SHARE-BASED COMPENSATION

The Company estimates the fair value of its stock options and stock issued under the Employee Stock Purchase Plan using the Black-Scholes option pricing model. Groups of employees or non-employee directors that have similar historical and expected exercise behavior are considered separately for valuation purposes. Assumptions used in estimating the fair value of stock options granted include risk-free interest rate, expected life, expected volatility factor, and expected dividend rate. The risk-free interest rate is based on the U.S. Treasury yield at the time of grant for a term equal to the expected life of the stock option; the expected life is determined using the simplified method of estimating the life as allowed under Staff Accounting Bulletin No. 110; and the expected volatility is based on the historical volatility of the Company's stock price for a period of time equal to the expected life of the stock option.

With the exception of the service-based non-vested share awards and the performance-based non-vested share awards discussed below, nearly all of the Company's share-based compensation arrangements utilize graded vesting schedules where a portion of the grant vests annually over a period of two to four years. The Company has a policy of recognizing compensation expense for awards with graded vesting over the requisite service period for each separately vesting portion of the award as if the award was, in-substance, multiple awards. This policy has the effect of accelerating the recognition of expense when compared to a straight-line amortization methodology.

As of December 30, 2017, the Company has two share-based compensation plans under which awards are outstanding, which are described below. No income tax benefits were recognized in fiscal 2017 or fiscal 2016 due to the full valuation allowance on the Company's deferred tax assets. In addition, no compensation costs related to these arrangements were capitalized in either year. The Company has historically issued and expects to continue to issue new shares to satisfy stock option exercises, vesting of non-vested shares or purchases of shares under the Employee Stock Purchase Plan.

EQUITY INCENTIVE PLAN

The Company's Equity Incentive Plan, as amended and restated, (the "Equity Plan"), is a stockholder approved plan, which provides for the granting of incentive stock options and nonqualified stock options to employees, and nonqualified stock options, nonvested stock, and restricted stock units to employees, directors and consultants. The Equity Plan is scheduled to expire in June 2025. As of December 30, 2017, the Company has 1,295,585 shares of the Company's common stock available for issuance upon exercise of outstanding options or for future awards under the Equity Plan.

Stock Options

Service-Based Stock Option Awards – Stock options are granted at an exercise price of not less than market value per share of the common stock on the date of grant as determined by the Board of Directors. Vesting and exercise provisions are determined by the Board of Directors.

As of December 30, 2017, all options granted under the Equity Plan were non-qualified stock options. Service-based options generally become exercisable over a one to four-year period beginning on the date of grant and have a maximum term of ten years.

A summary of the service-based stock option activity of the Company's Equity Plan as of December 30, 2017 and changes during the fiscal year then ended is presented below:



	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at December 31, 2016	212,762		$	6.91
Forfeited/cancelled	(105,262	)	$	10.92

Outstanding at December 30, 2017	107,500		$	2.98	7.1 years	$	—

Options vested and expected to vest at December 30, 2017	100,625		$	3.05	7.0 years	$	—

Options exercisable at December 30, 2017	69,999		$	3.48	6.7 years	$	—

The Company did not grant any service-based stock option awards during fiscal year 2017. During fiscal 2016, the Company granted a service-based stock option award for 37,500 shares of the Company's common stock having an exercise price of $1.10 per share. The stock option vests solely based on employee service over a three-year period. The Company recorded share-based compensation expense in connection with service-based stock option awards of $18,000 and $16,000 during fiscal years 2017 and 2016, respectively. As of December 30, 2017, there was $8,000 of unrecognized share-based compensation expense, net of estimated forfeitures, related to service-based stock option awards, and this unrecognized expense is expected to be recognized over a weighted average period of 10 months. As of December 31, 2016, there was $26,000 of unrecognized share-based compensation expense, net of estimated forfeitures, related to service-based stock option awards.

