10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 2, 2016

Or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For 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 of incorporation or organization)	(I.R.S. Employer Identification Number)
1212 Terra Bella Avenue Mountain View, California	94043-1824
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (650) 940-4700

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter 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   þ     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 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 and post such files).    Yes   þ     No   ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   þ

The number of shares of common stock, $0.01 par value, issued and outstanding as of July 25, 2016 was 10,118,499.

TABLE OF CONTENTS

Items		Page
PART I. FINANCIAL INFORMATION		3
Item 1.	Condensed Consolidated Financial Statements (Unaudited)	3
	Unaudited Condensed Consolidated Balance Sheets as of July 2, 2016 and January 2, 2016	3
	Unaudited Condensed Consolidated Statements of Operations for the three and six months ended July 2, 2016 and July 4, 2015	4
	Unaudited Condensed Consolidated Statements of Comprehensive Income for the three and six months ended July 2, 2016 and July 4, 2015	5
	Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended July 2, 2016 and July 4, 2015	6
	Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	22
Item 4.	Controls and Procedures	22
PART II. OTHER INFORMATION		23
Item 1.	Legal Proceedings	23
Item 1A.	Risk Factors	23
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 3.	Defaults Upon Senior Securities	36
Item 4.	Mine Safety Disclosures	36
Item 5.	Other Information	36
Item 6.	Exhibits	37
Signature		38
Exhibit Index		39

2

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited)

IRIDEX Corporation

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands except share and per share data)

	July 2, 2016			January 2, 2016 (1)
ASSETS
Current assets:
Cash and cash equivalents	$	11,521		$	9,995
Accounts receivable, net of allowance for doubtful accounts of $149 as of July 2, 2016 and $140 as of January 2, 2016		8,450			9,282
Inventories		12,141			11,106
Prepaid expenses and other current assets		560			386
Total current assets		32,672			30,769
Property and equipment, net		1,188			1,104
Intangible assets, net		260			268
Goodwill		533			533
Deferred income taxes		8,985			8,985
Other long-term assets		107			164
Total assets	$	43,745		$	41,823
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	3,194		$	2,223
Accrued compensation		1,750			1,572
Accrued expenses		1,838			1,722
Accrued warranty		610			603
Deferred revenue		1,271			1,311
Total current liabilities		8,663			7,431
Long-term liabilities:
Other long-term liabilities		566			704
Total liabilities		9,229			8,135
Stockholders’ equity:
Common stock, $0.01 par value:
Authorized: 30,000,000 shares;
Issued and outstanding 10,117,076 and 10,009,408 shares as of July 2, 2016 and January 2, 2016, respectively		112			111
Additional paid-in capital		39,040			37,986
Accumulated deficit		(4,636	)		(4,409	)
Total stockholders’ equity		34,516			33,688
Total liabilities and stockholders’ equity	$	43,745		$	41,823

(1) Derived from the audited consolidated financial statements included in the Annual Report on Form 10-K filed with the SEC for the year ended January 2, 2016.

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

IRIDEX Corporation

Condensed Consolidated Statements of Operations

(Unaudited, in thousands except per share data)

	Three Months Ended						Six Months Ended
	July 2, 2016			July 4, 2015			July 2, 2016			July 4, 2015
Total revenues	$	11,908		$	9,033		$	23,839		$	19,829
Cost of revenues		6,174			4,816			12,808			10,202
Gross profit		5,734			4,217			11,031			9,627
Operating expenses:
Research and development		1,392			1,482			2,751			2,763
Sales and marketing		2,405			2,158			4,834			4,229
General and administrative		2,331			1,324			3,688			2,979
Total operating expenses		6,128			4,964			11,273			9,971
Loss from operations		(394	)		(747	)		(242	)		(344	)
Other expense, net		21			23			32			30
Loss from operations before (benefit from) provision for income taxes		(415	)		(770	)		(274	)		(374	)
(Benefit from) provision for income taxes		(87	)		(118	)		(47	)		32
Net loss	$	(328	)	$	(652	)	$	(227	)	$	(406	)
Net loss per share:
Basic	$	(0.03	)	$	(0.07	)	$	(0.02	)	$	(0.04	)
Diluted	$	(0.03	)	$	(0.07	)	$	(0.02	)	$	(0.04	)
Weighted average shares used in computing net loss per common share:
Basic		10,085			10,027			10,060			9,948
Diluted		10,085			10,027			10,060			9,948

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

IRIDEX Corporation

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited, in thousands)

	Three Months Ended						Six Months Ended
	July 2, 2016			July 4, 2015			July 2, 2016			July 4, 2015
Net loss	$	(328	)	$	(652	)	$	(227	)	$	(406	)
Other comprehensive loss, net of tax		—			—			—			—
Comprehensive loss	$	(328	)	$	(652	)	$	(227	)	$	(406	)

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

IRIDEX Corporation

Condensed Consolidated Statements of Cash Flows

(Unaudited, in thousands)

	Six Months Ended
	July 2, 2016			July 4, 2015
Operating activities:
Net loss	$	(227	)	$	(406	)
Adjustments to reconcile net loss to net cash provided by operating    activities:
Depreciation and amortization		291			252
Change in fair value of earn-out liability		33			32
Stock-based compensation		800			562
Provision for doubtful accounts		41			—
Changes in operating assets and liabilities:
Accounts receivable		791			1,018
Inventories		(1,035	)		(1,052	)
Prepaid expenses and other current assets		(174	)		(105	)
Other long-term assets		57			26
Accounts payable		971			302
Accrued compensation		178			(393	)
Accrued expenses		121			52
Accrued warranty		7			51
Deferred revenue		(40	)		20
Other long-term liabilities		14			26
Net cash provided by operating activities		1,828			385
Investing activities:
Acquisition of property and equipment		(367	)		(588	)
Payment on earn-out liability		(190	)		(236	)
Net cash used in investing activities		(557	)		(824	)
Financing activities:
Proceeds from stock option exercises		413			614
Repurchase of common stock		(59	)		(670	)
Taxes paid related to net share settlements of equity awards		(99	)		(605	)
Net cash provided by (used in) financing activities		255			(661	)
Net increase (decrease) in cash and cash equivalents		1,526			(1,100	)
Cash and cash equivalents, beginning of period		9,995			13,303
Cash and cash equivalents, end of period	$	11,521		$	12,203
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes	$	35		$	32

The accompanying notes are an integral part of these condensed consolidated financial statements.

6

IRIDEX Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of IRIDEX Corporation (“IRIDEX”, the “Company”, “we”, “our”, or “us”) have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the financial statements have been included.

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto, together with management’s discussion and analysis of the Company’s financial condition and results of operations, contained in our Annual Report on Form 10-K for the fiscal year ended January 2, 2016, which was filed with the Securities and Exchange Commission (“SEC”) on March 31, 2016. The results of operations for the three and six months ended July 2, 2016 and July 4, 2015 are not necessarily indicative of the results for the fiscal year ending December 31, 2016 or any future interim period. The three and six month periods ended July 2, 2016 and July 4, 2015, each had 13 weeks. For purposes of reporting the financial results, the Company’s fiscal years end on the Saturday closest to the end of December. Periodically, the Company includes a 53rd week to a year in order to end that year on the Saturday closest to the end of December.

2. Summary of Significant Accounting Policies

The Company’s significant accounting policies are disclosed in our Annual Report on Form 10-K for the year ended January 2, 2016, which was filed with the SEC on March 31, 2016.

Financial Statement Presentation.

The unaudited condensed consolidated financial statements include the accounts of the Company and our wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates.

The preparation of unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and the related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. In addition, any change in these estimates or their related assumptions could have an adverse effect on our operating results.

Revenue Recognition.

Our revenues arise from the sale of laser consoles, delivery devices, consumables and service and support activities. Revenue from product sales is recognized upon receipt of a purchase order and product shipment provided that no significant obligations remain and collectibility is reasonably 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 sales revenue is recognized. The Company’s sales may include post-sales obligations for training or other deliverables. For revenue arrangements such as these, we recognize revenue in accordance with Accounting Standards Codification (“ASC”) 605, “Revenue Recognition, Multiple-Element Arrangements”. The Company allocates revenue among deliverables in multiple-element arrangements using the relative selling price method. Revenue allocated to each element is recognized when the basic revenue recognition criteria 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 these elements 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 time depending upon the unique facts and circumstances related to each deliverable. As a result, the Company’s ESP for products and services could change. Revenues for post-sales obligations are recognized as the obligations are fulfilled.

7

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 retention rights to 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 the contract terms when royalties from licensees can be reliably measured and collectibility is reasonably assured, such as upon the earlier of the receipt of a royalty statement from the licensee or upon payment by the licensee.

Concentration of Credit Risk.

Our cash and cash equivalents are deposited in demand and money market accounts. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally these deposits may be redeemed upon demand and therefore, bear minimal risk.

We market our products to distributors and end-users throughout the world. Sales to international distributors are generally made on open credit terms and letters of credit. Management performs ongoing credit evaluations of our customers and maintains an allowance for potential credit losses. Historically, we have not experienced any significant losses related to individual customers or a group of customers in any particular geographic area. For the three and six month periods ended July 2, 2016 and July 4, 2015, no single customer accounted for 10% of total revenues. As of July 2, 2016, no customer accounted for approximately 10% of our accounts receivable and as of January 2, 2016, no customer accounted for more than 10% of our accounts receivable.

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 condensed consolidated statements of operations.

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 periods presented.

Deferred Revenue.

Revenue related to extended service contracts is deferred and recognized on a straight line basis over the period of the applicable service contract. Costs associated with these service arrangements are recognized as incurred.

A reconciliation of the changes in the Company’s deferred revenue balance for the six months ended July 2, 2016 and July 4, 2015 is as follows:

	Six Months Ended
(in thousands)	July 2, 2016			July 4, 2015
Balance, beginning of period	$	1,311		$	1,179
Additions to deferral		640			687
Revenue recognized		(680	)		(667	)
Balance, end of period	$	1,271		$	1,199

Warranty.

The Company generally provides a one to two year warranty on its products, which is accrued for upon shipment of products. Actual warranty costs incurred have not materially differed from those accrued. The Company’s 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 statement of operations as cost of revenues.

8

A reconciliation of the changes in the Company’s warranty liability for the six months ended July 2, 2016 and July 4, 2015 is as follows:

	Six Months Ended
(in thousands)	July 2, 2016			July 4, 2015
Balance, beginning of period	$	603		$	469
Accruals for product warranties		232			183
Cost of warranty claims and adjustments		(225	)		(132	)
Balance, end of period	$	610		$	520

Recently Issued and Adopted Accounting Standards.

In May 2014, as part of its ongoing efforts to assist in the convergence of U.S. GAAP and International Financial Reporting Standards (“IFRS”), the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers.” The new guidance sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in U.S. GAAP. The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not addressed completely in the prior accounting guidance. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers, Deferral of the Effective Date”. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted for annual periods beginning after December 15, 2016. We are currently evaluating the impact that this standard will have on the Company’s consolidated financial statements.

In June 2014, the FASB issued ASU 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force)”. The ASU clarifies that entities should treat performance targets that can be met after the requisite service period of a share-based payment award as performance conditions that affect vesting. Therefore, an entity would not record compensation expense (measured as of the grant date without taking into account the effect of the performance target) related to an award for which transfer to the employee is contingent on the entity’s satisfaction of a performance target until it becomes probable that the performance target will be met. The ASU does not contain any new disclosure requirements. The ASU is effective for reporting periods beginning after December 15, 2015. We adopted this standard at the beginning of fiscal 2016 and it did not have a material impact on the Company’s consolidated financial statements.

In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory.” Under this ASU, inventory will be measured at the “lower of cost and net realizable value” and options that currently exist for “market value” will be eliminated. The ASU defines net realizable value as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.” No other changes were made to the current guidance on inventory measurement. ASU 2015-11 is effective for interim and annual periods beginning after December 15, 2016. Early application is permitted and should be applied prospectively. Management is evaluating the provisions of this statement, including which period to adopt, and has not determined what impact the adoption of this standard will have on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, "Leases," amending ASC 842. This ASU requires the Company to recognize on the balance sheet the assets and liabilities for the rights and obligations created by leases with terms of more than twelve months. This ASU also requires disclosures enabling the users of financial statements to understand the amount, timing and uncertainty of cash flows arising from leases. This new standard will become effective for the Company for annual periods beginning after December 15, 2018 (including interim reporting periods within those periods). Early adoption is permitted as of the beginning of an interim or annual reporting period. We are currently evaluating the impact of this new standard on the Company’s consolidated financial statements.

In March 2016, the FASB issued Accounting Standards Update ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting." This ASU affects entities that issue share-based payment awards to their employees. The ASU is designed to simplify several aspects of accounting for share-based payment award transactions, which include the income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows and forfeiture rate calculations. This ASU will become effective for the Company on December 15, 2016 (including interim reporting periods within those periods). Early adoption is permitted in any interim or annual period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must

9

adopt all of the amendments in the same period. We are currently evaluating the impact of this new standard on the Company’s consolidated financial statements.

In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606), which amended certain aspects of the FASB's new revenue standard, ASU No. 2014-09, Revenue from Contracts with Customers. The standard should be adopted concurrently with adoption of ASU 2014-09 which is effective for annual and interim periods beginning after December 15, 2017. We have not yet selected a transition method nor have we determined the effect of the standard on the Company’s ongoing financial reporting.

In May 2016, the FASB issued ASU No. 2016-12 which amended the revenue recognition guidance regarding collectability, noncash consideration, presentation of sales tax and transition. This ASU is effective during the same period as ASU 2014-09. We are currently evaluating the impact of this guidance on the Company’s consolidated financial statements.

3. Inventories

The components of the Company’s inventories as of July 2, 2016 and January 2, 2016 are as follows:

(in thousands)	July 2, 2016		January 2, 2016
Raw materials	$	5,267	$	4,578
Work in process		2,032		1,791
Finished goods		4,842		4,737
Total inventories	$	12,141	$	11,106

4. Goodwill and Intangible Assets

Goodwill.

The carrying value of goodwill was $0.5 million as of July 2, 2016 and January 2, 2016.

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. The Company reviews goodwill for impairment on an annual basis or whenever events or changes in circumstances indicate the carrying value may 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 is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step quantitative goodwill impairment test. If, after assessing 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 carrying amount, then it is required to perform the two-step impairment test. An entity is not required to calculate the fair value of a reporting unit unless the entity determines 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 qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test. The Company has determined that it has a single reporting unit for purposes of performing its goodwill impairment test. As the Company uses the market approach to assess impairment, its common stock price is an important component of the fair value calculation. If the Company’s stock price continues to experience significant price and volume fluctuations, this will impact the fair value of the reporting unit and can lead to potential impairment in future periods. The Company performed its annual impairment test during the second quarter of fiscal 2015 and determined that its goodwill was not impaired. As of July 2, 2016, the Company had not identified any factors that indicated there was an impairment of its goodwill and determined that no additional impairment analysis was then required.

Intangible Assets.

The following table summarizes the components of gross and net intangible asset balances:

	July 2, 2016							January 2, 2016
(in thousands)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Remaining Amortization Life	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Patents	$	720	$	600	$	120	Varies	$	720	$	600	$	120
Customer relations		240		100		140	8.75  Years		240		92		148
Total	$	960	$	700	$	260		$	960	$	692	$	268

10

For the six months ended July 2, 2016 and July 4, 2015, amortization expense totaled $8 thousand for each period.

The amortization of customer relations was charged to sales and marketing expense and the amortization of patents was charged to cost of revenues.

Future estimated amortization expense (in thousands):
2016 (six months)	$	8
2017		78
2018		74
2019		16
2020		16
Thereafter		68
Total	$	260

5. Fair Value Measurements

Fair 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 market participants at the measurement date. The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels 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 assets and liabilities in active markets and quoted prices in markets that are not active. Level 2 also includes assets and liabilities that are valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors, are corroborated by readily observable data from actively quoted markets for substantially the full term of the financial instrument.

· Level 3: Unobservable inputs that are supported by little or no market activity and reflect the use of significant management judgment. These values are generally 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 unobservable inputs 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 July 2, 2016 and January 2, 2016, approximate fair value because of the short maturity of these instruments.

As of July 2, 2016 and January 2, 2016, financial assets and liabilities measured and recognized at fair value on a recurring basis and classified under the appropriate level of the fair value hierarchy as described above were as follows:

	July 2, 2016								January 2, 2016
	Fair Value Measurements								Fair Value Measurements
(in thousands)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Money market funds	$	9,664		—		—	$	9,664	$	9,212		—		—	$	9,212
Liabilities:
Earn-out liability		—		—	$	848	$	848	$	—		—	$	1,005	$	1,005

The Company’s Level 1 financial assets are money market funds whose fair values are based on quoted market prices. The Company does not have any Level 2 financial assets or liabilities. The fair value of the earn-out liability arising from the acquisitions

11

of RetinaLabs, Inc. and Ocunetics, Inc. is classified within Level 3 of the fair value hierarchy since it is based on significant unobservable inputs. The significant unobservable inputs include projected royalties and discount rates to present value the payments. A significant increase (decrease) in the projected royalty payments in isolation could result in a significantly higher (lower) fair value measurement and a significant increase (decrease) in the discount rate in isolation could result in a significantly lower (higher) fair value measurement. The fair value of the earn-out liability is calculated on a quarterly basis by the Company based on a collaborative effort of the Company’s operations, finance and accounting groups as additional information becomes available. Any change in the fair value adjustment is recorded in the statement of operations of that period.

The following table presents quantitative information about the inputs and valuation methodologies used for our fair value measurements classified in Level 3 of the fair value hierarchy as of July 2, 2016.

As of  July 2, 2016	Fair Value (in thousands)		Valuation Technique	Significant Unobservable Input	Weighted Average (range)
Earn-out liability	$	848	Discounted cash flow	Projected royalties (in thousands)	$2,720 ($134 - $2,926)
				Discount rate	11.46% (10.22% - 27.00%)

A reconciliation of the changes in the Company’s earn-out liability (Level 3 liability) for the six months ended July 2, 2016 and July 4, 2015 is as follows:

	Six Months Ended
(in thousands)	July 2, 2016			July 4, 2015
Balance as of beginning of the period	$	1,005		$	1,423
Payments against earn-out		(190	)		(236	)
Change in fair value of earn-out liability		33			32
Balance as of the end of the period	$	848		$	1,219

The earn-out liability is included in accrued expenses and other long-term liabilities in the condensed consolidated balance sheets. Any change in the fair value adjustment is recorded to other expense in the condensed consolidated statements of operations.

