16. STOCK-BASED COMPENSATION

Effective January 15, 2009, our board of directors adopted the Equity Incentive Plan for the purpose of providing additional incentive to selected employees, directors and consultants whose contributions are essential to the growth and success of our business. The Equity Incentive Plan provides for the grant of options, share appreciation rights, restricted stock, restricted stock units, deferred shares, performance shares, unrestricted shares, other share-based awards or any combination of the foregoing awards. Awards under the Equity Incentive Plan, as amended July 20, 2016 and August 18, 2016, are limited to 16,562,730 shares of our common stock, subject to adjustment as provided in the Equity Incentive Plan document. The Equity Incentive Plan provides for board of directors’ discretion in determining vesting periods, contractual lives and option exercise prices for each award issuance under the Equity Incentive Plan.

Restricted Stock

Prior to July 20, 2016, the only awards issued under the Equity Incentive Plan were restricted stock, and, pursuant to the First Amended and Restated Stockholders’ Agreement by and among the Company and its stockholders and the individual award agreements, transfers of such awards were restricted. In addition, prior to July 20, 2016, such restricted stock provided us with the right, but not the obligation to repurchase all or any portion of the vested equity interests in the event that the awardee’s employment was terminated for any reason. The purchase price that we paid for the restricted stock was based on a valuation made in good faith by our board of directors. Since we had previously exercised this right in every instance of employment termination, the awardees did not bear the risks and rewards of ownership. Therefore, we determined that liability classification of these awards was appropriate until the point that the shares had been vested for six months, a sufficient period of time to allow the holder to fully bear the risks and rewards of ownership. If the employee remained with the Company after the six month period, the award was reclassified from liabilities to equity.

Under liability classification, we were required to recognize a liability based on the stock award’s fair value at each reporting date with reference to its vesting schedule. The liability recognized at July 2, 2016 and January 2, 2016 were based on fair values of $17.65 and $10.24, respectively.

Following the IPO, more than 25% of our common stock was available for trading on The New York Stock Exchange on July 20, 2016, thereby resulting in a termination of the call right on that date. Hence, 24 awardees began to bear the risks and rewards of ownership. As a result, the liability award was converted to an equity award as of July 20, 2016, since the call right feature was the only condition that prevented it from being classified as an equity award. As of that date, the fair value of the award was determined to be $23.53, based on the opening price of our common stock, and an additional compensation expense of $6,477 was recognized for the period that spanned the beginning of the third fiscal quarter to July 20, 2016. This additional compensation expense is included in stock-based compensation expense. On the same date, the award was transferred from liabilities to equity. While the award was a liability award, pursuant to ASC 718, we were required to re-measure the fair value of the award at each reporting date and record additional compensation with reference to the vesting schedule. Fair values were, at those times, estimated at the grant dates using estimates of enterprise value, adjusted by liquidity discounts.

Further, during 3rd Quarter 2016, the dividend provision of the restricted stock award agreement was modified to provide for the payment of dividends even on unvested restricted stock.

The table below reflects the restricted stock activity for the year to date period as well as other information related to awards of restricted stock that were granted under the Equity Incentive Plan. Restricted stock granted under the Equity Incentive Plan vests over a three- or four-year period on a graded-vesting basis with equal proportions of the shares vesting at the annual anniversary date of the grant in each of the three or four years in the vesting period.

			Weighted
			Average
			Grant Date
			Fair value
	Shares		per Share
Unvested Restricted Shares:
Balance at beginning of fiscal year	1,625,477		$	2.46
Granted	224,378		$	10.66
Vested	(431,407	)	$	4.58
Forfeited	(98,543	)	$	1.01
Balance at end of period	1,319,905		$	3.26
Vested Restricted Shares:
Balance at beginning of fiscal year	2,913,207		$	1.72
Vested	431,407		4.58
Repurchased	(259,249	)	$	1.51
Balance at end of period	3,085,365		$	2.27

Compensation expense, included in selling, general and administrative expenses, associated with outstanding restricted stock awards, including credits for stock forfeitures, was $12,736 and $24,589 for 3rd Quarter 2016 and the year to date period ended October 1, 2016, respectively, and, was $1,452 and $8,669 for 3rd Quarter 2015 and the year to date period ended October 3, 2015, respectively. As of October 1, 2016, total unrecognized compensation cost was approximately $9,940 related to unvested restricted stock awards granted under the Equity Incentive Plan. This cost is expected to be recognized over the weighted average period of 0.76 years.

