SHARE-BASED COMPENSATION

12 Months Ended

Jan. 02, 2016

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

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

5. 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 January 2, 2016, the Company has two share-based compensation plans under which awards are outstanding, which are described below. The Company recognized an income tax benefit of $40,000 and $61,000 related to share-based compensation arrangements during fiscal years 2015 and 2014, respectively. 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

In April 2015, our Board of Directors approved an amendment and restatement of the Company’s Equity Incentive Plan (the “Equity Plan”), which was approved by our stockholders at the 2015 annual meeting of stockholders which was held on June 16, 2015. As a result of the amendment and restatement, the cumulative number of shares of common stock that are available for issuance (inclusive of shares previously issued) under the Equity Plan increased by 500,000 shares from 2,305,659 to 2,805,659 shares. The amendments to the Equity Plan included changes in the method of counting shares under the Equity Plan, changes in the minimum vesting period for restricted stock awards and restricted stock unit awards under the Equity Plan, extension of the expiration date of the Equity Plan from June 8, 2019 to June 16, 2025 and authorization of the cash-out of awards in connection with certain corporate transactions involving the Company. As of January 2, 2016, the Company has 1,499,442 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 January 2, 2016, 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 January 2, 2016 and changes during the fiscal year then ended is presented below:

 

					Weighted
			Weighted		Average
			Average		Remaining		Aggregate
			Exercise		Contractual		Intrinsic
	Shares		Price		Term		Value
Outstanding at January 3, 2015		307,753	$	8.54
Exercised		(7,500)	$	1.55
Forfeited/cancelled		(55,700)	$	11.60
Outstanding at January 2, 2016		244,553	$	8.06		3.9 years	$	0
Options vested and expected to vest at January 2, 2016		237,053	$	8.18		3.7 years	$	0
Options exercisable at January 2, 2016		207,052	$	8.80		3.1 years	$	0

 The Company did not grant any service-based stock option awards during fiscal year 2015 and granted 90,000 service-based stock option awards during fiscal year 2014. The Company recorded share-based compensation expense in connection with service-based stock option awards of $56,000 and $85,000 during fiscal years 2015 and 2014, respectively. As of January 2, 2016, there was $20,000 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 27 months. As of January 3, 2015, there was $78,000 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 January 2, 2016 and changes during the fiscal year then ended is presented below:

			Weighted
			Average
			Exercise
	Shares		Price
Outstanding at January 3, 2015		-	$	-
Granted		200,000	$	3.34
Outstanding at January 2, 2016		200,000	$	3.34
Options vested and expected to vest at January 2, 2016		200,000	$	3.34
Options exercisable at January 2, 2016		-	$	-

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. The stock option 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 75,000 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 75,000 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 50,000 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 were as follows:

	Grant Date		Derived Service
	Fair Value		Period
	Per Share		(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 year 2015 the Company recorded $250,000 of share-based compensation expense in connection with this market condition stock option award. As of January 2, 2016, there was $142,000 of unrecognized share-based compensation expense, net of estimated forfeitures, related to the market condition stock option award, and this unrecognized expense is expected to be recognized over a weighted average period of 11 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 January 2, 2016 and changes during the fiscal year then ended is presented below:

			Weighted
			Average
			Grant Date
			Fair Value per
	Shares		share
Outstanding at January 3, 2015		81,000	$	3.93
Vested		(81,000)	$	3.93
Outstanding at January 2, 2016		–	$	–

The Company’s 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 on a graded vesting schedule over the vesting period. During fiscal years 2015 and 2014, the Company recorded $54,000 and $257,000, respectively, of share-based compensation expense in connection with service-based non-vested share awards. As of January 2, 2016, there is no unrecognized share-based compensation expense related to service-based non-vested share awards. As of January 3, 2015, there was an estimated $54,000 of unrecognized share-based compensation expense related to 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 January 2, 2016 and changes during the fiscal year then ended is presented below:

			Weighted
			Average
			Grant Date
			Fair Value per
	Shares		share
Outstanding at January 3, 2015		652,999	$	3.19
Granted		58,940	$	3.17
Vested		(63,406)	$	3.26
Forfeited		(398,318)	$	3.20
Outstanding at January 2, 2016		250,215	$	3.15

On July 22, 2015, the Company granted 58,940 shares of non-vested stock to two employees that vests 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. Except for termination of employment in certain circumstances following a change of control, the unvested portion of an award is forfeited upon any termination of employment. Under the terms of the awards, vesting is accelerated upon a change of control of the Company. If the vesting percentage is less than 100% on the vesting date, that percentage of the non-vested stock that does not vest as of the vesting date shall be forfeited. 

