscheme that covers the methods and documentation of the design, testing, control, manufacturing, labeling, quality assurance, packaging, storage andshipping of our products. Because our products involve the use of lasers, our products also are covered by a performance standard for lasers set forth in FDAregulations. The laser performance standard imposes specific record-keeping, reporting, product testing and product labeling requirements. Theserequirements include affixing warning labels to laser products, as well as incorporating certain safety features in the design of laser products. The FDAenforces the QSR and laser performance standards through periodic unannounced inspections. We have been, and anticipate in the future being, subject tosuch inspections. Our failure to take satisfactory corrective action in response to an adverse QSR inspection or our failure to comply with applicable laserperformance standards could result in enforcement actions, including a public warning letter, a shutdown of our manufacturing operations, a recall of ourproducts, civil or criminal penalties, or other sanctions, such as those described in the 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 our devices in the past and may make additional modifications in the future that we believe do not or will notrequire additional clearances or approvals. If the FDA disagrees, and requires new clearances or approvals for the modifications, we may be required to recalland to stop marketing the modified devices, which could harm our operating results and require us to redesign our products.Our products may be misused, which could harm our reputation and our business.We market and sell out products for use by highly skilled physicians with specialized training and experience in the treatment of eye-relateddisorders. We, and our distributors, generally offer but do not require purchasers or operators of our products to attend training sessions, nor do we supervisethe procedures performed with our products. The physicians who operate our products are responsible for their use and the treatment regime for eachindividual patient. In addition, non-physicians, particularly in countries outside of the United States, or poorly trained or inexperienced physicians maymake use of our products. Our efforts to market our MicroPulse systems as a Fovea-friendly alternative to traditional CW systems or alternative treatmentmethods may increase the risk that our products will be misused. The lack of training and the purchase and use of our products by non-physicians or poorlytrained or inexperienced physicians may result in product misuse and adverse treatment outcomes, which could harm our reputation and expose us to costlyproduct liability litigation, or otherwise cause our business to suffer.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, which couldincrease 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.21 Our customers may discover defects in our products after the products have been fully deployed and operated under peak stress conditions. Inaddition, some of our products are combined with products from other vendors, which may contain defects. As a result, should problems occur, it may bedifficult to identify 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;·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 and adverselyaffect 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 ofour products in the event of material deficiencies or defects in design or manufacture. A government mandated recall, or a voluntary recall by us, could occuras a result of component failures, manufacturing errors or design defects, including defects in labeling. A recall could divert management’s attention, cause usto incur 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 business orresults 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 eyetissue. We believe we maintain adequate levels of product liability insurance but product liability insurance is expensive and we might not be able to obtainproduct liability 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 ofour insurance coverage could have a material adverse effect on our business, results of operations and financial condition.We are subject to federal, state and foreign laws governing our business practices which, if violated, could result in substantial penalties.Additionally, challenges to or investigation into our practices could cause adverse publicity and be costly to respond to and thus could harm ourbusiness.The Dodd-Frank Wall Street Reform and Consumer Protection Act requires us to track and disclose the source of certain metals used in manufacturingwhich may stem from minerals (so called “conflict minerals”) which originate in the Democratic Republic of the Congo or adjoining regions. These metalsinclude tantalum, tin, gold and tungsten. These metals are central to the technology industry and are present in some of our products as component parts. Inmost cases no acceptable alternative material exists which has the necessary properties. It is not possible to determine the source of the metals by analysis butinstead a good faith description of the source of the intermediate components and raw materials must be obtained. The components which incorporate thosemetals may originate from many sources and we purchase fabricated products from manufacturers who may have a long and difficult-to-trace supply chain.As the spot price of these materials varies, producers of the metal intermediates can be expected to change the mix of sources used, and components andassemblies which we buy may have a mix of sources as their origin. We are required to carry out a diligent effort to determine and disclose the source of thesematerials. There can be no assurance we can obtain this information from intermediate producers who are unwilling or unable to provide this information orfurther identify their sources of supply or to notify us if these sources change. These metals are subject to price fluctuations and shortages which can affectour ability to obtain the manufactured materials we rely on at favorable terms or from consistent sources. These changes could have an adverse impact on ourability to manufacture and market our devices and products. Item 1B. Unresolved Staff CommentsNone. 22 Item 2. PropertiesWe lease 37,000 square feet of space in Mountain View, California and our lease expires in February 2015. This facility is being substantially utilizedfor all of our manufacturing, research and 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. Although the results of litigation and claimscannot be predicted with certainty, we currently believe that the final outcome of these ordinary course matters will not have a material adverse effect on ourbusiness, operating results, financial condition or cash flows. Regardless of the outcome, litigation can have an adverse impact on us because of defense andsettlement costs, diversion of management resources and other factors. Item 4. Mine Safety DisclosuresNot applicable. 23 PART II Item 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 underthe symbol “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 2013 Fourth Quarter $10.74 $5.80 Third Quarter $6.58 $5.30 Second Quarter $6.57 $4.01 First Quarter $5.00 $3.76 Fiscal 2012 Fourth Quarter $4.09 $3.54 Third Quarter $4.09 $3.07 Second Quarter $4.49 $3.12 First Quarter $4.50 $3.61 On March 11, 2014 the closing price on the NASDAQ Global Market for our common stock was $9.43 per share. As of March 11, 2014, there wereapproximately 53 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 28, 2013.ISSUER PURCHASES OF EQUITY SECURITIES Period TotalNumberof SharesPurchased (1) AveragePricePaid perShare (2) Total Number ofShares Purchasedas Part of aPubliclyAnnounced Plan Approximate DollarValue of Shares thatMay Yet BePurchased Underthe Plan09/29/13 to 11/02/13 38,488 $6.03 38,488 2,574,06511/03/13 to 11/30/13 — $— — 2,574,06512/01/13 to 12/28/13 — $— — 2,574,065Total 38,488 $6.03 38,488 2,574,065(1)On February 28, 2013, the Board of Directors announced a $3.0 million stock repurchase program expiring in February 2014. The above table reflectsthe repurchase of shares of our common stock in the open market or privately negotiated transactions in accordance with the stock repurchase programduring the fourth quarter 2013. As of December 28, 2013, the Company has repurchased 75,025 shares for $425,935 under this program. Eachrepurchase was financed by available cash balances and cash from operations. On February 27, 2014, the Board of Directors approved the extensionof the plan for an additional year and approximately $2.6 million remains available for stock repurchases. All Company stock repurchases duringfiscal 2013 were made in accordance with this repurchase program.(2)Average price paid per share of common stock repurchased represents the execution price, including commissions paid to brokers.24 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 consoles, 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 and comparable information to the reader of our financial statements both on a retrospective and prospectivebasis. Our ophthalmology products are sold in the United States predominantly through a direct sales force and internationally through approximately 70independent distributors 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, 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.Cost 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 - 2013, 2012 and 2011Our fiscal year ends on the Saturday closest to December 31. Fiscal 2013 ended on December 28, 2013, fiscal 2012 ended on December 29, 2012, andfiscal 2011 ended on December 31, 2011. Fiscal years 2013, 2012 and 2011 each included 52 weeks of operations.25 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 2013Dec 28, 2013 FY 2012Dec 29, 2012 FY 2011Dec 31, 2011 Revenues: Total revenues 100.0% 100.0% 100.0%Cost of revenues 51.4 51.7 50.9 Gross margin 48.6 48.3 49.1 Operating expenses: Research and development 9.6 13.0 11.8 Sales and marketing 20.2 23.3 22.4 General and administrative 13.1 14.5 12.8 Proceeds from demutualization of insurance carrier (1.2) — — Legal settlement, net of expenses — — (3.8)Total operating expense 41.7 50.8 43.2 Income (loss) from continuing operations 6.9 (2.5) 5.9 Legal settlement — 2.3 2.4 Interest and other expense, net (1.0) (0.6) (0.9)Income (loss) from continuing operations before income taxes 5.9 (0.8) 7.4 Provision for (benefit from) income taxes 0.1 (0.3) 0.9 Income (loss) from continuing operations, net of tax 5.8 (0.5) 6.5 Income (loss) from discontinued operations, net of tax — (0.8) 1.4 Gain on sale of discontinued operations, net of tax — 5.5 — Income from discontinued operations, net of tax — 4.7 1.4 Net income 5.8% 4.2% 7.9%Comparison of 2013 and 2012Revenues.Our total revenues increased $4.4 million or 13.0% from $33.9 million in 2012 to $38.3 million in 2013, as a result of increases in both system salesand in our recurring revenues. The increase in system sales was due to an increase in sales of our IQ lasers that features MicroPulse, both domestic andinternational. The increase in recurring revenues was attributable to the inclusion of sales generated by the independent sales force resulting from the Peregrinedistribution and supply agreement, as well as an increase in sales of our licensed GreenTip product by our distribution partner, Alcon, Inc. (“Alcon”). OEMsales are expected to cease shortly as our OEM partner, Bausch & Lomb, Incorporated (“B&L”), has discontinued selling this product. (in millions) FY 2013 FY 2012 Change in $ Change in % Systems - domestic $8.4 $7.1 $1.3 18.3%Systems - international 10.9 9.4 1.5 16.0%Recurring revenues 18.7 17.1 1.6 9.4%OEM 0.3 0.3 — — Total revenues $38.3 $33.9 $4.4 13.0%Gross Profit.Gross profit was $18.6 million in 2013 compared with $16.3 million in 2012, an increase of $2.2 million or 13.7%. The increase in gross profit wasprimarily due to the increase in revenues. Gross margin as a percent of revenue was 48.6% compared with 48.3%, an increase of 0.3% due to overheadefficiencies and cost reductions, which were partly offset by a change in product mix.Gross margins as a percentage of revenues are expected to continue to fluctuate due to changes in the relative proportions of domestic and internationalsales, the product mix of sales, manufacturing variances, total unit volume changes that lead to greater or lesser production efficiencies and a variety of otherfactors. See Item 1A. “Risk Factors - Factors That May Affect Future Results - ‘Our operating results may fluctuate from quarter to quarter and year toyear.”26 Research and Development.R&D expenses decreased $0.7 million or 16.0% from $4.4 million in 2012 to $3.7 million in 2013. The decrease in spending was primarilyattributable to a decrease in headcount and associated costs. Additionally, project development materials decreased as a result of units being released toproduction. We anticipate an increase in the spending level in R&D in support of new products and certain product cost reduction programs we are initiatinggoing forward.Sales and Marketing.Sales and marketing expenses decreased $0.2 million or 2.2%, from $7.9 million in 2012 to $7.7 in 2013. Marketing expenditures decreased $0.6million due to reduced headcount and program spending as we transitioned from traditional marketing programs to online digital marketing programs, thesesavings were, partly offset by costs associated with the expansion of our independent sales force resulting from the Peregrine agreement and increasedcommissions associated with increased revenues.General and Administrative.General and administrative expenses increased $0.1 million or 2.0%, from $4.9 million in 2012 to $5.0 million in 2013. The 2012 expenses included$0.7 million in severance and related costs. Excluding these costs, the increase of $0.8 million was primarily attributable to the introduction of the MedicalDevice Tax introduced in connection with the Patient Protection and Affordable Care Act in 2013, which cost us $0.3 million for the year and an increase incompensation charges of $0.4 million for the year.Proceeds from Demutualization of Insurance Carrier.In January 2013, we received $0.5 million as a result of the demutualization of our product and liability insurance carrier.Other Income (expense).The legal settlement relates to payments received from Synergetics, Inc. associated with a 2007 settlement of legal claims for patent infringement. The$0.8 million received in 2012 represented the final payment.Interest and other expense, net consisted primarily of expense recorded for the fair value re-measurement of the contingent earn-out liabilities incurred asa result of the Company’s recent acquisitions and was $0.4 million in 2013 and $0.2 million in 2012.Income Taxes.We recorded a provision for income taxes of $31 thousand for the year ended December 28, 2013 compared to a benefit for income taxes of $0.1 millionfor the year ended December 29, 2012. Our effective tax rate on continued operations for the year ended December 28, 2013 was 1.4% compared to an effectivetax rate of 37% for the year ended December 29, 2012. Our effective tax rate decreased due mainly to the change from 2012 pretax loss from continuingoperations of $0.3 million to 2013 pretax income from continuing operations of $2.3 million. Our tax rate is benefiting from a decrease in the valuationallowance we currently have booked against our deferred tax asset and benefiting from a deduction under Section 199 of the Internal Revenue Code of 1986,as amended (“IRC”). Ultimately, assuming we remain profitable, the entire valuation allowance will be released and our tax rate will return to more normallevels. At the end of 2013, the valuation allowance totaled $10.0 million.Comparison of 2012 and 2011Revenues.Total revenues from continuing operations in 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. Our ophthalmology system revenues remained consistent period to period. Our OEM revenue continued to decline as anticipated because this revenueis generated from a product that is now in its end of life phase. (in millions) FY 2012 FY 2011 Change in $ Change in % Systems - domestic $7.1 $7.2 $(0.1) (1.4)%Systems - international 9.4 9.3 0.1 1.1%Recurring revenues 17.1 16.2 0.9 5.6%OEM 0.3 0.5 (0.2) (40.0)%Total revenues $33.9 $33.2 $0.7 2.1%27 Gross Profit.Gross profit remained level at $16.3 million in 2012 even though revenues increased as a result of a decrease in gross margin to 48.3% in 2012, from49.1% in 2011. The reduction in gross margin was primarily attributable to increased manufacturing and service costs.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 continued 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 expenseswas primarily attributable to employee severance and related costs taken as part of streamlining the Company’s operations in the latter half of the year.Legal Settlement and Other Expense, Net.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 on continuing operations of $0.1 million and an effective tax rate of 37% for fiscal year 2012 compared to aprovision for income taxes of $0.3 million and an effective tax rate of 12% for fiscal year 2011. 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 2013 and 2012Liquidity 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.As of December 28, 2013, we had cash and cash equivalents of $13.4 million, no debt and working capital of $24.6 million compared to cash andcash equivalents of $11.9 million, no debt and working capital of $20.7 million as of December 29, 2012.The increase in cash and cash equivalents for the year ended December 28, 2013 was generated primarily by income from continuing operations of$2.2 million, the add back of non-cash items of $1.6 million, partially offset by changes in working capital by $3.1 million. We used $0.4 million on capitalexpenditures and $0.4 million on paying the contingent earn-out liability arising from our acquisitions of RetinaLabs and Ocunetics. Exercises of stock optionsgenerated $1.5 million and we spent $0.4 million to purchase stock under our stock repurchase program, and we received $0.5 million in cash from therelease of funds held in escrow related to our 2012 sale of the aesthetics business. See Item 2, Unregistered Sales of Equity Securities and Use of Proceeds inPart II, Other Information, for additional information.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.28 Comparison of 2012 and 2011During 2012, net cash used in continuing operating activities was $1.1 million. The use of cash resulted primarily from a net loss from continuingoperations of $0.2 million plus changes in working capital consuming an additional $2.0 million partially offset by certain non-cash items of $1.1 million.This compares to net cash provided by continuing operating activities in 2011 of $2.3 million which was generated from net income from continuingoperations of $2.1 million the add back of non-cash items of $1.2 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 compared tocash and cash equivalents of $10.8 million, no debt and working capital of $20.6 million as of December 31, 2011.Contractual Payment ObligationsAs of December 28, 2013, our contractual payment obligations that were fixed and determinable to third parties for non-cancelable operating leases,contract manufacturers and other purchase commitments were as follows (in thousands): Payments Due by PeriodPayments Due by Period TotalTotal <1 year<1 year 1-3 years1-3 years 3-5 years3-5 years Operating leases payments $1,198 $866 $318 $14 Commitments to contract manufacturers and suppliers 3,053 1,178 1,500 375 Total contractual cash obligations $4,251 $2,044 $1,818 $389 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 accounted for and presented 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 360.29 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,third-party 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 returns 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. Once the cost of theinventory is reduced, a new lower-cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in therestoration or increase in that newly established cost basis. Factors influencing these adjustments include changes in demand, product life cycle anddevelopment plans, component cost trends, product pricing, physical deterioration and quality issues. Revisions to these adjustments would be required ifthese 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 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 sales levels increase the level of accounts receivable wouldlikely also increase. In addition, in the event that customers were to delay their payments to us, the levels of accounts receivable would likely also increase. Wemaintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. The allowance fordoubtful accounts is based on past payment history with