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Stockholders' Equity
 12 Months Ended
Dec. 29, 2012
Stockholders' Equity [Abstract]  
Stockholders' Equity

12. Stockholders’ Equity

Convertible Preferred Stock

The Company is authorized to issue up to 2,000,000 shares of undesignated preferred stock from time to time in one or more series. During August 2007, the Company filed a Certificate of Designation authorizing the Company to issue up to 500,000 of the 2,000,000 shares of authorized undesignated preferred stock as shares of Series A Preferred Stock, par value $0.01 per share.

 

In August 2007, the Company issued 500,000 shares of Series A Preferred Stock, convertible into 1 million shares of common stock, and warrants to purchase an aggregate of 600,000 shares of common stock at an exercise price of $0.01 per share. The warrants were to expire December 31, 2007 but were exercised prior to that date. The purchase price for a unit of 1 share of Series A Preferred Stock and a warrant to purchase 1.2 shares of common stock was $10.00, resulting in net proceeds to the Company of approximately $4.9 million. Of the total $4.9 million proceeds received, approximately $2.3 million has been allocated to the common stock warrants based on their estimated fair value at the time of issuance.

In the event that the common stock of the Company trades on a trading market at or above a closing price equal to $5.00 per share (as adjusted for capital reorganizations, stock splits, reclassifications, etc.) for a period of 30 consecutive trading days, the shares of Series A Preferred Stock shall automatically convert to common stock.

Holders of Series A Preferred Stock have preferential rights to noncumulative dividends when and if declared by the Board of Directors. In the event of liquidation, the holders have preferential rights to liquidation payments in the amount of the original purchase price plus declared and unpaid dividends, if any. At December 29, 2012, the aggregate liquidation preference was $5,000,000.

In addition, holders of Series A Preferred Stock have certain registration rights including the requirement that the Company file a Form S-3 registration statement within 90 days of becoming eligible to file a Form S-3 registration statement and the right to request that the Company file a Form S-1 registration statement any time after February 29, 2008.

If the holders notify the Company of their decision to have a registration statement filed, the Company has 90 days to cause the registration statement to be declared effective. If the registration statement is not filed within 90 days, the Company is obligated to pay the holders partial liquidated damages until the registration statement is declared effective. The Company shall pay to each holder an amount in cash equal to 1% of the aggregate purchase price paid for the original units of Series A Preferred Stock and warrants to purchase common stock. The maximum aggregate damages payable to the holders is 12% of the aggregate purchase price paid by the holders. If the Company fails to pay any partial liquidated damages in full within seven days of the date payable, the Company will pay interest thereon at a rate of 18% per annum (or the lesser maximum amount that is permitted to be paid by applicable law) to the holders.

The maximum potential amount of damages, excluding interest, that the Company may have to pay the holders is $600,000. The Company regards the probability of having to make this payment to the holders as remote and has therefore not recorded a liability to represent this potential obligation.

During 2009 the holders of the Series A Preferred Stock and the Company agreed to amend the Form S-3 registration rights. The agreement changed the clause requiring the Company to file a Form S-3 registration statement within 90 days of becoming eligible to a right to request the Company file a Form S-3 registration statement any time after June 30, 2009. In consideration for extending the period during which the Company is not required to file a registration statement, the Company issued the holders of Series A Preferred Stock warrants to purchase an aggregate of 20,000 shares of common stock at an exercise price of $0.01 per share. The warrants were exercised in fiscal year 2009. As of December 29, 2012, the Company has not received a request to file a Form S-3.

