Stock Based Compensation

9 Months Ended

Oct. 01, 2011

Stock Based Compensation [Abstract]

Stock Based Compensation

7. Stock Based Compensation

2008 Equity Incentive Plan

For the nine months ended October 1, 2011, the only active share-based compensation plan was the 2008 Equity Incentive Plan (the "Incentive Plan"). The terms of awards granted during the nine months ended October 1, 2011 were consistent with those described in the consolidated financial statements included in our Annual Report on Form 10-K for the year ended January 1, 2011.

Summary of Stock Options

The following table summarizes information regarding activity in our stock option plan during the nine months ended October 1, 2011 and October 2, 2010:

	Number of Shares			Weighted Average Exercise Price Per Share		Aggregate Intrinsic Value (thousands)
Outstanding at January 1, 2011		1,618,066		$	3.65
Granted		125,300		$	3.79
Exercised		(99,291	)	$	3.24
Canceled or forfeited		(68,461	)	$	4.88
Outstanding at October 1, 2011		1,575,614		$	3.63	$	1,213
	Number of Shares			Weighted Average Exercise Price Per Share		Aggregate Intrinsic Value (thousands)
Outstanding at January 2, 2010		1,583,508		$	3.91
Granted		193,300		$	3.99
Exercised		(22,235	)	$	2.82
Canceled or forfeited		(102,837	)	$	7.64
Outstanding at October 2, 2010		1,651,736		$	3.69	$	1,118

The aggregate intrinsic value in the table above represents the pre-tax intrinsic value, based on the Company's closing price as of September 30, 2011, that would have been received by option holders had all option holders exercised their stock options as of that date.

For the three month period ended October 1, 2011, there were 85,000 shares in stock options granted under the Company's stock plans. For the three month period ended October 2, 2010, there were no stock options granted.

The weighted-average grant date fair value of the options granted under the Company's stock plans as calculated using Black-Scholes was $2.57 for the three months ended October 1, 2011. The weighted-average grant date fair value of the options granted under the Company's stock plans as calculated using Black-Scholes was $2.60 and $2.71 per share for the nine months ended October 1, 2011 and October 2, 2010, respectively.

The Company uses the Black-Scholes option-pricing model to estimate fair value of stock-based awards with the following weighted average assumptions:

	Three Months Ended						Nine Months Ended
	October 1, 2011			October 2, 2010			October 1, 2011			October 2, 2010
Average risk free interest rate		0.94	%		1.89	%		1.23	%		2.03	%
Expected life (in years)		4.69			4.75			4.71			4.75
Dividend yield		0.0	%		0.0	%		0.0	%		0.0	%
Average volatility		91	%		88	%		91	%		88	%

Option-pricing models require the input of various subjective assumptions, including the option's expected life and the price volatility of the underlying stock. The expected stock price volatility is based on analysis of the Company's stock price history over a period commensurate with the expected term of the options, trading volume of the Company's stock, look-back volatilities and Company specific events that affected volatility in a prior period. The Company had elected to use the simplified method for estimating the expected term prior to July 3, 2011. Effective July 3, 2011, the expected term of employee stock options represents the weighted average period the stock options are expected to remain outstanding and is based on the history of exercises and cancellations on all past option grants made by the Company, the contractual term, the vesting period and the expected remaining term of the outstanding options. The risk-free interest rate is based on the U.S. Treasury interest rates whose term is consistent with the expected life of the stock options. No dividend yield is included as the Company has not issued any dividends and does not anticipate issuing any dividends in the future.

The following table shows stock-based compensation expense included in the Condensed Consolidated Statements of Operations for the three and nine month periods ended October 1, 2011 and October 2, 2010 (in thousands):

	Three Months Ended				Nine Months Ended
	October 1, 2011		October 2, 2010		October 1, 2011		October 2, 2010
Cost of revenues	$	29	$	27	$	84	$	89
Research and development		16		23		52		71
Sales and marketing		28		33		89		96
General and administrative		50		62		149		159
	$	123	$	145	$	374	$	415

Approximately $10 thousand and $9 thousand of the stock based compensation expense recognized was capitalized into inventory as a component of overhead at October 1, 2011 and October 2, 2010, respectively.

Information regarding stock options outstanding, exercisable and expected to vest at October 1, 2011 is summarized below:

	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value (thousands)
As of October 1, 2011
Options outstanding		1,575,614	$	3.63		3.75	$	1,213
Options vested and expected to vest		1,489,523	$	3.67		3.67	$	1,134
Options exercisable		1,221,100	$	3.79		3.28	$	937

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the Company's closing stock price on the Nasdaq Global Market on the last trading day of the quarter, September 30, 2011 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on October 1, 2011. This amount changes based on the fair market value of the Company's stock. The total intrinsic value of options exercised for the three months periods ended October 1, 2011 and October 2, 2010 were approximately $15 thousand and $0 thousand, respectively. The total intrinsic value of options exercised for the nine months periods ended October 1, 2011 and October 2, 2010 were approximately $84 thousand and $28 thousand, respectively.

As of October 1, 2011, there was $653 thousand of total unrecognized compensation cost, net of forfeitures, related to non-vested share-based compensation arrangements under the Incentive Plan. The cost is expected to be recognized over a weighted average period of 2.37 years.

Restricted Stock Awards/Restricted Stock Units

Effective for the 2011 fiscal year, each non-employee member of the Board will receive an annual equity award of either restricted stock or a restricted stock unit ("RSU"), at the election of such Board member, in each case equal to $20,000 worth of our common stock (determined at the fair market value of the shares at the time such award is granted) under the Company's 2008 Equity Incentive Plan. Each equity award or RSU vests in full on the one-year anniversary of the date of grant provided that the non-employee member continues to serve on the Board through such date.

Summary of Restricted Stock Units and Awards

The Company recognizes the estimated compensation expense of restricted stock units and awards, net of estimated forfeitures, over the vesting term. The estimated compensation expense is based on the fair value of the Company's common stock on the date of grant.

Information regarding the restricted stock units outstanding, vested and expected to vest as of October 1, 2011 is summarized below:

	Number of Shares		Weighted Average Remaining Contractual Life (years)		Aggregate Intrinsic Value (thousands)
As of October 1, 2011
Restricted stock units outstanding		15,189		0.75	$	56
Restricted stock units vested and expected to vest		13,720		0.75	$	51

The intrinsic value of the restricted stock units is calculated based on the closing price of IRIDEX shares as quoted on the Nasdaq Global Market on the last trading day of the quarter, September 30, 2011 of $3.70.

For the three months ended October 1, 2011, there were no restricted stock units granted. For the nine months ended October 1, 2011, the Company granted 15,189 shares of restricted units to the Board of Directors with a weighted average grant date fair value of approximately $56,000 or $3.70 per share. There were no restricted stock units or awards granted in 2010. There was no restricted stock units vested, released and or forfeited during the three and nine month periods ended October 1, 2011.

Information regarding the restricted stock awards activity during the nine months ended October 1, 2011 is summarized below:

	Number of Shares		Weighted Average Grant Date Fair Value
Outstanding at January 1, 2011		0		0
Restricted stock awards granted		10,126	$	3.70
Outstanding at October 1, 2011		10,126	$	3.70