Stock-Based Compensation

6 Months Ended

Jul. 03, 2016

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Employee Stock Plans

1999 Stock Plan

The 1999 Stock Plan, or 1999 Plan, provided for the issuance of incentive and non-qualified options, restricted stock units ("RSUs") and restricted stock. Equity awards granted under the 1999 Plan have a term of up to ten years. Options typically vest at a rate of 25% one year after the vesting commencement date, and one forty-eighth for each month of service thereafter. In March 2009, the Board adopted the 2009 Stock Plan, which was approved by the Company's stockholders on April 22, 2009. Effective April 22, 2009, no further stock options may be granted under the 1999 Plan.

2009 Stock Plan

The 2009 Stock Plan, or 2009 Plan, was amended and restated by the Board of Directors in January 2015 and approved by the Company's stockholders on April 23, 2015 to, among other things, reserve an additional 2.5 million shares of common stock for issuance under the 2009 Plan. As of July 3, 2016, approximately 9.8 million shares were reserved for issuance under the 2009 Plan. Equity awards that are cancelled, forfeited or repurchased under the 1999 Plan become available for grant under the 2009 Plan, up to a maximum of an additional 10 million shares. Equity awards granted under the 2009 Plan have a term of up to ten years. Options typically vest at a rate of 25% one year after the vesting commencement date, and one forty-eighth for each month of service thereafter. RSUs typically vest at a rate of 25% one year after the vesting commencement date, and one eighth every six months thereafter. The Company may implement different vesting schedules in the future with respect to any new equity awards.

Employee Stock Purchase Plan

The 2009 Employee Stock Purchase Plan, or 2009 ESPP, was adopted in March 2009. In January 2015, the 2009 ESPP was amended by the Board of Directors and approved by the Company's stockholders on April 23, 2015 to reserve an additional 1.0 million shares of common stock for issuance under the 2009 ESPP. As of July 3, 2016, approximately 3.3 million shares were reserved for issuance under the 2009 ESPP Plan. The 2009 ESPP provides for six month offering periods. Participants purchase shares through payroll deductions of up to 20% of an employee's total compensation (maximum of 20,000 shares per offering period). The 2009 ESPP permits the Board of Directors to determine, prior to each offering period, whether participants purchase shares at: (i) 85% of the fair market value of the common stock at the end of the offering period; or (ii) 85% of the lower of the fair market value of the common stock at the beginning or the end of an offering period. The Board of Directors has determined that, until further notice, future offering periods will be made at 85% of the lower of the fair market value of the common stock at the beginning or the end of an offering period.

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 cash settlement of stock appreciation rights, or SARs. 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 three and six months ended July 3, 2016 and June 28, 2015 was as follows (in thousands):



	Three Months Ended				Six Months Ended
	July 3, 2016		June 28, 2015		July 3, 2016		June 28, 2015
Cost of revenue	$	47	$	27	$	85	$	66
Research and development	175		212		466		403
Selling, general and administrative	217		252		450		519
Total costs and expenses	$	439	$	491	$	1,001	$	988

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 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:



	Three Months Ended				Six Months Ended
	July 3, 2016		June 28, 2015		July 3, 2016		June 28, 2015
Expected term (years)	0		0		0		4.78
Risk-free interest rate	—	%	—	%	—	%	1.40	%
Expected volatility	—	%	—	%	—	%	52.11	%
Expected dividend yield	—		—		—		—

No stock options were granted during the first six months of 2016 and second quarter of 2015. The weighted average estimated fair value for options granted during the six months of 2015 was $0.90 per option. As of July 3, 2016 and June 28, 2015, the fair value of unvested stock options, net of expected forfeitures, was approximately $2.0 million and $2.7 million, respectively. This unrecognized stock-based compensation expense is expected to be recorded over a weighted average period of 1.94 years.

Stock-Based Compensation Award Activity

The following table summarizes the activity in the shares available for grant under the 2009 Plan during the six months ended July 3, 2016:



	Shares Available for Grant
	(in thousands)
Balance at January 03, 2016	2,929
Options forfeited or expired	373
RSUs granted	(612	)
PRSUs granted	(193	)
RSUs forfeited or expired	159
PRSUs forfeited or expired	201
Balance at July 3, 2016	2,857

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 2016:



	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Term	Aggregate Intrinsic Value
	(in thousands)				(in years)	(in thousands)
Balance outstanding at January 3, 2016	5,266		$	2.64
Forfeited or expired	(373	)	$	2.74
Balance outstanding at July 3, 2016	4,893		$	2.63	3.82	$	17
Exercisable at July 3, 2016	4,542		$	2.62	3.50	$	17
Vested and expected to vest at July 3, 2016	4,838		$	2.63	3.77	$	17

The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on the Company's closing stock price of $0.94 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 2016 and 2015 was $0 and $81,000, respectively. Total cash received from employees as a result of employee stock option exercises during the first six months of 2016 and 2015 was approximately $0 and $114,000 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 $100,000 and $214,000 for the three months and six months ended July 3, 2016.

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 RSU as it vests. In general, the Company's policy is to withhold shares in settlement of employee tax withholding obligations upon the vesting of RSUs. The stock-based compensation related to RSUs and PRSUs was $235,000 and $14,000 for the three months and $539,000 and $88,000 for the six months ended July 3, 2016, respectively. As of July 3, 2016, there was $1.6 million in unrecognized compensation expense related to RSUs and PRSUs.

A summary of activity for the Company's RSUs and PRSUs for the six months ended July 3, 2016 and information regarding RSUs and PRSUs outstanding and expected to vest as of July 3, 2016 is as follows:



	RSUs & PRSUs Outstanding
	Number of Shares		Weighted Average Grant Date Fair Value
	(in thousands)
Nonvested at January 3, 2016	1,435		$	2.30
Granted	805		1.11
Vested	(442	)	1.04
Forfeited	(360	)	—
Nonvested at July 3, 2016	1,438		$	2.08

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 quarters of 2016 and 2015 was $0.31 and $0.48 per right, respectively.

As of July 3, 2016, 917,000 shares remained available for issuance under the 2009 ESPP. For the three and six months ended July 3, 2016, the Company recorded stock-based compensation expense related to the 2009 ESPP of $90,000 and $160,000, respectively.

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
	July 3, 2016		June 28, 2015		July 3, 2016		June 28, 2015
Expected term (months)	6.08		6.08		6.08		6.08
Risk-free interest rate	0.40	%	0.08	%	1.04	%	0.08	%
Volatility	54.31	%	51.54	%	61.06	%	51.54	%
Dividend yield	—		—		—		—

As of July 3, 2016, the unrecognized stock-based compensation expense relating to the Company's 2009 ESPP was $96,000 and is expected to be recognized over a weighted average period of approximately 4.5 months.