Market Condition Stock Option Awards – A summary of the market condition stock option activity under the Equity Plan, as of December 30, 2017 and changes during the fiscal year then ended is presented below:



	Shares	Weighted Average Exercise Price
Outstanding at December 31, 2016	325,000	$	2.54

Granted	—	$	—

Outstanding at December 30, 2017	325,000	$	2.54

Options vested and expected to vest at December 30, 2017	325,000	$	2.54

Options exercisable at December 30, 2017	—	$	—

On September 28, 2016, the Company granted non-qualified stock option awards for 125,000 shares of the Company’s common stock having an exercise price of $1.25 per share. On June 16, 2015 the Company granted a non-qualified stock option award for 200,000 shares of the Company’s common stock having an exercise price of $3.34 per share. These stock options will vest only if the price of the Company’s common stock reaches certain price targets, as follows:


•	the stock option will vest with respect to 116,666 shares if at any time the closing market price of the Company’s common stock on each day during a 30 consecutive trading day period equals or exceeds $4.00 per share;


•	the stock option will vest with respect to an additional 116,667 shares if at any time the closing market price of the Company’s common stock on each day during a 30 consecutive trading day period equals or exceeds $5.00 per share; and


•	the stock option will vest with respect to an additional 91,667 shares if at any time the closing market price of the Company’s common stock on each day during a 30 consecutive trading day period equals or exceeds $6.00 per share.

For stock options which contain market conditions, the market conditions are required to be considered when calculating the grant date fair value. FASB ASC 718 – “Compensation – Stock Compensation,” requires us to select a valuation technique that best fits the circumstances of an award. In order to reflect the substantive characteristics of the market condition option award, a Monte Carlo simulation valuation model was used to calculate the grant date fair value of such stock options. Monte Carlo approaches are a class of computational algorithms that rely on repeated random sampling to compute their results. This approach allows the calculation of the value of such stock options based on a large number of possible stock price path scenarios. Expense for the market condition stock options is recognized over the derived service period as determined through the Monte Carlo simulation model. The fair value and derived service periods calculated for this market condition stock option award by vesting tranche for the market condition stock option awards granted in September 2016 were as follows:



	Grant Date Fair Value Per Share		Derived Service Period (in Years)
$4.00 market condition tranche	$	0.32	5.1
$5.00 market condition tranche	$	0.31	5.5
$6.00 market condition tranche	$	0.30	5.9

The fair value and derived service periods calculated for this market condition stock option award by vesting tranche for the market condition stock option awards granted in June 2015 were as follows:



	Grant Date Fair Value Per Share		Derived Service Period (in Trading Days)
$4.00 market condition tranche	$	1.95	151
$5.00 market condition tranche	$	1.95	262
$6.00 market condition tranche	$	1.99	362

During fiscal years 2017 and 2016 the Company recorded $7,000 and $144,000 of share-based compensation expense in connection with this market condition stock option award. As of December 30, 2017 and December 31, 2016, there was $30,000 and $37,000 of unrecognized share-based compensation expense, net of estimated forfeitures, related to the market condition stock option awards, respectively, As of December 30, 2017, the unrecognized expense is expected to be recognized over a weighted average period of 19 months.

Non-vested Shares

Service-Based Non-vested Share Awards - A summary of the status of service-based non-vested share awards issued under the Equity Plan as of December 30, 2017 and changes during the fiscal year then ended is presented below:



	Shares		Weighted Average Grant Date Fair Value per share
Outstanding at December 31, 2016	172,422		$	0.71
Granted	140,000		$	0.95
Vested	(172,422	)	$	0.71
Outstanding at December 30, 2017	140,000		$	0.95

On July 25, 2017, the Company granted 50,000 shares of service-based non-vested stock that vest one year from the date of grant. Also on July 25, 2017, the Company granted 30,000 shares of service-based non-vested stock that vest two years from the date of grant. On March 13, 2017, the Company granted 60,000 shares of service-based non-vested stock that vest two years from the date of grant. On July 22, 2016, the Company granted 40,000 shares of service-based non-vested stock that vest one year from the date of grant. These service-based non-vested share awards are valued at the date of grant based on the closing market price of the Company’s common stock, and are expensed using the straight-line method over the requisite service period (which is the vesting period of the award). During fiscal years 2017 and 2016, the Company recorded $71,000 and $13,000 of stock-based compensation expense in connection with these service-based non-vested share awards. As of December 30, 2017, there is an estimated $78,000 of unrecognized stock-based compensation expense, net of estimated forfeitures, related to these service-based non-vested share awards, and this unrecognized expense is expected to be recognized over a period of 13 months. As of December 31, 2016, there was $16,000 of unrecognized share-based compensation expense, net of estimated forfeitures, related to service-based non-vested share awards.

