10. Stockholders’ Equity

1998 Stock Plan.

The 1998 Stock Plan (the “1998 Plan”), as amended, provides for the granting to employees (including officers and non-employee directors) of incentive stock options and for the granting to employees (including officers and non-employee directors) and consultants of nonstatutory stock options, stock purchase rights (“SPRs”), restricted stock, restricted stock units (“RSUs”), performance shares, performance units and stock appreciation rights. The exercise price of incentive stock options and stock appreciation rights granted under the 1998 Plan must be at least equal to the fair market value of the shares at the time of grant. With respect to any recipient who owns stock possessing more than 10% of the voting power of our outstanding capital stock, the exercise price of any option or SPR granted must be at least equal to 110% of the fair market value at the time of grant. Options granted under the 1998 Plan are exercisable at such times and under such conditions as determined by the administrator; generally over a four year period. The maximum term of incentive stock options granted to any recipient must not exceed ten years; provided, however, that the maximum term of an incentive stock option granted to any recipient possessing more than 10% of the voting power of our outstanding capital stock must not exceed five years. In the case of SPRs, unless the administrator determines otherwise, we have a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser’s employment with us for any reason (including death or disability). Such repurchase option lapses at a rate determined by the administrator. The purchase price for shares repurchased is the original price paid by the purchaser. As of December 31, 2016 and January 2, 2016, no shares were subject to repurchase. The form of consideration for exercising an option or stock purchase right, including the method of payment, is determined by the administrator. The 1998 Plan expired in February 2008.

2008 Equity Incentive Plan.

On June 11, 2008, the shareholders approved the adoption of the 2008 Equity Incentive Plan, (the “Incentive Plan”). There are no material changes in the Incentive Plan from the 1998 Plan. In 2014, the stockholders approved an amendment to the Incentive Plan for purposes of complying with Section 162(m) of the Internal Revenue Code of 1986, as amended, to increase the share reserve under the Incentive Plan, and to make certain other amendments to the terms of the Incentive Plan. The maximum aggregate number of shares that may be awarded and sold under the Incentive Plan is 300,000 shares plus any shares subject to stock options or similar awards granted under the 1998 Plan that expire or otherwise terminate without having been exercised in full and shares issued pursuant to awards granted under the 1998 Plan that are forfeited to us on or after February 23, 2008, which was the date the 1998 Plan expired.

The following table summarizes information regarding activity in our stock option plans during the fiscal years ended 2016, 2015 and 2014 (in thousands except share and per share data):

				Outstanding Options
	Shares Available for Grant			Number of Shares			Weighted Average Exercise Price
Balances as of December 28, 2013		476,545			1,102,842			3.97
Additional shares reserved		503,306			—			—
Options granted		(158,300	)		158,300			8.61
Restricted stock granted		(62,225	)		—			—
Options exercised		—			(399,390	)		3.76
Options cancelled		27,957			(27,957	)		6.13
Awards cancelled		79,890			—			—
Options expired		(13,056	)		—			—
Balances as of January 3, 2015		854,117			833,795			4.88
Additional shares reserved		1,000			—			—
Options granted		(170,300	)		170,300			9.38
Restricted stock granted		(227,905	)		—			—
Options exercised		—			(277,733	)		3.70
Options cancelled		174,870			(174,870	)		4.71
Awards cancelled		146,000			—			—
Options expired		(7,000	)		—			—
Balances as of January 2, 2016		770,782			551,492			6.92
Additional shares reserved		-			—			—
Options granted		(112,277	)		112,277			13.71
Restricted stock granted		(286,294	)					—
Options exercised		—			(126,077	)		5.62
Options cancelled		66,707			(66,707	)		7.37
Awards cancelled		66,000			—			—
Options expired		-			—			—
Balances as of December 31, 2016		504,918			470,985		$	8.69

There were 975,903 shares reserved for future issuance under the stock option plans as of December 31, 2016.