the customer, analysis of the customer’s current financial condition, the aging of the accountsreceivable balance, customer concentration and other known factors.30 Warranty.We provide reserves for the estimated cost of product warranties at the time revenue is recognized based on historical experience of known productfailure rates and expected material and labor costs to provide warranty services. We generally provide a two-year warranty on our products. Additionally, fromtime to time, specific warranty accruals may be made if unforeseen technical problems arise. Alternatively, if estimates are determined to be greater than theactual amounts necessary, we may reverse a portion of such provisions in future periods. Actual warranty costs incurred have not materially differed fromthose accrued. Our warranty policy is applicable to products which are considered defective in their performance or fail to meet the product specifications.Warranty costs are reflected in the consolidated statements of operations as cost of revenues.Income 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 2013 and 2012, we have recorded a full valuation allowance for our deferred taxassets based on our historical loss and the uncertainty regarding our ability to project future taxable income. In future periods if we are able to generate incomewe may reduce or eliminate the valuation allowance.On September 13, 2013, the Internal Revenue Service (“IRS”) and Treasury Department released final regulations under Sections 162(a) and 263(a) ofthe IRC on the deduction and capitalization of expenditures related to tangible personal property (the final repair regulations). The entirety of the final repairregulations apply to the Company’s 2014 tax year. Application of these regulations is not expected to have a material impact on the Company’s consolidatedfinancial statements.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 aspectsof measurement and recognition in accounting for income taxes. ASC 740 prescribes a recognition threshold and measurement attribute for the financialstatement recognition and measurement of a tax provision that an entity takes or expects to take in a tax return. Additionally, ASC 740 provides guidance onde-recognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. Under ASC 740, an entity may only recognizeor continue 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 share-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.31 Recently Issued and Adopted Accounting StandardsIn February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-02, ComprehensiveIncome (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“AOCI”), which aims to improve thereporting of reclassifications out of AOCI. This update requires an entity to report the effect of significant reclassifications out of AOCI on the respective lineitems in net income if the amount being reclassified is required under US GAAP to be reclassified in its entirety to net income. For other amounts that are notrequired under US GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosuresrequired under US GAAP that provide additional detail about those amounts. The amendments do not change the current requirements for reporting net incomeor other comprehensive income in financial statements. For public entities, the amendments are effective prospectively for reporting periods beginning afterDecember 15, 2012. The Company adopted this standard in the first quarter of fiscal year 2013. The adoption of this standard did not have a material effecton our consolidated financial position, results of operations, or cash flows.In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit when a Net Operating Loss Carryforward, aSimilar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”). This standard requires an entity to present unrecognized tax benefits as areduction to deferred tax assets when a net operating loss carryforward, similar tax loss or a tax credit carryforward exists, with limited exceptions. Thisstandard is effective for fiscal years beginning on or after December 15, 2013, and for interim periods within those fiscal years. Since ASU 2013-11 onlyimpacts financial statement disclosure requirements for unrealized tax benefits, the Company does not expect its adoption to have an impact on the Company’sfinancial position or results of operations.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-U.S. 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 28, 2013 and December 29, 2012 and the consolidated statements of operations, comprehensiveincome, stockholders’ equity and cash flows for each of our fiscal years 2013, 2012 and 2011 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. 32 REPORT 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 28, 2013 and December 29,2012, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three years in theperiod ended December 28, 2013. 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 28, 2013 and December 29, 2012, and the results of their operations and their cash flows for each of the three years in the periodended December 28, 2013 in conformity with accounting principles generally accepted in the United States of America./s/ Burr Pilger Mayer, IncSan Jose, CaliforniaMarch 27, 2014 33 IRIDEX CorporationCONSOLIDATED BALANCE SHEETS(in thousands, except share and per share data) FY 2013December 28,2013 FY 2012December 29,2012 ASSETS Current assets: Cash and cash equivalents $13,444 $11,901 Accounts receivable, net of allowance for doubtful accounts of $207 in 2013 and $146 in 2012 7,345 5,480 Inventories 10,605 8,035 Prepaid expenses and other current assets 576 1,129 Current assets of discontinued operations — 510 Total current assets 31,970 27,055 Property and equipment, net 543 483 Other intangible assets, net 328 554 Goodwill 533 533 Other long-term assets 303 287 Total assets $33,677 $28,912 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $2,278 $2,105 Accrued compensation 1,891 1,563 Accrued expenses 1,592 1,242 Accrued warranty 468 453 Deferred revenue 1,133 1,004 Total current liabilities 7,362 6,367 Long-term liabilities: Other long-term liabilities 461 640 Total liabilities 7,823 7,007 Commitments and contingencies (Note 10) Stockholders’ equity: Convertible preferred stock, $0.01 par value: Authorized: 2,000,000 shares; Issued and outstanding: 0 and 500,000 shares in 2013 and 2012, respectively; Liquidation preference of $5,000 in2012 — 5 Common stock, $0.01 par value: Authorized: 30,000,000 shares; Issued and outstanding: 9,899,483 shares in 2013 and 8,452,971 shares in 2012 104 94 Additional paid-in capital 40,671 38,958 Accumulated deficit (14,921) (17,152)Total stockholders’ equity 25,854 21,905 Total liabilities and stockholders’ equity $33,677 $28,912 The accompanying notes are an integral part of these consolidated financial statements. 34 IRIDEX CorporationCONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per share data) FY 2013Year EndedDecember 28,2013 FY 2012Year EndedDecember 29,2012 FY 2011Year EndedDecember 31,2011 Total revenues $38,273 $33,859 $33,159 Cost of revenues 19,686 17,513 16,869 Gross profit 18,587 16,346 16,290 Operating expenses: Research and development 3,684 4,385 3,913 Sales and marketing 7,720 7,895 7,458 General and administrative 5,023 4,926 4,259 Proceeds from demutualization of insurance carrier (473) — — Legal settlement, net of expenses — — (1,274)Total operating expenses 15,954 17,206 14,356 Income (loss) from continuing operations 2,633 (860) 1,934 Legal settlement — 800 800 Interest and other expense, net (371) (210) (296) Income (loss) from continuing operations before provision (benefit from) income taxes 2,262 (270) 2,438 Provision for (benefit from) income taxes 31 (100) 297 Income (loss) from continuing operations, net of tax 2,231 (170) 2,141 Income (loss) from discontinued operations, net of tax — (264) 469 Gain on sale of discontinued operations, net of tax — 1,872 — Income from discontinued operations, net of tax — 1,608 469 Net income $2,231 $1,438 $2,610 Net income (loss) per share: Basic - Continuing operations $0.24 $(0.02) $0.24 Discontinued operations 0.00 0.18 0.05 Net income $0.24 $0.16 $0.29 Diluted - Continuing operations $0.22 $(0.02) $0.21 Discontinued operations 0.00 0.18 0.05 Net income $0.22 $0.16 $0.26 Weighted average shares used in computing net income per common share - basic 9,245 8,935 8,958 Weighted average shares used in computing net income per common share - diluted 10,104 8,935 10,225 The accompanying notes are an integral part of these consolidated financial statements. 35 IRIDEX CorporationCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(in thousands) FY 2013Year EndedDecember 28,2013 FY 2012Year EndedDecember 29,2012 FY 2011Year EndedDecember 31,2011 Net income $2,231 $1,438 $2,610 Other comprehensive income, net of tax: Recognition of accumulated foreign currency translation loss — 35 170 Other comprehensive income, net of tax — 35 170 Comprehensive income $2,231 $1,473 $2,780 The accompanying notes are an integral part of these consolidated financial statements. 36 IRIDEX CorporationCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(in thousands, except share data) ConvertiblePreferred Stock Common Stock AdditionalPaid-in Treasury AccumulatedOtherComprehensive Accumulated Shares Amount Shares Amount Capital Stock Income (Loss) Deficit Total 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 compensation expense 544 544 Tax effect of stock compensation expense 2 2 Foreign currency translation adjustments 170 170 Issuance of common stock in connection withRetinaLabs acquisition 2 (2) — 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 compensation expense 396 396 Release of restricted stock and escrow shares 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 — — (17,152) 21,905 Issuance of common stock under stockoption plan 493,622 5 1,490 1,495 Employee stock-based compensation expense 689 689 Release of restricted stock and escrow shares 27,915 — Stock repurchase (75,025) (426) (426)Stock repurchased from tender offer (40) (40) Preferred stock conversion to common stock (500,000) (5) 1,000,000 5 — Net income 2,231 2,231 FY 2013: Balances, December 28, 2013 — $— 9,899,483 $104 $40,671 $— $— $(14,921) $25,854 The accompanying notes are an integral part of these consolidated financial statements. 