6. Stock Based Compensation

The Company accounts for stock-based compensation granted to employees and directors, including employees stock option awards, restricted stock and restricted stock units in accordance with ASC 718, “Compensation – Stock Compensation” (“ASC 718”). 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 a ratable basis over the requisite service period of the award.

The Company values options using the Black-Scholes option pricing model. Restricted stock and time-based restricted stock units are valued at the grant date fair value of the underlying common shares. Performance-based restricted stock units are valued using the Monte Carlo simulation model. The Black-Scholes option pricing model requires the use of highly subjective and complex assumptions which determine the fair value of stock-based awards, including the option’s expected term and the price volatility of the underlying stock. The Monte Carlo simulation model incorporates assumptions for the holding period, risk-free interest rate, stock price volatility and dividend yield.

2008 Equity Incentive Plan.

For the six months ended July 2, 2016, the only active stock-based compensation plan was the 2008 Equity Incentive Plan (the “Incentive Plan”). The terms of awards granted during the six months ended July 2, 2016 were consistent with those described in the consolidated financial statements included in our Annual Report on Form 10-K for the year ended January 2, 2016.

12

Summary of Stock Options

The following table summarizes information regarding activity in our stock option plan during the six months ended July 2, 2016:

	Number of Shares			Weighted Average Exercise Price Per Share		Aggregate Intrinsic Value (thousands)
Outstanding as of January 2, 2016		551,492		$	6.92
Granted		41,900		$	10.60
Exercised		(88,417	)	$	4.67
Canceled or forfeited		(49,995	)	$	8.58
Outstanding as of July 2, 2016		454,980		$	7.51	$	3,638

The weighted average grant date fair value of the options granted under the Company’s stock plans as calculated using the Black-Scholes option-pricing model was $4.33 and $4.40 per share for the three months ended July 2, 2016 and July 4, 2015, respectively. The weighted average grant date fair value of the options granted under the Company’s stock plans as calculated using the Black-Scholes option-pricing model was $4.21 and $4.57 per share for the six months ended July 2, 2016 and July 4, 2015, respectively.

The Company uses the Black-Scholes option-pricing model to estimate fair value of stock-based awards (options) with the following weighted average assumptions:

	Three Months Ended						Six Months Ended
	July 2, 2016			July 4, 2015			July 2, 2016			July 4, 2015
Average risk free interest rate		1.10	%		1.51	%		1.16	%		1.27	%
Expected life (in years)	4.55 years			4.55 years			4.55 years			4.55 years
Dividend yield	—%			—%			—%			—%
Average volatility		46	%		51	%		47	%		51	%

Option-pricing models require the input of various subjective assumptions, including the option’s expected life and the price volatility of the underlying stock. 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 the options, trading volume of the Company’s stock, look-back volatilities and Company specific events that affected volatility in a prior period. The expected term of employee stock options represents the weighted average period the stock options are expected to remain outstanding and is based on the history of exercises and cancellations on all past option grants made by the Company, the contractual term, the vesting period and the expected remaining term of the outstanding options. The risk-free interest 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 as the Company has not issued any dividends and does not anticipate issuing any dividends in the future.

The following table shows stock-based compensation expense included in the condensed consolidated statements of operations for the three and six months ended July 2, 2016 and July 4, 2015:

	Three Months Ended				Six Months Ended
	July 2, 2016		July 4, 2015		July 2, 2016		July 4, 2015
Cost of revenues	$	30	$	56	$	81	$	123
Research and development		19		53		51		132
Sales and marketing		41		45		81		104
General and administrative		488		75		587		203
	$	578	$	229	$	800	$	562

Stock-based compensation expense capitalized to inventory was immaterial for the quarters ended July 2, 2016 and July 4, 2015.

Occasionally, the Company will grant stock-based instruments to non-employees. During the six months ended July 2, 2016 and July 4, 2015, the amount of stock-based compensation related to non-employee options was not material.  

13

Information regarding stock options outstanding, vested and expected to vest and exercisable as of July 2, 2016 is summarized below:

	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)		Aggregate IntrinsicValue (thousands)
Options outstanding		454,980	$	7.51		4.59	$	3,638
Options vested and expected to vest		423,114	$	7.40		4.51	$	3,432
Options exercisable		226,651	$	6.42		3.73	$	2,059

The aggregate intrinsic value in the table above represents the pre-tax intrinsic value, based on the Company’s closing price as of April 1, 2016, that would have been received by option holders had all option holders exercised their stock options as of that date. This amount changes based on the fair market value of the Company’s stock. The total intrinsic value of options exercised for the three months ended July 2, 2016 and July 4, 2015 was approximately $261 thousand and $243 thousand, respectively.

As of July 2, 2016, there was $3.0 million of total unrecognized compensation cost, net of expected forfeitures, related to non-vested stock-based compensation arrangements under the Incentive Plan. The cost is expected to be recognized over a weighted average period of 2.39 years.

Summary of Restricted Stock Units and Awards

Information regarding the restricted stock units (“RSUs”) activity for the six months ended July 2, 2016 is summarized below:

	Number of Shares
Outstanding as of January 2, 2016		147,589
Restricted stock units granted		213,867
Restricted stock units released		(30,789	)
Restricted stock units cancelled		(66,000	)
Outstanding as of July 2, 2016		264,667

On March 1, 2016, the Board approved an award of performance-based restricted stock units (“PRSUs”) to our President and Chief Executive Officer, and to five executives of the Company. The total target number of PRSUs is 210,000. Each PRSU represents the right to receive one share of the Company’s common stock and is subject to the terms of the Company’s 2008 Equity Incentive Plan (the “Plan”) and the applicable performance-based restricted stock unit award agreement under the Plan. The PRSUs will become eligible to vest (“vesting eligible PRSUs”) if the Company’s stock price (measured based on the average, trailing, 60 day closing price of a share of the Company’s common stock) achieves one or more of the four specified stock price performance goals, measured during four performance periods covering each of the Company’s fiscal years 2016 through 2019. The achievement of each performance goal results in 25% of the target number of PRSUs becoming vesting eligible PRSUs. The maximum number of PRSUs that can vest under the PRSU award is 100% of the target number of PRSUs. If any of the performance goals are met, vesting of the PRSUs additionally is subject to the executive’s continued service with the Company through the applicable vesting date as follows. Any PRSUs that become eligible to vest will be scheduled to vest on an annual basis on the last day of the performance period (provided that the first vesting date for any PRSUs that become eligible to vest during a particular performance period will be delayed until the performance results are certified). However, the maximum number of PRSUs that can vest prior to the last performance period will be limited as follows: (i) upon completion of a particular performance period vesting will be limited to 25% of the target number of PRSUs even if more than one stock price goal is achieved during that period (and if more than one stock price goal is achieved, the PRSUs will become eligible to vest at a future date, subject to clause (ii)), and (ii) vesting will be limited to no more than 50% of the target number of PRSUs even if more than two stock price goals are achieved prior to the last performance period (and in that instance, any PRSUs that become eligible to vest would vest on the last day of the final performance period. In the event of a change in control of the Company, the performance periods will end and a final measurement of the Company’s stock price will occur. For this final measurement, the Company’s stock price will be determined based on the value of the consideration that common stockholders receive in the change in control. Upon the final measurement, any vesting eligible PRSUs that become eligible to vest will vest in fullon the closing of the change in control, and any PRSUs that have not become eligible to vest will be scheduled to vest based on continued service (but not subject to any further performance criteria), on the last day of the Company’s fiscal year 2019. If, on or after the change in control, the executive’s employment is terminated without cause, a prorated number of the then unvested PRSUs will accelerate vesting based on the total period following the change in control during which the executive provided services.

14

To the extent that the market condition is not met, the PRSUs will not vest and will be cancelled. Utilizing the Monte Carlo simulation technique, which incorporated assumptions for the expected holding period, risk-free interest rate, stock price volatility and dividend yield, the fair value at grant date of these restricted stock units was $1.7 million. Compensation expense is recognized ratably during the period the RSU’s are expected to vest.

During the three months ended July 2, 2016, the Company accelerated the vesting of 6,400 of RSUs and 10,000 PRSUs in connection with an employee termination.  In connection with the acceleration, the Company recorded a $220,000 charge to general and administrative expenses.

Information regarding the restricted stock awards activity for the six months ended July 2, 2016 is summarized below:

	Number of Shares
Outstanding as of January 2, 2016		2,513
Restricted stock awards granted		1,289
Restricted stock units released		(2,513	)
Outstanding as of July 2, 2016		1,289

Stock Repurchase Program.

          In February 2013, the Board of Directors approved a one year $3.0 million stock repurchase program that replaced the prior two year $4.0 million stock repurchase program. In February 2014, the Board of Directors approved the extension of the plan for an additional year. In July 2014, the Board of Directors approved an extension of the plan for an additional year and authorized an additional $3.0 million of stock repurchases. In August 2015, the Board of Directors approved a further extension of the plan for another year and authorized an additional $2.0 million of stock repurchases. During the six months ended July 2, 2016, the Company repurchased 6,544 shares at an average price of $9.00 per share. As of July 2, 2016, we have repurchased 843,785 shares for approximately $6.7 million under this current program and we are authorized to purchase up to an additional $1.0 million in common shares under the stock repurchase program. See Item 2, Unregistered Sales of Equity Securities and Use of Proceeds in Part II, Other Information, for additional information.

7. Income Taxes  

Provision for Income Tax.

The Company calculates its interim tax provision in accordance with the provisions of ASC 740-270, Income Taxes; Interim Reporting. For interim periods, the Company estimates its annual effective income tax rate and applies the estimated rate to the year-to-date income or loss before income taxes. The Company also computes the tax provision or benefit related to items reported separately and recognizes the items net of their related tax effect in the interim periods in which they occur. The Company also recognizes the effect of changes in enacted tax laws or rates in the interim periods in which the changes occur.  The Company recorded a tax benefit of $47 for the six months ended July 2, 2016 and a provision for income tax of $32 thousand for the six months ended July 4, 2015.

Deferred Income Taxes.

The Company accounts for income taxes in accordance with ASC topic 740, Income Taxes (“ASC 740”), which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. 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 assets will not be realized. In the fourth quarter of fiscal year 2014, the Company's management determined, based on the Company's recent history of earnings coupled with its forecasted profitability that it is more likely than not that all of its federal and the majority of its state deferred tax assets will be realized in the foreseeable future.  Accordingly, in the fourth quarter of fiscal year 2014, the Company released $9.2 million of valuation allowance against most of its deferred tax assets except for the California Research and Development Credits. The Company maintains the same positions as of July 2, 2016 and will reevaluate the position on a quarterly basis.

15

Uncertain Tax Positions.

The Company accounts for its uncertain tax positions in accordance with ASC 740.  As of January 2, 2016, the Company had $0.9 million of unrecognized tax benefits of which $0.4 million of unrecognized tax benefits would result in a change in the Company’s effective tax rate if recognized in future years.

The Company is not aware of any other uncertain tax positions that could result in significant additional payments, accruals, or other material deviation in this estimate during the fiscal year.

The Company files U.S. federal and state returns. The tax years 2008 to 2015 remain open in several jurisdictions, none of which have individual significance.

8. Computation of Basic and Diluted Net Loss Per Common Share

Basic and diluted net loss per share is based upon the weighted average number of common shares outstanding during the period. Common stock equivalents consist of incremental common shares issuable upon the exercise of stock options, and the release (vesting) of restricted stock units and awards and are calculated under the treasury stock method. Common stock equivalent shares from unexercised stock options, and unvested restricted stock units and awards are excluded from the computation for periods in which we incur a net loss or if the exercise price of such options is greater than the average market price of our common stock for the period as their effect would be anti-dilutive.

  For the six months ended July 2, 2016 and July 4, 2015, stock options to purchase 454,980 and 743,955 shares, respectively, were excluded from the computation of diluted weighted average shares outstanding.

A reconciliation of the numerator and denominator of basic and diluted net loss per common share is provided as follows:

	Three Months Ended						Six Months Ended
	July 2, 2016			July 4, 2015			July 2, 2016			July 4, 2015
Numerator:
Net loss	$	(328	)	$	(652	)	$	(227	)	$	(406	)
Denominator:
Weighted average shares of common stock (basic)		10,085			10,027			10,060			9,948
Effect of dilutive stock options		-			-			-			-
Effect of dilutive contingent shares		-			-			-			-
Weighted average shares of common stock (diluted)		10,085			10,027			10,060			9,948
Per share data:
Basic net loss per share	$	(0.03	)	$	(0.07	)	$	(0.02	)	$	(0.04	)
Diluted net loss per share	$	(0.03	)	$	(0.07	)	$	(0.02	)	$	(0.04	)

9. Business Segments

The Company operates in one segment, ophthalmology. The Company develops, manufactures and markets medical devices. Our revenues arise from the sale of consoles, delivery devices, consumables, service and support activities.

Revenue information shown by geographic region, based on the location at which each sale originates, is as follows:

	Three Months Ended				Six Months Ended
(in thousands)	July 2, 2016		July 4, 2015		July 2, 2016		July 4, 2015
United States	$	6,923	$	5,391	$	12,771	$	10,972
Europe		2,297		1,366		4,588		3,680
Rest of Americas		762		539		1,382		1,535
Asia/Pacific Rim		1,926		1,737		5,098		3,642
	$	11,908	$	9,033	$	23,839	$	19,829

16

Revenues are attributed to countries based on location of end customers. No individual country accounted for more than 10% of the Company’s revenues, other than the United States, which accounted for 58.1% and 59.7% of revenues for the three month periods ended July 2, 2016 and July 4, 2015, respectively. For the six month period ended July 2, 2016 and July 4, 2016, the United States accounted for 53.6% and 55.3% of sales, respectively.    

10. Subsequent Events

The Company has evaluated subsequent events and has concluded that no subsequent events that require disclosure in the financial statements have occurred since the quarter ended July 2, 2016. 

17

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q contains trend analysis and other 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 our anticipated levels of future sales; our operating results and long term growth; market acceptance and adoption of our products and our outlook for system sales; our gross margin goals and performance; the success of our efforts to reduce costs and manage cash flows; general economic conditions, including changes in foreign currency rates, and levels of international sales; corporate strategy; effects of seasonality; inspections by and approvals required by the Food and Drug Administration (“FDA”); our current and future liquidity and capital requirements; our stock repurchase program; levels of future investment in research and development and sales and marketing efforts; our product distribution strategies with Alcon, Inc.; and compliance of our devices and products with various environmental laws and regulations. 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 statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to differ materially from those expressed or implied by such forward-looking statements, including as a result of the factors set forth under “Factors That May Affect Future Operating Results” and other risks detailed in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2016 and detailed from time to time in our reports filed with the Securities and Exchange Commission. The reader is cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date of this quarterly report on Form 10-Q. We undertake no obligation to update such forward-looking statements to reflect events or circumstances occurring after the date of this report.

Overview

IRIDEX Corporation is a leading worldwide provider of therapeutic based laser systems, delivery devices and consumable instrumentation used to treat sight-threatening eye diseases in ophthalmology. Our ophthalmology products are sold in the United States through direct and independent sales forces and internationally through approximately 70 independent distributors into over 100 countries.

We manage and evaluate our business in one reporting 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 laser probes and other associated instrumentation (“consumables”) and service and support).

Our ophthalmology revenues arise primarily from the sale of our laser systems (IQ, Oculight and recently introduced Cyclo G6), consumables and service and support activities. Our current family of IQ products includes IQ 532 and IQ 577 laser photocoagulation systems and our OcuLight products include OcuLight TX, OcuLight GL, OcuLight GLx, OcuLight SL, and OcuLight SLx laser photocoagulation systems. Our Cyclo G6 Glaucoma Laser System is an 810nm, infrared laser designed to treat patients diagnosed with a range of glaucoma disease states. This glaucoma laser platform consists of a family of single-use probes that connect to an intuitive, user-friendly laser console. The product received FDA approval in January 2015, and commenced commercial sales in March 2015. Certain of our laser systems are capable of performing our patented Fovea-Friendly MicroPulse laser photocoagulation in addition to conventional continuous wavelength photocoagulation offered by all of our laser systems. Towards the end of 2012, we introduced the TxCell Scanning Laser Delivery System, a durable delivery device which operates with our IQ 532 and IQ 577 laser consoles. The TxCell Scanning Laser Delivery System saves significant time in a variety of laser photocoagulation procedures by allowing physicians to deliver the laser in a multi-spot scanning mode, a more efficient method for these procedures than the traditional single spot mode, and facilitates the use of the laser console in MicroPulse mode. The majority of our recurring revenues come from the sale of laser probes and our current family of laser probes includes a wide variety of products in 20, 23, 25 and 27 gauge for vitreoretinal surgery along with our recently patented MicroPulse P3 (“MP3”) and G-Probe for glaucoma 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, are not subject to risks associated with currency fluctuations. However, increases in the value of the U.S. dollar against any local currencies could cause our products to become relatively more expensive to customers in a particular country or region, leading to reduced revenue or profitability in that country or region.

Cost of revenues consists primarily of the cost of purchasing components and sub-systems, assembling, packaging, shipping and testing components at 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 and materials to support new product development; and regulatory expenses. Research and development costs have been expensed as incurred.

18

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, public company costs, insurance and other expenses not allocated to other departments.

Results of Operations

The following table sets forth certain operating data as a percentage of revenues:

	Three Months Ended						Six Months Ended
	July 2, 2016			July 4, 2015			July 2, 2016			July 4, 2015
Revenues		100.0	%		100.0	%		100.0	%		100.0	%
Cost of revenues		51.8	%		53.3	%		53.7	%		51.4	%
Gross margin		48.2	%		46.7	%		46.3	%		48.6	%
Operating expenses:
Research and development		11.7	%		16.4	%		11.5	%		13.9	%
Sales and marketing		20.2	%		23.9	%		20.3	%		21.4	%
General and administrative		19.6	%		14.7	%		15.5	%		15.0	%
Total operating expenses		51.5	%		55.0	%		47.3	%		50.3	%
Loss from operations		-3.3	%		-8.3	%		-1.0	%		-1.7	%
Other expense, net		0.2	%		0.2	%		0.1	%		0.2	%
Loss from operations before (benefit from) provision for income taxes		-3.5	%		-8.5	%		-1.1	%		-1.9	%
(Benefit from) provision for income taxes		-0.7	%		-1.3	%		-0.1	%		0.1	%
Net loss		-2.8	%		-7.2	%		-1.0	%		-2.0	%

The following comparisons are between the three month periods ended July 2, 2016 and July 4, 2015:

Revenues.

