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 with market conditions 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 nine months ended October 1, 2016, the only active stock-based compensation plan was the 2008 Equity Incentive Plan (the “Incentive Plan”). The terms of awards granted during the nine months ended October 1, 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 under the Incentive Plan during the nine months ended October 1, 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		79,777		$	13.30
Exercised		(117,576	)	$	5.53
Canceled or forfeited		(51,307	)	$	8.56
Outstanding as of October 1, 2016		462,386		$	8.19	$	2,980

The weighted average grant date fair value of the options granted under the Incentive Plan as calculated using the Black-Scholes option-pricing model was $6.37 and $2.77 per share for the three months ended October 1, 2016 and October 3, 2015, respectively. The weighted average grant date fair value of the options granted under the Incentive Plan as calculated using the Black-Scholes option-pricing model was $5.23 and $4.23 per share for the nine months ended October 1, 2016 and October 3, 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						Nine Months Ended
	October 1, 2016			October 3, 2015			October 1, 2016			October 3, 2015
Average risk free interest rate		1.03	%		1.30	%		1.10	%		1.27	%
Expected life (in years)	4.55 years			4.55 years			4.55 years			4.55 years
Dividend yield	—%			—%			—%			—%
Average volatility		46	%		47	%		46	%		50	%

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 nine months ended October 1, 2016 and October 3, 2015:

	Three Months Ended				Nine Months Ended
	October 1, 2016		October 3, 2015		October 1, 2016		October 3, 2015
Cost of revenues	$	3	$	49	$	84	$	172
Research and development		39		21		90		153
Sales and marketing		38		42		119		146
General and administrative		390		51		977		254
	$	470	$	163	$	1,270	$	725

Stock-based compensation expense capitalized to inventory was immaterial for the nine months ended October 1, 2016 and October 3, 2015.

Occasionally, the Company will grant stock-based instruments to non-employees. During the nine months ended October 1, 2016 and October 3, 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 October 1, 2016 is summarized below:

	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value (thousands)
Options outstanding		462,386	$	8.19		4.54	$	2,980
Options vested and expected to vest		428,659	$	7.98		4.44	$	2,844
Options exercisable		225,703	$	6.35		3.52	$	1,837

The aggregate intrinsic value in the table above represents the pre-tax intrinsic value, based on the Company’s closing price as of September 30, 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 October 1, 2016 and October 3, 2015 was approximately $187 thousand and $144 thousand, respectively.

As of October 1, 2016, there was $3.5 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 2.47 years.

Summary of Restricted Stock Units and Awards

Information regarding the restricted stock units (“RSUs”) activity for the nine months ended October 1, 2016 is summarized below:

	Number of Shares
Outstanding as of January 2, 2016		147,589
Restricted stock units granted		285,005
Restricted stock units released		(30,789	)
Restricted stock units cancelled		(66,000	)
Outstanding as of October 1, 2016		335,805

During the nine months ended October 1, 2016, the Company awarded 285,005 restricted stock units at a weighted-average grant date fair value of $11.89 per share. Of this amount, 256,138 stock units represent performance based shares that are subject to service, performance and market vesting conditions with a weighted-average grant date fair value of $11.40 per share.

RSUs granted with market conditions are valued using the Monte Carlo simulation model and compensation expense is recognized ratably during the service period even if the market condition is not satisfied. To the extent that the market condition is not met, the RSUs will not vest and will be cancelled.

RSUs granted with performance conditions are valued at the grant date fair value of the underlying common shares. The Company makes a determination regarding the probability of the performance criteria being achieved and compensation expense is recognized ratably over the vesting period, if it is expected that the performance criteria will be met.

During the nine months ended October 1, 2016, the Company accelerated the vesting of 6,400 of restricted stock units and 10,000 performance-based restricted stock units in connection with an early 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 nine months ended October 1, 2016 is summarized below:

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

During the nine months ended October 1, 2016, the Company awarded 1,289 unvested restricted stock awards at an average grant date fair value of $15.51 per share.

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 nine months ended October 1, 2016, the Company repurchased 6,544 shares at an average price of $9.00 per share. As of October 1, 2016, we have repurchased 843,785 shares for approximately $6.7 million under this current program. The remaining balance of approximately $1.0 million approved under the plan was not used when the plan lapsed in August 2016.