Share-Based Compensation

The Company issues stock option awards and non-vested share awards under its share-based compensation plans. The key provisions of the Company’s share-based compensation plans are described in Note 5, Share-Based Compensation, in the Notes to the Consolidated Financial Statements included in Item 8, Consolidated Financial Statements of the 2015 Form 10-K.

The Company recognized income tax benefits of $8,000 and $5,000 related to share-based compensation arrangements during the thirteen weeks ended July 2, 2016 and July 4, 2015, respectively. The Company recognized income tax benefits of $15,000 and $20,000 related to share-based compensation arrangements during the twenty-six weeks ended July 2, 2016 and July 4, 2015, respectively.

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.

Stock Options

Service-Based Stock Option Awards – A summary of the service-based stock option activity under the Equity Plan, as of July 2, 2016 and changes during the twenty-six weeks then ended is presented below:



	Shares		Weighted Average Exercise Price
Outstanding at January 2, 2016	244,553		$	8.06
Exercised	—		—
Forfeited/cancelled	(20,540	)	$	10.62

Outstanding at July 2, 2016	224,013		$	7.82

Options vested and expected to vest at July 2, 2016	219,013		$	7.91

Options exercisable at July 2, 2016	199,012		$	8.31

The Company did not grant any service-based stock option awards during the twenty-six weeks ended July 2, 2016 or July 4, 2015. The Company recorded share-based compensation expense in connection with service-based stock option awards of $3,000 and $13,000 during the thirteen weeks ended July 2, 2016 and July 4, 2015, respectively, and recorded $8,000 and $38,000 during the twenty-six weeks ended July 2, 2016 and July 4, 2015, respectively. As of July 2, 2016, there was $12,000 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 21 months. 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.

Market Condition Stock Option Awards – A summary of the market condition stock option activity under the Equity Plan, as of July 2, 2016 and changes during the twenty-six weeks then ended is presented below:



	Shares	Weighted Average Exercise Price
Outstanding at January 2, 2016	200,000	$	3.34

Outstanding at July 2, 2016	200,000	$	3.34

Options vested and expected to vest at July 2, 2016	200,000	$	3.34

Options exercisable at July 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 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 the thirteen weeks ended July 2, 2016 and July 4, 2015 the Company recorded $51,000 and $22,000, respectively, of share-based compensation expense in connection with this market condition stock option award and during the twenty-six weeks ended July 2, 2016 and July 4, 2015, recorded $116,000 and $22,000, respectively. As of July 2, 2016, there was $26,000 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 5 months.

Non-vested Shares

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 July 2, 2016 is presented below:



	Shares		Weighted Average Grant Date Fair Value per share
Outstanding at January 2, 2016	250,215		$	3.15
Forfeited/cancelled	(50,053	)	$	3.14

Outstanding at July 2, 2016	200,162		$	3.14

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 of the vesting date shall be forfeited.

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 2017. Shares not vested as of the release date for the first quarter of fiscal 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. During the thirteen weeks ended July 2, 2016 and July 4, 2015, the Company recorded reductions to expense of $3,000 and $63,000, respectively, of share-based compensation expense in connection with performance-based non-vested share awards. During the twenty-six weeks ended July 2, 2016 and July 4, 2015, the Company recorded $53,000 and $153,000, respectively, of share-based compensation expense in connection with performance-based non-vested share awards. As of July 2, 2016, based on management’s assessment of the probability of achievement of less than one-hundred percent of the performance condition, there was an estimated $167,000 of unrecognized share-based compensation expense, net of estimated forfeitures, related to performance-based non-vested share awards. Unrecognized compensation cost at July 2, 2016 related to performance-based non-vested share awards is expected to be recognized over a period of 9 months.

2000 Supplemental Stock Plan

A summary of the option activity under the Company’s 2000 Supplemental Stock Plan (the “Supplemental Stock Plan”) as of July 2, 2016 and changes during the twenty-six weeks then ended is presented below:



	Shares		Weighted Average Exercise Price
Outstanding at January 2, 2016	36,900		$	11.11
Forfeited/cancelled	(6,800	)	$	11.36

Outstanding at July 2, 2016	30,100		$	11.06

Options vested and exercisable at July 2, 2016	30,100		$	11.06

No awards have been granted under the Supplemental Stock Plan since it expired on May 23, 2010. There is no remaining unrecognized compensation cost related to 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 former Chief Executive Officer on June 3, 2015, the Company issued a put option to the former executive which granted 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”).

In March 2016 the holder of the Put Option exercised the Put Option and in April 2016, subsequent to the end of the first quarter of fiscal 2016, the Company purchased approximately 19,000 shares at $4.50 for a total of approximately $85,000. In 2015, the holder of the Put Option exercised the Put Option with respect to 90,036 shares. As of July 2, 2016 and January 2, 2016, the balance related to the liability component of the Put Option was $0 and $102,000, respectively, and is included in Other accrued liabilities in the Condensed Consolidated Balance Sheets. The Put Option expired on March 15, 2016.