(in thousands)	Three Months Ended July 2, 2016		Three Months Ended July 4, 2015		Change in $		Change in %
Systems – domestic	$	2,976	$	2,164	$	812		37.5	%
Systems – international		2,910		2,090		820		39.2	%
Recurring revenues		6,022		4,779		1,243		26.0	%
Total revenues	$	11,908	$	9,033	$	2,875		31.8	%

Our total revenues increased $2.9 million, or 31.8%, from $9.0 million to $11.9 million for the quarter just ended. The increase resulted mainly from sales of our Cyclo G6 laser platform. Revenues for the second quarter of 2015 were impacted by supply chain issues that forced us to reduce shipments of laser systems during the quarter.

Gross Profit and Gross Margin.

Gross profit was $5.7 million compared with $4.2 million, an increase of $1.5 million or 36.0%. Gross margin was 48.2% compared with 46.7%, an increase of 1.5 percentage points. The increase in gross margin was attributable primarily to product mix towards higher margin disposable probes.

19

Gross margins as a percentage of revenues are expected to continue to fluctuate due to changes in the relative proportions of domestic and international sales, the product mix of sales, introduction of new products, manufacturing variances, total unit volume changes that lead to greater or lesser production efficiencies and a variety of other factors.

Research and Development.

Research and development (“R&D”) expenses decreased $0.1 million, or 6.1%, from $1.5 million to $1.4 million. The decrease in spending was attributable primarily to a decrease in consulting and general operating expenses.

Sales and Marketing.

Sales and marketing expenses increased $0.2 million, or 11.4%, from $2.2 million to $2.4 million. The increase in spending was attributable to an increase in salaries and related costs due to an increase in headcount and other general selling and marketing expenses.

General and Administrative.

General and administrative expenses increased $1.0 million, or 76.1%, from $1.3 million to $2.3 million. The increase in spending was attributable primarily to an increase in termination and severance costs, an increase in bonus and an increase in stock compensation charges.

Other Expense, Net.

Other expense, net amounted to $21 thousand and $23 thousand and consisted primarily of additional expense recorded for the fair value re-measurement of the contingent liabilities incurred as a result of our prior acquisitions.

Income Taxes.

We recorded a benefit from income taxes of $87 thousand and $118 thousand, respectively.

The following comparisons are between the six month periods ended July 2, 2016 and July 4, 2015:

Revenues.

(in thousands)	Six Months Ended July 2, 2016		Six Months Ended July 4, 2015		Change in $		Change in %
Systems – domestic	$	5,188	$	4,245	$	943		22.2	%
Systems – international		7,456		5,587		1,869		33.5	%
Recurring revenues		11,195		9,997		1,198		12.0	%
Total revenues	$	23,839	$	19,829	$	4,010		20.2	%

Our total revenues increased $4.0 million, or 20.2%, from $19.8 million to $23.8 million. The increase resulted mainly from sales of our Cyclo G6 laser platform. In 2015, beginning in the second quarter, revenues were impacted by supply chain issues that forced the Company to slow shipments of laser systems throughout the quarter.

Gross Profit and Gross Margin.

Gross profit was $11.1 million compared with $9.6 million, an increase of $1.4 million or 14.6%. Gross margin was 46.3% compared with 48.6%, a decrease of 2.3 percentage points. The decrease in gross margin was attributable primarily to product mix towards lower margin systems sales.

20

Gross margins as a percentage of revenues are expected to continue to fluctuate due to changes in the relative proportions of domestic and international sales, the product mix of sales, introduction of new products, manufacturing variances, total unit volume changes that lead to greater or lesser production efficiencies and a variety of other factors.

Research and Development.

Research and development (“R&D”) expenses remained consistent at $2.8 million.

Sales and Marketing.

Sales and marketing expenses increased $0.6 million, or 14.3%, from $4.2 million to $4.8 million. The increase in spending was attributable to an increase in salaries and related costs due to an increase in headcount, commissions and trade shows.

General and Administrative.

General and administrative expenses increased $0.7 million, or 23.8%, from $3.0 million to $3.7 million. The increase in spending was attributable primarily to an increase in termination and severance costs, an increase in bonus and an increase in stock compensation charges.

Other Expense, Net.

Other expense, net amounted to $32 thousand and $30 thousand and consisted primarily of additional expense recorded for the fair value re-measurement of the contingent liabilities incurred as a result of our prior acquisitions.

Income Taxes.

We recorded a benefit from income taxes of $47 thousand and a provision for income taxes of $32 thousand, respectively.

Liquidity and Capital Resources.

Liquidity is our ability to generate sufficient cash flows from operating activities to meet our obligations and commitments. In addition, liquidity includes the ability to obtain appropriate financing or to raise capital

As of July 2, 2016, we had cash and cash equivalents of $11.5 million and working capital of $24.0 million compared to cash and cash equivalents of $10.0 million and working capital of $23.3 million as of January 2, 2016.

For the six months ended July 2, 2016, net cash of $1.8 million was provided by operating activities, which was generated by the add back of non-cash items of $1.2 million, and changes in operating assets and liabilities by $0.9 million, which included collection of $0.8 million in accounts receivable, and purchases of $1.0 million in inventory, partially offset by our net loss of $0.2 million. We used $0.6 million net cash in investing activities, $0.4 million on capital expenditures and $0.2 million for payment of the contingent earn-out liability. Financing activities provided $0.3 million of net cash, which was generated by exercises of employee stock options of $0.4 million, which was partially offset by $0.1 million net cash used to purchase stock under our stock repurchase program and $0.1 million to pay payroll withholding taxes related to net shares settlement of equity awards.  

Management is of the opinion that the Company’s current cash and cash equivalents together with our ability to generate cash flows from operations provide sufficient liquidity to operate for the next 12 months.

Contractual Obligations and Commitments.

Our contractual obligations and commitments as of July 2, 2016 are as follows:

(in thousands)	Total		Less than1 Year		1-3 years		3-5 years		More than 5 years
Operating leases payments	$	2,715	$	494	$	2,221	$	—	$	—
Purchase commitments		10,155		5,715		4,440		—		—
Total obligations	$	12,870	$	6,209	$	6,661	$	—	$	—

Our operating lease commitments consist primarily of our facility lease and various office and computer equipment leases.

21

Our purchase commitments consist primarily of non-cancellable purchase commitments with vendors to manufacture certain components and ophthalmic instrumentation.

Off-Balance Sheet Arrangements.

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Other Information

IRIDEX Corporation was incorporated in California in February 1989 as IRIS Medical Instruments, Inc. In November 1995, we changed our name to IRIDEX 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. Investors and others should note that we announce material financial information to our investors using SEC filings, press releases, our investor relations website, public conference calls and webcasts. We use these channels as well as social media to communicate with investors, customers and the public 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 material information. We encourage investors, our customers, and others interested in our company 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 social media channels is not part of this report.

Item 3. Quantitative and Qualitative Disclosure 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 financial and commodity market prices and rates. None of our international revenues and costs for the six months ended July 2, 2016 were denominated in foreign currencies and therefore changes in foreign currency rates will not have an impact on our income statement or cash flows. However, increases in the value of the U.S. dollar against any local currencies could cause our products to become relatively more expensive to customers in a particular country or region, leading to reduced revenue or profitability in that country or region. As we continue to expand our international sales, our non-U.S. dollar denominated revenue and our exposure to gains and losses on international currency 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 the future.

Interest Rate Risk.

Our exposure to interest rate risk as of July 2, 2016 is related to our cash equivalent holdings, which is nominal given the nature of our cash equivalent holdings. Since we have no fixed or variable interest rate debt outstanding, our interest expense is not affected by changes in interest rates. In the event we issue any new debt in the future, increases in interest rates will increase the interest expense associated with the debt.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures.

We maintain “disclosure controls and procedures,” as such term is defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation

22

of our disclosure controls and procedures as of July 2, 2016. Based on the foregoing, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting.

There have been no changes in our internal control over financial reporting that occurred during the period covered by this Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we may be involved in legal proceedings arising in the ordinary course of business. Although the results of litigation and claims cannot be predicted with certainty, we currently believe that the final outcome of these ordinary course matters will not have a material adverse effect on our business, operating results, financial condition or cash flows. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

Item 1A. Risk Factors

Factors That May Affect Future Results

In addition to the other information contained in this Quarterly Report Form 10-Q, we have identified the following risks and uncertainties that may have a material adverse effect on our business, common stock price, financial condition or results of operations. You should carefully consider the risks described below before making an investment decision.

If applicable, we have marked with an asterisk (*) those risk factors below that reflect substantive changes from the risk factors included in our Annual Report on Form 10-K for the year ended January 2, 2016, which was filed with the SEC on March 31, 2016.

Risks Related to Our Business

We face quality control and other production issues that could materially and adversely impact our sales and financial results and the acceptance of our products.

The manufacture of our infrared and visible laser consoles and the related delivery devices is a highly complex and precise process. We assemble critical 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.

We have recently experienced production difficulties as we continued to increase production for certain legacy and new product offerings to meet the increased sales volumes. When these production difficulties began manifesting themselves as quality issues we reduced shipments, particularly to international distributors. If we are unable to address these issues in a timely and cost-effective manner, or if we were to experience similar quality control and production issues in the future, our sales levels may suffer and manufacturing and operational costs may increase.

If our sales increase substantially we may need 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 manufacture sufficient 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 be delayed, which would negatively impact our net revenues.

Some of our laser systems are complex in design and may contain defects that are not detected until deployed by our customers, which could increase our costs and reduce our revenues.

Laser systems are inherently complex in design and require ongoing regular maintenance. The manufacture of our lasers, laser products and systems involves a highly complex and precise process. As a result of the technical complexity of our products, changes in our or our suppliers’ manufacturing processes or the inadvertent use of defective materials by us or our suppliers could result in a material adverse effect on our ability to achieve acceptable manufacturing yields and product reliability. To the extent that we do not achieve such yields or product reliability, our business, operating results, financial condition and customer relationships would be adversely affected. We provide warranties on certain of our product sales, and allowances for estimated warranty costs are recorded

23

during the period of sale. The determination of such allowances requires us to make estimates of failure rates and expected costs to repair or replace the products under warranty. We currently establish warranty reserves based on historical warranty costs. If actual return rates and/or repair and replacement costs differ significantly from our estimates, adjustments to recognize additional cost of revenues may be required in future periods.

Our customers may discover defects in our products after the products have been fully deployed and operated under peak stress conditions. In addition, some of our products are combined with products from other vendors, which may contain defects. As a result, should problems occur, it may be difficult 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.

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 second quarter of fiscal 2016, our international ophthalmology sales were $5.0 million or 42% of total revenues. We anticipate that international sales will continue to account for a significant portion of our revenues in the foreseeable future. None of our international revenues and costs for the quarter ended July 2, 2016 have been denominated 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 and thus less competitive in foreign markets. Our international operations and sales are subject to a number of risks and potential costs, including:

· fluctuations in foreign currency exchange rates;

· quality and production issues;

· performance of our international channel of distributors;

· longer accounts receivable collection periods;

· impact of recessions in global economies and availability of credit;

· political and economic instability;

· trade sanctions and embargoes;

· impact of international conflicts, terrorist and military activity, civil unrest;

· foreign certification requirements, including continued ability to use the “CE” mark in Europe, and other local regulatory requirements;

· differing local product preferences and product requirements;

· cultural differences;

· changes in foreign medical reimbursement and coverage policies and programs;

· 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.

24

As we expand our existing international operations we may encounter new risks. For example, as we focus on building our international sales and distribution networks in new geographic regions, we must continue to develop relationships with qualified local distributors and trading companies. If we are not successful in developing these relationships, we may not be able to grow sales in these geographic regions. These or other similar risks could adversely affect our revenues and profitability.

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, volatile corporate profits and reduced capital spending, international conflicts, terrorist and military activity, civil unrest and pandemic illness could reduce customer orders or cause customer order cancellations. In addition, political and social turmoil related to international conflicts and terrorist acts may put further pressure 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 often discretionary. 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 a number of follow-on effects from economic uncertainty on our business, including insolvency of key suppliers resulting in product delays, delays in customer payments of outstanding accounts receivable and/or customer insolvencies, counterparty failures negatively impacting our operations, and increasing expense or inability to obtain future financing.

If economic uncertainty persisted, or if the economy entered a prolonged period of decelerating growth, our results of operations may be harmed.

Our operating results may fluctuate from quarter to quarter and year to year.

Our sales and operating results may vary significantly from quarter to quarter and from year to year in the future. Our operating results are affected by a number of factors, many of which are beyond our control. Factors contributing to these fluctuations include the following:

· changes in the prices at which we can sell our products, including the impact of changes in exchange rates;

· introduction of new products, product enhancements and new applications by our competitors, including new drugs, entry of new competitors into our markets, pricing pressures and other competitive factors;

· 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 timely deliver components at the times and prices that we have planned;

· our ability to maintain sales volumes at a level sufficient to cover fixed manufacturing and operating costs;

· fluctuations in our product mix within ophthalmology products and foreign and domestic sales;

· the effect of regulatory approvals and changes in domestic and foreign regulatory requirements; our long and highly variable sales cycle; changes in customers’ or potential customers’ budgets as a result of, among other things, reimbursement policies of government programs and private 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 European sales during the third quarter are generally lower due to many businesses being closed for the summer vacation season.

Our expense levels are based, in part, on expected future sales. If sales levels in a particular quarter do not meet expectations, we may be unable to adjust operating expenses quickly enough to compensate for the shortfall of sales, and our results of operations may be adversely affected. In addition, we have historically made a significant portion of each quarter’s product shipments near the end of the quarter. If that pattern continues, any delays in shipment of 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 and year 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 of our future performance.

25

Our operating results in future quarters and years may be below expectations, which would likely cause the price of our common stock to fall.

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 market new products. Successful commercialization of new products and new applications will require that we effectively transfer production processes from research and development to manufacturing and effectively coordinate with our suppliers. In addition, we must successfully sell and achieve market acceptance of new products and applications and enhanced versions of existing products. The extent of, and rate at which, market acceptance and penetration are achieved by future products is a function of many variables, which include, among other things, price, safety, efficacy, reliability, marketing and sales efforts, the development of new applications for these products, the availability of third-party reimbursement of procedures using our new products, the existence of competing products and general economic conditions affecting purchasing patterns. Our ability to market and sell new products may also be subject to government regulation, including approval or clearance by the FDA and foreign government agencies. Any failure in our ability to successfully develop and introduce new products or enhanced versions of existing products and achieve market acceptance of new products and new applications could have a material adverse effect on our operating results and would cause our net revenues to decline.

We rely on continued market acceptance of our existing products and any decline in sales of our existing products would adversely affect our 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 and increased 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 laser photocoagulation 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 where healthcare systems and healthcare operators are becoming increasingly price sensitive;

· availability of competing products, technologies and alternative treatments; and

· level of reimbursement for treatments administered with our products.

In addition, we derive a meaningful portion of our sales in the form of recurring revenues from selling consumable instrumentation including our EndoProbe devices and service. Our ability to increase recurring revenues from the sale of consumable products will depend primarily upon the features of our current products and product innovation, the quality of our products, ease of use and prices of our products, including the relationship to prices of competing products. The level of our service revenues will depend on the quality of service we provide and the responsiveness and the willingness of our customers to request our services rather than purchase competing products or services. Any significant decline in market acceptance of our products or our revenues derived from the sales of laser consoles, delivery devices, consumables or services may have a material adverse effect on our business, results of operations and financial 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 depends on a number of factors including product performance, characteristics and functionality, ease of use, scalability, durability and cost. Our principal competitors in ophthalmology are Alcon Inc. (Novartis AG), Carl Zeiss Meditec AG, Nidek Co. Ltd., Synergetics (Bausch and Lomb), Topcon Corporation, Ellex Medical Lasers, Ltd., Quantel Medical SA, and Lumenis Ltd. Most of these companies currently offer a competitive, semiconductor-based laser system for ophthalmology. Also within ophthalmology, pharmaceutical alternative treatments for AMD and DME such as Lucentis/Avastin (Genentech), Eylea (Regeneron), Macugen (OSI Pharmaceuticals), Ozurdex (Allergan) and ILUVIEN (Alimera Sciences), and to a lesser extent Visudyne (Valeant Pharmaceuticals), compete rigorously with traditional laser procedures. A number of these competitors have substantially greater financial, engineering, product development, manufacturing, marketing and technical resources than we do, including greater name recognition, and benefit from long-standing customer relationships. Some medical companies, academic and research institutions, or others, may develop new technologies or therapies that are more effective in treating conditions targeted by us or are less expensive

26

than our current or future products. Any such 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 coverage and reimbursement policies.

Changes in government legislation or regulation or in private third-party payers’ policies toward reimbursement for procedures employing our products may prohibit adequate reimbursement. There have been a number of legislative and regulatory proposals to change the healthcare system, reduce the costs of healthcare and change medical reimbursement policies. Doctors, clinics, hospitals and other users of our products may decline to purchase our products to the extent there is uncertainty regarding reimbursement of medical procedures using our products and any healthcare reform measures. Further proposed legislation, regulation and policy changes affecting third-party reimbursement are likely. We are unable to predict what legislation or regulation, if any, relating to 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 on us. Furthermore, existing legislation and regulation related to the health care industry and third-party coverage reimbursement has been subject to judicial challenge, and may be subject to similar challenges from time to time in the future. Denial of coverage and reimbursement of our products, or the revocation or changes to coverage and reimbursement policies, could have a material adverse effect on our business, results of operations and financial condition.

Our ophthalmology products are typically purchased by doctors, clinics, hospitals and other users, which bill various third-party payers, such as governmental programs and private insurance plans, for the health care services provided to their patients. Third-party payers are increasingly scrutinizing and continue to challenge the coverage of new products and the level of reimbursement for covered products. 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 products if they determine that the device was not reasonable and necessary for the purpose used, was investigational or was not cost-effective.

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 centers and physicians in connection with the research and innovation and clinical testing of our products. Commercially, we currently have a distribution and licensing agreement with Alcon for our GreenTip SoftTip Cannula. Sales of and royalties from the GreenTip Soft Tip Cannula are dependent upon the sales performance of Alcon, which depends on their efforts and is beyond our control. The failure to obtain any additional future clinical or commercial collaborations and the resulting failure or success of such arrangements of any current or future clinical or commercial collaboration relationships could have a material adverse effect on our ability to introduce new products or applications and therefore could have a material adverse effect on our business, results of operations and financial condition.

While we devote significant resources to research and development, our research and development may not lead to new products that achieve commercial success.

Our 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 is expensive, 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 products successfully. The products currently in our development pipeline may not be approved by regulatory entities and may not be commercially successful, and our current and planned products could be surpassed by more effective or advanced products of current or future competitors. Therefore, even if we are able to successfully develop enhancements or new generations of our products, these enhancements or new generations of products may not produce revenue in excess of the costs of development and they may be quickly rendered obsolete by changing customer preferences or the introduction by our competitors of products embodying new technologies or features.

