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 September 30, 2017, 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 September 30, 2017 were consistent with those described in the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016.

On June 14, 2017, the stockholders approved an increase of 650,000 shares of Common Stock reserved for issuance under the Incentive Plan.

Summary of Stock Options

The following table summarizes information regarding activity under the Incentive Plan during the nine months ended September 30, 2017:

	Number of Shares			Weighted Average Exercise Price Per Share		Aggregate Intrinsic Value (thousands)
Outstanding as of December 31, 2016		470,985		$	8.69
Granted		465,900		$	10.05
Exercised		(55,752	)	$	5.89
Canceled or forfeited		(52,607	)	$	10.50
Outstanding as of September 30, 2017		828,526		$	9.53	$	601

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 $3.55 and $6.37 per share for the three months ended September 30, 2017 and October 1, 2016, 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 $3.75 and $5.23 per share for the nine months ended September 30, 2017 and October 1, 2016, 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
	September 30, 2017			October 1, 2016			September 30, 2017			October 1, 2016
Average risk free interest rate		1.80	%		1.03	%		1.79	%		1.10	%
Expected life (in years)	4.55 years			4.55 years			4.55 years			4.55 years
Dividend yield	—%			—%			—%			—%
Average volatility		42	%		46	%		42	%		46	%

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 September 30, 2017 and October 1, 2016:

	Three Months Ended				Nine Months Ended
	September 30, 2017		October 1, 2016		September 30, 2017		October 1, 2016
Cost of revenues	$	39	$	3	$	131	$	84
Research and development		104		39		215		90
Sales and marketing		59		38		238		119
General and administrative		319		390		773		977
	$	521	$	470	$	1,357	$	1,270

Stock-based compensation expense capitalized to inventory was immaterial for the nine months ended September 30, 2017 and October 1, 2016.

Occasionally, the Company will grant stock-based instruments to non-employees. During the nine months ended September 30, 2017 and October 1, 2016, the amount of stock-based compensation related to non-employee options was not material.

Information regarding stock options outstanding, vested, expected to vest, and exercisable as of September 30, 2017 is summarized below:

	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value (thousands)
Options outstanding		828,526	$	9.53		5.45	$	601
Options vested and expected to vest		743,785	$	9.45		5.30	$	597
Options exercisable		272,008	$	7.94		3.39	$	555

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, 2017, 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 common stock. The total intrinsic value of options exercised for the three months ended September 30, 2017 and October 1, 2016 was approximately $31 thousand and $187 thousand, respectively, and the nine months ended September 30, 2017 and October 1, 2016 was approximately $328 thousand and $735 thousand, respectively.

As of September 30, 2017, there was $3.9 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 3.41 years.

Summary of Restricted Stock Units and Awards

Information regarding the restricted stock units (“RSUs”) activity for the nine months ended September 30, 2017 is summarized below:

	Number of Shares
Outstanding as of December 31, 2016		335,805
Restricted stock units granted		112,391
Restricted stock units released		(67,197	)
Restricted stock units forfeited		(30,789	)
Outstanding as of September 30, 2017		350,210

During the nine months ended September 30, 2017, the Company awarded 112,391 restricted stock units at a weighted-average grant date fair value of $11.28 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. No RSUs with market conditions were granted during the nine months ended September 30, 2017.

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.

Information regarding the RSUs granted with performance conditions activity for the nine months ended September 30, 2017 is summarized below:

	Number of Shares
Outstanding as of December 31, 2016		1,289
Restricted stock awards granted		4,301
Restricted stock awards released		(1,289	)
Outstanding as of September 30, 2017		4,301

During the nine months ended September 30, 2017, the Company awarded 4,301 RSUs granted with performance conditions at a weighted-average grant date fair value of $9.30 per share.