Stock-Based Compensation

1998 Stock Plan.

The 1998 Stock Plan (the 1998 Plan), as amended, provides for the granting to employees (including officers and employee directors) of incentive stock options and for the granting to employees (including officers and employee directors) and consultants of nonstatutory stock options, stock purchase rights (SPRs), restricted stock, restricted stock units, performance shares, performance units and stock appreciation rights. The exercise price of incentive stock options and stock appreciation rights granted under the 1998 Plan must be at least equal to the fair market value of the shares at the time of grant. With respect to any recipient who owns stock possessing more than 10% of the voting power of our outstanding capital stock, the exercise price of any option or SPR granted must be at least equal to 110% of the fair market value at the time of grant. Options granted under the 1998 Plan are exercisable at such times and under such conditions as determined by the Administrator; generally over a four year period. The maximum term of incentive stock options granted to any recipient must not exceed ten years; provided, however, that the maximum term of an incentive stock option granted to any recipient possessing more than 10% of the voting power of the Company’s outstanding capital stock must not exceed five years. In the case of SPRs, unless the Administrator determines otherwise, the Company has a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser’s employment with the Company for any reason (including death or disability). Such repurchase option lapses at a rate determined by the Administrator. The purchase price for shares repurchased by the Company is the original price paid by the purchaser. In June 2006, the 1998 Plan was amended to shorten the contractual life of all option grants made after June 2006 to a seven year term. As of December 29, 2012, no shares were subject to repurchase. The form of consideration for exercising an option or stock purchase right, including the method of payment, is determined by the Administrator. The 1998 Plan expired in February 2008.

Stand-Alone Options.

In February 2007, the Compensation Committee of the Company’s Board of Directors approved the grant of 235,000 non-qualified stock options, outside of the Company’s existing stock plans, to a total of 54 new employees, both domestic and international, hired in connection with the Company’s acquisition of the assets of the aesthetics business of Laserscope. The options were granted as of February 28, 2007 at an exercise price of $10.06 per share. As of December 29, 2012 there were 4,000 shares outstanding and exercisable under these options.

2008 Equity Incentive Plan

On June 11, 2008, the shareholders approved the adoption of the 2008 Equity Incentive Plan, (the Incentive Plan). There are no material changes in the Incentive Plan from the 1998 Stock Plan. The maximum aggregate number of shares that may be awarded and sold under the Incentive Plan is 300,000 shares plus any shares subject to stock options or similar awards granted under the 1998 Stock Plan that expire or otherwise terminate without having been exercised in full and shares issued pursuant to awards granted under the 1998 Stock Plan that are forfeited to the Company on or after the date the 1998 Stock Plan expires.

Exchange Program

In August 2009, we completed a one-time stock exchange program to exchange certain employee stock options issued under the 1998 Plan, the Incentive Plan or in connection with IRIDEX’s acquisition of the assets of the aesthetics business of Laserscope for stock options issued under the Incentive Plan (the “Exchange Program”). The exchange offer was made to employees of the Company who, as the date of the exchange offer commenced, were actively employed. Members of our board of directors and our executive officers who are subject to the provisions of Section 16 of the Securities 1934 Exchange Act were not eligible to participate. The number of options held by eligible employees at the date of commencement was 663,018. Seventy two eligible employees surrendered 364,162 options in exchange for 197,116 new options. These new options were granted pursuant to the Exchange Program and have an exercise price of $2.35 per share, the closing price of IRIDEX common stock as reported by NASDAQ on August 27, 2009.

The exchange of original options for new options was treated as a modification of the original options. As such, the Company will continue to recognize compensation cost for the incremental difference between the fair value of the new option and the fair value of the original options immediately before modification, reflecting the current facts and circumstances on the modification date, in addition to the compensation cost being incurred for the original options, over the vesting term of the new options. The Exchange resulted in an incremental expense of approximately $38 thousand which is being recognized over the vesting periods of the new options which ranges from 6 months to 3 years.

The following table summarizes information regarding activity in our stock option plans during the fiscal years ended 2012, 2011 and 2010 (in thousands except share and per share data):

 

                                 
          Outstanding Options  
    Shares
Available
for Grant		     Number
of Shares		     Aggregate
Price		     Weighted
Average
Exercise Price		  

FY 2009: Balances, January 2, 2010

     862,157       1,583,508     $ 6,169     $ 3.91  

Additional shares reserved

     93,299                          

Options granted

     (195,800 )      195,800       780       3.98  

Options exercised

     0       (34,558 )      (88 )      2.54  

Options cancelled

     126,684       (126,684 )      (955 )      7.54  

Options expired

     (126,203 )      0       0       0  
   

 

 

    

 

 

    

 

 

          

FY 2010: Balances, January 1, 2011

     760,137       1,618,066     $ 5,906       3.65  

Additional shares reserved

     63,063                          

Options granted

     (319,900 )      319,900       1,148       3.59  

Options exercised

     0       (99,291 )      (321 )      3.24  

Options cancelled

     72,274       (72,274 )      (353 )      4.88  

Options expired

     (70,353 )      0       0       0  
   

 