37 TIRIDEX CorporationCONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands) FY 2013Year EndedDecember 28,2013 FY 2012Year EndedDecember 29,2012 FY 2011Year EndedDecember 31,2011 Operating activities: Net income $2,231 $1,438 $2,610 Less income from discontinued operations — 1,608 469 Income (loss) from continuing operations 2,231 (170) 2,141 Adjustments to reconcile net income (loss) from continuing operations to net cash provided by (used in) operating activities: Depreciation and amortization 490 427 410 Change in fair value of earn-out liability 355 215 280 Stock-based compensation cost recognized 689 388 478 Tax effect of stock compensation expense — — 2 Provision for doubtful accounts 61 33 (12)Changes in operating assets and liabilities, net of assets and liabilities acquired: Accounts receivable (1,926) 38 (82)Inventories (2,514) (1,376) (1,027)Prepaid expenses and other current assets 553 (665) (75)Other long-term assets (16) (88) 7 Accounts payable 173 525 66 Accrued compensation 328 383 (209)Accrued expenses 171 (756) 285 Accrued warranty 15 (103) (51)Deferred revenue 129 (10) 12 Other long-term liabilities 28 21 26 Net cash provided (used in) by operating activities 767 (1,138) 2,251 Investing activities: Acquisition of property and equipment (380) (394) (203)Cash paid in business combination — — (75)Payment on earn-out liability (383) (328) — Net cash used in investing activities (763) (722) (278) Cash flows from financing activities: Proceeds from stock option exercises 1,495 445 321 Repurchase of common stock (426) (2,835) (648)Payment of legal costs in connection with tender offer (40) — — Net cash provided by (used in) financing activities 1,029 (2,390) (327)Net cash provided by operating activities from discontinued operations — 695 797 Net cash provided by investing activities from discontinued operations 510 4,632 — Effect of foreign exchange rate changes from discontinued operations — 35 (1)Net cash provided by discontinued operations 510 5,362 796 Net increase in cash and cash equivalents 1,543 1,112 2,442 Cash and cash equivalents, beginning of year 11,901 10,789 8,347 Cash and cash equivalents, end of year $13,444 $11,901 $10,789 Supplemental disclosure of cash flow information: Cash paid (received) during the year for: Income taxes $(536) $(145) $522 Interest paid $— $— $1 Supplemental disclosure of non-cash activities: Contingent consideration – earn-out liability $— $— $105 Conversion of preferred stock to common stock $5 $— $— The accompanying notes are an integral part of these consolidated financial statements. 38 IRIDEX CorporationNotes to Consolidated Financial Statements 1. OrganizationDescription 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 (“U.S.”) predominantly through a direct sales force, and an independent sales force, and internationally through approximately 70 independentdistributors in over 100 countries. In February 2012, we completed the sale of our aesthetics business to Cutera, Inc. and reclassified the aesthetics businesssegment 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 2013 ended on December 28, 2013, fiscal 2012 ended on December 29,2012, and fiscal 2011 ended on December 31, 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 accounted for and presented 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 operating results of our aesthetics business weretherefore classified as discontinued operations, and the associated assets and liabilities were classified as discontinued operations for all periods presentedunder the requirements of ASC 360. The sale of the aesthetics business was completed on February 2, 2012. 39 FY 2013Year Ended FY 2012Year Ended FY 2011Year Ended (in thousands) December 28, 2013 December 29, 2012 December 31, 2011 Total revenues $— $1,630 $10,840 Income (loss) from discontinued operations $— $(325) $653 Gain on sales of aesthetics business $— $1,149 $— Income from discontinued operations, before income taxes $— $824 $653 Income tax (benefit) expense $— $(784) $184 Income from discontinued operations, net of tax $— $1,608 $469 Current assets of discontinued operations as of December 29, 2012 comprised of restricted cash in the amount of $510 thousand. In accordance withthe terms of the sale of the aesthetics segment to Cutera, Inc., 10% of the total purchase price was deposited and held in an escrow account for a period oftwelve months from the date of closing and was available to resolve certain claims by Cutera, Inc., if any, against which the Company had indemnifiedCutera, Inc. There had been no claims made by Cutera, Inc. and in May 2013, the cash held in the escrow account was released to the Company.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 tobe cash equivalents. Cash equivalents consist primarily of cash deposits in money market funds that are available for withdrawal without restriction.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 was $33 thousand and $53 thousand as of December 28, 2013 and December 29, 2012,respectively, and is recorded within the deferred revenue accounts in the balance sheet.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 sales levels change, the level of accounts receivable wouldlikely also change. In addition, in the event that customers were to delay their payments to us, the levels of accounts receivable would likely increase. Wemaintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. The allowance fordoubtful accounts is based on past payment history with the customer, analysis of the customer’s current financial condition, the aging of the accountsreceivable balance, customer concentration and other 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. Once the cost of theinventory is reduced, a new lower-cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in therestoration or increase in that newly established cost basis. Factors influencing these adjustments include changes in demand, product life cycle anddevelopment plans, component cost trends, product pricing, physical deterioration and quality issues. Revisions to these adjustments would be required ifthese 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 $1.6 million and $1.4 million and the accumulated amortization was $601 thousand and $603thousand as of December 28, 2013 and December 29, 2012, respectively. The net book value of demos and loaners is charged to cost of revenues when suchdemos or loaners are sold.40 Property and Equipment.Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated on a straight–line basis 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.Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a businesscombination. The Company reviews goodwill for impairment on an annual basis or whenever events or changes in circumstances indicate the carrying valuemay not be recoverable. The Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit isless than its carrying amount as a basis for determining whether it is necessary to perform the two-step quantitative goodwill impairment test. If, afterassessing the totality of circumstances, an entity determines that it is more likely than not that the fair value of a reporting unit is less than its carryingamount, then it is required to perform the two-step impairment test. It does not require an entity to calculate the fair value of a reporting unit unless the entitydetermines that it is more likely than not that its fair value is less than its carrying value. However, an entity also has the option to bypass the qualitativeassessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test. The Company hasdetermined that it has a single reporting unit for purposes of performing its goodwill impairment test. As the Company uses the market approach to assessimpairment, its common stock price is an important component of the fair value calculation. If the Company’s stock price continues to experience significantprice and volume fluctuations, this will impact the fair value of the reporting unit and can lead to potential impairment in future periods. The Companyperformed its annual impairment test during the second quarter of 2013 and determined that its goodwill was not impaired. As of December 28, 2013, theCompany had not identified any factors that indicated there was an impairment of its goodwill and determined that no additional impairment analysis wasthen required.Intangible assets with definite lives are amortized over the useful life of the asset. We review our amortizing intangible assets for impairment wheneverevents or changes in circumstances indicate that their carrying value may not be recoverable. An asset is considered impaired if its carrying amount exceeds thefuture non-discounted net cash flow the asset is expected to generate. If an asset is considered to be impaired, the impairment to be recognized is measured bythe amount by which the carrying amount of the asset exceeds its fair value. In such circumstances, the Company conducts an impairment analysis inaccordance with the 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,third-party 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 return rights toany of our distributors.41 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.Taxes 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 as well as accrued expenses to the degree which is appropriate.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 28, 2013 and December 29, 2012 are as follows (in thousands): 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 Additions to deferral 1,383 Revenue recognized (1,254)FY 2013: Balance, December 28, 2013 $1,133 Warranty.We provide reserves for the estimated cost of product warranties at the time revenue is recognized based on historical experience of known productfailure rates and expected material and labor costs to provide warranty services. We generally provide a two-year warranty on our products. Additionally, fromtime to time, specific warranty accruals may be made if unforeseen technical problems arise. Alternatively, if estimates are determined to be greater than theactual amounts necessary, we may reverse a portion of such provisions in future periods. Warranty costs are reflected in the consolidated statements ofoperations as costs of revenues. A reconciliation of the changes in the Company’s warranty liability for the years ended December 28, 2013 and December 29,2012 are as follows (in thousands): FY 2011: Balance, December 31, 2011 $556 Accruals for product warranties 173 Cost of warranty claims (276)FY 2012: Balance, December 29, 2012 453 Accruals for product warranties 213 Cost of warranty claims (198)FY 2013: Balance, December 28, 2013 $468 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 2013, 2012 and 2011.