STOCK-BASED COMPENSATION

The Company's equity incentive program 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.

Stock-based compensation expense is recognized in the Company's consolidated statements of operations and includes compensation expense for the stock-based compensation awards granted or modified subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of the amended authoritative guidance. The impact on the Company's results of operations of recording stock-based compensation expense for fiscal years 2014, 2013, and 2012 was as follows (in thousands):



	Fiscal Years
	2014		2013		2012
Cost of revenue	$	137	$	232	$	179
Research and development	924		666		455
Selling, general and administrative	1,181		1,081		1,369
Total costs and expenses	$	2,242	$	1,979	$	2,003

In 2014, the Company granted restricted stock units, or RSUs, to employees with vesting terms from fully vested to 12 months vesting. Total stock-based compensation related to RSUs was $854,000 in 2014. The Company issued net shares for the vested RSUs, withholding shares in settlement of employee tax withholding obligations. In 2014, the Company also granted performance-based restricted stock units, or PRSUs, to new employees and the stock-based compensation related to PRSUs was $64,000.

The amount of stock-based compensation included in inventories at the end of 2014, 2013 and 2012 was not significant.

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 amended authoritative guidance requires that the Company recognize expense for awards ultimately expected to vest; therefore 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:



	Fiscal Years
	2014		2013		2012
Expected term (years)	6.6		6.1		6.3
Risk-free interest rate	1.98	%	1.74	%	0.98	%
Expected volatility	58	%	59	%	61	%
Expected dividend	—		—		—

The methodologies for determining the above values were as follows:


•	Expected term: The expected term represents the period that the Company's stock-based awards are expected to be outstanding and is estimated based on historical experience.


•	Risk-free interest rate: The risk-free interest rate assumption is based upon the risk-free rate of a Treasury Constant Maturity bond with a maturity appropriate for the expected term of the Company's employee stock options.


•	Expected volatility: The Company determines expected volatility based on historical volatility of the Company's common stock according to the expected term of the options.


•	Expected dividend: The expected dividend assumption is based on the Company's intent not to issue a dividend under its dividend policy.

The weighted average estimated fair value for options granted during 2014, 2013 and 2012 was $1.99, $1.82, and $1.36 per option, respectively. As of the end of 2014, the fair value of unvested stock options, net of expected forfeitures, was approximately $3.1 million. This unrecognized stock-based compensation expense is expected to be recorded over a weighted average period of 2.41 years.

Stock-Based Compensation Award Activity

The following table summarizes the shares available for grant under the 2009 Plan for 2014:



	Shares Available for Grant
	(in thousands)
Balance at December 29, 2013	2,253
Options granted	(428	)
Options forfeited or expired	219
RSUs granted	(927	)
PRSU's granted	(20	)
PRSU's forfeited or expired	42
Balance at December 28, 2014	1,139

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 2014, 2013 and 2012:



	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Term	Aggregate Intrinsic Value
	(in thousands)				(in years)	(in thousands)
Balance outstanding at January 1, 2012	7,483		$	2.58
Granted	791		2.43
Forfeited or expired	(935	)	3.04
Exercised	(379	)	1.87
Balance outstanding at December 30, 2012	6,960		2.55
Granted	716		3.26
Forfeited or expired	(269	)	2.65
Exercised	(165	)	2.21
Balance outstanding at December 29, 2013	7,242		2.62
Granted	428		3.51
Forfeited or expired	(219	)	3.56
Exercised	(1,769	)	2.57
Balance outstanding at December 28 ,2014	5,682		$	2.67	5.47	$	3,889
Exercisable at December 28, 2014	4,554		$	2.56	4.69	$	3,616
Vested and expected to vest at December 28, 2014	5,456		$	2.65	5.33	$	3,852

The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on the Company's closing stock price of $3.20 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 2014, 2013 and 2012 was $3.7 million, $139,000 and $343,000, respectively. Total cash received from employees as a result of employee stock option exercises during 2014, 2013 and 2012 was approximately $4.5 million, $365,000 and $711,000, 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 $1.1 million, $1.1 million, and $1.4 million for 2014, 2013, and 2012, respectively.

Significant exercise price ranges of options outstanding, related weighted average exercise prices and contractual life information at the end of 2014 were as follows:



	Options Outstanding				Options Exercisable
Range of Exercise Prices	Options Outstanding	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Options Vested and Exercisable	Weighted Average Exercise Price
	(in thousands)	(in years)			(in thousands)
$0.78 - $0.90	516	3.82	$	0.90	516	$	0.90
1.63 - 1.63	895	4.19	1.63		895	1.63
2.16 - 2.76	571	6.96	2.29		349	2.31
2.78 - 2.78	1,596	5.89	2.78		1,454	2.78
2.82 - 3.20	633	5.19	3.03		399	2.94
3.21 - 3.48	727	7.94	3.40		325	3.41
3.54 - 3.92	167	8.70	3.69		39	3.64
4.17 - 4.17	504	2.86	4.17		504	4.17
4.36- 4.36	35	0.42	4.36		35	4.36
5.94 - 5.94	38	1.14	5.94		38	5.94
$0.78 - $5.94	5,682	5.47	$	2.67	4,554	$	2.56

Restricted Stock Units

RSUs entitle the holder to receive, at no cost, one common share for each restricted stock unit on the vesting date as it vests. The Company withholds shares in settlement of employee tax withholding obligations upon the vesting of restricted stock units. The stock-based compensation related to grants of vested RSUs was $854,000 in 2014. In 2014, the Company also granted PRSUs, to new employees and the stock-based compensation related to PRSUs was $64,000.



	RSUs & PRSUs Outstanding
	Number of Shares		Weighted Average Grant Date Fair Value
	(in thousands)
Nonvested at December 29, 2013	225		$	3.17
Granted	947		3.74
Vested	(480	)	3.86
Forfeited	(42	)	—
Nonvested at December 28, 2014	650		$	3.47

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 ESPP during 2014, 2013 and 2012 was $0.96, $0.71 and $0.74, respectively. Sales under the ESPP were 278,000 shares of common stock at an average price of $2.76 for 2014, 357,000 shares of common stock at an average price of $1.74 for 2013, and 270,000 shares of common stock at an average price of $1.95 for 2012.

Under the 2009 ESPP, the Company issued 278,000 shares at an average price of $2.76 per share during 2014. As of December 28, 2014, 877,000 shares under the 2009 ESPP remained available for issuance. For 2014, the Company recorded compensation expenses related to the ESPP of $255,000.

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



	Fiscal Years
	2014		2013		2012
Expected life (months)	6.0		6.1		6.00
Risk-free interest rate	0.07	%	0.09	%	0.14	%
Volatility	49	%	39	%	56	%
Dividend yield	—		—		—

The methodologies for determining the above values were as follows:


•	Expected term: The expected term represents the length of the purchase period contained in the ESPP.


•	Risk-free interest rate: The risk-free interest rate assumption is based upon the risk-free rate of a Treasury Constant Maturity bond with a maturity appropriate for the term of the purchase period.


•	Volatility: The Company determines expected volatility based on historical volatility of the Company's common stock for the term of the purchase period.


•	Dividend Yield: The expected dividend assumption is based on the Company's intent not to issue a

dividend under its dividend policy.

As of the end of 2014, the unrecognized stock-based compensation expense relating to the Company's ESPP was $119,000 and was expected to be recognized over a weighted average period of approximately 4.6 months.