 

    

 

 

    

 

 

          

FY 2011: Balances, December 31, 2011

     505,221       1,766,401     $ 6,380       3.61  

Additional shares reserved

     324,501                          

Options granted

     (335,050 )      335,050       1,313       3.92  

Options exercised

     0       (174,631 )      (445 )      2.55  

Options cancelled

     356,277       (356,277 )      (1,550 )      4.35  

Options expired

     (108,971 )      0       0       0  
   

 

 

    

 

 

    

 

 

          

FY 2012: Balances, December 29, 2012

     741,978       1,570,543     $ 5,698     $ 3.63  
   

 

 

    

 

 

    

 

 

          

There were 2,312,521 shares reserved for future issuance under the stock option plans at December 29, 2012.

 

The following table summarizes information with respect to stock options outstanding and exercisable at December 29, 2012:

 

                                         
    Options Outstanding     Options Vested and Exercisable  
Range of Exercise Prices   Number of Shares
Outstanding at
December 29,
2012		     Weighted Average
Remaining
Contractual Life		     Weighted
Average
Exercise
Price		     Number of Shares
Exercisable at
December 29,
2012		     Weighted
Average
Exercise
Price		  
          (Years)                    

$0.82 - $1.00

     159,645       2.71     $ 0.90       158,855     $ 0.90  

$2.24 - $2.38

     166,531       2.16     $ 2.33       161,232     $ 2.33  

$2.41 - $2.78

     185,237       2.06     $ 2.56       185,237     $ 2.56  

$2.93 - $3.52

     163,651       2.44     $ 3.26       128,378     $ 3.24  

$3.53 - $3.75

     147,000       5.35     $ 3.66       55,031     $ 3.64  

$3.86 - $3.86

     188,500       6.96     $ 3.86       0     $ 0.00  

$3.89 - $4.31

     226,073       4.98     $ 4.11       114,659     $ 4.16  

$4.43 - $5.56

     221,419       1.41     $ 5.20       221,419     $ 5.20  

$5.69 - $9.79

     108,487       1.19     $ 7.33       108,487     $ 7.33  

$10.06 - $10.06

     4,000       1.17     $ 10.06       4,000     $ 10.06  
   

 

 

                    

 

 

          

$0.82 - $10.06

     1,570,543       3.34     $ 3.63       1,137,298     $ 3.58  
   

 

 

                    

 

 

          

The determination of fair value of options granted by the Company is computed using the Black-Scholes option-pricing model with the following weighted average assumptions:

 

             
    Employee Stock Option Plan
    FY 2012   FY 2011   FY 2010

Average risk free interest rate

   0.68%   0.98%   2.03%

Expected life (in years)

   4.55 years   4.70 years   4.75 years

Dividend yield

   0   0   0

Average volatility

   89.2%   92.2%   88.2%

The weighted average grant date fair value of option granted as calculated using Black-Scholes option-pricing was $2.60, $2.47 and $2.70 per share for the fiscal years 2012, 2011 and 2010, respectively.

Option-pricing models require the input of various subjective assumptions, including the option’s expected life and the price volatility of the 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 Company had elected to use the simplified method for estimating the expected term prior to July 3, 2011. Effective July 3, 2011, the expected term of employee 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 Income from Continuing Operations in the Consolidated Statements of Operations for 2012, 2011 and 2010 (in thousands):

 

                         
    FY 2012
Year Ended
December 29,
2012		     FY 2011
Year Ended
December 31,
2011		     FY 2010
Year Ended
January 1,
2011		  

Cost of revenues

   $ 63     $ 60     $ 64  

Research and development

     77       76       93  

Sales and marketing

     105       112       116  

General and administrative

     143       230       215  
   

 

 

    

 

 

    

 

 

  

Total stock-based compensation expense - continuing operations

     388       478       488  

Total stock-based compensation expense - discontinued operations

     8       66       63  
   

 

 

    

 

 

    

 

 

  

Total stock-based compensation expense

   $ 396     $ 544     $ 551  
   

 

 

    

 

 

    

 

 

  

Stock-based compensation expense capitalized to inventory was immaterial for 2012, 2011, and 2010.