During the year to date period ended July 20, 2016, we repurchased terminated employees’ vested stock with cash of $1,577; no such purchases were made during the year to date period ended October 3, 2015, and no such purchases were made between July 20, 2016 and October 1, 2016. Shares repurchased were retired upon repurchase. Since all the restricted stock awards were reclassified from liabilities to equity as of July 20, 2016, liability to holders of grants as of October 1, 2016 was nil. As of January 2, 2016, our liability to holders of those grants was $17,393. Such liability was classified as current (part of other accrued liabilities) in the Condensed Consolidated Balance Sheet at January 2, 2016 since, at the time, the employees could have resigned at will or through termination which would have resulted in our call of the stock.

Restricted Stock Units and Stock Options

On August 26, 2016, the Company awarded certain of its employees and nonemployee directors an aggregate of 240,843 restricted stock units (“RSUs”) and nonqualified stock options (“stock options”) with the right to acquire an aggregate 648,301 shares of its common stock at an exercise price of $25.69. These awards vest on a graded-vesting basis over a thirty-five-month period, whereby, one-third vests on July 27, 2017, one third vests on July 27, 2018 and one-third vests on July 27, 2019. The awards are subject to service conditions only. Each RSU may be exchanged on the vesting date for one share of the Company’s common stock and can only be settled in shares. Awardees of the RSUs are also entitled to nonforfeitable dividend-equivalent payments on unvested RSUs. The contractual term of the stock option award is 10 years.

Compensation expense for the RSUs and the stock options will be recognized over the vesting period on a graded-vesting basis based on a grant-date fair value of $25.69 for the RSUs and $4.74 for the stock option awards. The grant date fair value of the RSUs was based on the closing price of our common stock on the date of grant. The grant-date fair value of the stock option awards was determined using the Black-Scholes model utilizing the following inputs:

Stock price on date of grant	$	25.69
Exercise price	$	25.69
Expected term	6 years
Risk-free interest rate	1.36%
Expected dividend yield	2.2%
Expected volatility	23.8%

The expected term of 6 years was determined using the simplified method specified in SEC Staff Accounting Bulletin Topic 14 because we have no exercise history on which to base estimates of future exercise behavior. The expected volatility of 23.8% was calculated by taking the average historical volatility of a group of peer companies over the six years ended on the grant date of August 26, 2016. Expected volatility based on peer group volatility was used instead of volatility based on our historical stock price because we have insufficient trading history on which to base historical volatility. The risk-free interest rate was based on the implied yield on U.S. treasury zero-coupon issues with a remaining term equal to the expected term (6 years) as of the grant date. The dividend yield was based on expected dividend-equivalent payments of $0.14 per share per quarter.

Between the award date and October 1, 2016, none of the RSUs or stock options vested, none were exercised and none expired.

Additional information relating to the RSUs awards is as follows:

			Weighted
			Average
			Grant Date
			Fair value
	Shares		per Share
Total Restricted Stock Units
Balance at beginning of fiscal year	—		—
Granted	240,843		$	25.69
Forfeited	(1,414	)	$	25.69
Balance at end of period	239,429		$	25.69
Vested Restricted Stock Units	—		—
Unvested shares at end of period	239,429		$	25.69
Expected to vest	225,348		$	25.69

As of October 1, 2016, unrecognized compensation expense related to the RSUs was $5,756, is expected to be recognized over the weighted average period of 1.8 years and does not reflect our estimate of potential forfeitures. During the quarter and year-to-date period ended October 1, 2016, compensation expense recognized with respect to the RSUs totaled $376.

Additional information relating to our stock option award during and at the end of the period are as follows:

					Weighted
			Weighted		Average	Aggregate
			Average		Remaining	Intrinsic
	Number of		Exercise		Contractual	Value (1)
	Shares		Price		Term	(in thousands)
Balance at beginning of fiscal year	—		—
Granted	648,301		$	25.69
Forfeited	(4,242	)	$	25.69

Balance outstanding at end of period	644,059		$	25.69	9.9 years	$	1,204

Options expected to vest	610,175		$	25.69	9.9 years	$	1,134

(1)

Represents the total pre-tax intrinsic value, based on the closing price of our common stock on the New York Stock Exchange on October 1, 2016 and is the amount the option holders would have received had all option holders exercised their options on October 1, 2016.

As of October 1, 2016, unrecognized compensation expense related to the stock option awards was $2,857, is expected to be recognized over the weighted average period of 1.8 years and does not reflect our estimate of potential forfeitures. During the quarter and year-to-date period ended October 1, 2016, compensation expense recognized with respect to the stock options totaled $187.

At October 1, 2016, 5,628,690 shares remained available for grant under the Equity Incentive Plan.