If we cannot increase our sales volumes, reduce our costs or introduce higher margin products to offset anticipated reductions in the average 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 product introductions by our competitors or other factors. If we are unable to offset the anticipated decrease in our average selling prices by increasing our sales volumes or through new product introductions, our net revenues will decline. In addition,

27

to maintain our gross margins we must continue to reduce the manufacturing cost of our products. If we cannot maintain our gross margins our business could be seriously harmed, particularly if the average selling price of our products decreases significantly without a corresponding increase in sales.

We rely on our direct and independent sales forces and network of international distributors to sell our products and any failure to maintain 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 relationships with independent distributors outside the United States. Currently our direct and independent sales forces within the United States consists of approximately 15 employees and 15 independent representatives, respectively. Our international independent distributors are managed by a team of five people. We generally grant our distributors exclusive territories for the sale of our products in specified countries. The amount and timing of resources dedicated by our distributors to the sales of our products is not within our control. Our international sales are entirely dependent on the efforts of these third parties. If any distributor breaches the terms of its distribution agreement with us or fails to generate sales of our products, we may be forced to replace the distributor and our ability to sell our products into that exclusive sales territory would be adversely affected.

We do not have any long-term employment contracts with the members of our direct sales force. We may be unable to replace our direct sales force personnel 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 their relationships with us, which would affect our sales and results of operations.

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 and clinical trials for new applications and products. We must also be prepared to expand our work force and to train, motivate and manage additional employees as the need for additional personnel arises. Our personnel, systems, procedures and controls may not be adequate to support our future operations. Any failure to 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, copyright and trademark laws, nondisclosure and other contractual agreements and technical measures to protect our intellectual property rights. We file patent applications to protect technology, inventions and improvements that are significant to the development of our business. We have been issued 24 United States patents and 15 foreign patents on the technologies related to our products and processes. We have 7 pending patent applications in the United States and 25 foreign pending patent applications that have been filed. Our patent applications may not be approved. Any patents granted now or in the future may offer only limited protection against potential infringement and development by our competitors of competing products. Moreover, our competitors, many of which have substantial resources and have made substantial investments in competing technologies, may seek to apply for and obtain patents that will prevent, limit or interfere 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 a patent 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 agreements with employees, consultants and other parties. Our proprietary information agreements with our employees and consultants contain industry standard provisions requiring such individuals 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. Proprietary information agreements with employees, consultants and others may be breached, and we may not 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 the medical device industry have employed intellectual property litigation to gain a competitive advantage. Numerous patents are held by others, including academic institutions and our competitors. Patent applications filed in the United States after November 2000 generally will be published eighteen months after the 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 with regards 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

28

other proprietary intellectual 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 offered licenses 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 and diversion of technical and management personnel, cause shipment delays or require us to develop non-infringing technology or to enter into royalty or licensing agreements. An adverse determination in a judicial or administrative proceeding and failure to obtain necessary licenses or develop alternate technologies could prevent us from manufacturing and selling our products, which would have a material adverse effect on our business, results of operations and financial condition.

If we lose key personnel or fail to integrate replacement personnel successfully, our ability to manage our business could be impaired.

Our future success depends upon the continued service of our key management, technical, sales, and other critical personnel. Our officers and other key 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 there likely 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 our operations, including adversely affecting the timeliness of product releases, the successful implementation and completion of Company initiatives, and the results 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 and characterized by increasing salaries, which may increase our operating expenses or hinder our ability to recruit qualified candidates. In addition, the integration of 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 incur additional costs or experience manufacturing delays and may experience lost sales or significant inventory carrying costs.

We use quarterly and annual forecasts based primarily on our anticipated product orders to plan our manufacturing efforts and determine our requirements for components and materials. It is very important that we accurately predict both the demand for our product and the lead times required to obtain the necessary components and materials. Lead times for components vary significantly and depend on numerous factors, including the specific supplier, the size of the order, contract terms and current market demand for such components. If we overestimate the demand for our product, we may have excess 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 customer sales. 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 have some long term or volume purchase agreements with our suppliers and currently purchase components on a purchase order basis. Some of our suppliers and manufacturers are sole or limited sources. In addition, some of these suppliers are relatively small private companies whose operations may be disrupted or discontinued 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. The process 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 our products and additional product testing under FDA and relevant foreign regulatory agency guidelines, which may delay sales and increase product costs. Any failures by our vendors to adequately supply limited and sole source components may impair our ability to offer our existing products, delay the submission of new products for regulatory approval and market introduction, materially harm our business and financial condition and cause our stock price to decline.

29

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 desired and at the prices we have budgeted.

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, our corporate headquarters and other critical business operations are located near major earthquake faults in Mountain View, California. Any such loss at any of our facilities could disrupt our operations, delay production, shipments and revenue and result in large expense to repair and replace our facilities.

If we fail to maintain our relationships with health care providers, customers may not buy our products and our revenue and profitability may decline.

We market our products to numerous health care providers, including physicians, hospitals, ASC’s, government affiliated groups and group purchasing organizations. We have developed and strive to maintain close relationships with members of each of these groups who assist in product research 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 to their 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 of these various groups could have a material adverse effect on our business, financial condition and results of operations.

We are subject to government regulations which may cause us to delay or withdraw the introduction of new products or new applications for 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 the FDA Act and the related regulations, the FDA regulates the design, development, clinical testing, manufacture, labeling, sale, distribution and promotion of medical devices. Before a new device can be introduced into the market, the product must undergo rigorous testing and an extensive regulatory review process implemented 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 the nature 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 withdrawal of the product from the market. Other countries also have extensive regulations regarding clinical trials and testing prior to new product introductions. Our failure to obtain government approvals or any delays in receipt of such approvals would have a material adverse effect on our business, results of operations and financial condition.

The FDA imposes additional regulations on manufacturers of approved medical devices. We are required to comply with the applicable Quality System regulations and our manufacturing facilities are subject to ongoing periodic inspections by the FDA and corresponding state agencies, including unannounced inspections, and must be licensed as part of the product approval process before being utilized for commercial manufacturing. Noncompliance with the applicable requirements can result in, among other things, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, withdrawal of marketing approvals, and criminal prosecution. The FDA also has the authority to request repair, replacement or refund of the cost of any device we manufacture or distribute. Any of these actions by the FDA would materially and adversely affect our ability to continue operating our business and the results of our operations.

In addition, we are also subject to varying product standards, packaging requirements, labeling requirements, tariff regulations, duties and tax requirements. As a result of our sales in Europe, we are required to have all products “CE” marked, an international symbol affixed to all products demonstrating compliance with the European Medical Device Directive and all applicable standards. While currently all of our released products are CE marked, continued certification is based on the successful review of our quality system by our European Registrar during their annual audit. Any loss of certification 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 product introductions 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 do embark 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 in the commercial sale of a product. We may suffer significant setbacks in clinical trials,

30

even after earlier clinical trials showed promising results. Any of our products 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 health risks.

If we fail to comply with the FDA’s quality system regulation and laser performance standards, our manufacturing operations could be halted, and our business would suffer.

We are currently required to demonstrate and maintain compliance with the FDA’s QSR. The QSR is a complex regulatory scheme that covers the methods and documentation of the design, testing, control, manufacturing, labeling, quality assurance, packaging, storage and shipping 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 FDA regulations. The laser performance standard imposes specific record-keeping, reporting, product testing and product labeling requirements. These requirements include affixing warning labels to laser products, as well as incorporating certain safety features in the design of laser products. The FDA enforces the QSR and laser performance standards through periodic unannounced inspections. We have been, and anticipate in the future being, subject to such inspections. Our failure to take satisfactory corrective action in response to an adverse QSR inspection or our failure to comply with applicable laser performance standards could result in enforcement actions, including a public warning letter, a shutdown of our manufacturing operations, a recall of our products, civil or criminal penalties, or other sanctions, 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 our modified 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 its intended 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 premarket approvals for new products or for modifications to, or additional indications for, our existing products in a timely fashion, or at all. Delays in obtaining future clearances would adversely affect our ability to introduce new or enhanced products in a timely manner, which in turn would harm our revenues and future profitability. 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 not require additional clearances or approvals. If the FDA disagrees, and requires new clearances or approvals for the modifications, we may be required to recall and to stop marketing the modified devices, which could harm our operating results and require us to redesign our products.

Our products may be misused, which could harm our reputation and our business.

We market and sell our products for use by highly skilled physicians with specialized training and experience in the treatment of eye-related disorders. We, and our distributors, generally offer but do not require purchasers or operators of our products to attend training sessions, nor do we supervise the procedures performed with our products. The physicians who operate our products are responsible for their use and the treatment regime for each individual patient. In addition, non-physicians, particularly in countries outside of the United States, or poorly trained or inexperienced physicians may make use of our products. Our efforts to market our MicroPulse systems as a Fovea-friendly alternative to traditional CW systems or alternative treatment methods 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 poorly trained or inexperienced physicians may result in product misuse and adverse treatment outcomes, which could harm our reputation and expose us to costly product liability litigation, or otherwise cause our business to suffer.

Inability of customers to obtain 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 they secure through various financing arrangements with third-party financial institutions, including credit facilities and short-term loans. If availability of credit becomes more limited, or interest rates increase, these financing arrangements may be harder to obtain or more expensive to our customers, which may decrease demand for our products. Any reduction in the sales of our products would cause our business to suffer.

Our products could be subject to recalls even after receiving FDA approval or clearance. A recall would harm our reputation and adversely affect our operating results.

The FDA and similar governmental authorities in other countries in which we market and sell our products have the authority to require the recall of our products in the event of material deficiencies or defects in design or manufacture. A government mandated recall, or a voluntary recall by us, could occur as a result of component failures, manufacturing errors or design defects, including

31

defects in labeling. A recall could divert management’s attention, cause us to 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 or results of operations.

We may be subject to product liability claims from time to time. Our products are highly complex and some are used to treat extremely delicate eye tissue. We believe we maintain adequate levels of product liability insurance. However, product liability insurance is expensive and we might not be able to obtain product 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 of our insurance coverage could have a material adverse effect on our business, results of operations and financial condition.

Efforts to acquire additional companies or product lines may divert our managerial resources away from our business operations, and if we complete additional acquisitions, we may incur or assume additional liabilities or experience integration problems.

Since 1989, we have completed six 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 expanding into new geographic markets. Our ability to successfully grow through acquisitions depends upon our ability to identify, negotiate, complete and integrate suitable acquisitions and to obtain any necessary financings. These efforts could divert the attention of our management and key personnel from our business operations. If we complete future acquisitions, we may also experience:

· difficulties integrating any acquired products into our existing business;

· delays in realizing the benefits of the acquired products;

· diversion of our management’s time and attention from other business concerns;

· adverse customer reaction to the product acquisition; and

· increases in expenses.

Any one or more of these factors stated above could have a material adverse effect on our business, financial condition or results of operations. Furthermore, acquisitions could materially impair our operating results by causing us to amortize acquired assets, incur acquisition expenses and add debt.

We are 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 our business.

The Dodd-Frank Wall Street Reform and Consumer Protection Act requires us to track and disclose the source of certain metals used in manufacturing which may stem from minerals (so called “conflict minerals”) which originate in the Democratic Republic of the Congo or adjoining regions. These metals include tantalum, tin, gold and tungsten. These metals are central to the technology industry and are present in some of our products as component parts. In most cases no acceptable alternative material exists which has the necessary properties. It is not possible to determine the source of the metals by analysis but instead a good faith description of the source of the intermediate components and raw materials must be obtained. The components which incorporate those metals 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 and assemblies 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 these materials. There can be no assurance we can obtain this information from intermediate producers who are unwilling or unable to provide this information or further identify their sources of supply or to notify us if these sources change. These metals are subject to price fluctuations and shortages which can affect our ability to obtain the manufactured materials we rely on at favorable terms or from consistent sources. These changes could have an adverse impact on our ability to manufacture and market our devices and products.

If we fail to comply with environmental requirements, our business, financial condition, operating results and reputation could be adversely affected.

Our products and operations  are subject to various federal, state, local and foreign environmental laws and regulations, including those governing the use, storage, handling, exposure to, and disposal of hazardous materials and a large and growing body

32

of international standards which govern the design, manufacture, materials content and sourcing, testing, certification, packaging, installation, use and disposal of our products. We must continually keep abreast of these standards and requirements and integrate compliance to these with the development and regulatory documentation for our products. Failure to meet these standards could limit the ability to market our products in those regions which require compliance to such standards or subject us to fines and penalties. Examples of such standards include laws governing the hazardous material content of our devices and products, such as the European Union (“EU”) Directive 2011/65/EU relating to Restrictions on the Use of Certain Hazardous Substances “RoHS Directive, and the EU Directive 2012/19/EU on Waste Electrical and Electronic Equipment or “WEEE Directive”. Similar laws and regulations have been passed or are pending in several other jurisdictions and may be enacted in other regions, including in the United States, and we are, or may in the future be, subject to these laws and regulations.

Our failure to comply with past, present and future similar laws could result in reduced sales of our devices and products, inventory write-offs, reputational damage, penalties and other sanctions, any of which could harm our business and financial condition. We also expect that our devices and products will be affected by new environmental laws and regulations on an ongoing basis. To date, our expenditures for environmental compliance have not had a material impact on our results of operations or cash flows, and although we cannot predict the future impact of such laws or regulations, they will likely result in additional costs and may increase penalties associated with violations or require us to change the content of our devices and products or how they are manufactured, which could have a material adverse effect on our business, operating results and financial condition.

Risks Related to Ownership of Our Common Stock

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 changes in foreign currency exchange rates, 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 the second quarter of 2016, the trading price of our common stock fluctuated from a low of $9.87 per share to a high of $15.66 per share. There can be no assurance that our common stock trading price will not suffer declines. Our common stock may experience an imbalance between supply and demand resulting from low trading volumes and therefore broad market fluctuations could have a significant impact on the market price of our common stock regardless of our performance.

* If securities or industry analysts do not continue to publish research or publish incorrect or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us, our market and our competitors. If no or few securities or industry analysts cover our company, the trading price for our stock could be negatively impacted. If one or more of the analysts who covers us downgrades our stock or publishes incorrect or unfavorable research about our business, our stock price could decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price or trading volume to decline.

* Because we do not intend to pay dividends, stockholders will benefit from an investment in our common stock only if it appreciates in value.

We expect to retain any earnings for use to further develop our business, and do not expect to declare cash dividends on our common stock in the foreseeable future. The declaration and payment of any such dividends in the future depends upon our earnings, financial condition, capital needs and other factors deemed relevant by the Board of Directors, and may be restricted by future agreements with lenders. As a result, the success of an investment in our common stock will depend entirely upon any future appreciation. There is no guarantee that our common stock will appreciate in value or even maintain the price at which stockholders have purchased their shares.

* Ownership of our common stock is concentrated among a few investors, which may affect the ability of a third party to acquire control of us. Substantial sales by such investors could cause our stock price to decline.

Our executive officers, directors, current five percent or greater stockholders and affiliated entities together beneficially own a significant portion of our common stock outstanding as of July 2, 2016. The sale of a substantial number of our shares by any such investor or our other stockholders within a short period of time could cause our stock price to decline, make it more difficult for us to

33

raise funds through future offerings of our common stock or acquire other businesses using our common stock as consideration. Having such a concentration of ownership may have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from seeking to acquire, a majority of our outstanding common stock or control of our Board of Directors through a proxy solicitation.

* Our ability to raise capital in the future may be limited, and our failure to raise capital when needed could prevent us from growing.

Our business and operations may consume resources faster than we anticipate. In the future, we may need to raise additional funds to invest in future growth opportunities. Additional financing may not be available on favorable terms, if at all. If adequate funds are not available on acceptable terms, we may be unable to invest in future growth opportunities, which could seriously harm our business and operating results.

* Future sales and issuances of securities could negatively affect our stock price and dilute the ownership interest of our existing investors.

Future sales or issuances of securities by us could decrease the value of our common stock, dilute stockholders’ voting power and reduce future potential earnings per share.

To raise capital, we may sell common stock, convertible securities or other equity securities in one or more transactions at prices and in a manner we determine from time to time. If we sell additional equity securities, our existing stockholders may be materially diluted. Additionally, new investors could gain rights, preferences and privileges senior to those of existing holders of our common stock. Further, future resales of our common stock by our existing stockholders could cause the market price of our common stock to decline.  We may also issue debt securities, which may impose restrictive covenants on our operations or otherwise adversely affect the holdings or the rights of our stockholders.

As of April 12, 2016, Holders of an aggregate of 2,060,688 shares of our common stock have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or our other stockholders.  In addition, the shares of common stock subject to outstanding options and RSUs under our equity incentive plans and the shares reserved for future issuance under our equity incentive plans will become eligible for sale in the public markets in the future, subject to certain legal and control limitations.  

We cannot predict the size of future sales and issuances of securities or the effect, if any, that future sales and issuances of securities will have on the market price of our common stock. Sales or issuances of a substantial amount of securities, or the perception that such sales could occur, may adversely affect prevailing market prices for our common stock.

* As a public company, we are obligated to develop and maintain proper and effective internal control over financial reporting. We may not complete our analysis of our internal control over financial reporting in a timely manner, or these internal controls may not be determined to be effective, which may adversely affect investor confidence in our company and, as a result, the value of our common stock.

We are required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. This assessment must include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. We may experience difficulty in meeting these reporting requirements in a timely manner, particularly if material weaknesses or significant deficiencies persist. In addition, our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 while we are a “smaller reporting company” as defined in the Exchange Act.  If we are unable to comply with the requirements of Section 404 in a timely manner, the market price of our stock could decline and we could be subject to sanctions or investigations by the NASDAQ Stock Market, the SEC or other regulatory authorities, which could require additional financial and management resources.

Any failure to develop or maintain effective controls, or any difficulties encountered in their implementation or improvement, could harm our operating results or cause us to fail to meet our reporting obligations. Any failure to implement and maintain effective internal controls also could adversely affect the results of periodic management evaluations regarding the effectiveness of our internal control over financial reporting. Ineffective disclosure controls and procedures or internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which could likely have a negative effect on the trading price of our common stock.

34

Implementing any appropriate changes to our internal controls may require specific compliance training of our directors, officers and employees, entail substantial costs in order to modify our existing accounting systems, and take a significant period of time to complete. Such changes may not, however, be effective in maintaining the adequacy of our internal controls, and any failure to maintain that adequacy, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and could materially impair our ability to operate our business. In the event that we are not able to demonstrate compliance with Section 404 of the Sarbanes-Oxley Act in a timely manner, that our internal controls are perceived as inadequate or that we are unable to produce timely or accurate financial statements, investors may lose confidence in our operating results and our stock price could decline.