Information regarding stock options outstanding, exercisable and expected to vest at December 29, 2012 is summarized below:

 

                                 
    Number of
Shares		     Weighted Average
Exercise Price		     Weighted Average
Remaining Contractual
Life (Years)		     Aggregate
Intrinsic Value
(thousands)		  

Options outstanding

     1,570,543     $ 3.63       3.34     $ 1,013  

Options vested and expected to vest

     1,471,271     $ 3.63       3.16     $ 1,003  

Options exercisable

     1,137,298     $ 3.58       2.25     $ 980  

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the Company’s closing stock price on the last trading day of fiscal 2012 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 29, 2012. This amount changes based on the fair market value of the Company’s stock. The total intrinsic value of options exercised for fiscal years 2012, 2011 and 2010 were approximately $261 thousand, $84 thousand and $46 thousand, respectively.

As of December 29, 2012, there was $1.4 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements under both of the plans. The cost is expected to be recognized over a weighted average period of 3.28 years.

Restricted Stock Awards/Restricted Stock Units

Effective for the 2011 fiscal year, each non-employee member of the Board received an annual equity award of either restricted stock or a restricted stock unit (“RSU”), at the election of such Board member, in each case equal to $20,000 worth of our common stock (determined at the fair market value of the shares at the time such award is granted) under the Company’s 2008 Equity Incentive Plan. Each equity award or RSU vests in full on the one-year anniversary of the date of grant provided that the non-employee member continues to serve on the Board through such date.

 

Summary of Restricted Stock Units and Awards

The Company recognizes the estimated compensation expense of restricted stock units and awards, net of estimated forfeitures, over the vesting term. The estimated compensation expense is based on the fair value of the Company’s common stock on the date of grant.

Information regarding the restricted stock units outstanding, vested and expected to vest as of December 29, 2012 is summarized below:

 

                         
    Number
of
Shares		     Weighted Average
Remaining Contractual Life
(years)		     Aggregate Intrinsic
Value (thousands)		  

As of December 29, 2012

                

Restricted stock units outstanding

     55,999       0.94     $ 211  

Restricted stock units vested and expected to vest

     48,545       0.91     $ 183  

The intrinsic value of the restricted stock units is calculated based on the closing price of IRIDEX shares as quoted on the NASDAQ Global Market on the last trading day of the year, December 29, 2012 of $3.76.

For the year ended December 29, 2012, the Company granted 55,999 shares of restricted stock units, with a weighted average grant date fair value of approximately $216,000 or $3.85 per share, and 10,666 shares of restricted stock awards, with a weighted average grant date fair value of approximately $40,000 or $3.75 per share, to the Board of Directors. For the year ended December 31, 2011, the Company granted 90,189 shares of restricted stock units, with a weighted average grant date fair value of approximately $315,000 or $3.49 per share, and 10,126 shares of restricted stock awards, with a weighted average grant date fair value of approximately $40,000 or $3.95 per share. There were no restricted stock units or awards granted in 2010.

Information regarding the restricted stock units and awards activity during the year ended December 29, 2012 and December 31, 2011 is summarized below:

 

                 
    Number of
Shares		     Weighted Average
Grant Date Fair
Value		  

Outstanding at January 1, 2011

     0     $ 0.00  

Restricted stock units granted

     90,189     $ 3.49  
   

 

 

          

Outstanding at December 31, 2011

     90,189     $ 3.49  

Restricted stock units granted

     55,999     $ 3.85  

Restricted stock units released

     (15,189 )    $ 3.95  

Restricted stock units forfeited

     (75,000 )    $ 3.40  
   

 

 

          

Outstanding at December 29, 2012

     55,999     $ 3.85  
   

 

 

          

 

                 
    Number of
Shares		     Weighted Average
Grant Date Fair
Value		  

Outstanding at January 1, 2011

     0     $ 0.00  

Restricted stock awards granted

     10,126     $ 3.95  
   

 

 

          

Outstanding at December 31, 2011

     10,126     $ 3.95  

Restricted stock awards granted

     10,666     $ 3.75  

Restricted stock awards released

     (10,126 )    $ 3.95  
   

 

 

          

Outstanding at December 29, 2012

     10,666     $ 3.75