NOTE 7—COMMITMENTS AND CONTINGENCIES

Leases

In January 2006, the Company entered into a five-year lease for its 57,000 square foot corporate headquarters and manufacturing facility located at 4 Cromwell, Irvine, California, with initial monthly installments of $38,692 and annual adjustments over the lease term. On September 24, 2009, the lease was amended to extend the term through April 20, 2015, adjust the basic rent, and modify provisions to the security deposit. On January 4, 2011, the lease was further amended to defer a portion of the basic rent to future periods. The Company is recognizing rent expense on a straight line basis with the difference between rent expense and the cash paid recorded to deferred rent. These amounts are reflected in the commitments as of December 31, 2011, listed below. The Company also leases certain office equipment and automobiles under various operating lease arrangements.

Future minimum rental commitments under operating lease agreements with non-cancelable terms greater than one year for each of the years ending December 31 are as follows (in thousands):

Rent expense totaled approximately $1.0 million, $849,000, and $846,000 for the years ended December 31, 2011, 2010, and 2009, respectively.

Licensed patent rights

In February 2005, the Company purchased a license to use certain patent rights for technology in the field of presbyopia totaling $2.0 million, including related transaction costs. The entire consideration has been expensed as in-process research and development. In 2006, additional consideration totaling $100,000 was expensed as incurred with the remaining $100,000 expensed at $25,000 annually through 2010.

Employee arrangements and other compensation

In March 2009, the Company entered into a Separation and General Release Agreement, with Mr. Jake St. Philip (“the St. Philip Separation Agreement”) who was the Company’s Chief Executive Officer (“CEO”). Pursuant to the St. Philip Separation Agreement, the Company agreed to pay a severance payment of $350,000, of which half was paid in May 2009 and half was paid in twelve consecutive equal monthly installments commencing on June 1, 2009. In addition, the Company paid COBRA premiums on his behalf for twelve months. The St. Philip Separation Agreement superseded any prior employment agreements.

On August 24, 2010, the Company entered into a Separation Agreement with Mr. Dave Mulder (“the Mulder Separation Agreement”), whereby Mr. Mulder resigned his positions as the Company’s Chairman of the Board, CEO, and President. Pursuant to the Mulder Separation Agreement, the Company paid Mr. Mulder a one-time severance payment of $10,416.67 and paid COBRA premiums on his behalf for six months. The Mulder Separation Agreement superseded the severance provisions contained in his employment agreement, as amended.

On July 6, 2010, the Company entered into a Separation Agreement with Mr. Brett Scott (“the Scott Separation Agreement”), whereby Mr. Scott resigned his position as the Company’s Chief Financial Officer (“CFO”). Pursuant to the Scott Separation Agreement, the Company paid Mr. Scott a severance payment of $17,500 in two consecutive installments and COBRA premiums on his behalf for three months. The Scott Separation Agreement superseded the severance provisions contained in his employment agreement.

On June 10, 2010, Mr. Federico Pignatelli was terminated as President of the Company. On July 1, 2010, Mr. Pignatelli was appointed Vice Chairman of the Board of Directors. In connection with such appointment, Mr. Pignatelli agreed to annual cash compensation of $1 and 35,000 shares of stock options in lieu of the cash compensation paid to Directors. The Company also agreed to reimburse Mr. Pignatelli for $50,000 of his out-of-pocket legal fees and expenses incurred in conjunction with stockholder activities. On August 24, 2010, Mr. Pignatelli was appointed Executive Chairman of the Board and Interim CEO. On September 30, 2010, Mr. Pignatelli was appointed the Company’s permanent CEO.

Certain members of management are entitled to severance benefits payable upon termination following a change in control, which would approximate $962,000 at December 31, 2011. The Company also has agreements with certain employees to pay bonuses based on targeted performance criteria.

Purchase Commitments

The Company generally purchases components and subassemblies for its products from a limited group of third party suppliers through purchase orders. The Company relies on purchase orders, and generally does not have written supply contracts with its key suppliers. However, as of December 31, 2011, the Company has one long term purchase agreement with a single source supplier in the amount of $2.8 million for delivery of products through 2012, or later depending on the terms set forth in an amendment dated October 1, 2010. The Company has evaluated this purchase commitment as of December 31, 2011 and has determined that no loss accrual is required.

Litigation

The Company discloses material loss contingencies deemed to be reasonably possible and accrues for loss contingencies when, in consultation with its legal advisors, management concludes that a loss is probable and reasonably estimable. The ability to predict the ultimate outcome of such matters involves judgments, estimates, and inherent uncertainties. The actual outcome of such matters could differ materially from management’s estimates.

Intellectual Property Litigation

During April 2010, Discus Dental LLC (“Discus”) and Zap Lasers LLC (“Zap”) filed a lawsuit against the Company in the United States District Court for the Central District of California (the “U.S. District Court”), related to the Company’s iLase diode laser. The lawsuit alleged claims for patent infringement, federal unfair competition, common law trademark infringement and unfair competition, fraud and violation of the California Unfair Trade Practices Act. In May 2010, Discus and Zap filed a First Amended Complaint (the “Complaint”) which removed the allegations for fraud as well as certain claims for trademark infringement and unfair competition. In July 2010, Discus informed the U.S District Court that it had acquired Zap and requested that Zap be dropped as a party to the lawsuit and Discus became the sole plaintiff in the suit. Discus was subsequently acquired by Royal Philips Electronics N.V. (“Philips”) on October 11, 2010. Discus and Philips settled all of their claims against the Company in June 2011 for a nominal amount and the Complaint was dismissed in its entirety with prejudice in July 2011.

Other Matters

In the normal course of business, the Company may be subject to other legal proceedings, lawsuits and other claims. Although the ultimate aggregate amount of probable monetary liability or financial impact with respect to these matters is subject to many uncertainties and is therefore not predictable with assurance, the Company’s management believes that any monetary liability or financial impact to the Company from these other matters, individually and in the aggregate, would not be material to the Company’s financial condition, results of operations or cash flows. However, there can be no assurance with respect to such result, and monetary liability or financial impact to the Company from these other matters could differ materially from those projected.