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				Six Months Ended
	July 1, 2016		July 3, 2015		July 1, 2016		July 3, 2015
Employee stock options	$	153	$	555	$	5,049	$	1,193
Restricted stock		2		63		227		307
Restricted stock units		145		154		2,423		274
Nonemployee stock options		--		57		59		49
Total	$	300	$	829	$	7,758	$	1,823

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

	Three Months Ended				Six Months Ended
	July 1, 2016		July 3, 2015		July 1, 2016		July 3, 2015
Cost of sales	$	--	$	6	$	560	$	23
General and administrative		167		548		3,688		1,124
Marketing and selling		68		104		1,471		355
Research and development		65		171		2,039		321
Total stock compensation expense		300		829		7,758		1,823
Amounts capitalized as part of inventory		36		129		188		251
Total	$	336	$	958	$	7,946	$	2,074

Stock Option Plan

Our Amended and Restated 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 (“RSUs”), 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 our 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 under certain circumstances in the event of a change in control (as defined in the Plan). Pursuant to the Plan, options for 3,785,537 shares were outstanding at July 1, 2016 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 15,379 shares of restricted stock and 260,425 RSUs outstanding at July 1, 2016. As of July 1, 2016, there were 2,223,858 shares authorized and available for grants 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 the Plan, which resulted in the immediate vesting of all unvested equity awards outstanding under the Plan (“Acceleration Event”) and us recording 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 RSUs). This charge was recorded and included in the following categories of the condensed consolidated statements of operations for the six months ended July 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-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 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 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						Six Months Ended
	July 1, 2016			July 3, 2015			July 1, 2016			July 3, 2015
Expected dividend yield		0	%		0	%		0	%		0	%
Expected volatility		45	%		57	%		53	%		57	%
Risk-free interest rate		1.01	%		1.42	%		1.27	%		1.61	%
Expected term (in years)		4.40			5.54			5.19			5.61

A summary of option activity under the Plan for the six-month period ended July 1, 2016 is presented below:

	Options Shares (000’s)
Outstanding at January 1, 2016		3,623
Granted		725
Exercised		(265)
Forfeited or expired		(298)
Outstanding at July 1, 2016		3,785
Exercisable at July 1, 2016		3,176

A summary of restricted stock and RSU activity under the Plan for the six-month period ended July 1, 2016 is presented below:

	Restricted Shares (000’s)		RSUs (000’s)
Outstanding at January 1, 2016		124		339
Granted		15		307
Vested		(124)		(379)
Forfeited		--		(6)
Outstanding at July1, 2016		15		261