Stock-Based Compensation

The equity incentive program in the Company is a broad-based, long-term retention program intended to attract, motivate, and retain talented employees as well as align stockholder and employee interests. The Company provides stock-based incentive compensation, or awards, to eligible employees and non-employee directors. Awards that may be granted under the program include non-qualified and incentive stock options, restricted stock units, or RSUs, performance-based restricted stock units, or PRSUs, and stock bonus units. To date, awards granted under the program consist of stock options, RSUs and PRSUs. The majority of stock-based awards granted under the program vest over four years. Stock options granted under the program have a maximum contractual term of ten years.

The stock-based compensation expense included in the Company's consolidated financial statements for the second quarter of 2013 and 2012 was as follows (in thousands):



	Three Months Ended				Six Months Ended
	June 30, 2013		July 1, 2012		June 30, 2013		July 1, 2012
Cost of revenue	$	22	$	39	$	52	$	71
Research and development	46		99		212		192
Selling, general and administrative	217		296		473		555
Total costs and expenses	$	285	$	434	$	737	$	818

No stock-based compensation was capitalized during any period presented above.

Valuation Assumptions

The Company uses the Black-Scholes option pricing model to estimate the fair value of employee stock options and rights to purchase shares under the Company's 2009 ESPP. Using the Black-Scholes pricing model requires the Company to develop highly subjective assumptions including the expected term of awards, expected volatility of its stock, expected risk-free interest rate and expected dividend rate over the term of the award. The Company's expected term of awards assumption is based primarily on its historical experience with similar grants. The Company's expected stock price volatility assumption for both stock options and ESPP shares is based on the historical volatility of the Company's stock, using the daily average of the opening and closing prices and measured using historical data appropriate for the expected term. The risk-free interest rate assumption approximates the risk-free interest rate of a Treasury Constant Maturity bond with a maturity approximately equal to the expected term of the stock option or ESPP shares. This fair value is expensed over the requisite service period of the award. The fair value of RSUs and PRSUs is based on the closing price of the Company's common stock on the date of grant. Equity compensation awards which vest with service are expensed using the straight-line attribution method over the requisite service period.

In addition to the assumptions used in the Black-Scholes pricing model, the Company is required to develop an estimate of the number of awards expected to be forfeited prior to vesting, or forfeiture rate. The forfeiture rate is estimated based on historical pre-vest cancellation experience and is applied to all share-based awards.

The following weighted average assumptions are included in the estimated fair value calculations for stock option grants:



	Three Months Ended				Six Months Ended
	June 30, 2013		July 1, 2012		June 30, 2013		July 1, 2012
Expected term (years)	6.42		6.53		6.13		6.22
Risk-free interest rate	1.27	%	1.16	%	1.18	%	1.10	%
Expected volatility	59.31	%	59.03	%	60.44	%	59.65	%
Expected dividend yield	—		—		—		—

The weighted average estimated fair value for options granted during the second quarter of 2013 and 2012 were $1.30 and $1.94 per option, respectively. The weighted average estimated fair value for options granted during the first six months of 2013 and 2012 were $1.30 and $1.82, respectively. As of June 30, 2013, the fair value of unvested stock options, net of expected forfeitures, was approximately $1.6 million. This unrecognized stock-based compensation expense is expected to be recorded over a weighted average period of 2.23 years.

Stock-Based Compensation Award Activity

The following table summarizes the shares available for grant under the 2009 Plan as of June 30, 2013:



	Shares Available for Grant
	(in thousands)
Balance at December 30, 2012	2,920
Authorized	—
Options granted	(99	)
Options forfeited or expired	200
RSUs granted	(18	)
PRSUs forfeited or expired	25
Balance at June 30, 2013	3,028

Stock Options

The following table summarizes stock options outstanding and stock option activity under the 1999 Plan and the 2009 Plan, and the related weighted average exercise price, for the first six months of 2013:



	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Term	Aggregate Intrinsic Value
	(in thousands)				(in years)	(in thousands)
Balance outstanding at December 30, 2012	6,960		$	2.55
Granted	99		2.32
Forfeited or expired	(200	)	2.27
Exercised	(34	)	1.40
Balance outstanding at June 30, 2013	6,825		$	2.56	5.80	$	1,533
Exercisable at June 30, 2013	5,395		$	2.54	5.11	$	1,527
Vested and expected to vest at June 30, 2013	6,583		$	2.56	5.70	$	1,532

The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on the Company's closing stock price of $2.21 as of the end of the Company's current reporting period, which would have been received by the option holders had all option holders exercised their options as of that date.

The total intrinsic value of options exercised during the first six months of 2013 and 2012 was $28,000 and $152,000, respectively. Total cash received from employees as a result of employee stock option exercises during the first six months of 2013 and 2012 was approximately $47,000 and $273,000, respectively. The Company settles employee stock option exercises with newly issued common shares. In connection with these exercises, there was no tax benefit realized by the Company due to the Company's current loss position. Total stock-based compensation related to stock options was $259,000 and $590,000 for the second quarter and first six months of 2013, respectively.

Restricted Stock Units and Performance-based Restricted Stock Units

The Company began issuing RSUs and PRSUs in the third quarter of 2007. RSUs entitle the holder to receive, at no cost, one common share for each restricted stock unit as it vests. The Company's policy is to withhold shares in settlement of employee tax withholding obligations upon the vesting of restricted stock units. The stock-based compensation related to RSUs and PRSUs was $2,000 and $(26,000), respectively, for the second quarter of 2013. As of June 30, 2013, there were $33,000 unrecognized compensation expense related to RSUs and PRSUs.

A summary of activity for our RSUs and PRSUs for the six months ended June 30, 2013 and information regarding RSUs and PRSUs outstanding and expected to vest as of June 30, 2013 is as follows:



	RSUs & PRSUs Outstanding
	Number of Shares		Weighted Average Grant Date Fair Value
	(in thousands)
Nonvested at December 30, 2012	40		$	2.30
Granted	19		2.30
Vested	(17	)	2.33
Forfeited	(25	)	—
Nonvested at June 30, 2013	17		$	2.29

Employee Stock Purchase Plan

The weighted average estimated fair value, as defined by the amended authoritative guidance, of rights issued pursuant to the Company's 2009 ESPP during the second quarter of 2013 and 2012 was $0.59 and $1.15 per right, respectively.

As of June 30, 2013, 1.3 million shares remained available for issuance under the 2009 ESPP. For the second quarter of 2013, the Company recorded compensation expense related to the 2009 ESPP of $50,000.

The fair value of rights issued pursuant to the Company's 2009 ESPP was estimated on the commencement date of each offering period using the following weighted average assumptions:



	Three Months Ended				Six Months Ended
	June 30, 2013		July 1, 2012		June 30, 2013		July 1, 2012
Expected term (months)	6.08		6.08		6.08		6.08
Risk-free interest rate	0.09	%	0.14	%	0.09	%	0.14	%
Volatility	39.03	%	67.93	%	39.03	%	67.93	%
Dividend yield	—		—		—		—

As of June 30, 2013, the unrecognized stock-based compensation expense relating to the Company's 2009 ESPP was $73,000 and is expected to be recognized over a weighted average period of approximately 4.6 months.