* Our charter documents, anti-takeover provisions of Delaware law, and contractual provisions could delay or prevent an acquisition or sale of our company.

Our Certificate of Incorporation empowers the Board of Directors to establish and issue a class of preferred stock, and to determine the rights, preferences and privileges of the preferred stock. These provisions give the Board of Directors the ability to deter, discourage or make more difficult a change in control of our company, even if such a change in control could be deemed in the interest of our stockholders or if such a change in control would provide our stockholders with a substantial premium for their shares over the then-prevailing market price for the common stock. Our certificate of incorporation and bylaws contain other provisions that could have an anti-takeover effect, including the following:

· only our board of directors is authorized to fill vacant directorships, including newly created seats ;

· stockholders cannot act by written consent;

· special meetings of our stockholders may be called only by our board of directors or by a committee of our board of directors, thus prohibiting a stockholder from calling a special meeting;

· stockholders must give advance notice to nominate directors or propose other business; and

· stockholders are not permitted to cumulate votes in the election of directors.

In addition, we are generally subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which regulates corporate acquisitions. These provisions could discourage potential acquisition proposals and could delay or prevent a change in control transaction. They could also have the effect of discouraging others from making tender offers for our common stock or prevent changes in our management.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

The following table provides information with respect to acquisitions by the Company of shares of its common stock during the quarter ended July 2, 2016.

ISSUER PURCHASES OF EQUITY SECURITIES

Period	Total Number of Shares Purchased (1)		Average Price Paid per Share		Total Number of Shares Purchased as Part of a Publicly Announced Plan		Approximate DollarValue of Shares that May Yet Be Purchased Under the Plan
04/03/16 to 05/07/16		—	$	—		—	$	1,011,531
05/08/16 to 06/04/16		—	$	—		—	$	—
06/05/16 to 07/02/16		—	$	—		—	$	—
Total		—	$	—		—	$	1,011,531

35

(1) In February 2013, the Board of Directors approved a one year $3.0 million stock repurchase program that replaced the prior two year $4.0 million stock repurchase program. In February 2014, the Board of Directors approved the extension of the plan for an additional year. In July 2014, the Board of Directors approved an extension of the plan for an additional year and authorized an additional $3.0 million of stock repurchases. In August 2015, the Board of Directors approved a further extension of the plan for another year and authorized an additional $2.0 million of stock repurchases. We did not repurchase any shares of our common stock during the second quarter of 2016. This plan will expire on August 15, 2016. As of July 2, 2016, we have repurchased 843,785 shares for approximately $6.7 million under this current program and we are authorized to purchase up to an additional $1.0 million in common shares under the stock repurchase program.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

36

Item 6. Exhibits

Exhibit No.	Exhibit Title
3.1(1)	Amended and Restated Certificate of Incorporation of Registrant.
3.2(2)	Amended and Restated Bylaws of Registrant.
10.1(3)*	Form of Indemnification Agreement, between the Company and certain of its directors and executive officers. Offer.
10.2(3)*	Letter between the Company and Mr. Mokari effective as of May 13, 2016.
10.3(3)*	Change in Control Severance Agreement, between the Company and Mr. Mokari.
10.4(4)*	Confidential Separation Agreement and Release of All Claims dated as of June 15, 2016 by and between the Company and Ronald Steckel.
31.1	Certification of Principal Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a).
31.2	Certification of Principal Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a).
32.1**	Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**	Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema
101.CAL	XBRL Taxonomy Extension Calculation Linkbase
101.CAL	XBRL Taxonomy Extension Definition Linkbase
101.LAB	XBRL Taxonomy Extension Label Linkbase
101.PRE	XBRL Taxonomy Extension Presentation Linkbase

* Indicates a management contract or compensatory plan or arrangement.

** The certification furnished in Exhibit 32.1 and 32.2 hereto is deemed to accompany this Quarterly Report on Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. Such certification will not be deemed to be incorporated by reference into any filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the registrant specifically incorporates it by reference.

(1) Incorporated by reference to the Exhibits filed with the Registration Statement on Form SB-2 (No. 333-00320-LA) which was declared effective on February 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 Registrant’s Report on Form 8-K on July 11, 2016.

(4) Incorporated by reference to the Registrant’s Report on Form 8-K on June 21, 2016.

Trademark Acknowledgments

IRIDEX, the IRIDEX logo, IRIS Medical, MicroPulse, OcuLight, SmartKey, and EndoProbe, are our registered trademarks. G-Probe, DioPexy, DioVet, TruFocus, TrueCW, IQ 577, IQ 532, Cyclo G6, TxCell, OtoProbe, Symphony, EasyFit, Endoview, MoistAir and GreenTip product names are our trademarks. All other trademarks or trade names appearing in this Quarterly Report on Form 10-Q are the property of their respective owners.

37

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		IRIDEX Corporation (Registrant)
Date: August 8, 2016	By:	/s/ WILLIAM M. MOORE
		Name:	William M. Moore
		Title:	President and Chief Executive Officer (Principal Executive Officer)

Date: August 8, 2016	By:	/s/ ROMEO R. DIZON
		Name:	Romeo R. Dizon
		Title:	Vice President and Controller (Principal Accounting Officer)

38

Exhibit Index

Exhibit No.	Exhibit Title
3.1(1)	Amended and Restated Certificate of Incorporation of Registrant.
3.2(2)	Amended and Restated Bylaws of Registrant.
10.1(3)*	Form of Indemnification Agreement, between the Company and certain of its directors and executive officers. Offer.
10.2(3)*	Letter between the Company and Mr. Mokari effective as of May 13, 2016.
10.3(3)*	Change in Control Severance Agreement, between the Company and Mr. Mokari.
10.4(4)*	Confidential Separation Agreement and Release of All Claims dated as of June 15, 2016 by and between the Company and Ronald Steckel.
31.1	Certification of Principal Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a).
31.2	Certification of Principal Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a).
32.1**	Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**	Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema
101.CAL	XBRL Taxonomy Extension Calculation Linkbase
101.CAL	XBRL Taxonomy Extension Definition Linkbase
101.LAB	XBRL Taxonomy Extension Label Linkbase
101.PRE	XBRL Taxonomy Extension Presentation Linkbase

* Indicates a management contract or compensatory plan or arrangement.

** The certification furnished in Exhibit 32.1 and 32.2 hereto is deemed to accompany this Quarterly Report on Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. Such certification will not be deemed to be incorporated by reference into any filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the registrant specifically incorporates it by reference.

(1) Incorporated by reference to the Exhibits filed with the Registration Statement on Form SB-2 (No. 333-00320-LA) which was declared effective on February 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 Registrant’s Report on Form 8-K on July 11, 2016.

(4) Incorporated by reference to the Registrant’s Report on Form 8-K on June 21, 2016.

39

EX-31.1

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO SECTION 13(a) or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, William M. Moore, certify that:

1. I have reviewed this quarterly report on Form 10-Q of IRIDEX Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements 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 of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under 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 quarterly report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 8, 2016

By:	/s/ WILLIAM M. MOORE
Name:	William M. Moore
Title:	President and Chief Executive Officer
	(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

PURSUANT TO SECTION 13(a) or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Atabak Mokari, certify that:

1. I have reviewed this quarterly report on Form 10-Q of IRIDEX Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements 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 of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under 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 quarterly report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 8, 2016

By:	/s/ ATABAK MOKARI
Name:	Atabak Mokari
Title:	Chief Financial Officer and Vice President of Corporate Development
	(Principal Financial Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, William M. Moore, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, certify that the Quarterly Report of IRIDEX Corporation on Form 10-Q for the fiscal quarter ended July 2, 2016 (i) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) that information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of IRIDEX Corporation.

Date: August 8, 2016

By:	/s/ WILLIAM M. MOORE
Name:	William M. Moore
Title:	President and Chief Executive Officer (Principal Executive Officer)

EX-32.2

Exhibit 32.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Atabak Mokari, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, certify that the Quarterly Report of IRIDEX Corporation on Form 10-Q for the fiscal quarter ended July 2, 2016 (i) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) that information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of IRIDEX Corporation.

Date: August 8, 2016

By:	/s/ ATABAK MOKARI
Name:	Atabak Mokari
Title:	Chief Financial Officer and Vice President of Corporate Development (Principal Financial Officer)

XML

Document and Entity Information - shares	6 Months Ended
	Jul. 02, 2016	Jul. 25, 2016
Document And Entity Information [Abstract]
Entity Registrant Name	IRIDEX CORP
Entity Central Index Key	0001006045
Document Type	10-Q
Document Period End Date	Jul. 02, 2016
Amendment Flag	false
Document Fiscal Year Focus	2016
Document Fiscal Period Focus	Q2
Current Fiscal Year End Date	--12-31
Trading Symbol	IRIX
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		10,118,499

XML

Condensed Consolidated Balance Sheets (Unaudited) - USD ($) $ in Thousands	Jul. 02, 2016	Jan. 02, 2016	[1]
Current assets:
Cash and cash equivalents	$ 11,521	$ 9,995
Accounts receivable, net of allowance for doubtful accounts of $149 as of July 2, 2016 and $140 as of January 2, 2016	8,450	9,282
Inventories	12,141	11,106
Prepaid expenses and other current assets	560	386
Total current assets	32,672	30,769
Property and equipment, net	1,188	1,104
Intangible assets, net	260	268
Goodwill	533	533
Deferred income taxes	8,985	8,985
Other long-term assets	107	164
Total assets	43,745	41,823
Current liabilities:
Accounts payable	3,194	2,223
Accrued compensation	1,750	1,572
Accrued expenses	1,838	1,722
Accrued warranty	610	603
Deferred revenue	1,271	1,311
Total current liabilities	8,663	7,431
Long-term liabilities:
Other long-term liabilities	566	704
Total liabilities	9,229	8,135
Stockholders’ equity:
Common stock, $0.01 par value: Authorized: 30,000,000 shares; Issued and outstanding 10,117,076 and 10,009,408 shares as of July 2, 2016 and January 2, 2016, respectively	112	111
Additional paid-in capital	39,040	37,986
Accumulated deficit	(4,636)	(4,409)
Total stockholders’ equity	34,516	33,688
Total liabilities and stockholders’ equity	$ 43,745	$ 41,823

[1] Derived from the audited consolidated financial statements included in the Annual Report on Form 10-K filed with the SEC for the year ended January 2, 2016.

XML

Condensed Consolidated Balance Sheets (Parenthetical) (Unaudited) - USD ($) $ in Thousands	Jul. 02, 2016	Jan. 02, 2016
Statement Of Financial Position [Abstract]
Accounts receivable, allowance for doubtful accounts	$ 149	$ 140
Common stock, par value	$ 0.01	$ 0.01
Common stock, shares authorized	30,000,000	30,000,000
Common stock, shares issued	10,117,076	10,009,408
Common stock, shares outstanding	10,117,076	10,009,408

XML

Condensed Consolidated Statements of Operations - USD ($) shares in Thousands, $ in Thousands	3 Months Ended		6 Months Ended
	Jul. 02, 2016	Jul. 04, 2015	Jul. 02, 2016	Jul. 04, 2015
Income Statement [Abstract]
Total revenues	$ 11,908	$ 9,033	$ 23,839	$ 19,829
Cost of revenues	6,174	4,816	12,808	10,202
Gross profit	5,734	4,217	11,031	9,627
Operating expenses:
Research and development	1,392	1,482	2,751	2,763
Sales and marketing	2,405	2,158	4,834	4,229
General and administrative	2,331	1,324	3,688	2,979
Total operating expenses	6,128	4,964	11,273	9,971
Loss from operations	(394)	(747)	(242)	(344)
Other expense, net	21	23	32	30
Loss from operations before (benefit from) provision for income taxes	(415)	(770)	(274)	(374)
(Benefit from) provision for income taxes	(87)	(118)	(47)	32
Net loss	$ (328)	$ (652)	$ (227)	$ (406)
Net loss per share:
Basic	$ (0.03)	$ (0.07)	$ (0.02)	$ (0.04)
Diluted	$ (0.03)	$ (0.07)	$ (0.02)	$ (0.04)
Weighted average shares used in computing net loss per common share:
Basic	10,085	10,027	10,060	9,948
Diluted	10,085	10,027	10,060	9,948

XML

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jul. 02, 2016	Jul. 04, 2015	Jul. 02, 2016	Jul. 04, 2015
Statement Of Income And Comprehensive Income [Abstract]
Net loss	$ (328)	$ (652)	$ (227)	$ (406)
Comprehensive loss	$ (328)	$ (652)	$ (227)	$ (406)

XML

Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($) $ in Thousands	6 Months Ended
	Jul. 02, 2016		Jul. 04, 2015
Operating activities:
Net loss	$ (227)		$ (406)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	291		252
Change in fair value of earn-out liability	33		32
Stock-based compensation	800		562
Provision for doubtful accounts	41
Changes in operating assets and liabilities:
Accounts receivable	791		1,018
Inventories	(1,035)		(1,052)
Prepaid expenses and other current assets	(174)		(105)
Other long-term assets	57		26
Accounts payable	971		302
Accrued compensation	178		(393)
Accrued expenses	121		52
Accrued warranty	7		51
Deferred revenue	(40)		20
Other long-term liabilities	14		26
Net cash provided by operating activities	1,828		385
Investing activities:
Acquisition of property and equipment	(367)		(588)
Payment on earn-out liability	(190)		(236)
Net cash used in investing activities	(557)		(824)
Financing activities:
Proceeds from stock option exercises	413		614
Repurchase of common stock	(59)		(670)
Taxes paid related to net share settlements of equity awards	(99)		(605)
Net cash provided by (used in) financing activities	255		(661)
Net increase (decrease) in cash and cash equivalents	1,526		(1,100)
Cash and cash equivalents, beginning of period	9,995	[1]	13,303
Cash and cash equivalents, end of period	11,521		12,203
Cash paid during the period for:
Income taxes	$ 35		$ 32

[1] Derived from the audited consolidated financial statements included in the Annual Report on Form 10-K filed with the SEC for the year ended January 2, 2016.

XML

Basis of Presentation

6 Months Ended

Jul. 02, 2016

Organization Consolidation And Presentation Of Financial Statements [Abstract]

Basis of Presentation

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of IRIDEX Corporation (“IRIDEX”, the “Company”, “we”, “our”, or “us”) have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the financial statements have been included.

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto, together with management’s discussion and analysis of the Company’s financial condition and results of operations, contained in our Annual Report on Form 10-K for the fiscal year ended January 2, 2016, which was filed with the Securities and Exchange Commission (“SEC”) on March 31, 2016. The results of operations for the three and six months ended July 2, 2016 and July 4, 2015 are not necessarily indicative of the results for the fiscal year ending December 31, 2016 or any future interim period. The three and six month periods ended July 2, 2016 and July 4, 2015, each had 13 weeks. For purposes of reporting the financial results, the Company’s fiscal years end on the Saturday closest to the end of December. Periodically, the Company includes a 53rd week to a year in order to end that year on the Saturday closest to the end of December.

XML

Summary of Significant Accounting Policies

6 Months Ended

Jul. 02, 2016

Accounting Policies [Abstract]

Summary of Significant Accounting Policies

2. Summary of Significant Accounting Policies

The Company’s significant accounting policies are disclosed in our Annual Report on Form 10-K for the year ended January 2, 2016, which was filed with the SEC on March 31, 2016.

Financial Statement Presentation.

The unaudited condensed consolidated financial statements include the accounts of the Company and our wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates.

The preparation of unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and the related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. In addition, any change in these estimates or their related assumptions could have an adverse effect on our operating results.

Revenue Recognition.

Our revenues arise from the sale of laser consoles, delivery devices, consumables and service and support activities. Revenue from product sales is recognized upon receipt of a purchase order and product shipment provided that no significant obligations remain and collectibility is reasonably 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 sales revenue is recognized. The Company’s sales may include post-sales obligations for training or other deliverables. For revenue arrangements such as these, we recognize revenue in accordance with Accounting Standards Codification (“ASC”) 605, “Revenue Recognition, Multiple-Element Arrangements”. The Company allocates revenue among deliverables in multiple-element arrangements using the relative selling price method. Revenue allocated to each element is recognized when the basic revenue recognition criteria 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 these elements 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 time depending upon the unique facts and circumstances related to each deliverable. As a result, the Company’s ESP for products and services could change. 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 retention rights to 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 the contract terms when royalties from licensees can be reliably measured and collectibility is reasonably assured, such as upon the earlier of the receipt of a royalty statement from the licensee or upon payment by the licensee.

Concentration of Credit Risk.

Our cash and cash equivalents are deposited in demand and money market accounts. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally these deposits may be redeemed upon demand and therefore, bear minimal risk.

We market our products to distributors and end-users throughout the world. Sales to international distributors are generally made on open credit terms and letters of credit. Management performs ongoing credit evaluations of our customers and maintains an allowance for potential credit losses. Historically, we have not experienced any significant losses related to individual customers or a group of customers in any particular geographic area. For the three and six month periods ended July 2, 2016 and July 4, 2015, no single customer accounted for 10% of total revenues. As of July 2, 2016, no customer accounted for approximately 10% of our accounts receivable and as of January 2, 2016, no customer accounted for more than 10% of our accounts receivable.

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 condensed consolidated statements of operations.

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 periods presented.

Deferred Revenue.

Revenue related to extended service contracts is deferred and recognized on a straight line basis over the period of the applicable service contract. Costs associated with these service arrangements are recognized as incurred.

A reconciliation of the changes in the Company’s deferred revenue balance for the six months ended July 2, 2016 and July 4, 2015 is as follows:

	Six Months Ended
(in thousands)	July 2, 2016			July 4, 2015
Balance, beginning of period	$	1,311		$	1,179
Additions to deferral		640			687
Revenue recognized		(680	)		(667	)
Balance, end of period	$	1,271		$	1,199

Warranty.

The Company generally provides a one to two year warranty on its products, which is accrued for upon shipment of products. Actual warranty costs incurred have not materially differed from those accrued. The Company’s 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 statement of operations as cost of revenues.

A reconciliation of the changes in the Company’s warranty liability for the six months ended July 2, 2016 and July 4, 2015 is as follows:

	Six Months Ended
(in thousands)	July 2, 2016			July 4, 2015
Balance, beginning of period	$	603		$	469
Accruals for product warranties		232			183
Cost of warranty claims and adjustments		(225	)		(132	)
Balance, end of period	$	610		$	520

Recently Issued and Adopted Accounting Standards.

