Employee Share-Based Compensation

12 Months Ended

Jan. 03, 2015

Employee Share-based Compensation

Employee Equity Incentive Plan

Stock Option Plans

At the discretion of the Company’s compensation committee (the “Compensation Committee”), and with the approval of the Company’s board of directors (the “Board of Directors”), the Company may grant options to purchase the Company’s common stock to certain individuals from time to time. Management and the Compensation Committee determine the terms of awards which include the exercise price, vesting conditions and expiration dates at the time of grant. Expiration dates for stock options are not to exceed 10 years from their date of issuance. The Company, under its Second Amended and Restated 2007 Equity Incentive Plan, is authorized to issue stock options that total no more than 20% of the shares of common stock issued and outstanding, as determined on a fully diluted basis.  Beginning in 2007, stock options were no longer issuable under the Company’s 2000 Non-Qualified Incentive Stock Plan.  The remaining amount available for issuance under the Second Amended and Restated 2007 Equity Incentive Plan totaled 4,738,496 at January 3, 2015. The stock option awards generally vest ratably over a four-year period following grant date after a passage of time.  However, some stock option awards are performance based and vest based on the achievement of certain criteria established by the Compensation Committee, subject to approval by the Board of Directors.

The fair value of the Company’s stock options was estimated at the date of grant using the Black-Scholes based option valuation model.  The table below outlines the weighted average assumptions for options granted to employees during the years ended January 3, 2015 and December 28, 2013.

Year Ended December	2014			2013
Expected Volatility		74.63	%		32.75	%
Expected dividends		0.00	%		0.00	%
Expected term	5.76 years			6.0 years
Risk-free rate		1.86	%		1.51	%

Prior to the year 2014, the Company calculated expected volatility from the volatility of publicly held companies in similar industries, as the historical volatility of the Company’s common stock did not cover the period equal to the expected life of the options.  For the stock options granted during the year ended January 3, 2015, the Company calculated expected volatility rate based principally on the combined volatility of similarly situated publicly held companies.  Based on the expected term of stock options, a 20~75% weight was assigned to the volatility of the Company common stock as the historical volatility of the Company’s common stock from June 2008 through April 2010 was exceptionally high due to a thinly traded market.  Below table illustrates the Company’s historical volatility and the average daily trading volume of the Company’s common stock from June 2008 through April 2010 and from April 2010 through December 2014.

Period	Volatility			Average Daily Trading Volume
6/20/2008 ~ 4/19/2010		402	%		11,455
4/20/2010 ~ 1/2/2015		77	%		155,111

The dividend yield assumption is based on the Company’s history and expectation of future dividend payouts on the common stock.  The risk-free interest rate is based on the implied yield available on U.S. treasury zero-coupon issues with an equivalent remaining term.  For the expected term, the Company used SEC Staff Accounting Bulletin No. 107 simplified method since most of the options granted were “plain vanilla” options with following characteristics: (i) the share options are granted at the market price on the grant date; (ii) exercisability is conditional on performing service through the vesting date on most options; (iii) If an employee terminates service prior to vesting, the employee would forfeit the share options; (iv) if an employee terminates service after vesting, the employee would have 30 days to exercise the share options; and (v) the share options are nontransferable and nonhedgeable.

1) Service Period Based Stock Options

The majority of options granted by the Company are comprised of service based options granted to employees.  These options vest ratably over a defined period following grant date after a passage of a service period.

The following table summarizes service period based stock options activity at January 3, 2015 and changes during the year then ended:

				Weighted Average
						Remaining		Aggregate
	Number of			Exercise		Contractual		Intrinsic
	Shares			Price		Term		Value
Outstanding at December 28, 2013		12,113,655		$	1.06		7.43
Options Granted		2,233,987			1.39		10.00
Options Classification from Employee to Non-Employee		(113,151	)		0.76
Options Exercised		(534,715	)		0.87
Options Expired		(253,900	)		1.00
Options Forfeited		(722,275	)		1.13
Outstanding at January 3, 2015		12,723,601		$	1.13		7.00	$	581,050
Exercisable at January 3, 2015		9,362,374		$	1.13		6.40	$	455,570

The aggregate intrinsic values in the table above are based on the Company’s closing stock price of $0.90 on the last day of business for the year ended January 3, 2015.  The weighted average fair value of options granted during the years ended January 3, 2015, and December 28, 2013 was $0.90, and $0.29 respectively.  The aggregate intrinsic value for options exercised during the years ended January 3, 2015, and December 28, 2013 was approximately $156,000 and $7,000 respectively.

2) Performance Based Stock Options

The Company also grants stock option awards that are performance based and vest based on the achievement of certain criteria established from time to time by the Compensation Committee.  If these performance criteria are not met, the compensation expenses are not recognized and the expenses that have been recognized will be reversed.

The following table summarizes performance based stock options activity at January 3, 2015 and changes during the year then ended:

			Weighted Average
					Remaining		Aggregate
	Number of		Exercise		Contractual		Intrinsic
	Shares		Price		Term		Value
Outstanding at December 28, 2013		200,000	$	0.63		9.08
Options Granted		-		-
Options Exercised		-		-
Options Expired		-		-
Options Forfeited		-		-
Outstanding at January 3, 2015		200,000	$	0.63		8.08	$	54,000
Exercisable at January 3, 2015		95,833	$	0.63		8.08	$	25,875

The aggregate intrinsic value in the table above are, based on the Company’s closing stock price of $0.90 on the last day of business for the period ended January 3, 2015.

As of January 3, 2015, there was approximately $1,768,000 of total unrecognized compensation expense related to non-vested share-based compensation arrangements granted under the plans for employee stock options. That cost is expected to be recognized over a weighted average period of 2.20 years.  The realized tax benefit from stock options for the years ended January 3, 2015, and December 28, 2013 was $0, based on the Company’s election of the “with and without” approach.

Restricted Stock Awards

Restricted stock awards granted by the Company to employees have vesting conditions that are unique to each award.

The following table summarizes activity of restricted stock awards granted to employees at January 3, 2015 and changes during the year then ended:

			Weighted Average
			Award-Date
	Shares		Fair Value
Unvested shares at December 28, 2013		500,000	$	0.69
Granted		1,090,000		1.41
Vested		-		-
Forfeited		-		-
Unvested shares at January 3, 2015		1,590,000	$	1.18
Expected to Vest as of January 3, 2015		1,590,000	$	1.18

On January 2, 2014, the Company awarded an aggregate of 1,090,000 shares of restricted stock to the Company’s officers and members of the board of directors.  These shares shall vest upon the earlier to occur of the following: (i) the market price of the Company’s stock exceeds a certain price, or (ii) one of other certain triggering events, including the termination of the officers and members of the board of directors without cause for any reason.  The fair values of these restricted stock awards were $1,536,900 in aggregate, and they were based on the trading price of the Company’s common stock on the date of grant.  The expense related to the restricted stock award has been amortized over the period of six months through July 1, 2014, as the Company determined the requisite service period to be 6 months as that is when they are eligible to vest.

Employee Option and Restricted Stock Compensation

The Company recognized share-based compensation expense of approximately $2,747,000 and $958,000 in general and administrative expenses in the statement of operations for the year ended January 3, 2015 and December 28, 2013.