4.	EMPLOYEE BENEFIT PLANS

Nuvectra Corporation

2016

Equity Incentive Plan

– The Nuvectra Corporation

2016

Equity Incentive Plan (the

“2016

Equity Plan”) was initially adopted by the Board of Managers of QiG Group, LLC (the Company’s former name) and was subsequently ratified and approved by Nuvectra’s Board of Directors effective as of

March 14, 2016.

The

2016

Equity Plan provides that the Compensation and Organization Committee of the Board of Directors (the “Compensation Committee”)

may

award eligible participants, as it

may

determine from time to time, the following types of awards: stock options, stock appreciation rights, restricted stock, restricted stock units and stock bonuses. Subject to the adjustment clauses in the

2016

Equity Plan, the total number of shares of Nuvectra common stock reserved for issuance under the

2016

Equity Plan is

2,362,785.

During the

six

months ended

June 30, 2017,

the Compensation Committee granted equity awards aggregating

538,502

shares of common stock under the

2016

Equity Plan in the form of both restricted stock units and non-qualified stock options to its directors and certain officers and key employees. Compensation cost related to the

2016

Equity Plan for the

three

and

six

months ended

June 30, 2017

was approximately

$0.5

million and

$0.9

million, respectively.

During the

six

months ended

July 1, 2016,

the Compensation Committee granted equity awards aggregating

791,238

shares of common stock under the

2016

Equity Plan in the form of both restricted stock units and non-qualified stock options to its directors and certain officers and key employees. Compensation cost related to the

2016

Equity Plan for the

three

and

six

months ended

July 1, 2016

was approximately

$0.4

million and

$0.4

million, respectively.

Stock-Based Compensation

– Certain of the Company’s employees participated in the stock-based compensation programs of Integer and prior to the Spin-off received awards of time-based stock options and time- and performance-based restricted stock units, which typically vest over a

three

-year period and are settled in shares of Integer common stock. The stock-based payment compensation expense includes the compensation expense directly attributable to Nuvectra employees from these Integer equity incentives. In addition, certain incentive awards that were originally granted under an Integer equity incentive award plan adjusted into an incentive award of Nuvectra common stock at the time of the Spin-off. Compensation cost related to these Integer equity incentives was approximately

$0.1

million and

$0.2

million for the

three

and

six

months ended

June 30, 2017,

respectively. Compensation cost related to these Integer equity incentives was approximately

$0.1

million and

$0.8

million for the

three

and

six

months ended

July 1, 2016,

respectively.

The components and classification of stock-based compensation expense were as follows (in thousands):

	Three Months Ended				Six Months Ended
	June 30, 2017		July 1, 2016		June 30, 2017		July 1, 2016
Stock options	$	239	$	185	$	410	$	248
Restricted stock and restricted stock units		389		360		695		1,003
Total stock-based compensation expense	$	628	$	545	$	1,105	$	1,251

	Three Months Ended				Six Months Ended
	June 30, 2017		July 1, 2016		June 30, 2017		July 1, 2016
Selling, general and administrative expense	$	542	$	453	$	984	$	619
Research, development and engineering costs, net		86		92		121		163
Other operating expenses		—		—		—		469
Total stock-based compensation expense	$	628	$	545	$	1,105	$	1,251

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model with weighted-average assumptions based on the grant date. The weighted average fair value and assumptions used to value options granted under the

2016

Equity Plan were as follows:

	Three Months Ended						Six Months Ended

	June 30, 2017			July 1, 2016			June 30, 2017			July 1, 2016
Weighted average fair value	$	3.61		$	4.50		$	3.57		$	4.50
Risk-free interest rate		2.04	%		1.72	%		2.06	%		1.72	%
Expected volatility		55	%		55	%		55	%		55	%
Holding period (in years)		6			10			6			10
Expected dividend yield		—	%		—	%		—	%		—	%

The following table summarizes the stock option activity during the

first

six

months of fiscal year

2017:

	Number of Time-Vested Stock Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value
Outstanding at December 30, 2016		873,992		$	6.49
Granted		332,469			6.74
Exercised		(16,007	)		4.91
Forfeited or expired		(28,880	)		7.79
Outstanding at June 30, 2017		1,161,574		$	6.55		6.52	$	7,813,773
Exercisable at June 30, 2017		616,615		$	6.14		4.02	$	4,399,729

The Company received proceeds totaling

$66,000

upon the exercise of

16,007

stock options during the

first

six

months of fiscal year

2017.

The following table summarizes the restricted stock and restricted stock unit activity during the

first

six

months of fiscal year

2017:

	Time-Vested Activity			Weighted Average Fair Value
Nonvested at December 30, 2016		551,224		$	6.90
Granted		206,033			6.67
Vested		(146,754	)		6.47
Forfeited		(73,353	)		6.47
Nonvested at June 30, 2017		537,150		$	6.86

Nuvectra Bonus Plan

– The terms of the Nuvectra Corporation Bonus Plan (the “Bonus Plan”) provides for both annual discretionary defined contribution cash bonuses and performance-based bonuses based upon Nuvectra’s company-wide performance measures and, for certain employees, individual performance measures that are set by Nuvectra’s executive management and, in some instances, members of the Board of Directors. Compensation cost related to the Bonus Plan for the

three

and

six

months ended

June 30, 2017

were approximately

$0.6

million and

$1.3

million, respectively. Compensation cost related to the Bonus Plan for the

three

and

six

months ended

July 1, 2016

were approximately

$0.3

million and

$1.0

million, respectively.

Defined Contribution Plans

– The Company sponsors a defined contribution

401

(k) plan for its employees. The plan provides for the deferral of employee compensation under Section

401

(k) of the Internal Revenue Code of

1986,

as amended (“Section

401

(k)”), and a discretionary match. For the

three

and

six

months ended

June 30, 2017

this match was

25%

per dollar of participant deferral, up to

of the total compensation for each participant. Direct costs related to this defined contribution plan were

$0.07

million and

$0.1

million for the

three

and

six

months ended

June 30, 2017,

respectively.

Integer sponsors a defined contribution

401

(k) plan for its employees, in which the Company’s employees historically participated. The plan provides for the deferral of employee compensation under Section

401

(k) and a discretionary match. Until the spin-off in the

first

quarter of fiscal year

2016

this match was

35%

per dollar of participant deferral, up to

of the total compensation for each participant. The

401

(k) compensation expense for the

first

quarter of fiscal year

2016

recognized in these

condensed consolidated financial statements includes all of the compensation expenses directly attributable to Nuvectra employees. Direct costs related to this defined contribution plan allocated to the Company were

$0.03

million and

$0.07

million for the

three

and

six

months ended

July 1, 2016,

respectively.