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
	April 1, 2016		April 3, 2015
Employee stock options	$	4,896	$	638
Restricted stock		225		244
Restricted stock units		2,280		119
Nonemployee stock options		57		(7)
Total	$	7,458	$	994

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

	Three Months Ended
	April 1, 2016		April 3, 2015
Cost of sales	$	560	$	10
General and administrative		3,394		583
Marketing and selling		1,531		251
Research and development		1,973		150
Total stock compensation expense		7,458		994
Amounts capitalized as part of inventory		152		122
Total	$	7,610	$	1,116

Stock Option Plan

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, and restricted stock units (RSUs). Options under the plan are granted at fair market value on the date of grant, become exercisable generally 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 and pre-established financial metrics are met (as defined in the Plan). Grants of restricted stock outstanding under the Plan generally vest over periods of one to three years. Grants of RSUs outstanding under the Plan generally vest based on service, performance or a combination of both. As of April 1, 2016, there were 413,513 shares authorized and available for grant under the Plan.

Immediate Vesting of All Unvested Equity Awards

On February 11, 2016, one of our shareholders increased its beneficial ownership of the Company’s common stock to approximately 26% of all shares outstanding. This triggered the “Change in Control” provision in our Amended and Restated 2003 Omnibus Equity Incentive Plan (“Plan”). As a result, all unvested equity awards outstanding under the Plan immediately vested. Consequently, we recorded an aggregate $6.9 million non-cash charge to stock-based compensation in the condensed consolidated statements of operations on that date ($4.6 million for stock options and $2.3 million for restricted stock and restricted stock units). This charge was recorded and included in the following categories of the condensed consolidated statements of operations for the three months ended April 1, 2016: $2.9 million in general and administrative expenses, $1.5 million in marketing and selling expenses, $1.9 million in research and development expenses and $0.6 million in manufacturing costs. Approximately $3.7 million of the $6.9 million of accelerated charges would have been recognized for stock-based compensation by the Company during fiscal year 2016 after the Change in Control provision was triggered.

Assumptions

The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model applying the 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 9% 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
	April 1, 2016			April 3, 2015
Expected dividend yield		0	%		0	%
Expected volatility		57	%		57	%
Risk-free interest rate		1.40	%		1.70	%
Expected term (in years)		5.57			5.64

A summary of option activity under the Plan for the period ended April 1, 2016 is presented below:

	Options Shares (000’s)
Outstanding at January 1, 2016		3,623
Granted		486
Exercised		(1)
Forfeited or expired		(61)
Outstanding at April 1, 2016		4,047
Exercisable at April 1, 2016		3,674

A summary of restricted stock and restricted stock units activity under the Plan for the period ended April 1, 2016 is presented below:

	Restricted Shares (000’s)		Restricted Units (000’s)
Outstanding at January 1, 2016		124		339
Granted		—		233
Vested		(124)		(380)
Forfeited		—		(4)
Outstanding at April 1, 2016		—		188