In May 2014, as part of its ongoing efforts to assist in the convergence of U.S. GAAP and International Financial Reporting Standards (“IFRS”), the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers.” The new guidance sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in U.S. GAAP. The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not addressed completely in the prior accounting guidance. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers, Deferral of the Effective Date”. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted for annual periods beginning after December 15, 2016. We are currently evaluating the impact that this standard will have on the Company’s consolidated financial statements.

In June 2014, the FASB issued ASU 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force)”. The ASU clarifies that entities should treat performance targets that can be met after the requisite service period of a share-based payment award as performance conditions that affect vesting. Therefore, an entity would not record compensation expense (measured as of the grant date without taking into account the effect of the performance target) related to an award for which transfer to the employee is contingent on the entity’s satisfaction of a performance target until it becomes probable that the performance target will be met. The ASU does not contain any new disclosure requirements. The ASU is effective for reporting periods beginning after December 15, 2015. We adopted this standard at the beginning of fiscal 2016 and it did not have a material impact on the Company’s consolidated financial statements.

In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory.” Under this ASU, inventory will be measured at the “lower of cost and net realizable value” and options that currently exist for “market value” will be eliminated. The ASU defines net realizable value as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.” No other changes were made to the current guidance on inventory measurement. ASU 2015-11 is effective for interim and annual periods beginning after December 15, 2016. Early application is permitted and should be applied prospectively. Management is evaluating the provisions of this statement, including which period to adopt, and has not determined what impact the adoption of this standard will have on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, "Leases," amending ASC 842. This ASU requires the Company to recognize on the balance sheet the assets and liabilities for the rights and obligations created by leases with terms of more than twelve months. This ASU also requires disclosures enabling the users of financial statements to understand the amount, timing and uncertainty of cash flows arising from leases. This new standard will become effective for the Company for annual periods beginning after December 15, 2018 (including interim reporting periods within those periods). Early adoption is permitted as of the beginning of an interim or annual reporting period. We are currently evaluating the impact of this new standard on the Company’s consolidated financial statements.

In March 2016, the FASB issued Accounting Standards Update ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting." This ASU affects entities that issue share-based payment awards to their employees. The ASU is designed to simplify several aspects of accounting for share-based payment award transactions, which include the income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows and forfeiture rate calculations. This ASU will become effective for the Company on December 15, 2016 (including interim reporting periods within those periods). Early adoption is permitted in any interim or annual period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. We are currently evaluating the impact of this new standard on the Company’s consolidated financial statements.

In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606), which amended certain aspects of the FASB's new revenue standard, ASU No. 2014-09, Revenue from Contracts with Customers. The standard should be adopted concurrently with adoption of ASU 2014-09 which is effective for annual and interim periods beginning after December 15, 2017. We have not yet selected a transition method nor have we determined the effect of the standard on the Company’s ongoing financial reporting.

In May 2016, the FASB issued ASU No. 2016-12 which amended the revenue recognition guidance regarding collectability, noncash consideration, presentation of sales tax and transition. This ASU is effective during the same period as ASU 2014-09. We are currently evaluating the impact of this guidance on the Company’s consolidated financial statements.

XML

Inventories

6 Months Ended

Jul. 02, 2016

Inventory Disclosure [Abstract]

Inventories

3. Inventories

The components of the Company’s inventories as of July 2, 2016 and January 2, 2016 are as follows:

(in thousands)	July 2, 2016		January 2, 2016
Raw materials	$	5,267	$	4,578
Work in process		2,032		1,791
Finished goods		4,842		4,737
Total inventories	$	12,141	$	11,106

XML

Goodwill and Intangible Assets

6 Months Ended

Jul. 02, 2016

Goodwill And Intangible Assets Disclosure [Abstract]

Goodwill and Intangible Assets

4. Goodwill and Intangible Assets

Goodwill.

The carrying value of goodwill was $0.5 million as of July 2, 2016 and January 2, 2016.

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. The Company reviews goodwill for impairment on an annual basis or whenever events or changes in circumstances indicate the carrying value may 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 is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step quantitative goodwill impairment test. If, after assessing 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 carrying amount, then it is required to perform the two-step impairment test. An entity is not required to calculate the fair value of a reporting unit unless the entity determines 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 qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test. The Company has determined that it has a single reporting unit for purposes of performing its goodwill impairment test. As the Company uses the market approach to assess impairment, its common stock price is an important component of the fair value calculation. If the Company’s stock price continues to experience significant price and volume fluctuations, this will impact the fair value of the reporting unit and can lead to potential impairment in future periods. The Company performed its annual impairment test during the second quarter of fiscal 2015 and determined that its goodwill was not impaired. As of July 2, 2016, the Company had not identified any factors that indicated there was an impairment of its goodwill and determined that no additional impairment analysis was then required.

Intangible Assets.

The following table summarizes the components of gross and net intangible asset balances:

	July 2, 2016							January 2, 2016
(in thousands)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Remaining Amortization Life	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Patents	$	720	$	600	$	120	Varies	$	720	$	600	$	120
Customer relations		240		100		140	8.75  Years		240		92		148
Total	$	960	$	700	$	260		$	960	$	692	$	268

For the six months ended July 2, 2016 and July 4, 2015, amortization expense totaled $8 thousand for each period.

The amortization of customer relations was charged to sales and marketing expense and the amortization of patents was charged to cost of revenues.

Future estimated amortization expense (in thousands):
2016 (six months)	$	8
2017		78
2018		74
2019		16
2020		16
Thereafter		68
Total	$	260

XML

Fair Value Measurements

6 Months Ended

Jul. 02, 2016

Fair Value Disclosures [Abstract]

Fair Value Measurements

5. Fair Value Measurements

Fair 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 market participants at the measurement date. The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels 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 assets and liabilities in active markets and quoted prices in markets that are not active. Level 2 also includes assets and liabilities that are valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors, are corroborated by readily observable data from actively quoted markets for substantially the full term of the financial instrument.

· Level 3: Unobservable inputs that are supported by little or no market activity and reflect the use of significant management judgment. These values are generally 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 unobservable inputs 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 July 2, 2016 and January 2, 2016, approximate fair value because of the short maturity of these instruments.

As of July 2, 2016 and January 2, 2016, financial assets and liabilities measured and recognized at fair value on a recurring basis and classified under the appropriate level of the fair value hierarchy as described above were as follows:

	July 2, 2016								January 2, 2016
	Fair Value Measurements								Fair Value Measurements
(in thousands)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Money market funds	$	9,664		—		—	$	9,664	$	9,212		—		—	$	9,212
Liabilities:
Earn-out liability		—		—	$	848	$	848	$	—		—	$	1,005	$	1,005

The Company’s Level 1 financial assets are money market funds whose fair values are based on quoted market prices. The Company does not have any Level 2 financial assets or liabilities. The fair value of the earn-out liability arising from the acquisitions of RetinaLabs, Inc. and Ocunetics, Inc. is classified within Level 3 of the fair value hierarchy since it is based on significant unobservable inputs. The significant unobservable inputs include projected royalties and discount rates to present value the payments. A significant increase (decrease) in the projected royalty payments in isolation could result in a significantly higher (lower) fair value measurement and a significant increase (decrease) in the discount rate in isolation could result in a significantly lower (higher) fair value measurement. The fair value of the earn-out liability is calculated on a quarterly basis by the Company based on a collaborative effort of the Company’s operations, finance and accounting groups as additional information becomes available. Any change in the fair value adjustment is recorded in the statement of operations of that period.

The following table presents quantitative information about the inputs and valuation methodologies used for our fair value measurements classified in Level 3 of the fair value hierarchy as of July 2, 2016.

As of  July 2, 2016	Fair Value (in thousands)		Valuation Technique	Significant Unobservable Input	Weighted Average (range)
Earn-out liability	$	848	Discounted cash flow	Projected royalties (in thousands)	$2,720 ($134 - $2,926)
				Discount rate	11.46% (10.22% - 27.00%)

A reconciliation of the changes in the Company’s earn-out liability (Level 3 liability) for the six months ended July 2, 2016 and July 4, 2015 is as follows:

	Six Months Ended
(in thousands)	July 2, 2016			July 4, 2015
Balance as of beginning of the period	$	1,005		$	1,423
Payments against earn-out		(190	)		(236	)
Change in fair value of earn-out liability		33			32
Balance as of the end of the period	$	848		$	1,219

The earn-out liability is included in accrued expenses and other long-term liabilities in the condensed consolidated balance sheets. Any change in the fair value adjustment is recorded to other expense in the condensed consolidated statements of operations.

XML

Stock Based Compensation

6 Months Ended

Jul. 02, 2016

Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]

Stock Based Compensation

6. Stock Based Compensation

The Company accounts for stock-based compensation granted to employees and directors, including employees stock option awards, restricted stock and restricted stock units in accordance with ASC 718, “Compensation – Stock Compensation” (“ASC 718”). 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 a ratable basis over the requisite service period of the award.

The Company values options using the Black-Scholes option pricing model. Restricted stock and time-based restricted stock units are valued at the grant date fair value of the underlying common shares. Performance-based restricted stock units are valued using the Monte Carlo simulation model. The Black-Scholes option pricing model requires the use of highly subjective and complex assumptions which determine the fair value of stock-based awards, including the option’s expected term and the price volatility of the underlying stock. The Monte Carlo simulation model incorporates assumptions for the holding period, risk-free interest rate, stock price volatility and dividend yield.

2008 Equity Incentive Plan.

For the six months ended July 2, 2016, the only active stock-based compensation plan was the 2008 Equity Incentive Plan (the “Incentive Plan”). The terms of awards granted during the six months ended July 2, 2016 were consistent with those described in the consolidated financial statements included in our Annual Report on Form 10-K for the year ended January 2, 2016.

Summary of Stock Options

The following table summarizes information regarding activity in our stock option plan during the six months ended July 2, 2016:

	Number of Shares			Weighted Average Exercise Price Per Share		Aggregate Intrinsic Value (thousands)
Outstanding as of January 2, 2016		551,492		$	6.92
Granted		41,900		$	10.60
Exercised		(88,417	)	$	4.67
Canceled or forfeited		(49,995	)	$	8.58
Outstanding as of July 2, 2016		454,980		$	7.51	$	3,638

The weighted average grant date fair value of the options granted under the Company’s stock plans as calculated using the Black-Scholes option-pricing model was $4.33 and $4.40 per share for the three months ended July 2, 2016 and July 4, 2015, respectively. The weighted average grant date fair value of the options granted under the Company’s stock plans as calculated using the Black-Scholes option-pricing model was $4.21 and $4.57 per share for the six months ended July 2, 2016 and July 4, 2015, respectively.

The Company uses the Black-Scholes option-pricing model to estimate fair value of stock-based awards (options) with the following weighted average assumptions:

	Three Months Ended						Six Months Ended
	July 2, 2016			July 4, 2015			July 2, 2016			July 4, 2015
Average risk free interest rate		1.10	%		1.51	%		1.16	%		1.27	%
Expected life (in years)	4.55 years			4.55 years			4.55 years			4.55 years
Dividend yield	—%			—%			—%			—%
Average volatility		46	%		51	%		47	%		51	%

Option-pricing models require the input of various subjective assumptions, including the option’s expected life and the price volatility of the underlying stock. 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 the options, trading volume of the Company’s stock, look-back volatilities and Company specific events that affected volatility in a prior period. The expected term of employee stock options represents the weighted average period the stock options are expected to remain outstanding and is based on the history of exercises and cancellations on all past option grants made by the Company, the contractual term, the vesting period and the expected remaining term of the outstanding options. The risk-free interest 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 as the Company has not issued any dividends and does not anticipate issuing any dividends in the future.

The following table shows stock-based compensation expense included in the condensed consolidated statements of operations for the three and six months ended July 2, 2016 and July 4, 2015:

	Three Months Ended				Six Months Ended
	July 2, 2016		July 4, 2015		July 2, 2016		July 4, 2015
Cost of revenues	$	30	$	56	$	81	$	123
Research and development		19		53		51		132
Sales and marketing		41		45		81		104
General and administrative		488		75		587		203
	$	578	$	229	$	800	$	562

Stock-based compensation expense capitalized to inventory was immaterial for the quarters ended July 2, 2016 and July 4, 2015.

Occasionally, the Company will grant stock-based instruments to non-employees. During the six months ended July 2, 2016 and July 4, 2015, the amount of stock-based compensation related to non-employee options was not material.  

Information regarding stock options outstanding, vested and expected to vest and exercisable as of July 2, 2016 is summarized below:

	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)		Aggregate IntrinsicValue (thousands)
Options outstanding		454,980	$	7.51		4.59	$	3,638
Options vested and expected to vest		423,114	$	7.40		4.51	$	3,432
Options exercisable		226,651	$	6.42		3.73	$	2,059

The aggregate intrinsic value in the table above represents the pre-tax intrinsic value, based on the Company’s closing price as of April 1, 2016, that would have been received by option holders had all option holders exercised their stock options as of that date. This amount changes based on the fair market value of the Company’s stock. The total intrinsic value of options exercised for the three months ended July 2, 2016 and July 4, 2015 was approximately $261 thousand and $243 thousand, respectively.

As of July 2, 2016, there was $3.0 million of total unrecognized compensation cost, net of expected forfeitures, related to non-vested stock-based compensation arrangements under the Incentive Plan. The cost is expected to be recognized over a weighted average period of 2.39 years.

Summary of Restricted Stock Units and Awards

Information regarding the restricted stock units (“RSUs”) activity for the six months ended July 2, 2016 is summarized below:

	Number of Shares
Outstanding as of January 2, 2016		147,589
Restricted stock units granted		213,867
Restricted stock units released		(30,789	)
Restricted stock units cancelled		(66,000	)
Outstanding as of July 2, 2016		264,667

On March 1, 2016, the Board approved an award of performance-based restricted stock units (“PRSUs”) to our President and Chief Executive Officer, and to five executives of the Company. The total target number of PRSUs is 210,000. Each PRSU represents the right to receive one share of the Company’s common stock and is subject to the terms of the Company’s 2008 Equity Incentive Plan (the “Plan”) and the applicable performance-based restricted stock unit award agreement under the Plan. The PRSUs will become eligible to vest (“vesting eligible PRSUs”) if the Company’s stock price (measured based on the average, trailing, 60 day closing price of a share of the Company’s common stock) achieves one or more of the four specified stock price performance goals, measured during four performance periods covering each of the Company’s fiscal years 2016 through 2019. The achievement of each performance goal results in 25% of the target number of PRSUs becoming vesting eligible PRSUs. The maximum number of PRSUs that can vest under the PRSU award is 100% of the target number of PRSUs. If any of the performance goals are met, vesting of the PRSUs additionally is subject to the executive’s continued service with the Company through the applicable vesting date as follows. Any PRSUs that become eligible to vest will be scheduled to vest on an annual basis on the last day of the performance period (provided that the first vesting date for any PRSUs that become eligible to vest during a particular performance period will be delayed until the performance results are certified). However, the maximum number of PRSUs that can vest prior to the last performance period will be limited as follows: (i) upon completion of a particular performance period vesting will be limited to 25% of the target number of PRSUs even if more than one stock price goal is achieved during that period (and if more than one stock price goal is achieved, the PRSUs will become eligible to vest at a future date, subject to clause (ii)), and (ii) vesting will be limited to no more than 50% of the target number of PRSUs even if more than two stock price goals are achieved prior to the last performance period (and in that instance, any PRSUs that become eligible to vest would vest on the last day of the final performance period. In the event of a change in control of the Company, the performance periods will end and a final measurement of the Company’s stock price will occur. For this final measurement, the Company’s stock price will be determined based on the value of the consideration that common stockholders receive in the change in control. Upon the final measurement, any vesting eligible PRSUs that become eligible to vest will vest in fullon the closing of the change in control, and any PRSUs that have not become eligible to vest will be scheduled to vest based on continued service (but not subject to any further performance criteria), on the last day of the Company’s fiscal year 2019. If, on or after the change in control, the executive’s employment is terminated without cause, a prorated number of the then unvested PRSUs will accelerate vesting based on the total period following the change in control during which the executive provided services.

To the extent that the market condition is not met, the PRSUs will not vest and will be cancelled. Utilizing the Monte Carlo simulation technique, which incorporated assumptions for the expected holding period, risk-free interest rate, stock price volatility and dividend yield, the fair value at grant date of these restricted stock units was $1.7 million. Compensation expense is recognized ratably during the period the RSU’s are expected to vest.

During the three months ended July 2, 2016, the Company accelerated the vesting of 6,400 of RSUs and 10,000 PRSUs in connection with an employee termination.  In connection with the acceleration, the Company recorded a $220,000 charge to general and administrative expenses.

Information regarding the restricted stock awards activity for the six months ended July 2, 2016 is summarized below:

	Number of Shares
Outstanding as of January 2, 2016		2,513
Restricted stock awards granted		1,289
Restricted stock units released		(2,513	)
Outstanding as of July 2, 2016		1,289

Stock Repurchase Program.

          In February 2013, the Board of Directors approved a one year $3.0 million stock repurchase program that replaced the prior two year $4.0 million stock repurchase program. In February 2014, the Board of Directors approved the extension of the plan for an additional year. In July 2014, the Board of Directors approved an extension of the plan for an additional year and authorized an additional $3.0 million of stock repurchases. In August 2015, the Board of Directors approved a further extension of the plan for another year and authorized an additional $2.0 million of stock repurchases. During the six months ended July 2, 2016, the Company repurchased 6,544 shares at an average price of $9.00 per share. As of July 2, 2016, we have repurchased 843,785 shares for approximately $6.7 million under this current program and we are authorized to purchase up to an additional $1.0 million in common shares under the stock repurchase program. See Item 2, Unregistered Sales of Equity Securities and Use of Proceeds in Part II, Other Information, for additional information.

XML

Income Taxes

6 Months Ended

Jul. 02, 2016

Income Tax Disclosure [Abstract]

Income Taxes

7. Income Taxes  

Provision for Income Tax.

The Company calculates its interim tax provision in accordance with the provisions of ASC 740-270, Income Taxes; Interim Reporting. For interim periods, the Company estimates its annual effective income tax rate and applies the estimated rate to the year-to-date income or loss before income taxes. The Company also computes the tax provision or benefit related to items reported separately and recognizes the items net of their related tax effect in the interim periods in which they occur. The Company also recognizes the effect of changes in enacted tax laws or rates in the interim periods in which the changes occur.  The Company recorded a tax benefit of $47 for the six months ended July 2, 2016 and a provision for income tax of $32 thousand for the six months ended July 4, 2015.

Deferred Income Taxes.