The following table summarizes information with respect to stock options outstanding and exercisable as of December 31, 2016:

	Options Outstanding						Options Vested and Exercisable
Range of Exercise Prices	Number of Shares Outstanding		Weighted Average Remaining Contractual Life (years)		Weighted Average Exercise Price		Number of Shares Exercisable		Weighted Average Exercise Price
$3.46 - $3.92		47,935		2.18	$	3.84		47,164	$	3.84
$3.95 - $5.92		73,182		2.87	$	5.01		60,241	$	4.86
$6.00 - $8.16		82,169		5.19	$	7.38		35,615	$	7.08
$8.29 - $8.58		60,799		4.17	$	8.45		38,325	$	8.45
$8.60 - $10.33		59,500		4.96	$	9.39		27,067	$	9.10
$10.45 - $10.45		400		5.17	$	10.45		200	$	10.45
$10.73 - $10.73		61,223		5.15	$	10.73		26,098	$	10.73
$11.04 - $11.04		15,800		5.17	$	11.04		885	$	11.04
$12.85 - $12.85		32,500		6.82	$	12.85		118	$	12.85
$16.29 - $16.29		37,477		6.57	$	16.29		686	$	16.29
$3.46 - $16.29		470,985		4.58	$	8.69		236,399	$	6.77

The determination of the fair value of options granted is computed using the Black-Scholes option pricing model with the following weighted average assumptions:

	Employee Stock Option Plan
	FY 2016			FY 2015			FY 2014
Average risk free interest rate		1.33	%		1.38	%		1.49	%
Expected life (in years)	4.55 years			4.55 years			4.50 years
Dividend yield		—			—			—
Average volatility		44.5	%		49.3	%		56.2	%

The weighted average grant date fair value of options granted as calculated using the Black-Scholes option pricing was $5.06, $3.95, and $4.02 per share for the fiscal years 2016, 2015 and 2014, respectively.

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 our stock price history over a period commensurate with the expected term of the options, trading volume of our 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, 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 we have not issued any dividends and does not anticipate issuing any dividends in the future.

The following table shows stock-based compensation expense by functional line item in the consolidated statements of operations for 2016, 2015 and 2014 (in thousands):

	FY 2016 Year Ended		FY 2015 Year Ended		FY 2014 Year Ended
	December 31, 2016		January 2, 2016		January 3, 2015
Cost of revenues	$	119	$	223	$	149
Research and development		134		176		105
Sales and marketing		164		185		118
General and administrative		1,404		311		600
Total stock-based compensation expense	$	1,821	$	895	$	972

Stock-based compensation expense capitalized to inventory was immaterial for 2016, 2015, and 2014.

Information regarding stock options outstanding, exercisable and expected to vest as of December 31, 2016 is summarized below:

	Number of		Weighted Average		Weighted Average Remaining Contractual		Aggregate Intrinsic Value
	Shares		Exercise Price		Life (years)		(thousands)
Options outstanding		470,985	$	8.69		4.58	$	2,611
Options vested and expected to vest		436,564	$	8.48		4.48	$	2,505
Options exercisable		236,399	$	6.77		3.66	$	1,725

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between our closing stock price on the last trading day of fiscal 2016 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 December 31, 2016. This amount is subject to change due to changes to the fair market value of our common stock. The total intrinsic value of options exercised for fiscal years 2016, 2015 and 2014 was approximately $0.8 million, $1.5 million, and $1.9 million, respectively.

As of December 31, 2016, there was $3.3 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements under both of the plans. The cost is expected to be recognized over a weighted average period of 2.52 years.

Cash flows resulting from excess tax benefits are classified as a part of cash flows from financing activities. Excess tax benefits are realized tax benefits from tax deductions for exercised stock options and vested restricted stock units and awards in excess of the deferred tax asset attributable to stock-based compensation expense for such stock-based awards. Excess tax benefits are considered realized when the tax deductions reduce taxes that otherwise would be payable. Excess tax benefits classified as a financing cash inflow for fiscal 2016, 2015 and 2014 were $0, $0 and $36 thousand, respectively.

Restricted Stock Awards/Restricted Stock Units

Effective for the 2011 fiscal year and thereafter, each non-employee member of the Board of Directors received an annual equity award of either restricted stock or RSU, at the election of such Board member, in each case equal to $20 thousand worth of our common stock (determined at the fair market value of the shares at the time such award is granted) under our 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

We recognize 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 our common stock on the date of grant.

Information regarding the restricted stock units outstanding, vested and expected to vest as of December 31, 2016 is summarized below:

Number of

Weighted Average

Remaining Contractual

Life (years)

Aggregate Intrinsic

Value (thousands)

Restricted stock units outstanding

335,805

1.95

4,721

Restricted stock units vested and expected to vest

218,412

1.87

3,071

The intrinsic value of the restricted stock units is calculated based on the closing price of our shares as quoted on the NASDAQ Global Market on the last trading day of the year, December 30, 2016, of $14.06.