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 $0.1 million in 2013, $0.2 million in 2012, and$0.3 million in 2011 and are included in sales and marketing expenses in the accompanying consolidated statements of operations.42 Income 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 2013 and 2012, we have recorded a full valuation allowance for our deferred taxassets based on our historical loss and the uncertainty regarding our ability to project future taxable income. In future periods if we are able to generate incomewe may reduce or eliminate the valuation allowance.On September 13, 2013, the IRS and Treasury Department released final regulations under Sections 162(a) and 263(a) of the IRC on the deduction andcapitalization of expenditures related to tangible personal property (the final repair regulations). The entirety of the final repair regulations apply to theCompany’s 2014 tax year. Application of these regulations is not expected to have a material impact on the Company’s consolidated financial statements.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 aspectsof measurement and recognition in accounting for income taxes. ASC 740 prescribes a recognition threshold and measurement attribute for the financialstatement recognition 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.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, share-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 28, 2013, December 29, 2012, and December 31, 2011, no single customer accounted for greater than 10% of total sales. Nosingle customer accounted for more than 10% of our net accounts receivable balance as of December 28, 2013 and December 29, 2012.The Company’s products require approvals from the Food and Drug Administration and international regulatory agencies prior to commercializedsales. The Company’s future products may not receive required approvals. If the Company were denied such approvals, or if such approvals were delayed, itwould have a materially adverse impact on the Company’s business, results of operations and financial condition.43 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, release (vesting) of restricted stock units and awards, and the conversion of Series A Preferred Stock into common stockand are calculated under the treasury stock method. Common stock equivalent shares from unexercised stock options and the conversion of Series A PreferredStock are excluded from the computation for periods in which the Company incurs a loss from continuing operations as their effect is anti-dilutive or if theexercise price of such options is greater than the average market price of the stock for the period. See Note 15 - Computation of Basic and Diluted Net Income(Loss) Per Common Share.Recently Issued and Adopted Accounting Standards.In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-02, ComprehensiveIncome (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“AOCI”), which aims to improve the reportingof reclassifications out of AOCI. This update requires an entity to report the effect of significant reclassifications out of AOCI on the respective line items in netincome if the amount being reclassified is required under US GAAP to be reclassified in its entirety to net income. For other amounts that are not requiredunder US GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures requiredunder US GAAP that provide additional detail about those amounts. The amendments do not change the current requirements for reporting net income or othercomprehensive income in financial statements. For public entities, the amendments are effective prospectively for reporting periods beginning after December15, 2012. The Company adopted this standard in the first quarter of fiscal year 2013. The adoption of this standard did not have a material effect on ourconsolidated financial position, results of operations, or cash flows.In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit when a Net Operating Loss Carryforward, aSimilar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”). This standard requires an entity to present unrecognized tax benefits as areduction to deferred tax assets when a net operating loss carryforward, similar tax loss or a tax credit carryforward exists, with limited exceptions. Thisstandard is effective for fiscal years beginning on or after December 15, 2013, and for interim periods within those fiscal years. Since ASU 2013-11 onlyimpacts financial statement disclosure requirements for unrealized tax benefits, the Company does not expect its adoption to have an impact on the Company’sfinancial position or results of operations. 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 $75thousand in cash consideration and an earn-out provision fair valued at $105 thousand. The earn-out is tied to future revenues and could result in additionalcash and share 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.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. 44 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 usingmodels or other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest ratesand volatility factors, are corroborated by readily observable data from actively quoted markets for substantially the full term of the financialinstrument.—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 as of December 28, 2013 and December 29, 2012, approximate fair value because of the short maturity of these instruments.As of December 28, 2013 and December 29, 2012, 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 2013: December 28, 2013 FY 2012: December 29, 2012 Fair Value Measurements Fair Value Measurements Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Assets: Money market funds $12,742 $12,742 $10,839 $10,839 Liabilities: Earn-out liability $624 $624 $652 $652 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 a significant increase (decrease) in the discount rate in isolation could result in a significantly lower (higher) fairvalue 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’soperations, finance and accounting groups based on additional information as it becomes available. Any change in the fair value adjustment is recorded in thestatement 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 28, 2013 and December 29, 2012. As of December 28, 2013 Fair Value(inthousands) ValuationTechnique SignificantUnobservableInput WeightedAverage(range)Earn-out liability $624 Discounted cash Projected royalties $1,463 flow (in thousands) (414 – 1,675) Discount rate 21.61%(20.52% - 27.00%)45 As of December 29, 2012 Fair Value(inthousands) ValuationTechnique SignificantUnobservableInput WeightedAverage(range)Earn-out liability $652 Discounted cash Projected royalties $1,762 flow (in thousands) (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 December 31, 2011 $765 Addition of earn-out related to Ocunetics, Inc. acquisition (328)Change in fair value of earn-out liability 215 Balance as of December 29, 2012 652 Payments against earn-out (383)Change in fair value of earn-out liability 355 Balance as of December 28, 2013 $624 .5. InventoriesThe components of the Company’s inventories are as follows (in thousands): FY 2013December 28,2013 FY 2012December 29,2012 Raw materials and work in process $6,898 $5,357 Finished goods 3,707 2,678 Total inventories $10,605 $8,035 6. Property and EquipmentThe components of the Company’s property and equipment are as follows (in thousands): FY 2013December 28,2013 FY 2012December 29,2012 Equipment $7,065 $6,762 Leasehold improvements 2,299 2,278 Less: accumulated depreciation and amortization (8,821) (8,557)Property and equipment, net $543 $483 Depreciation expense related to property and equipment was $264 thousand, $236 thousand, and $185 thousand for the fiscal years 2013, 2012 and2011, respectively. 7. GoodwillThe carrying value of goodwill was $0.5 million as of December 28, 2013 and December 29, 2012.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 2013, 2012 or 2011. 46 8. Intangible AssetsThe components of the Company’s purchased intangible assets as of December 28, 2013 are as follows (in thousands): UsefulLives FY 2013AnnualAmortization GrossCarryingValue AccumulatedAmortization NetCarryingValue UsefulLivesRemainingCustomer relations 15 Years $16 $240 $60 $180 11.4 YearsPatents Varies 210 720 572 148 Varies $226 $960 $632 $328 The components of the Company’s purchased intangible assets as of December 29, 2012 are as follows (in thousands): UsefulLives FY 2012AnnualAmortization GrossCarryingValue AccumulatedAmortization NetCarryingValue UsefulLivesRemainingCustomer relations 15 Years $16 $240 $44 $196 12.4 YearsPatents Varies 175 720 362 358 Varies $191 $960 $406 $554 Aggregate amortization expense for the fiscal years 2013 and 2012 were $226 thousand and $191 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: 2014 $58 2015 52 2016 86 2017 16 2018 16 Thereafter 100 Total $328 9. Accrued ExpensesThe components of the Company’s accrued expenses are as follows (in thousands): FY 2013December 28,2013 FY 2012December 29,2012 Distributor commission $524 $173 Customer deposits 200 158 Earn-out – short term 184 156 Sales and use tax payable 111 49 Royalties payable 32 32 Other accrued expenses 541 674 Total accrued expenses $1,592 $1,242 10. Commitments and ContingenciesLease Agreements.The Company leases its operating facilities under a non-cancelable operating lease. On December 22, 2009, the lease for the Mountain View, Californiafacility was amended and renewed to lease for an additional six year period beginning March 1, 2010 until February 28, 2015. Rent expense totaled $0.6million for each of the fiscal years 2013, 2012 and 2011.47 Future minimum lease payments under current operating leases at December 28, 2013 are summarized as follows (in thousands): Fiscal Year Operating Lease Payments 2014 $866 2015 226 2016 92 2017 14 Total future minimum lease payments $1,198 Manufacture and Supply Agreement.In April 2013, the Company entered into a manufacture and supply agreement with Peregrine Surgical Ltd. to manufacture and supply certaincomponents and ophthalmic instrumentation for IRIDEX. Annually, there is a minimum commitment to purchase $750 thousand. In 2013, purchases madeunder the agreement amounted to $134 thousand. The agreement, which terminates on July 2017, is renewable at the end of the term for successive one yearterms. Future minimum payments for manufacture and supply commitments as of December 28, 2013 are summarized as follows (in thousands): Fiscal Year ContractManufacturing andSupplyCommitments 2014 $1,178 2015 750 2016 750 2017 375 Total contract manufacturing and supply commitments $3,053 License Agreements.The Company is obligated to pay royalties equivalent to 5% of sales on certain products under certain license agreements with termination dates asearly as the end of 2018 and as late as the end of 2021. Royalty expense, charged to cost of revenues, was approximately $0.1 million, $0.1 million, and $0.2million for the fiscal years 2013, 2012 and 2011, 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.48 11. 