The Company accounts for income taxes in accordance with ASC topic 740, Income Taxes (“ASC 740”), which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. 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 assets will not be realized. In the fourth quarter of fiscal year 2014, the Company's management determined, based on the Company's recent history of earnings coupled with its forecasted profitability that it is more likely than not that all of its federal and the majority of its state deferred tax assets will be realized in the foreseeable future.  Accordingly, in the fourth quarter of fiscal year 2014, the Company released $9.2 million of valuation allowance against most of its deferred tax assets except for the California Research and Development Credits. The Company maintains the same positions as of July 2, 2016 and will reevaluate the position on a quarterly basis.

Uncertain Tax Positions.

The Company accounts for its uncertain tax positions in accordance with ASC 740.  As of January 2, 2016, the Company had $0.9 million of unrecognized tax benefits of which $0.4 million of unrecognized tax benefits would result in a change in the Company’s effective tax rate if recognized in future years.

The Company is not aware of any other uncertain tax positions that could result in significant additional payments, accruals, or other material deviation in this estimate during the fiscal year.

The Company files U.S. federal and state returns. The tax years 2008 to 2015 remain open in several jurisdictions, none of which have individual significance.

XML

Computation of Basic and Diluted Net Loss Per Common Share

6 Months Ended

Jul. 02, 2016

Earnings Per Share [Abstract]

Computation of Basic and Diluted Net Loss Per Common Share

8. Computation of Basic and Diluted Net Loss Per Common Share

Basic and diluted net loss per share is based upon the weighted average number of common shares outstanding during the period. Common stock equivalents consist of incremental common shares issuable upon the exercise of stock options, and the release (vesting) of restricted stock units and awards and are calculated under the treasury stock method. Common stock equivalent shares from unexercised stock options, and unvested restricted stock units and awards are excluded from the computation for periods in which we incur a net loss or if the exercise price of such options is greater than the average market price of our common stock for the period as their effect would be anti-dilutive.

  For the six months ended July 2, 2016 and July 4, 2015, stock options to purchase 454,980 and 743,955 shares, respectively, were excluded from the computation of diluted weighted average shares outstanding.

A reconciliation of the numerator and denominator of basic and diluted net loss per common share is provided as follows:

	Three Months Ended						Six Months Ended
	July 2, 2016			July 4, 2015			July 2, 2016			July 4, 2015
Numerator:
Net loss	$	(328	)	$	(652	)	$	(227	)	$	(406	)
Denominator:
Weighted average shares of common stock (basic)		10,085			10,027			10,060			9,948
Effect of dilutive stock options		-			-			-			-
Effect of dilutive contingent shares		-			-			-			-
Weighted average shares of common stock (diluted)		10,085			10,027			10,060			9,948
Per share data:
Basic net loss per share	$	(0.03	)	$	(0.07	)	$	(0.02	)	$	(0.04	)
Diluted net loss per share	$	(0.03	)	$	(0.07	)	$	(0.02	)	$	(0.04	)

XML

Business Segments

6 Months Ended

Jul. 02, 2016

Segment Reporting [Abstract]

Business Segments

9. Business Segments

The Company operates in one segment, ophthalmology. The Company develops, manufactures and markets medical devices. Our revenues arise from the sale of consoles, delivery devices, consumables, service and support activities.

Revenue information shown by geographic region, based on the location at which each sale originates, is as follows:

	Three Months Ended				Six Months Ended
(in thousands)	July 2, 2016		July 4, 2015		July 2, 2016		July 4, 2015
United States	$	6,923	$	5,391	$	12,771	$	10,972
Europe		2,297		1,366		4,588		3,680
Rest of Americas		762		539		1,382		1,535
Asia/Pacific Rim		1,926		1,737		5,098		3,642
	$	11,908	$	9,033	$	23,839	$	19,829

Revenues are attributed to countries based on location of end customers. No individual country accounted for more than 10% of the Company’s revenues, other than the United States, which accounted for 58.1% and 59.7% of revenues for the three month periods ended July 2, 2016 and July 4, 2015, respectively. For the six month period ended July 2, 2016 and July 4, 2016, the United States accounted for 53.6% and 55.3% of sales, respectively.    

XML

Subsequent Events

6 Months Ended

Jul. 02, 2016

Subsequent Events [Abstract]

Subsequent Events

10. Subsequent Events

The Company has evaluated subsequent events and has concluded that no subsequent events that require disclosure in the financial statements have occurred since the quarter ended July 2, 2016. 

XML

Summary of Significant Accounting Policies (Policies)

6 Months Ended

Jul. 02, 2016

Accounting Policies [Abstract]

Financial Statement Presentation

Financial Statement Presentation.

The unaudited condensed consolidated financial statements include the accounts of the Company and our wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

Use of Estimates.

The preparation of unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and the related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. In addition, any change in these estimates or their related assumptions could have an adverse effect on our operating results.

Revenue Recognition

Revenue Recognition.

Our revenues arise from the sale of laser consoles, delivery devices, consumables and service and support activities. Revenue from product sales is recognized upon receipt of a purchase order and product shipment provided that no significant obligations remain and collectibility is reasonably 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 sales revenue is recognized. The Company’s sales may include post-sales obligations for training or other deliverables. For revenue arrangements such as these, we recognize revenue in accordance with Accounting Standards Codification (“ASC”) 605, “Revenue Recognition, Multiple-Element Arrangements”. The Company allocates revenue among deliverables in multiple-element arrangements using the relative selling price method. Revenue allocated to each element is recognized when the basic revenue recognition criteria 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 these elements 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 time depending upon the unique facts and circumstances related to each deliverable. As a result, the Company’s ESP for products and services could change. 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 retention rights to 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 the contract terms when royalties from licensees can be reliably measured and collectibility is reasonably assured, such as upon the earlier of the receipt of a royalty statement from the licensee or upon payment by the licensee.

Concentration of Credit Risk

Concentration of Credit Risk.

Our cash and cash equivalents are deposited in demand and money market accounts. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally these deposits may be redeemed upon demand and therefore, bear minimal risk.

We market our products to distributors and end-users throughout the world. Sales to international distributors are generally made on open credit terms and letters of credit. Management performs ongoing credit evaluations of our customers and maintains an allowance for potential credit losses. Historically, we have not experienced any significant losses related to individual customers or a group of customers in any particular geographic area. For the three and six month periods ended July 2, 2016 and July 4, 2015, no single customer accounted for 10% of total revenues. As of July 2, 2016, no customer accounted for approximately 10% of our accounts receivable and as of January 2, 2016, no customer accounted for more than 10% of our accounts receivable.

Taxes Collected from Customers and Remitted to Governmental Authorities

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 condensed consolidated statements of operations.

Shipping and Handling Costs

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 periods presented.

Deferred Revenue

Deferred Revenue.

Revenue related to extended service contracts is deferred and recognized on a straight line basis over the period of the applicable service contract. Costs associated with these service arrangements are recognized as incurred.

A reconciliation of the changes in the Company’s deferred revenue balance for the six months ended July 2, 2016 and July 4, 2015 is as follows:

	Six Months Ended
(in thousands)	July 2, 2016			July 4, 2015
Balance, beginning of period	$	1,311		$	1,179
Additions to deferral		640			687
Revenue recognized		(680	)		(667	)
Balance, end of period	$	1,271		$	1,199

Warranty

Warranty.

The Company generally provides a one to two year warranty on its products, which is accrued for upon shipment of products. Actual warranty costs incurred have not materially differed from those accrued. The Company’s 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 statement of operations as cost of revenues.

A reconciliation of the changes in the Company’s warranty liability for the six months ended July 2, 2016 and July 4, 2015 is as follows:

	Six Months Ended
(in thousands)	July 2, 2016			July 4, 2015
Balance, beginning of period	$	603		$	469
Accruals for product warranties		232			183
Cost of warranty claims and adjustments		(225	)		(132	)
Balance, end of period	$	610		$	520

Recently Issued and Adopted Accounting Standards

Recently Issued and Adopted Accounting Standards.

In May 2014, as part of its ongoing efforts to assist in the convergence of U.S. GAAP and International Financial Reporting Standards (“IFRS”), the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers.” The new guidance sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in U.S. GAAP. The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not addressed completely in the prior accounting guidance. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers, Deferral of the Effective Date”. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted for annual periods beginning after December 15, 2016. We are currently evaluating the impact that this standard will have on the Company’s consolidated financial statements.

In June 2014, the FASB issued ASU 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force)”. The ASU clarifies that entities should treat performance targets that can be met after the requisite service period of a share-based payment award as performance conditions that affect vesting. Therefore, an entity would not record compensation expense (measured as of the grant date without taking into account the effect of the performance target) related to an award for which transfer to the employee is contingent on the entity’s satisfaction of a performance target until it becomes probable that the performance target will be met. The ASU does not contain any new disclosure requirements. The ASU is effective for reporting periods beginning after December 15, 2015. We adopted this standard at the beginning of fiscal 2016 and it did not have a material impact on the Company’s consolidated financial statements.

In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory.” Under this ASU, inventory will be measured at the “lower of cost and net realizable value” and options that currently exist for “market value” will be eliminated. The ASU defines net realizable value as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.” No other changes were made to the current guidance on inventory measurement. ASU 2015-11 is effective for interim and annual periods beginning after December 15, 2016. Early application is permitted and should be applied prospectively. Management is evaluating the provisions of this statement, including which period to adopt, and has not determined what impact the adoption of this standard will have on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, "Leases," amending ASC 842. This ASU requires the Company to recognize on the balance sheet the assets and liabilities for the rights and obligations created by leases with terms of more than twelve months. This ASU also requires disclosures enabling the users of financial statements to understand the amount, timing and uncertainty of cash flows arising from leases. This new standard will become effective for the Company for annual periods beginning after December 15, 2018 (including interim reporting periods within those periods). Early adoption is permitted as of the beginning of an interim or annual reporting period. We are currently evaluating the impact of this new standard on the Company’s consolidated financial statements.

In March 2016, the FASB issued Accounting Standards Update ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting." This ASU affects entities that issue share-based payment awards to their employees. The ASU is designed to simplify several aspects of accounting for share-based payment award transactions, which include the income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows and forfeiture rate calculations. This ASU will become effective for the Company on December 15, 2016 (including interim reporting periods within those periods). Early adoption is permitted in any interim or annual period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. We are currently evaluating the impact of this new standard on the Company’s consolidated financial statements.

In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606), which amended certain aspects of the FASB's new revenue standard, ASU No. 2014-09, Revenue from Contracts with Customers. The standard should be adopted concurrently with adoption of ASU 2014-09 which is effective for annual and interim periods beginning after December 15, 2017. We have not yet selected a transition method nor have we determined the effect of the standard on the Company’s ongoing financial reporting.

In May 2016, the FASB issued ASU No. 2016-12 which amended the revenue recognition guidance regarding collectability, noncash consideration, presentation of sales tax and transition. This ASU is effective during the same period as ASU 2014-09. We are currently evaluating the impact of this guidance on the Company’s consolidated financial statements.

XML

Summary of Significant Accounting Policies (Tables)

6 Months Ended

Jul. 02, 2016

Accounting Policies [Abstract]

Reconciliation of Changes in Deferred Revenue

A reconciliation of the changes in the Company’s deferred revenue balance for the six months ended July 2, 2016 and July 4, 2015 is as follows:

	Six Months Ended
(in thousands)	July 2, 2016			July 4, 2015
Balance, beginning of period	$	1,311		$	1,179
Additions to deferral		640			687
Revenue recognized		(680	)		(667	)
Balance, end of period	$	1,271		$	1,199

Reconciliation of Changes in Warranty Liability

A reconciliation of the changes in the Company’s warranty liability for the six months ended July 2, 2016 and July 4, 2015 is as follows:

	Six Months Ended
(in thousands)	July 2, 2016			July 4, 2015
Balance, beginning of period	$	603		$	469
Accruals for product warranties		232			183
Cost of warranty claims and adjustments		(225	)		(132	)
Balance, end of period	$	610		$	520

XML

Inventories (Tables)

6 Months Ended

Jul. 02, 2016

Inventory Disclosure [Abstract]

Components of Inventories

The components of the Company’s inventories as of July 2, 2016 and January 2, 2016 are as follows:

(in thousands)	July 2, 2016		January 2, 2016
Raw materials	$	5,267	$	4,578
Work in process		2,032		1,791
Finished goods		4,842		4,737
Total inventories	$	12,141	$	11,106

XML

Goodwill and Intangible Assets (Tables)

6 Months Ended

Jul. 02, 2016

Goodwill And Intangible Assets Disclosure [Abstract]

Summary of Components of Gross and Net Intangible Asset

The following table summarizes the components of gross and net intangible asset balances:

	July 2, 2016							January 2, 2016
(in thousands)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Remaining Amortization Life	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Patents	$	720	$	600	$	120	Varies	$	720	$	600	$	120
Customer relations		240		100		140	8.75  Years		240		92		148
Total	$	960	$	700	$	260		$	960	$	692	$	268

Future Estimated Amortization Expense

Future estimated amortization expense (in thousands):
2016 (six months)	$	8
2017		78
2018		74
2019		16
2020		16
Thereafter		68
Total	$	260

XML

Fair Value Measurements (Tables)

6 Months Ended

Jul. 02, 2016

Fair Value Disclosures [Abstract]

Financial Assets and Liabilities Measured and Recognized at Fair Value on a Recurring Basis

As of July 2, 2016 and January 2, 2016, financial assets and liabilities measured and recognized at fair value on a recurring basis and classified under the appropriate level of the fair value hierarchy as described above were as follows:

	July 2, 2016								January 2, 2016
	Fair Value Measurements								Fair Value Measurements
(in thousands)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Money market funds	$	9,664		—		—	$	9,664	$	9,212		—		—	$	9,212
Liabilities:
Earn-out liability		—		—	$	848	$	848	$	—		—	$	1,005	$	1,005

Quantitative Information about the Inputs and Valuation Methodologies Used for Fair Value Measurements

The following table presents quantitative information about the inputs and valuation methodologies used for our fair value measurements classified in Level 3 of the fair value hierarchy as of July 2, 2016.

As of  July 2, 2016	Fair Value (in thousands)		Valuation Technique	Significant Unobservable Input	Weighted Average (range)
Earn-out liability	$	848	Discounted cash flow	Projected royalties (in thousands)	$2,720 ($134 - $2,926)
				Discount rate	11.46% (10.22% - 27.00%)

Reconciliation of the Changes in the Company's Earn-Out - Cash (Level 3 Liabilities) Balance

A reconciliation of the changes in the Company’s earn-out liability (Level 3 liability) for the six months ended July 2, 2016 and July 4, 2015 is as follows:

	Six Months Ended
(in thousands)	July 2, 2016			July 4, 2015
Balance as of beginning of the period	$	1,005		$	1,423
Payments against earn-out		(190	)		(236	)
Change in fair value of earn-out liability		33			32
Balance as of the end of the period	$	848		$	1,219

XML

Stock Based Compensation (Tables)

6 Months Ended

Jul. 02, 2016

Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]

Summary of Activity in Stock Option Plan

The following table summarizes information regarding activity in our stock option plan during the six months ended July 2, 2016:

	Number of Shares			Weighted Average Exercise Price Per Share		Aggregate Intrinsic Value (thousands)
Outstanding as of January 2, 2016		551,492		$	6.92
Granted		41,900		$	10.60
Exercised		(88,417	)	$	4.67
Canceled or forfeited		(49,995	)	$	8.58
Outstanding as of July 2, 2016		454,980		$	7.51	$	3,638

Weighted Average Assumptions for Fair Value Estimate of Stock-Based Awards (Options)

The Company uses the Black-Scholes option-pricing model to estimate fair value of stock-based awards (options) with the following weighted average assumptions:

	Three Months Ended						Six Months Ended
	July 2, 2016			July 4, 2015			July 2, 2016			July 4, 2015
Average risk free interest rate		1.10	%		1.51	%		1.16	%		1.27	%
Expected life (in years)	4.55 years			4.55 years			4.55 years			4.55 years
Dividend yield	—%			—%			—%			—%
Average volatility		46	%		51	%		47	%		51	%

Stock-Based Compensation Expense

The following table shows stock-based compensation expense included in the condensed consolidated statements of operations for the three and six months ended July 2, 2016 and July 4, 2015:

	Three Months Ended				Six Months Ended
	July 2, 2016		July 4, 2015		July 2, 2016		July 4, 2015
Cost of revenues	$	30	$	56	$	81	$	123
Research and development		19		53		51		132
Sales and marketing		41		45		81		104
General and administrative		488		75		587		203
	$	578	$	229	$	800	$	562

Summary of Stock Options Outstanding, Vested and Expected to Vest and Exercisable

Information regarding stock options outstanding, vested and expected to vest and exercisable as of July 2, 2016 is summarized below:

	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)		Aggregate IntrinsicValue (thousands)
Options outstanding		454,980	$	7.51		4.59	$	3,638
Options vested and expected to vest		423,114	$	7.40		4.51	$	3,432
Options exercisable		226,651	$	6.42		3.73	$	2,059

Restricted Stock Units and Awards

Information regarding the restricted stock units (“RSUs”) activity for the six months ended July 2, 2016 is summarized below:

	Number of Shares
Outstanding as of January 2, 2016		147,589
Restricted stock units granted		213,867
Restricted stock units released		(30,789	)
Restricted stock units cancelled		(66,000	)
Outstanding as of July 2, 2016		264,667

Information regarding the restricted stock awards activity for the six months ended July 2, 2016 is summarized below:

	Number of Shares
Outstanding as of January 2, 2016		2,513
Restricted stock awards granted		1,289
Restricted stock units released		(2,513	)
Outstanding as of July 2, 2016		1,289

XML

Computation of Basic and Diluted Net Loss Per Common Share (Tables)

6 Months Ended

Jul. 02, 2016

Earnings Per Share [Abstract]

Reconciliation of Numerator and Denominator of Basic and Diluted Net Loss Per Common Share

A reconciliation of the numerator and denominator of basic and diluted net loss per common share is provided as follows:

	Three Months Ended						Six Months Ended
	July 2, 2016			July 4, 2015			July 2, 2016			July 4, 2015
Numerator:
Net loss	$	(328	)	$	(652	)	$	(227	)	$	(406	)
Denominator:
Weighted average shares of common stock (basic)		10,085			10,027			10,060			9,948
Effect of dilutive stock options		-			-			-			-
Effect of dilutive contingent shares		-			-			-			-
Weighted average shares of common stock (diluted)		10,085			10,027			10,060			9,948
Per share data:
Basic net loss per share	$	(0.03	)	$	(0.07	)	$	(0.02	)	$	(0.04	)
Diluted net loss per share	$	(0.03	)	$	(0.07	)	$	(0.02	)	$	(0.04	)

XML

Business Segments (Tables)

6 Months Ended

Jul. 02, 2016

Segment Reporting [Abstract]

Revenue Information by Geographic Region

Revenue information shown by geographic region, based on the location at which each sale originates, is as follows:

	Three Months Ended				Six Months Ended
(in thousands)	July 2, 2016		July 4, 2015		July 2, 2016		July 4, 2015
United States	$	6,923	$	5,391	$	12,771	$	10,972
Europe		2,297		1,366		4,588		3,680
Rest of Americas		762		539		1,382		1,535
Asia/Pacific Rim		1,926		1,737		5,098		3,642
	$	11,908	$	9,033	$	23,839	$	19,829

XML

Summary of Significant Accounting Policies - Additional Information (Details) - Customer	3 Months Ended		6 Months Ended		12 Months Ended
	Jul. 02, 2016	Jul. 04, 2015	Jul. 02, 2016	Jul. 04, 2015	Jan. 02, 2016
Disclosure Summary Of Significant Accounting Policies [Line Items]
Customer accounted percentage of net accounts receivable balance			10.00%		10.00%
Minimum
Disclosure Summary Of Significant Accounting Policies [Line Items]
Products warranty period			1 year
Maximum
Disclosure Summary Of Significant Accounting Policies [Line Items]
Products warranty period			2 years
Revenue, Total | Customer Concentration Risk
Disclosure Summary Of Significant Accounting Policies [Line Items]
Number of customer accounted for total revenues and net accounts receivable	0	0	0	0
Customer accounted percentage of total revenues	10.00%	10.00%	10.00%	10.00%
Accounts Receivable | Credit Concentration Risk
Disclosure Summary Of Significant Accounting Policies [Line Items]
Number of customer accounted for total revenues and net accounts receivable	0		0		0

XML

Summary of Significant Accounting Policies - Reconciliation of Changes in Deferred Revenue (Details) - USD ($) $ in Thousands	6 Months Ended
	Jul. 02, 2016		Jul. 04, 2015
Reconciliation of the changes in the Company's deferred revenue balance
Balance, beginning of period	$ 1,311	[1]	$ 1,179
Additions to deferral	640		687
Revenue recognized	(680)		(667)
Balance, end of period	$ 1,271		$ 1,199

[1] Derived from the audited consolidated financial statements included in the Annual Report on Form 10-K filed with the SEC for the year ended January 2, 2016.