The majority of the restricted stock units that were released in fiscal year 2016 were net-share settled such that we withheld shares with value equivalent to the employees’ minimum statutory obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. The total shares withheld were based on the value of the restricted stock units on their release date as determined by our closing stock price. These net-share settlements had the effect of share repurchases as they reduced and retired the number of shares that would have otherwise been issued as a result of the release and did not represent an expense to us. For the fiscal year ended December 31, 2016, 30,789 shares of restricted stock units were released with an intrinsic value of approximately $0.4 million. We withheld 7,507 shares to satisfy approximately $100 thousand of employees’ minimum tax obligation on the released restricted stock units.

Information regarding the RSU activity during the years ended December 31, 2016, January 2, 2016 and January 3, 2015 is summarized below:

	Number of Shares			Weighted Average Grant Date Fair Value
Outstanding as of December 28, 2013		269,259		$	4.42
Restricted stock units granted		59,780		$	9.76
Restricted stock units released		(46,759	)	$	4.29
Restricted stock units forfeited		(4,890	)	$	8.18
Outstanding as of January 3, 2015		277,390		$	5.52
Restricted stock units granted		225,392		$	8.66
Restricted stock units released		(209,193	)	$	4.82
Restricted stock units forfeited		(146,000	)	$	8.28
Outstanding as of January 2, 2016		147,589		$	8.59
Restricted stock units granted		285,005		$	11.89
Restricted stock units released		(30,789	)	$	8.30
Restricted stock units forfeited		(66,000	)	$	9.67
Outstanding as of December 31, 2016		335,805		$	11.20

During the year ended December 31, 2016, the Company awarded 285,005 restricted stock units at a weighted average grant date fair value of $11.89 per share. Of this amount, 256,138 stock units represent performance based shares that are subject to service, performance and market vesting conditions with a weighted average grant date fair value of $11.40 per share.

RSUs granted with market conditions are valued using the Monte Carlo simulation model and compensation expense is recognized ratably during the service period even if the market condition is not satisfied. To the extent that the market condition is not met, the RSUs will not vest and will be cancelled.

RSUs granted with performance conditions are valued at the grant date fair value of the underlying common shares. The Company make a determination regarding the probability of the performance criteria being achieved and compensation expense is recognized ratably over the vesting period, if it is expected that the performance criteria will be met.

During the year ended December 31, 2016, the Company accelerated the vesting of 6,400 of restricted stock units and 10,000 performance-based restricted stock units in connection with an employee termination. In connection with the acceleration, the Company recorded a $220 thousand charge to general and administrative expenses.

Information regarding the restricted stock awards activity during the year ended December 31, 2016, January 2, 2016 and January 3, 2015 is summarized below:

	Number of Shares			Weighted Average Grant Date Fair Value
Outstanding as of December 28, 2013		3,503		$	5.71
Restricted stock awards granted		2,445		$	8.18
Restricted stock awards released		(3,503	)	$	5.71
Outstanding as of January 3, 2015		2,445		$	8.18
Restricted stock awards granted		2,513		$	7.96
Restricted stock awards released		(2,445	)	$	7.96
Outstanding as of January 2, 2016		2,513		$	7.96
Restricted stock awards granted		1,289		$	15.51
Restricted stock awards released		(2,513	)	$	7.96
Outstanding as of December 31, 2016		1,289		$	15.51

Stock Repurchase Program.

In February 2013, the Board of Directors approved a one year $3.0 million stock repurchase program that replaced the prior two year $4.0 million stock repurchase program. In February 2014, the Board of Directors approved the extension of the plan for an additional year. In July 2014, the Board of Directors approved an extension of the plan for an additional year and authorized an additional $3.0 million of stock repurchases. In August 2015, the Board of Directors approved a further extension of the plan for another year and authorized an additional $2.0 million of stock repurchases. During the years ended December 31, 2016, January 2, 2016 and January 3, 2015, the Company repurchased 6,544, 199,776 and 562,440 shares at an average price of $9.00, $7.92 and $8.29 per share, respectively. On September 9, 2015, the Company made a payment to James H. Mackaness, our former Chief Financial Officer and Chief Operating Officer, of approximately $275 thousand in cash in exchange for Mr. Mackaness’ agreement to cancel vested stock options exercisable for an aggregate of 92,656 shares of our common stock. This payment to Mr. Mackaness was made using funds authorized and available under the stock repurchase program discussed above, and resulted in a reduction of the approximate dollar value of shares that may yet be purchased under this program. As of December 31, 2016, we have repurchased 843,785 shares for approximately $6.7 million under this current program. The remaining balance of approximately $1.0 million approved under the plan was not used when the plan lapsed in August 2016.