On July 22, 2016 and October 3, 2016, the Company granted 59,922 and 72,500 shares, respectively, of service-based non-vested stock to non-employees for services provided under consulting agreements which had three-year terms. In accordance with ASC 718, the fair value measurement date for these non-vested stock awards is the performance completion date. The fair value of the awards granted to the non-employee consultants was remeasured each reporting period based on their fair value at that time up to the performance completion date. The changes in fair value each reporting period were recognized in the Consolidated Statements of Operations and Comprehensive Loss. Effective March 31, 2017, the consulting agreements were terminated and in accordance with the consulting agreements, all unvested shares of non-vested stock granted under those agreements vested as of March 31, 2017. During fiscal years 2017 and 2016, the Company recorded $85,000 and $25,000 of stock-based compensation expense in connection with these service-based non-vested share awards.

Performance-Based Non-vested Share Awards - A summary of the status of performance-based non-vested share awards issued under the Equity Plan as of December 30, 2017 and changes during the fiscal year then ended is presented below:



	Shares		Weighted Average Grant Date Fair Value per share
Outstanding at December 31, 2016	172,657		$	3.14
Vested	(31,435	)	$	3.17
Forfeited	(141,222	)	$	3.14
Outstanding at December 30, 2017	—		$	—

On July 22, 2015, the Company granted 58,940 shares of non-vested stock to two employees that vested in full on July 1, 2017 in proportion to the earn-out consideration paid pursuant to the Purchase Agreement for the acquisition of the Farncombe Entities described in Note 2, Acquisition. On April 8, 2013, the Company granted performance-based non-vested share awards for a total of 800,000 shares of Common Stock to various executive officers and employees of the Company that vest in proportion to the ratio that the Company's "Cumulative Net Non-GAAP EBITDA" achieved over a four-year performance period compares to the Cumulative Net Non-GAAP EBITDA goal of $14 million. All 800,000 non-vested shares had a grant date fair value of $3.14 per share. The first potential vesting date was the Company's earnings release date for its 2014 first fiscal quarter and each subsequent potential vesting date was each of the Company's quarterly earnings release dates thereafter through the release date for the first quarter of fiscal year 2017. Shares not vested as of the release date for the first quarter of fiscal year 2017 were forfeited.

Share-based compensation cost for performance-based non-vested share awards is measured at the grant date based on the fair value of shares expected to be earned at the end of the performance period, based on the closing market price of the Company’s common stock on the date of grant, and is recognized as expense using the straight-line method over the performance period based upon the probable number of shares expected to vest. The Company estimates and excludes compensation cost related to awards not expected to vest based upon estimated forfeitures. During fiscal years 2017 and 2016, the Company recorded $144,000 of share-based compensation income and $88,000 of share-based compensation expense, respectively, in connection with performance-based non-vested share awards. As of December 30, 2017, there was no remaining unrecognized share-based compensation expense related to performance-based non-vested share awards. As of December 31, 2016, there was an estimated $46,000 of unrecognized share-based compensation expense, net of

estimated forfeitures, related to performance-based non-vested share awards.

2000 SUPPLEMENTAL STOCK PLAN

The Supplemental Stock Plan expired May 23, 2010. The outstanding awards issued pursuant to the Supplemental Stock Plan will remain subject to the terms of the Supplemental Stock Plan following expiration of the plan. The Supplemental Stock Plan provided the Company's common stock for the granting of nonqualified stock options to employees and was not subject to stockholder approval. Vesting and exercise provisions were determined by the Board of Directors. Options granted under the plan generally become exercisable over a period of up to four years beginning on the date of grant and have a maximum term of ten years.

A summary of the option activity under the Company's Supplemental Stock Plan as of December 30, 2017 and changes during the fiscal year then ended is presented below:



	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at December 31, 2016	30,100		$	11.06
Forfeited/cancelled	(22,400	)	$	11.61

Outstanding at December 30, 2017	7,700		$	9.45	0.2 years	$	—

Options vested and exercisable at December 30, 2017	7,700		$	9.45	0.2 years	$	—

No awards have been granted under the Supplemental Stock Plan since it expired on May 23, 2010. There were no options exercised during fiscal year 2017 or fiscal year 2016. As of December 30, 2017 there was no remaining unrecognized compensation cost related to the unvested portion of stock options issued under the Supplemental Stock Plan.

EMPLOYEE STOCK PURCHASE PLAN

Under the Employee Stock Purchase Plan ("ESPP"), shares of the Company's common stock may be purchased at six-month intervals at 85% of the lower of the fair market value on the first day of the enrollment period or on the last day of each six-month period over the subsequent two years. Employees may purchase shares through a payroll deduction program having a value not exceeding 15% of their gross compensation during an offering period. During fiscal years 2017 and 2016, the Company recognized net expense of $13,000 and $17,000, respectively, in accordance with FASB ASC 718 associated with the ESPP.