7. Stockholders’ Equity and Stock-Based Compensation

Common Stock

In September 2018, the Company completed its registered underwritten public offering of 1,916,667 shares of the Company’s common stock at a public offering price of $6.00 per share, pursuant to an underwriting agreement with Stifel, Nicolaus & Company, Incorporated, as representative of the underwriters named therein. The resulting aggregate net proceeds to the Company from the common stock offering was approximately $10.6 million, after deducting underwriting discount and offering expenses.

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 29, 2018, the only active stock-based compensation plan was the 2008 Equity Incentive Plan, or Incentive Plan. The terms of awards granted during the nine months ended September 29, 2018 were consistent with those described in the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 30, 2017.

The following table shows stock-based compensation expenses included in the condensed consolidated statements of operations for the three and nine months ended September 29, 2018 and September 30, 2017:

	Three Months Ended				Nine Months Ended
(in thousands)	September 29, 2018		September 30, 2017		September 29, 2018		September 30, 2017
Cost of revenues	$	23	$	39	$	68	$	131
Research and development		94		104		214		215
Sales and marketing		169		59		348		238
General and administrative		387		319		886		773
	$	673	$	521	$	1,516	$	1,357

Stock-based compensation expense capitalized to inventory was immaterial for the nine months ended September 29, 2018 and September 30, 2017.

Occasionally, the Company will grant stock-based instruments to non-employees. During the nine months ended September 29, 2018 and September 30, 2017, the amount of stock-based compensation related to non-employee options was not material.

Summary of Stock Options.

The following table summarizes information regarding activity under the Incentive Plan during the nine months ended September 29, 2018:

	Number of Shares			Weighted Average Exercise Price Per Share		Aggregate Intrinsic Value (thousands)
Outstanding as of December 30, 2017		857,311		$	9.49
Granted		136,435		$	6.22
Exercised		(23,750	)	$	4.10
Canceled or forfeited		(62,286	)	$	10.48
Outstanding as of September 29, 2018		907,710		$	9.07	$	132

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 $2.47 and $3.55 per share for the three months ended September 29, 2018 and September 30, 2017, 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 $2.34 and $3.75 per share for the nine months ended September 29, 2018 and September 30, 2017, 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 29, 2018			September 30, 2017			September 29, 2018			September 30, 2017
Average risk free interest rate		2.95	%		1.80	%		2.71	%		1.79	%
Expected life (in years)	4.55 years			4.55 years			4.55 years			4.55 years
Dividend yield	—%			—%			—%			—%
Average volatility		41	%		42	%		41	%		42	%

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.

Information regarding stock options outstanding, vested, expected to vest, and exercisable as of September 29, 2018 is summarized below:

	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value (thousands)
Options outstanding		907,710	$	9.07		5.06	$	132
Options vested and expected to vest		848,436	$	9.09		5.00	$	126
Options exercisable		384,468	$	9.07		3.87	$	87

The aggregate intrinsic value in the table above represents the pre-tax intrinsic value, based on the Company’s closing price as of September 29, 2018, 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 nine months ended September 29, 2018 and September 30, 2017 was approximately $71 thousand and $328 thousand, respectively.

As of September 29, 2018, there was $5.9 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 2.91 years.

Summary of Restricted Stock Units and Awards

Information regarding the restricted stock units (“RSUs”) activity for the nine months ended September 29, 2018 is summarized below:

	Number of Shares
Outstanding as of December 30, 2017		361,148
Restricted stock units granted		408,750
Restricted stock units released		(76,399	)
Restricted stock units forfeited		(6,750	)
Outstanding as of September 29, 2018		686,749

During the nine months ended September 29, 2018, the Company awarded 408,750 restricted stock units at a weighted-average grant date fair value of $7.86 per share.

RSUs granted with market conditions are valued using a 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. 72,870 RSUs with market conditions were granted during the nine months ended September 29, 2018.

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 September 29, 2018, the Company awarded 165,330 RSUs granted with performance conditions.

Information regarding the restricted stock awards activity during the nine months ended September 29, 2018 is summarized below:

	Number of Shares
Outstanding as of December 30, 2017		4,301
Restricted stock awards granted		—
Restricted stock awards released		(4,301	)
Outstanding as of September 29, 2018		—