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.In 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 wasallocated to the common stock warrants based on their estimated fair value at the time of issuance. On June 11, 2013, all outstanding shares of the Company’sSeries A Preferred Stock automatically converted into 1,000,000 shares of common stock.Stock-Based Compensation1998 Stock Plan.The 1998 Stock Plan (“the 1998 Plan”), as amended, provides for the granting to employees (including officers and non-employee directors) ofincentive stock options and for the granting to employees (including officers and non-employee directors) and consultants of nonstatutory stock options, stockpurchase rights (“SPRs”), restricted stock, restricted stock units (“RSUs”), performance shares, performance units and stock appreciation rights. Theexercise price 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 sharesat the time of grant. With respect to any recipient who owns stock possessing more than 10% of the voting power of our outstanding capital stock, the exerciseprice of 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 areexercisable at such times and under such conditions as determined by the administrator; generally over a four year period. The maximum term of incentivestock options granted to any recipient must not exceed ten years; provided, however, that the maximum term of an incentive stock option granted to anyrecipient possessing more than 10% of the voting power of the Company’s outstanding capital stock must not exceed five years. In the case of SPRs, unless theadministrator determines otherwise, the Company has a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser’semployment with the Company for any reason (including death or disability). Such repurchase option lapses at a rate determined by the administrator. Thepurchase price for shares repurchased by the Company is the original price paid by the purchaser. As of December 28, 2013 and December 29, 2012, noshares were subject to repurchase. The form of consideration for exercising an option or stock purchase right, including the method of payment, is determinedby the administrator. The 1998 Plan expired in February 2008. 2008 Equity Incentive Plan.On June 11, 2008, the shareholders approved the adoption of the 2008 Equity Incentive Plan, (“the Incentive Plan”). There are no material changes inthe Incentive Plan from the 1998 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 Plan that expire or otherwise terminate without having been exercised in fulland shares issued pursuant to awards granted under the 1998 Plan that are forfeited to the Company on or after the date the 1998 Plan expires.49 The following table summarizes information regarding activity in our stock option plans during the fiscal years ended 2013, 2012 and 2011 (inthousands except share and per share data): Outstanding Options SharesAvailablefor Grant Numberof Shares AggregatePrice WeightedAverageExercisePrice FY 2010: Balances, January 1, 2011 760,137 1,618,066 $5,906 $3.65 Additional shares reserved 163,378 Options granted (319,900) 319,900 1,148 3.59 Restricted stock granted (100,315) Options exercised — (99,291) (321) 3.24 Options cancelled 72,274 (72,274) (353) 4.88 Options expired (70,353) — — — FY 2011: Balances, December 31, 2011 505,221 1,766,401 6,380 3.61 Additional shares reserved 391,166 Options granted (335,050) 335,050 1,313 3.92 Restricted stock granted (66,665) Options exercised — (174,631) (445) 2.55 Options cancelled 356,277 (356,277) (1,550) 4.35 Options expired (108,971) — — — FY 2012: Balances, December 29, 2012 741,978 1,570,543 5,698 3.63 Additional shares reserved 52,128 Options granted (149,600) 149,600 851 5.69 Restricted stock granted (234,012) Options exercised — (493,622) (1,495) 3.03 Options cancelled 123,679 (123,679) (698) 5.64 Options expired (57,628) — — — FY 2013: Balances, December 28, 2013 476,545 1,102,842 $4,356 $3.97 There were 1,579,387 shares reserved for future issuance under the stock option plans at December 28, 2013.The following table summarizes information with respect to stock options outstanding and exercisable at December 28, 2013: Options Outstanding Options Vested and Exercisable Range of Exercise Prices Number ofSharesOutstanding atDecember 28,2013 WeightedAverageRemainingContractualLife (years) WeightedAverageExercisePrice Number ofSharesExercisable atDecember 28,2013 WeightedAverageExercisePrice $0.90 - $2.34 124,474 2.00 $1.44 124,474 $1.44 $2.35 - $2.78 117,142 0.90 $2.49 117,142 $2.49 $2.93 - $3.60 127,694 3.63 $3.42 88,432 $3.36 $3.72 - $3.75 65,833 4.78 $3.72 39,000 $3.72 $3.86 - $3.86 171,875 5.96 $3.86 26,573 $3.86 $3.89 - $4.11 111,325 4.60 $3.98 62,498 $3.97 $4.12 - $4.74 126,775 4.05 $4.46 78,546 $4.32 $4.86 - $5.92 173,091 3.52 $5.63 104,367 $5.45 $6.00 - $9.06 81,633 2.22 $6.74 60,492 $6.90 $10.19 - $10.19 3,000 6.93 $10.19 — $0.00 $0.90 - $10.19 1,102,842 3.62 $3.97 701,524 $3.69 50 The determination of the 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 2013 FY 2012 FY 2011Average risk free interest rate 1.12% 0.68% 0.98%Expected life (in years) 4.50 years 4.55 years 4.70 yearsDividend yield — — —Average volatility 71.5% 89.2% 92.2%The weighted average grant date fair value of options granted as calculated using Black-Scholes option pricing was $3.16, $2.60, and $2.47 per sharefor the fiscal years 2013, 2012 and 2011, 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.The following table shows stock-based compensation expense by functional line item in the consolidated statements of operations for 2013, 2012 and2011 (in thousands): FY 2013Year Ended FY 2012Year Ended FY 2011Year Ended December 28, 2013 December 29, 2012 December 31, 2011 Cost of revenues $108 $63 $60 Research and development 71 77 76 Sales and marketing 113 105 112 General and administrative 397 143 230 Total stock-based compensation expense – continuing operations 689 388 478 Total stock-based compensation expense – discontinued operations — 8 66 Total stock-based compensation expense $689 $396 $544 Stock-based compensation expense capitalized to inventory was immaterial for 2013, 2012, and 2011.Information regarding stock options outstanding, exercisable and expected to vest as of December 28, 2013 is summarized below: Weighted Average Aggregate Number of Weighted Average Remaining Contractual Intrinsic Value Shares Exercise Price Life (years) (thousands) Options outstanding 1,102,842 $3.97 3.62 $6,287 Options vested and expected to vest 1,042,611 $3.93 3.48 $5,981 Options exercisable 701,524 $3.69 2.33 $4,196 51 The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the Company’s closing stock price onthe last trading day of fiscal 2013 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the optionholders had all option holders exercised their options on December 28, 2013. This amount changes based on the fair market value of the Company’s commonstock. The total intrinsic value of options exercised for fiscal years 2013, 2012 and 2011 were approximately $1.5 million, $261 thousand, and $84thousand, respectively.As of December 28, 2013, 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 2.89 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 RSU, at theelection of such Board member, in each case equal to $20 thousand worth of our common stock (determined at the fair market value of the shares at the timesuch award is granted) under the Company’s 2008 Equity Incentive Plan. Each equity award or RSU vests in full on the one-year anniversary of the date ofgrant provided that the non-employee member continues to serve on the Board through such date.Summary 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 28, 2013 is summarized below: Number ofShares Weighted AverageRemaining ContractualLife (years) Aggregate IntrinsicValue (thousands) Restricted stock units outstanding 269,259 0.86 $2,604 Restricted stock units vested and expected to vest 243,471 0.85 $2,354 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 27, 2013 of $9.67.On March 25, 2013, the Company granted a restricted stock unit award for up to 220,000 shares of the Company’s common stock (the “MarketPerformance Award”) under the terms of the Company’s 2008 Equity Incentive Plan, as amended, to the Company’s President and Chief Executive Officer.The number of shares issuable pursuant to the Market Performance Award will be based upon the Company’s average stock price performance during the twomonths prior to and two months following the date the service condition is met, or the fair market value of the Company’s common stock in the event vestingis triggered by a change of control of the Company. The Market Performance Award is expected to vest on December 31, 2014, given that no other vestingtriggers occur prior to that date. To the extent that the market condition is not met, the Market Performance Award will not vest and will be cancelled. Since themarket conditions will affect the vesting of the Market Performance Award, the Company cannot use the Black-Scholes option pricing model to value theaward; instead, a binomial model must be used. The Company utilized the Monte Carlo simulation technique, which incorporated assumptions for theexpected holding period, risk-free interest rate, stock price volatility and dividend yield. The total value of the Market Performance Award was $258thousand. Compensation expense is recognized ratably until such time as the market condition is satisfied.52 Information regarding the restricted stock units and awards activity during the year ended December 28, 2013, December 29, 2012 and December 31,2011 is summarized below: Number ofShares Weighted AverageGrant Date FairValue Outstanding at January 1, 2011 — $— 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 Restricted stock units granted 230,509 $4.51 Restricted stock units released (17,249) $3.77 Outstanding at December 28, 2013 269,259 $4.42 Information regarding the restricted stock units and awards activity during the year ended December 28, 2013, December 29, 2012 and December 31,2011 is summarized below: Number ofShares Weighted AverageGrant Date FairValue Outstanding at January 1, 2011 — $— 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 Restricted stock awards granted 3,503 $5.71 Restricted stock awards released (10,666) $3.75 Outstanding at December 28, 2013 3,503 $5.71 12. Employee Benefit PlanThe Company has a plan known as the IRIS Medical Instruments 401(k) Trust to provide retirement benefits through the deferred salary deductionsfor substantially all U.S. 