Note 10 — Stock-Based Compensation

The cost that has been charged against income for stock-based compensation is set forth below (in thousands):

	Three Months Ended				Nine Months Ended
	October 2,		October 3,		October 2,		October 3,
	2015		2014		2015		2014
Employee stock options	$	625	$	666	$	1,818	$	2,138
Restricted stock		88		141		396		666
Restricted stock units		210		705		484		1,857
Nonemployee stock options		—-		41		49		75
Total	$	923	$	1,553	$	2,747	$	4,736

The Company recorded stock-based compensation costs in the following categories on the accompanying condensed consolidated statements of operations (in thousands):

	Three Months Ended				Nine Months Ended
	October 2,		October 3,		October 2,		October 3,
	2015		2014		2015		2014
Cost of sales	$	9	$	32	$	33	$	77
General and administrative		543		837		1,667		2,848
Marketing and selling		184		326		539		906
Research and development		187		358		508		905
Total		923		1,553		2,747		4,736
Amounts capitalized as part of inventory		130		131		258		279
Total stock compensation expense	$	1,053	$	1,684	$	3,005	$	5,015

Stock Option Plans

The Amended and Restated 2003 Omnibus Equity Incentive Plan (“the Plan”) provides for various forms of stock-based incentives. To date, of the available forms of awards under the Plan, the Company has granted only stock options, restricted stock, unrestricted share grants, restricted stock units, and performance contingent stock units. Options under the plan are granted at fair market value on the date of grant, become exercisable over a three year period, or as determined by the Board of Directors, and expire over periods not exceeding 10 years from the date of grant. Certain option and share awards provide for accelerated vesting if there is a change in control (as defined in the Plan). Pursuant to the Plan, options for 3,579,441 shares were outstanding at October 2, 2015 with exercise prices ranging between $0.95 and $17.62 per share. Restricted stock grants under the Plan generally vest over a period between one to four years. There were 123,803 shares of restricted stock and 317,858 restricted stock units (RSUs) outstanding at October 2, 2015. As of October 2, 2015, there were 1,142,202 shares authorized and available for grants under the Plan.

Assumptions

The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model applying the weighted-average assumptions noted in the following table. Expected volatilities are based on historical volatility of the Company’s stock. The expected term of options granted is derived from the historical exercises and post-vesting cancellations and represents the period of time that options granted are expected to be outstanding. The Company has calculated a 7% estimated forfeiture rate based on historical forfeiture experience. The risk-free rate is based on the U.S. Treasury yield curve corresponding to the expected term at the time of the grant.

	Three Months Ended					Nine Months Ended
		October 2,		October 3,			October 2,		October 3,
		2015		2014			2015		2014
Expected dividend yield		0	%	0	%		0	%	0	%
Expected volatility		58	%	56	%		57	%	55	%
Risk-free interest rate		1.60	%	1.36	%		1.61	%	1.29	%
Expected term (in years)		5.62		4.12			5.61		4.12

A summary of option activity under the Plan for the nine-month period ended October 2, 2015 is presented below:

	Options
	Shares
	(000’s)
Outstanding at January 2, 2015		3,175
Granted		1,074
Exercised		(472)
Forfeited or expired		(198)
Outstanding at October 2, 2015		3,579
Exercisable at October 2, 2015		2,088

On June 1, 2009, the Company issued warrants to Broadwood Partners, L.P. (“Broadwood”), pursuant to a Warrant Agreement granting the right to purchase 700,000 shares of the Company’s common stock at a strike price of $4.00 per share. On May 27, 2015, Broadwood gave notice to exercise the 700,000 warrants and paid the $2.8 million exercise price in cash. On July 27, 2015, the Company issued 700,000 shares of Common Stock to Broadwood pursuant to an exercise of the Warrant Agreement dated June 1, 2009, and no warrants of the Company are currently outstanding.

A summary of restricted stock and restricted stock unit’s activity under the Plan for the nine-month period ended October 2, 2015 is presented below:

	Restricted		Restricted
	Shares		Units
	(000’s)		(000’s)
Outstanding at January 2, 2015		247		156
Granted		34		205
Exercised		(142)		(16)
Forfeited		(15)		(27)
Outstanding at October 2, 2015		124		318