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 Intrinsic Value (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 full on 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.