6. Stock Based Compensation

2008 Equity Incentive Plan

For the six months ended June 28, 2014, the only active share-based compensation plan was the 2008 Equity Incentive Plan (the “Incentive Plan”). The terms of awards granted during the six months ended June 28, 2014 were consistent with those described in the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 28, 2013.

Summary of Stock Options

The following table summarizes information regarding activity in our stock option plan during the six months ended June 28, 2014:

	Number of Shares			Weighted Average Exercise Price Per Share		Aggregate Intrinsic Value (thousands)
Outstanding as of December 28, 2013		1,102,842		$	3.97
Granted		127,500		$	8.72
Exercised		(209,610	)	$	4.05
Canceled or forfeited		(25,696	)	$	6.28
Outstanding as of June 28, 2014		995,036		$	4.50	$	3,821

The weighted average grant date fair value of the options granted under the Company’s stock plans as calculated using the Black-Scholes option-pricing model was $4.09 and $2.89 per share for the three months ended June 28, 2014 and June 29, 2013, respectively. The weighted-average grant date fair value of the options granted under the Company’s stock plans as calculated using the Black-Scholes option-pricing model was $4.09 and $3.00 per share for the six months ended June 28, 2014 and June 29, 2013, respectively.

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

	Three Months Ended						Six Months Ended
	June 28, 2014			June 29, 2013			June 28, 20143			June 29, 2013
Average risk free interest rate		1.45	%		1.31	%		1.48	%		0.83	%
Expected life (in years)		4.5 years			4.5 years			4.5 years			4.5 years
Dividend yield		—	%		—	%		—	%		—	%
Average volatility		55	%		79	%		57	%		84	%

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 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 six months ended June 28, 2014 and June 29, 2013:

	Three Months Ended				Six Months Ended
	June 28, 2014		June 29, 2013		June 28, 2014		June 29, 2013
Cost of revenues	$	39	$	29	$	73	$	51
Research and development		26		16		48		36
Sales and marketing		28		28		60		50
General and administrative		141		100		297		197
	$	234	$	173	$	478	$	334

Approximately $15 thousand and $11 thousand of the stock-based compensation recognized was capitalized into inventory as a component of overhead for the quarters ended June 28, 2014 and June 29, 30, 2013, respectively.

Information regarding stock options outstanding, vested and expected to vest and exercisable as of June 28, 2014 is summarized below:

	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value (thousands)
Options outstanding		995,036	$	4.50		4.03	$	3,821
Options vested and expected to vest		926,071	$	4.38		3.88	$	3,662
Options exercisable		564,581	$	3.58		2.69	$	2,655

The aggregate intrinsic value in the table above represents the pre-tax intrinsic value, based on the Company’s closing price as of June 27, 2014, that would have been received by option holders had all option holders exercised their stock options as of that date. This amount changes based on the fair market value of the Company’s stock. The total intrinsic value of options exercised for the six months ended June 28, 2014 and June 29, 2013 was approximately $566 thousand and $445 thousand, respectively.

As of June 28, 2014, there was $1.6 million of total unrecognized compensation cost, net of expected 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 2.79 years.

Summary of Restricted Stock Units and Awards

Information regarding the restricted stock units activity for the six months ended June 28, 2014 is summarized below:

	Number of Shares
Outstanding as of December 28, 2013		269,259
Restricted stock units granted		50,000
Restricted stock units released		(36,250	)
Outstanding as of June 28, 2014		283,009

On January 4, 2014, the Company granted a restricted stock unit award for up to 50,000 shares of the Company’s common stock (the “Market Performance Award”) under the terms of the Company’s 2008 Equity Incentive Plan, as amended, to the Company’s President and Chief Executive Officer. The number of shares issuable pursuant to the Market Performance Award will be based upon the Company’s calculated stock price (average stock price performance during the two months prior to and two months following the date the service condition is met, or the fair market value of the Company’s common stock in the event vesting is triggered by a change of control of the Company). The Market Performance Award is expected to vest on December 31, 2014, given that no other vesting triggers occur prior to that date. To the extent that the market condition is not met, the Market Performance Award will not vest and will be cancelled. None of the restricted stock units will vest if the calculated stock price is less than $11.00 per share. Since the market conditions will affect the vesting of the Market Performance Award, the Company cannot use the Black-Scholes option-pricing model to value the award; instead, a binomial model must be used. The Company utilized the Monte Carlo simulation technique, which incorporated assumptions for the expected holding period, risk-free interest rate, stock price volatility and dividend yield. Compensation expense is recognized ratably until such time as the market condition is satisfied. The grant date fair value for restricted stock units awarded during the six month period was $234 thousand. The weighted average stock price on the date of grant for restricted stock units awarded during the six month period was $4.67 per share.

There were no restricted stock awards granted, vested and forfeited for the six months ended June 28, 2014.

Stock Repurchase Program

In February 2013, the Board of Directors approved a new one year $3.0 million stock repurchase program that replaced the prior two year $4.0 million stock repurchase program. On February 27, 2014, the Board of Directors approved the extension of the plan for an additional year. For the six months ended June 28, 2014, the Company has purchased 260,196 shares at an average price of $8.63 per share. As of June 28, 2014, the Company still has the authorization to purchase up to $328 thousand in common shares under the stock repurchase program. See Item 2, Unregistered Sales of Equity Securities and Use of Proceeds in Part II, Other Information, for additional information.