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 December 29, 2012, the Company reinstated a Company match in the amount of 50% ofemployee contributions up to a maximum of $3 thousand. In 2013, total matching contributions made by the Company was $170 thousand. 13. Income TaxesPre-tax book income (loss) from continuing operations was comprised of the following: FY 2013Year EndedDecember 28,2013 FY 2012Year EndedDecember 29,2012 FY 2011Year EndedDecember 31,2011 United States $2,262 $(270) $2,438 Foreign — — — Total $2,262 $(270) $2,438 53 The provision for (benefit from) income taxes from continuing operations includes: FY 2013Year EndedDecember 28,2013 FY 2012Year EndedDecember 29,2012 FY 2011Year EndedDecember 31,2011 Current: Federal $11 $(114) $267 State 20 14 30 Foreign — — — 31 (100) 297 Deferred: Federal — — — State — — — Provision for (benefit from) income taxes $31 $(100) $297 The Company’s effective tax rate differs from the statutory federal income tax rate as shown in the following schedule: FY 2013Year EndedDecember 28,2013 FY 2012Year EndedDecember 29,2012 FY 2011Year EndedDecember 31,2011 Income tax provision at statutory rate 34.0% 34.0% 34.0%State income taxes, net of federal benefit (13.3%) (88.1%) (2.0%)Permanent differences (17.0%) (89.1%) 0.0%Research and development credits 0.0% 0.0% (3.8%)Change in valuation allowance (2.3%) 180.3% (15.8%)Effective tax rate 1.4% 37.1% 12.4%The tax effect of temporary differences and carryforwards that give rise to significant portions of the net deferred tax assets are presented below (inthousands): FY 2013December 28,2013 FY 2012December 29,2012 Accruals and reserves $1,792 $2,295 Deferred revenue 91 38 Fixed assets 423 429 Intangibles 441 180 Stock compensation 696 753 Net operating loss 5,224 5,310 Research and development credits 1,260 1,008 Other tax credits 47 47 Other — 1 Net deferred tax asset $9,974 $10,061 Valuation allowance (9,974) (10,061)Net deferred tax assets $— $— 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. The valuation allowance decreased by $87 thousand in 2013, $1.6 million in 2012, and $414 thousand in 2011.As of December 28, 2013, the Company had federal and state net operating loss (“NOL”) carryforwards of $13.9 million and $14.1 million,respectively. Of the total NOL carryforwards, $0.6 million for federal and $0.4 million for states, relate to windfall stock option deductions which, whenrealized, will be credited to equity. The federal NOL will begin to expire in 2032 and the state NOL will begin to expire in 2020, in each case if not used.54 The American Taxpayer Relief Act of 2012 was enacted on January 2, 2013. The Act extended the research and development credit through 2013. As ofDecember 28, 2013, the Company had federal and state R&D credit carryforwards of approximately $1.2 million and $1.7 million, respectively, available tooffset future tax liabilities. The federal R&D credits will begin expiring in 2026 if not used. The State R&D credits do not expire.The above NOLs and research and development credits are subject to Sections 382 and 383 of the Internal Revenue Code . In the event of a change inownership as defined by these code sections, the usage of the above mentioned NOL and R&D credits may be limited.On September 13, 2013, the IRS and Treasury Department released final regulations under Sections 162(a) and 263(a) of the IRC on the deduction andcapitalization of expenditures related to tangible personal property (the final repair regulations). The entirety of the final repair regulations apply to theCompany’s taxable year beginning on or after January 1, 2014. Application of these regulations is not expected to have a material impact on the Company’sconsolidated financial statements.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 28, 2013, the Company had accrued $67 thousand for payments of interest related to unrecognized tax benefits.A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands): FY 2013Year EndedDecember 28,2013 FY 2012Year EndedDecember 29,2012 FY 2011Year EndedDecember 31,2011 Balance at the beginning of the year $954 $1,191 $865 Additions based upon tax positions related to the current year 48 36 58 Additions based upon tax positions related to the prior year 25 — 268 Reductions based upon tax positions related to the prior year — (273) — Balance at the end of the year $1,027 $954 $1,191 If the ending balance of $1.0 million of unrecognized tax benefits as of December 28, 2013 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 $1.0 million 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. The tax years 2008 to 2013 remain open in several jurisdictions, none of which have individualsignificance. 14. Business Segments and CustomersThe 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 2013, 2012 and 2011, no customer individually accounted for more than 10% of our revenues.Revenue information shown by geographic region is as follows (in thousands): FY 2013Year EndedDecember 28,2013 FY 2012Year EndedDecember 29,2012 FY 2011Year EndedDecember 31,2011 United States $21,043 $18,496 $18,447 Europe 7,345 7,468 8,940 Rest of Americas 3,309 2,335 2,287 55 FY 2013Year EndedDecember 28,2013 FY 2012Year EndedDecember 29,2012 FY 2011Year EndedDecember 31,2011 Asia/Pacific Rim 6,576 5,560 3,485 $38,273 $33,859 $33,159 Revenues are attributed to countries based on location of end customers. For fiscal years 2013, 2012 and 2011 no individual country accounted formore than 10% of the Company’s sales, except for the United States, which accounted for 55.0%, 54.6%, and 55.6% of revenues in 2013, 2012, and 2011respectively.As of December 28, 2013 and December 29, 2012, the Company had no long-lived assets in any country other than in the United States. 15. Computation of Basic and Diluted Net Income (Loss) Per Common ShareA reconciliation of the numerator and denominator of basic and diluted net income (loss) per common share is provided as follows (in thousands,except per share amounts): FY 2013Year EndedDecember 28,2013 FY 2012Year EndedDecember 29,2012 FY 2011Year EndedDecember 31,2011 Numerator: Income (loss) from continuing operations $2,231 $(170) $2,141 Income from discontinued operations — 1,608 469 Net income $2,231 $1,438 $2,610 Denominator: Weighted average shares of common stock (basic) 9,245 8,935 8,958 Effect of dilutive preferred shares 448 — 1,000 Effect of dilutive stock options 291 — 245 Effect of dilutive contingent shares 120 — 22 Weighted average shares of common stock (diluted) 10,104 8,935 10,225 Per share data: Basic net income (loss) per share: Net income (loss) before discontinued operations $0.24 $(0.02) $0.24 Discontinued operations 0.00 0.18 0.05 Net income $0.24 $0.16 $0.29 Diluted net income (loss) per share: Net income (loss) before discontinued operations $0.22 $(0.02) $0.21 Discontinued operations 0.00 0.18 0.05 Net income $0.22 $0.16 $0.26 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) and vesting of restricted stock units and awards are included in the computation as their effect is dilutive. The Company excludes stock options andother common stock equivalents from the computation if the exercise price of the options is greater than the average market price of the stock for the periodbecause the inclusion of these options would be anti-dilutive. Accordingly, as of December 28, 2013 and December 31, 2011, stock options to purchase156,564 and 713,462 shares, respectively, were excluded from the computation of diluted weighted average shares outstanding. 56 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, as of December 29,2012, 1,000,000 shares of common stock equivalents (from the conversion of Series A Preferred Stock), stock options to purchase 1,570,543 shares ofcommon stock and restricted stock units and awards for 66,665 shares of common stock have been excluded. 16. Subsequent EventsOn February 27, 2014, the Board of Directors approved the extension of the Company’s stock repurchase plan, initially approved in February 2013 fora one-year period, for an additional year and $2.6 million remains available for stock repurchases.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 28, 2013. 57 Item 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 28, 2013, 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 28, 2013 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 28, 2013.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 2013 that has materiallyaffected, or is reasonably likely to materially affect, our internal control over financial reporting. Item 9B. Other InformationNot applicable. 58 PART 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 2014 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 11, 2014. 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” inour Proxy 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 the Appointment of Independent RegisteredPublic Accounting Firm” in our Proxy Statement. 59 PART IV Item 15. Exhibits and Financial Statement Schedules(a) The following documents are filed in Part II of this Annual Report on Form 10-K: Page inForm 10-KReport1. Index to Financial Statements Report of Independent Registered Public Accounting Firm 33Consolidated Balance Sheets as of December 28, 2013 and December 29, 2012 34Consolidated Statements of Operations for the years ended December 28, 2013, December 29, 2012, and December 31, 2011 35Consolidated Statements of Comprehensive Income for the years ended December 28, 2013, December 29, 2012, and December 31, 2011 36Consolidated Statements of Stockholders’ Equity for the years ended December 28, 2013, December 29, 2012, and December 31, 2011 37Consolidated Statements of Cash Flows for the years ended December 28, 2013, December 29, 2012, and December 31, 2011 38Notes to Consolidated Financial Statements 39 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 Title2.1(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; BlueLine CapitalPartners 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. 