On March 10, 2014, the Company granted 40,000 shares of non-vested stock that vest in proportion to the ratio that the Company's "Cumulative Net Non-GAAP EBITDA" achieved over a three-year performance period compares to the Cumulative Net Non-GAAP EBITDA goal of $10.5 million. All 40,000 non-vested shares had a grant date fair value of $3.93 per share. The first potential vesting date was the Company's earnings release date for its 2015 first fiscal quarter and each subsequent potential vesting date is 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 are forfeited. Except for termination of employment in certain circumstances following a change of control, the unvested portion of an award is forfeited upon any termination of employment. Under the terms of an award, vesting is partially accelerated and the award is converted to a time-vested award upon a change of control of the Company.

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 is 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 are forfeited. Except for termination of employment in certain circumstances following a change of control, the unvested portion of an award is forfeited upon any termination of employment. Under the terms of an award, vesting is partially accelerated and the award is converted to a time-vested award upon a change of control of the Company.

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. As a result of its evaluation performed during the fourth quarter of fiscal 2015, the Company does not currently believe it is probable that one-hundred percent of the performance conditions related to its outstanding performance-based non-vested share awards will be achieved. Based on this assumption, the Company recorded a reduction to expense of approximately $250,000 during the fourth quarter of fiscal 2015 to reflect revised estimates related to the ultimate number of shares expected to vest. During fiscal years 2015 and 2014, the Company recorded $170,000 of income and $631,000 of expense, respectively, in connection with performance-based non-vested share awards. As of January 2, 2016, there was an estimated $179,000 of unrecognized share-based compensation expense, net of estimated forfeitures, related to performance-based non-vested share awards. Unrecognized compensation cost as of January 2, 2016 related to performance-based non-vested share awards is expected to be recognized over a period of 15 months.

 

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 January 2, 2016 and changes during the fiscal year then ended is presented below:

					Weighted
			Weighted		Average
			Average		Remaining		Aggregate
			Exercise		Contractual		Intrinsic
	Shares		Price		Term		Value
Outstanding at January 3, 2015		82,600	$	11.33
Forfeited/cancelled		(45,700)	$	11.51
Outstanding at January 2, 2016		36,900	$	11.11		1.4 years	$	0
Options vested and exercisable at January 2, 2016		36,900	$	11.11		1.4 years	$	0

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 2015 or fiscal year 2014. As of January 2, 2016 there was no remaining unrecognized compensation cost related to the unvested portion of stock options issued under the Supplemental Stock Plan.

PUT OPTION

In connection with the Company’s approval of the separation from service of the Company’s Chief Executive Officer on June 3, 2015, the Company issued a put option to the former executive which grants him the option and right to sell to the Company up to 112,692 of his shares of the Company’s common stock owned on June 3, 2015 at $4.50 per share (the “Put Option”). This transaction has been accounted for under FASB ASC 718 under the tandem award approach with both liability and equity components. The liability component relates to the holder’s right to sell the shares to the Company and the equity component relates to a call option feature related to the holder’s right not to exercise the Put Option. The fair value of the components of the Put Option was calculated using the Black-Scholes model using the following assumptions.

 

	Issuance Date
Common stock price	$	3.30
Dividend yield		0.0	%
Exercise price of put option	$	4.50
Expected term		0.78 years
Risk-free interest rate		0.20	%
Estimated stock volatility		55	%

Approximately $33,000, or $0.29 per share, related to the call option component was recorded as an increase to Additional paid in capital on the Consolidated Statements of Stockholders’ Equity for fiscal year 2015. For fiscal year 2015, approximately $168,000, or $1.49 fair value per share of the put feature, was recorded as share-based compensation expense in Selling, general and administrative expense on the Consolidated Statements of Operations and Comprehensive Loss. Approximately $372,000, or $3.30 per share, related to the market value of the shares subject to the Put Option as of the issue date was recorded as a reduction of Additional paid in capital on the Consolidated Statements of Stockholders’ Equity for fiscal year 2015.

In November 2015 the holder of the Put Option exercised the Put Option and the Company purchased approximately 90,000 shares at $4.50 for a total of approximately $405,000. As of January 2, 2016, the balance related to the liability component of the Put Option was approximately $102,000 and is included in Other accrued liabilities in the Consolidated Balance Sheets. In March 2016, the holder of the Put Option notified the Company of intent to exercise the Put Option with respect to the remaining shares subject to the Put Option. The Put Option expired on March 15, 2016.

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 2015 and 2014, the Company recognized net expense of $17,000 and $84,000, respectively, in accordance with FASB ASC 718 associated with the ESPP.