XML

Summary of Significant Accounting Policies - Reconciliation of Changes in Warranty Liability (Details) - USD ($) $ in Thousands	6 Months Ended
	Jul. 02, 2016		Jul. 04, 2015
Reconciliation of the changes in the Company's warranty liability
Balance, beginning of period	$ 603	[1]	$ 469
Accruals for product warranties	232		183
Cost of warranty claims and adjustments	(225)		(132)
Balance, end of period	$ 610		$ 520

[1] Derived from the audited consolidated financial statements included in the Annual Report on Form 10-K filed with the SEC for the year ended January 2, 2016.

XML

Inventories - Components of Inventories (Details) - USD ($) $ in Thousands	Jul. 02, 2016	Jan. 02, 2016
Inventory Disclosure [Abstract]
Raw materials	$ 5,267	$ 4,578
Work in process	2,032	1,791
Finished goods	4,842	4,737
Total inventories	$ 12,141	$ 11,106	[1]

[1] Derived from the audited consolidated financial statements included in the Annual Report on Form 10-K filed with the SEC for the year ended January 2, 2016.

XML

Goodwill and Intangible Assets - Additional Information (Details) - USD ($)	6 Months Ended
	Jul. 02, 2016	Jul. 04, 2015	Jan. 02, 2016	[1]
Goodwill And Intangible Assets Disclosure [Abstract]
Carrying value of goodwill	$ 533,000		$ 533,000
Impairment of goodwill	0
Amortization expense	$ 8,000	$ 8,000

[1] Derived from the audited consolidated financial statements included in the Annual Report on Form 10-K filed with the SEC for the year ended January 2, 2016.

XML

Goodwill and Intangible Assets - Summary of Components of Gross and Net Intangible Asset (Details) - USD ($) $ in Thousands	6 Months Ended
	Jul. 02, 2016	Jan. 02, 2016
Schedule of Intangible Assets
Gross Carrying Amount	$ 960	$ 960
Accumulated Amortization	700	692
Net Carrying Amount	260	268	[1]
Patents
Schedule of Intangible Assets
Gross Carrying Amount	720	720
Accumulated Amortization	600	600
Net Carrying Amount	120	120
Customer relations
Schedule of Intangible Assets
Gross Carrying Amount	240	240
Accumulated Amortization	100	92
Net Carrying Amount	$ 140	$ 148
Remaining Amortization Life	8 years 9 months

[1] Derived from the audited consolidated financial statements included in the Annual Report on Form 10-K filed with the SEC for the year ended January 2, 2016.

XML

Goodwill and Intangible Assets - Future Estimated Amortization Expense (Details) - USD ($) $ in Thousands	Jul. 02, 2016	Jan. 02, 2016	[1]
Future estimated amortization expense
2016 (six months)	$ 8
2017	78
2018	74
2019	16
2020	16
Thereafter	68
Net Carrying Amount	$ 260	$ 268

[1] Derived from the audited consolidated financial statements included in the Annual Report on Form 10-K filed with the SEC for the year ended January 2, 2016.

XML

Fair Value Measurement - Financial Assets and Liabilities Measured and Recognized at Fair Value on a Recurring Basis (Details) - USD ($) $ in Thousands	Jul. 02, 2016	Jan. 02, 2016
Money Market Funds
Assets:
Assets, Fair Value Measurements	$ 9,664	$ 9,212
Money Market Funds | Level 1
Assets:
Assets, Fair Value Measurements	9,664	9,212
Earn Out Liability
Liabilities:
Liabilities, Fair Value Measurements	848	1,005
Earn Out Liability | Level 3
Liabilities:
Liabilities, Fair Value Measurements	$ 848	$ 1,005

XML

Fair Value Measurements - Quantitative Information about the Inputs and Valuation Methodologies Used for Fair Value Measurements (Details) - Earn Out Liability - USD ($) $ in Thousands	6 Months Ended
	Jul. 02, 2016	Jan. 02, 2016
Quantitative information about the inputs and valuation methodologies used for fair value measurements
Liabilities, Fair Value Measurements	$ 848	$ 1,005
Level 3
Quantitative information about the inputs and valuation methodologies used for fair value measurements
Liabilities, Fair Value Measurements	848	$ 1,005
Level 3 | Discounted Cash Flow
Quantitative information about the inputs and valuation methodologies used for fair value measurements
Liabilities, Fair Value Measurements	$ 848
Valuation Technique, Earn-out liability	Discounted cash flow
Level 3 | Discounted Cash Flow | Weighted Average
Quantitative information about the inputs and valuation methodologies used for fair value measurements
Weighted Average, Projected royalties	$ 2,720
Weighted Average, Discount rate	11.46%
Level 3 | Discounted Cash Flow | Minimum
Quantitative information about the inputs and valuation methodologies used for fair value measurements
Weighted Average, Projected royalties	$ 134
Weighted Average, Discount rate	10.22%
Level 3 | Discounted Cash Flow | Maximum
Quantitative information about the inputs and valuation methodologies used for fair value measurements
Weighted Average, Projected royalties	$ 2,926
Weighted Average, Discount rate	27.00%

XML

Fair Value Measurements - Reconciliation of the Changes in the Company's Earn-Out - Cash (Level 3 Liabilities) Balance (Details) - USD ($) $ in Thousands	6 Months Ended
	Jul. 02, 2016	Jul. 04, 2015
Reconciliation of the changes in the Company's earn-out - cash (Level 3 liabilities) balance
Balance as of beginning of the period	$ 1,005	$ 1,423
Payments against earn-out	(190)	(236)
Change in fair value of earn-out liability	33	32
Balance as of the end of the period	$ 848	$ 1,219

XML

Stock Based Compensation - Summary of Activity in Stock Option Plan (Details) $ / shares in Units, $ in Thousands	6 Months Ended
	Jul. 02, 2016 USD ($) $ / shares shares
Share-based Compensation Arrangement by Share-based Payment Award, Additional General Disclosures [Abstract]
Outstanding, Number of Shares, Beginning Balance | shares	551,492
Number of Shares, Options Granted | shares	41,900
Number of Shares, Options Exercised | shares	(88,417)
Number of Shares, Options Cancelled or forfeited | shares	(49,995)
Outstanding, Number of Shares, Ending Balance | shares	454,980
Weighted Average Exercise Price Per Share, Beginning Balance | $ / shares	$ 6.92
Weighted Average Exercise Price Per Share, Options Granted | $ / shares	10.60
Weighted Average Exercise Price Per Share, Options Exercised | $ / shares	4.67
Weighted Average Exercise Price Per Share, Options Cancelled or forfeited | $ / shares	8.58
Weighted Average Exercise Price Per Share, Ending Balance | $ / shares	$ 7.51
Aggregate Intrinsic Value, Ending Balance | $	$ 3,638

XML

Stock Based Compensation - Additional Information (Details)		3 Months Ended		6 Months Ended
	Mar. 01, 2016 USD ($) Executives shares	Jul. 02, 2016 USD ($) $ / shares shares	Jul. 04, 2015 USD ($) $ / shares	Jul. 02, 2016 USD ($) $ / shares shares	Jul. 04, 2015 $ / shares	Aug. 31, 2015 USD ($)	Jul. 31, 2014 USD ($)	Feb. 28, 2013 USD ($)	Feb. 28, 2012 USD ($)
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Weighted-average grant date fair value of the options granted | $ / shares		$ 4.33	$ 4.40	$ 4.21	$ 4.57
Total intrinsic value of options exercised		$ 261,000	$ 243,000
Total unrecognized compensation cost related to non-vested share-based compensation arrangements		3,000,000		$ 3,000,000
Cost is expected to be recognized over a weighted average period				2 years 4 months 21 days
Stock repurchase program authorized amount		$ 6,700,000		$ 6,700,000			$ 3,000,000	$ 3,000,000	$ 4,000,000
Repurchase of shares | shares		843,785		843,785
Remaining common stock value authorized to purchase under stock repurchase program		$ 1,000,000		$ 1,000,000
Stock repurchase program additional amount authorized						$ 2,000,000
Stock repurchase, shares | shares				6,544
Shares repurchased price, per share | $ / shares				$ 9.00
Restricted Stock Units (RSUs)
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Restricted stock units granted | shares				213,867
Number of shares, vested | shares		6,400		30,789
Restricted Stock Units (RSUs) | Performance Award
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Number of executives | Executives	5
Restricted stock units granted | shares	210,000
Period consider for calculation of average stock price performance after awards vesting				60 days
Award investing period				4 years
Percentage of targeted number of PRSUs becoming vest	25.00%
Percentage of targeted number of PRSUs becoming vest prior to end of last performance period				50.00%
Award vesting conditions				the maximum number of PRSUs that can vest prior to the last performance period will be limited as follows: (i) upon completion of a particular performance period vesting will be limited to 25% of the target number of PRSUs even if more than one stock price goal is achieved during that period (and if more than one stock price goal is achieved, the PRSUs will become eligible to vest at a future date, subject to clause (ii)), and (ii) vesting will be limited to no more than 50% of the target number of PRSUs even if more than two stock price goals are achieved prior to the last performance period (and in that instance, any PRSUs that become eligible to vest would vest on the last day of the final performance period.
Weighted grant date fair value of restricted stock units granted	$ 1,700,000
Number of shares, vested | shares		10,000
Restricted Stock Units (RSUs) | Performance Award | General and administrative
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock-based compensation expense		$ 220,000
Maximum | Restricted Stock Units (RSUs) | Performance Award
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Percentage of targeted number of PRSUs becoming vest				100.00%

XML

Stock Based Compensation - Weighted Average Assumptions for Fair Value Stock-Based Awards (Options) (Details)	3 Months Ended		6 Months Ended
	Jul. 02, 2016	Jul. 04, 2015	Jul. 02, 2016	Jul. 04, 2015
Weighted average assumptions for fair value estimate of stock-based awards (options)
Average risk free interest rate	1.10%	1.51%	1.16%	1.27%
Expected life (in years)	4 years 6 months 18 days	4 years 6 months 18 days	4 years 6 months 18 days	4 years 6 months 18 days
Average volatility	46.00%	51.00%	47.00%	51.00%

XML

Stock Based Compensation - Stock-Based Compensation Expense (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jul. 02, 2016	Jul. 04, 2015	Jul. 02, 2016	Jul. 04, 2015
Employee Service Share Based Compensation Allocation Of Recognized Period Costs [Line Items]
Stock-based compensation expense	$ 578	$ 229	$ 800	$ 562
Cost of revenues
Employee Service Share Based Compensation Allocation Of Recognized Period Costs [Line Items]
Stock-based compensation expense	30	56	81	123
Research and development
Employee Service Share Based Compensation Allocation Of Recognized Period Costs [Line Items]
Stock-based compensation expense	19	53	51	132
Sales and marketing
Employee Service Share Based Compensation Allocation Of Recognized Period Costs [Line Items]
Stock-based compensation expense	41	45	81	104
General and administrative
Employee Service Share Based Compensation Allocation Of Recognized Period Costs [Line Items]
Stock-based compensation expense	$ 488	$ 75	$ 587	$ 203

XML

Stock Based Compensation - Summary of Stock Options Outstanding, Vested and Expected to Vest and Exercisable (Details) - USD ($) $ / shares in Units, $ in Thousands	6 Months Ended
	Jul. 02, 2016	Jan. 02, 2016
Stock options outstanding, exercisable and expected to vest
Options outstanding, Number of Shares	454,980	551,492
Options vested and expected to vest, Number of Shares	423,114
Options exercisable, Number of Shares	226,651
Options outstanding, Weighted Average Exercise Price	$ 7.51	$ 6.92
Options vested and expected to vest, Weighted Average Exercise Price	7.40
Options exercisable, Weighted Average Exercise Price	$ 6.42
Options outstanding, Weighted Average Remaining Contractual Life (years)	4 years 7 months 2 days
Options vested and expected to vest, Weighted Average Remaining Contractual Life (years)	4 years 6 months 4 days
Options exercisable, Weighted Average Remaining Contractual Life (years)	3 years 8 months 23 days
Options outstanding, Aggregate Intrinsic Value	$ 3,638
Options vested and expected to vest, Aggregate Intrinsic Value	3,432
Options exercisable, Aggregate Intrinsic Value	$ 2,059

XML

Stock Based Compensation - Restricted Stock Units and Awards (Details) - shares	3 Months Ended	6 Months Ended
	Jul. 02, 2016	Jul. 02, 2016
Restricted Stock Units (RSUs)
Restricted stock units
Number of Shares, Beginning Balance		147,589
Number of Shares, Restricted stock granted		213,867
Number of Shares, Restricted stock released	(6,400)	(30,789)
Number of Shares, Restricted stock cancelled		(66,000)
Number of Shares, Ending Balance	264,667	264,667
Restricted Stock Awards
Restricted stock units
Number of Shares, Beginning Balance		2,513
Number of Shares, Restricted stock granted		1,289
Number of Shares, Restricted stock released		(2,513)
Number of Shares, Ending Balance	1,289	1,289

XML

Income Taxes - Additional Information (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jul. 02, 2016	Jul. 04, 2015	Jul. 02, 2016	Jul. 04, 2015	Jan. 02, 2016
Income Taxes [Line Items]
(Benefit from) provision for income taxes	$ (87)	$ (118)	$ (47)	$ 32
Release of deferred tax assets valuation allowance			$ 9,200
Unrecognized tax benefits					$ 900
Unrecognized tax benefits recognition impact on income tax rate					$ 400
Earliest Tax Year
Income Taxes [Line Items]
Open Tax Year			2008
Latest Tax Year
Income Taxes [Line Items]
Open Tax Year			2015

XML

Computation of Basic and Diluted Net Loss Per Common Share - Additional Information (Details) - shares	6 Months Ended
	Jul. 02, 2016	Jul. 04, 2015
Stock option
Antidilutive Securities Excluded From Computation Of Earnings Per Share [Line Items]
Shares that were excluded from the computation of diluted weighted average shares outstanding	454,980	743,955

XML

Computation of Basic and Diluted Net Loss Per Common Share - Reconciliation of Numerator and Denominator of Basic and Diluted Net Loss Per Common Share (Details) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	3 Months Ended		6 Months Ended
	Jul. 02, 2016	Jul. 04, 2015	Jul. 02, 2016	Jul. 04, 2015
Numerator:
Net loss	$ (328)	$ (652)	$ (227)	$ (406)
Denominator:
Weighted average shares of common stock (basic)	10,085	10,027	10,060	9,948
Weighted average shares of common stock (diluted)	10,085	10,027	10,060	9,948
Per share data:
Basic net loss per share	$ (0.03)	$ (0.07)	$ (0.02)	$ (0.04)
Diluted net loss per share	$ (0.03)	$ (0.07)	$ (0.02)	$ (0.04)

XML

Business Segments - Additional Information (Details) - Segment		3 Months Ended		6 Months Ended
	Jul. 04, 2016	Jul. 02, 2016	Jul. 04, 2015	Jul. 02, 2016	Jul. 04, 2015
Segment Reporting Information [Line Items]
Number of operating segments				1
Customer Concentration Risk | Revenue, Total
Segment Reporting Information [Line Items]
Percentage of concentration risk		10.00%	10.00%	10.00%	10.00%
Other than United States | Customer Concentration Risk | Revenue, Total
Segment Reporting Information [Line Items]
Percentage of concentration risk		58.10%	59.70%
United States | Customer Concentration Risk | Revenue, Total
Segment Reporting Information [Line Items]
Percentage of concentration risk				53.60%
United States | Customer Concentration Risk | Subsequent Event | Revenue, Total
Segment Reporting Information [Line Items]
Percentage of concentration risk	55.30%

XML

Business Segments - Revenue Information by Geographic Region (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jul. 02, 2016	Jul. 04, 2015	Jul. 02, 2016	Jul. 04, 2015
Revenues From External Customers And Long Lived Assets [Line Items]
Total revenues	$ 11,908	$ 9,033	$ 23,839	$ 19,829
United States
Revenues From External Customers And Long Lived Assets [Line Items]
Total revenues	6,923	5,391	12,771	10,972
Europe
Revenues From External Customers And Long Lived Assets [Line Items]
Total revenues	2,297	1,366	4,588	3,680
Rest of Americas
Revenues From External Customers And Long Lived Assets [Line Items]
Total revenues	762	539	1,382	1,535
Asia/Pacific Rim
Revenues From External Customers And Long Lived Assets [Line Items]
Total revenues	$ 1,926	$ 1,737	$ 5,098	$ 3,642