60 Exhibits Exhibit Title10.8(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)* 2014 Bonus Plan Summary. 10.15(12)* Form of 2008 Equity Incentive Plan Restricted Stock Award Agreement. 10.16(12)* Form of 2008 Equity Incentive Plan Restricted Stock Unit Award Agreement. 10.17(13)* Restricted Stock Unit Award Agreement granted to William M. Moore under the Company’s 2008 Equity Incentive Plan, as amended. 21.1(1) Subsidiaries of Registrant. 23.1 Consent of Burr Pilger Mayer, Inc., Independent Registered Public Accounting Firm. 24.1 Power of Attorney (included on signature page). 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-OxleyAct 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-OxleyAct of 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 the Registrant’s Report on Form 8-K on December 10, 2013.(12)Incorporated by reference to the Exhibits filed with the Registrant’s Report on Form 10-Q for the quarter ended July 2, 2011.(13)Incorporated by reference to the Exhibit 10.1 filed with the Registrant’s Report on Form 8-K on March 27, 2013.61 Trademark AcknowledgmentsIRIDEX, the IRIDEX logo, IRIS Medical, OcuLight, SmartKey, and EndoProbe, are our registered trademarks. G-Probe, DioPexy, DioVet, TruFocus,TrueCW, IQ 810, IQ 577, IQ 532, MicroPulse, TxCell, OtoProbe, Symphony, EasyFit, Endoview, MoistAir and GreenTip product names are ourtrademarks. All other trademarks or trade names appearing in this Annual Report on Form 10-K are the property of their respective owners. 62 SIGNATURESPursuant 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 onits behalf by the undersigned, thereunto duly authorized, in the City of Mountain View, State of California, on the 27th day of March 2014. IRIDEX CORPORATION By: /s/ JAMES H. MACKANESS /s/ WILLIAM M. MOORE James H. Mackaness William M. Moore Chief Financial Officer and Chief Operating Officer President and Chief Executive Officer KNOW 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 President, Chief Executive Officer, and Chairman of the Board March 27, 2014(William M. Moore) (Principal Executive Officer) /s/ James H. Mackaness Chief Financial Officer and Chief Operating Officer March 27, 2014(James H. Mackaness) (Principal Financial and Accounting Officer) /s/ Sanford Fitch Director March 27, 2014(Sanford Fitch) /s/ Garrett A. Garrettson Director March 27, 2014(Garrett A. Garrettson) /s/ James B. Hawkins Director March 27, 2014(James B. Hawkins) /s/ Ruediger Naumann-Etienne Director March 27, 2014(Ruediger Naumann-Etienne) /s/ Scott A. Shuda Director March 27, 2014(Scott A. Shuda) 63 Exhibit Index Exhibits Exhibit Title2.1(15) Asset Purchase Agreement by and among Cutera, Inc., Registrant, and U.S. Bank, National Association, as Escrow Agent, dated December30, 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; BlueLine CapitalPartners 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 to AmendmentNo. 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)* 2014 Bonus Plan Summary. 10.15(12)* Form of 2008 Equity Incentive Plan Restricted Stock Award Agreement. 10.16(12)* Form of 2008 Equity Incentive Plan Restricted Stock Unit Award Agreement. 10.17(13)* Restricted Stock Unit Award Agreement granted to William M. Moore under the Company’s 2008 Equity Incentive Plan, as amended. 21.1(1) Subsidiaries of Registrant. 23.1 Consent of Burr Pilger Mayer, Inc., Independent Registered Public Accounting Firm. 24.1 Power of Attorney (included on signature page). 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. 64 Exhibits Exhibit Title32.2 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 the Registrant’s Report on Form 8-K on December 10, 2013.(12)Incorporated by reference to the Exhibits filed with the Registrant’s Report on Form 10-Q for the quarter ended July 2, 2011.(13)Incorporated by reference to the Exhibit 10.1 filed with the Registrant’s Report on Form 8-K on March 27, 2013.65 Exhibit 23.1Exhibit 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMCONSENT 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 27, 2014 related to the consolidated financialstatements of IRIDEX Corporation, which appears in this Annual Report on Form 10-K./s/ Burr Pilger Mayer, Inc.San Jose, CaliforniaMarch 27, 2014 EXHIBIT 31.1EXHIBIT 31.1CERTIFICATION OF CHIEF EXECUTIVE OFFICERCERTIFICATION OF CHIEF EXECUTIVE OFFICERPURSUANT TO SECTION 13(a) or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934PURSUANT TO SECTION 13(a) or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934AS ADOPTED PURSUANT TOAS ADOPTED PURSUANT TOSECTION 302 OF THE SARBANES-OXLEY ACT OF 2002SECTION 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 tostate a material fact necessary to make the statements made, in light of the circumstances under which suchstatements were made, not misleading with respect to the period covered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report,fairly present in all material respects the financial condition, results of operations and cash flows ofthe 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 disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controlover financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant andhave:a)Designed such disclosure controls and procedures, or caused such disclosure controls and proceduresto be designed under our supervision, to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others 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 financialreporting to be designed under our supervision, to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statements for external purposesin accordance with generally accepted accounting principles;c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented inthis report our conclusions about the effectiveness of the disclosure controls and procedures, as ofthe end of the period covered by this report based on such evaluation; andd)Disclosed in this report any changes in the registrant’s internal control over financial reportingthat occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscalquarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation ofinternal control over financial reporting, to the registrant’s auditors and the audit committee of theregistrant’s board of directors (or persons performing the equivalent functions):a)All significant deficiencies and material weaknesses in the design or operation of internal controlover financial reporting which are reasonably likely to adversely affect the registrant’s ability torecord, process, summarize and report financial information; andb)Any fraud, whether or not material, that involves management or other employees who have a significantrole in the registrant’s internal control over financial reporting.Date: March 27, 2014 By: /s/ WILLIAM M. MOORE Name: William M. Moore Title: President and Chief Executive Officer (Principal Executive Officer)  EXHIBIT 31.2EXHIBIT 31.2CERTIFICATION OF CHIEF FINANCIAL OFFICERCERTIFICATION OF CHIEF FINANCIAL OFFICERPURSUANT TO SECTION 13(a) or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934PURSUANT TO SECTION 13(a) or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934AS ADOPTED PURSUANT TOAS ADOPTED PURSUANT TOSECTION 302 OF THE SARBANES-OXLEY ACT OF 2002SECTION 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 tostate a material fact necessary to make the statements made, in light of the circumstances under which suchstatements were made, not misleading with respect to the period covered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report,fairly present in all material respects the financial condition, results of operations and cash flows ofthe 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 disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controlover financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant andhave:a)Designed such disclosure controls and procedures, or caused such disclosure controls and proceduresto be designed under our supervision, to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others 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 financialreporting to be designed under our supervision, to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statements for external purposesin accordance with generally accepted accounting principles;c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented inthis report our conclusions about the effectiveness of the disclosure controls and procedures, as ofthe end of the period covered by this report based on such evaluation; andd)Disclosed in this report any change in the registrant’s internal control over financial reporting thatoccurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarterin the case of an annual report) that has materially affected, or is reasonably likely to materiallyaffect the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation ofinternal control over financial reporting, to the registrant’s auditors and the audit committee of theregistrant’s board of directors (or persons performing the equivalent functions):a)All significant deficiencies and material weaknesses in the design or operation of internal controlover financial reporting which are reasonably likely to adversely affect the registrant’s ability torecord, process, summarize and report financial information; andb)Any fraud, whether or not material, that involves management or other employees who have a significantrole in the registrant’s internal control over financial reporting.Date: March 27, 2014 By: /s/ JAMES H. MACKANESS Name: James H. Mackaness Title: 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 theAnnual Report of IRIDEX Corporation on Form 10-K for the fiscal year ended December 28, 2013 (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 27, 2014 By: /s/ WILLIAM M. MOORE Name: William M. Moore Title: President and Chief Executive Officer (Principal Executive 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 28, 2013 (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 27, 2014 By: /s/ JAMES H. MACKANESS Name: James H. Mackaness Title: Chief Financial Officer and Chief Operating Officer (Principal Financial and Accounting Officer) 

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